Negative equity hurting McMansion owners, but most home owners needn’t worry

By Catherine Cashmore
Tuesday, 27 March 2012

Over-spending on real estate is a temptation often hard to resist. It’s not an emotion restricted to houses, however as property is often the most expensive purchase most make in a lifetime – usually with the intention of making a profit from the proceeds – it’s a serious enough “habit” to ponder the psychology behind it.

This past week, the media has widely publicised RP Data’s research revealing that the number of home owners experiencing negative equity rose to 6.11% in December 2011 compared with the previous quarter, which came in at 4.9%.  The report measures “baseline” equity – so in other words, it doesn’t take into account debt levels, which are based on individual circumstance and correctly observes most owners are covering interest payments on their home loans, as well as paying down the principal.

It simply assesses the difference between what your home was worth then and what it’s worth now. A full breakdown of how RP Data collates the information is described on the company’s website and to give the company its due, it leads the way in such technology, taking into account not only location and property type, but also basic attributes of each listing such as number of bedrooms and so forth. However, while this is valuable – especially when analysing broad market movements – it cannot accurately assess why two properties with similar attributes including land size and location may differ quite considerably in their sale price – did one owner overpay? To answer this, a physical inspection and subsequent assessment is needed.

RP Data uses an “automated valuation model”, which it has assessed through “blind tests” to be “within plus or minus 15% of the actual sale price”. However, while automated models are gaining traction as a credible tool even among time-poor (and arguably underpaid) valuers (some of whom seem to think a quick “drive by” is enough to attain an accurate assessment of “real value), they simply cannot be relied upon for an assumption of current market value when the majority of Australia’s real estate market is made up of home buyers whose individual circumstance and needs are subject to attributes that can only be assessed physically.

Last year the national capital city median dropped 5.5% (RP Data), which is a big enough drop to instigate a degree of concern. Yet RP Data reveals that in assessing the disparity between the previous sale price of a home and its current market value, it can be anywhere up to 15% “inaccurate”.  Even if we’re generous and assume properties entered into the system fall closer to the mark being just 10% or maybe even 5% out in terms of real selling price, it’s not a good enough analysis to make an assumption of the exact number of properties in negative equity – which is precisely what RP Data has done.

When valuing a home, certain aspects cannot be ascertained by an automated valuation model. These include physical condition of the property, the “feel” of space, natural light and most importantly, the “emotional appeal” unique to each home buyer. All of these you can only assess via a physical inspection and yet all bear a significant impact on the final sales price.

Our lives are ruled by automated systems that churn out statistics that affect not only commodity prices, interest rates and market sentiment, but also bear an increasingly controlling effect on our society and the decisions we make for ourselves and families.  We’ve had a year during which on paper, the economy looks remarkably OK. Market sentiment has been blamed for the housing downturn, however large numbers of small businesses are struggling – numbers that are somehow missed in various statistical models or eclipsed by the mining boom. This is not to dismiss the importance of transparent data; I’m simply drawing a line between where this data is useful and where it becomes an unnecessary and inaccurate intrusion affecting the paths we take.

Property is an emotional purchase where beauty is commonly in the eye of the beholder.  Spend enough time assessing a location, walking through open homes, attending auctions, gaining access to accurate sales data, and understanding the demographics of the area-specific buying market and what may drive one property to sell higher than another, and you’ll get easily within 5% accuracy on a property’s sales price 95% of the time – something an automated model cannot independently achieve.

This is one reason why buyers’ advocates are becoming an obvious option for the time-poor who don’t have the energy to do the necessary legwork I’ve described above.

We also need to bear in mind, in some states – such as Victoria – there’s still not open disclosure to the general public of “private” sales data aside from listing the street and suburb – further details revealing the exact house number are limited to licensed estate agents, therefore any detailed research in the public domain is limited to properties that have been auctioned (of course, assuming those prices are not listed as “undisclosed”).

However, for a home buyer, the assessment on how much to pay for a property is an emotional issue. What a house may be worth to one buyer is not an indication of what it’s worth to another. I’ve attended a surprisingly high number of auctions during which the next-door neighbour has been bidding for the home. Obviously a sale of land that has the potential to dramatically increase the value of the neighbouring house or apartment is worth significantly more than it would be to an average home buyer. Therefore overpaying and subsequently experiencing negative equity in such circumstances is consequential and should not be a concern considering the long-term benefit to the holder.

So are we really looking at 6.4% of homes in negative equity? Well, considering we’ve just been through a year with turnover has been at its lowest level for a decade and a drop in median value that has – in some areas and suburbs – eclipsed 10% or even 15%, there’s no doubt that those who purchased some three years ago at the peak of the market will be wondering if they didn’t over pay comparatively to today’s prices. Additionally, there are always those who didn’t research the market closely enough before jumping in, got carried away at auction and arguably overpaid. I see this often enough to genuinely believe that every home buyer should be diligent enough to get qualified independent advice prior to purchasing.

Other concerns on price paid include the number of off-the-plan sales, which are fast rising in number. Trying to value an unfinished product considering the considerable and temporary oversupply is hard at the best of times – therefore in answer to the question above, we can assume there is certainly a number of properties that are currently experiencing negative equity.

The report suggests there are some – albeit 1% – who have owned their homes for over 10 years that are looking at lower values. I would find this hard to perceive in any capital city area unless we’re assessing a location affected by floods or a regional location, therefore the exact breakdown of these results would need to be assessed further to draw conclusion. Therefore in short, yes, there are numbers who may be suffering a temporary period of negative equity, but to assess how many is quite simply impossible outside of a broad estimation (even “guess-timation”).

Aside from what I’d assess to be a report that is more of an assumption than accurate representation, there is a tendency to overpay for real estate that resides deeply in every home buyer’s psychological makeup. I’ve worked with many investors and owner-occupiers with budgets ranging from $300,000 to in excess of $4 million.  Without fail, all desire one step more than they can reasonably afford and the more money they have to play with, the more grandiose expectations become. You can somewhat understand it when dealing with a first-home buyer or a family who need a house but can only extend to a unit. Genuinely “needing” more than the budget can afford is a frustrating hazard of a rising population.

However, it’s a little harder to relate to at the other extreme and no better is it demonstrated than in those who commonly have the purchasing power to own modern man’s equivalent of the ancient castle. This is also the demographic most likely to experience negative equity when trying to sell in a downward cyclical phase.

As I’ve pointed out in previous articles, since history began, housing has been an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for. Land was – and has always been – the ultimate symbol of power and wealth, and owning it often holds more significance for the vendor than can be assessed in monitory value alone. In this instance, it’s not so much about need for shelter, but desire to exhibit status, and the higher the price paid, the greater the risk involved. For example, head out to the suburbs surrounding the capital that fall into the highest median price bracket, with large land sizes complete with McMansions – suburbs such as Toorak in Melbourne and Point Piper in Sydney – and the buyer market diminishes considerably. The further away from the median price bracket you get, the more volatility experienced.

Supply verses demand is what fundamentally drives market activity, therefore the less demand you have, the less opportunity for price appreciation. In a downward cycle, multimillion-dollar real estate will be forced to drop further in price in order to sell. Therefore if you’re a bargain hunter, pick the right time, and this isn’t a bad place to start! Once the cycle turns, these areas will re capture the greatest gains in median value and make a tidy profit for the astute buyer who “timed the market”.

Meanwhile, to each and every home buyer, considering we have not experienced anything near to a 40% drop in median value as exhibited in areas of the US and strong indications suggest we’re unlikely to for some time to come, you can assume any talk of negative equity affecting your property is a consequence of what a computer has assessed, not a home buyer. Once computers get to the level demonstrated in the film I, RobotI’ll take a little more notice.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. 

Negative equity…

Community facilities are necessary to keep home buyers both healthy and happy

Community facilities are necessary to keep home buyers both healthy and happy

By Catherine Cashmore
Tuesday, 20 March 2012

Well, was it any surprise? Last week we saw a report publicised that blamed obesity on outer-suburban living. It wasn’t the only health issue highlighted; others such as respiratory problems, abuse of alcohol, depression, and various other mental and physical diseases resulting primarily from poor lifestyle were cited. It’s a long shot to solely lay the blame on fringe living for a destructive lifestyle. It’s true residents in outer-suburban locations are generally more reliant on their cars as their prime method of transport and therefore won’t be walking to the non-existent “local” shopping strip and various other amenities abundant in our established inner-city ’burbs, however there are many other contributory factors we must consider – poor education being the first.

However, the report wasn’t revealing anything new – for years various studies have been citing rural and “growth” suburbs as hotspots for obesity epidemics, and it’s not a problem unique to Australia – similar results are also to be found in the USA, UK and throughout the western world.

Currently our outer-suburban new estates are amongst the fastest-growing suburbs in Australia. Areas such as Wyndam City and Whittlesea North in Victoria, along with Ipswich in Queensland, Camden in Sydney, and Wanneroo in Western Australia are just a few of the fringe localities that are all outperforming in the population stakes.  Some are running high on the mining boom, however these are commonly pulling in “fly in, fly out” workers and investors more than potential owner-occupiers.

The vast majority of home buyers are heading outwards for one of two reasons – the first being affordability.  Most houses in the new estates come with an attractive median price tag in some cases well under $400,000. Considering the average home loan hovers between $290,000 and $327,000 depending on which state you purchase in, it’s no surprise to see strong demand around the fringes, especially in times on low confidence and financial instability.

Government incentives are another inducement that pull purchasers outwards. The first-home buyer boost during the GFC offering generous grants for regional purchases produced large jumps in the median house price (resulting from increased buyer demand) and also inflated population figures in many of these localities. The same results have been replicated in NSW throughout 2011 due to cuts in stamp duty for first-time purchasers (cuts that have now been withdrawn for existing properties, but remain for new homes, mostly located in the outer-suburban estates).

However, the main buyers forced to look out of town are young families unable to afford their dream in the inner-city suburbs, which for the price of a house in woop woop would only be able to purchase a one-bedroom flat at best.  For those on tight budgets, it’s not a bad option – after all, our now affluent middle-ring suburbs were once considered outer suburban with similar issues as those above.  Fast forward some 20 (or so) years later and their median house prices are considered “unaffordable” and resident lifestyles improved with better amenities. Therefore it can – in some circumstances – be a good initial footstep onto the property ladder.

For years both state and national governments have understood the importance of facilitating the outer-suburban regions with adequate community facilities such as reliable public transport systems, schools, shopping centres, leisure centres, train lines, open park land and so forth. However, the cost of doing so has always fallen heavily on developers and purchasers, resulting in limited land releases and hefty development overlays. Most notably, promises of improvements in infrastructure supposedly funded by these development overlays generally go unfulfilled.  Quite simply, local government is now facing the stark reality of unprecedented growth, which has been forecast for decades by the ABS, but hasn’t been adequately planned for – whether this be through lack of funds or poor administration.

The prevalence of obesity results not only from the lifestyle, but also the socioeconomic status of the demographic. Studies done previously by the Australian National Rural Health Alliance Inc – Australia’s peak non-government organisation advocating for rural and remote health – shows “obesity is particularly prevalent among men and women in the most disadvantaged socioeconomic groups”.  These groups are generally located in remote or poorly facilitated outer-suburban areas such as those mentioned above. Not only are there a lack of sports and leisure facilities, it’s also been shown by “market basket surveys” in the Northern Territory that the further away from the city you migrate, healthy food items increase in cost in regional localities. Results that have been replicated in studies done by the Queensland HFAB (Healthy Food Access Basket) and various other organisations both here and abroad.

However, let’s be clear about this – purchasers don’t buy into these areas just because they have no choice. The second reason they buy in these localities is the abundance of property better suited to their version of the “McMansion-style Australian dream” – preferring to compromise on location rather than house size.

The old Aussie obsession of a quarter-acre block and detached family home may have modified somewhat as the population increased, however it has never disappeared.   It’s true, flats and apartments marginally outperform house sales in capital growth statistics; however, this is due to decreasing land sizes and greater density in the inner-city suburbs, where they make up the bulk of the housing stock.

Those who hold professional positions in the capitals are often unable (and unwilling) to live distances that require long commutes to the work place or local shopping strip.  However given the choice, there are few who would choose an apartment over a four-bedroom home, and countless studies have proven this with home sizes increasing, despite household numbers decreasing. Single-person dwellers may be the fastest-growing demographic, however “family units” are still our biggest buyer market and therefore affording the size of home needed and desired in an inner “well established” locality just isn’t possible for a growing demographic.

Oliver Hume real estate agency, which holds the market when it comes to land sales, reports that even though block sizes have decreased, due to affordability, the desire hasn’t diminished for large houses. In its 2011 Survey of Purchaser Sentiment, the company points out that large houses are still as requested as they were previously.

Given choice, the majority of purchasers wouldn’t push to the outer suburbs; however they do so because they often want to buy something bigger. And who can blame them? No one really wants to live in areas of increasing density. It’s one of the major complaints inherent in inner-city residents and hardly conducive to a healthy environment.  The levels of obesity may be lower in well-established affluent suburbs, but living in overcrowded polluted streets where despite being crammed in, you don’t know the person living in the upstairs apartment, and your once-private backyard is now overshadowed by the surrounding subdivided townhouse developments, is hardly an improvement on the suburban sprawl.

Believe it or not, the secret to all of this lies in “happiness economics”. If we’re going to effectively manage a growing population – something inevitable to our future evolution – we need to understand the importance of happiness in the equation.  Diseases such as those mentioned in the recent reports laying the blame for obesity and depressive illnesses on poorly designed suburbs are all stress related and prevalent in areas of high density as well as regional locations.

However, they can be effectively combated when the attention moves away from building houses to building communities. The obsession governments have had with building roof space to combat what has been widely accepted as a fundamental shortage of housing (something attested by our low vacancy rates across most states of Australia) has lead to an over supply of poorly designed accommodation, whether it be high-rise apartments, or endless rows of house-and-land packages.

We need to provide family accommodation, which we simply can’t keep doing in already overpopulated inner-city suburbs – therefore going outwards is not an option, but a necessity. However, unless we facilitate community needs vital for emotional health, we’re going to end up spending large amounts of money combating stress-related diseases such as obesity, which have nothing to do with proximity to a local gym or swimming pool.

It’s worth looking at a few places that have successfully found a solution to this paradox. In various studies that have been conducted across the country, certain suburbs have been named “the happiest place in Australia” – and they are not located inner city, with gyms and pubs on every street corner.  Results include Wagga Wagga and the wider Riverinain NSW, and Mayo in South Australia. Both these areas have not proven stress free, as recent flooding and loss of housing will attest, however residents are judged happy and consequently healthy because they have a relationship with their neighbours.

Within the suburb are community facilities such as religious meeting places, local festivals, good schools, parks, play centres and so forth – more importantly, their society has an element of autonomy, where residents take the initiative and encourage involvement in local activities. Their happiness has nothing to do with income but everything to do with their connection to others.

Therefore if we’re going to keep building outwards, it’s vital we invest money at the same time into infrastructure that nurtures community involvement and provide local residents with a say in what’s developed. You can’t do one without the other – and there is no advantage waiting until an expensive government report can prove the viability of providing a train line, school or leisure centre. The return on infrastructure investment is never easy to prove on paper but then, happiness economics isn’t about money, it’s about people – and when employed correctly, it will nurture a growing populous who will prove less burdensome on the economy over the long term.

It’s not a new concept: Aristotle, Thomas Jefferson, and more recently great religious icons such as the Dalai Lama have put the pursuit of happiness on equal status to other revolutionary concepts such as liberty, democracy, and economic health.  However, let’s be clear about this – we don’t need to pursue happiness, we have it right there in the people surrounding us. Community involvement is the key, and high priority when assessing a property’s investment potential. As Rabbi Jonathan Sacks once said, “If I have power and money and give some to you I have less, however if I have love and happiness and give some to you, I have more.” As for the home buyer and investor, the lesson is obvious, you don’t buy a house, you buy a location and consequently a lifestyle – a happy community will increase the potential of your property investment two fold, and an emotion that should never be discounted.

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. 

Home buyers head for the hills, and the outer suburbs

Home buyers head for the hills, and the outer suburbs

By Catherine Cashmore
Tuesday, 13 March 2012

The government has offered many half-hearted incentives to encourage purchasers to choose regional towns over the more “desired” inner-city locations for their property purchases. Much of this encouragement has been via grants such as the first-home owners’ boost, which enabled some buyers to claim in excess of $30,000 if building or purchasing off the plan in an outer-suburban zone.

However the “fixes” have only been temporary and commonly when the incentive finished, overall turnover dropped along with the median house price. Calls for more permanent solutions such as heavy investment into infrastructure and the decentralisation of jobs have barely been heeded and consequently growth has been lacking.

However it now seems the government has unwittingly stumbled across its greatest and most successful incentive yet. The consistent squeeze and shuffling of cards in the inner- and middle-ring locations, causing median prices to rise disproportionably compared to over all affordability, alongside vain attempts to address shortages for renters and home buyers with mass approvals of high-rise accommodation or poorly facilitated new estates, is starting to force a dramatic shift in the way regional towns are viewed by our home buyer market.

You may remember the furore that was invoked early last year by ProsperAustralia’s call for a “first-home buyer strike”.  At the time many in the industry viewed it as a joke, it was based on a preconceived idea thatAustralia was on the brink of a housing crash.  “Price falls are imminent – protect yourself. Don’t buy now!” was the slogan.  However as of writing, it’s yet another doomsayer prediction that has failed to eventuate with an upward turn in median prices already evidenced in various pockets of the country.

However, if you didn’t know any better, you could look back in retrospect and herald it a success, because over all turnover throughout the course of 2011 – according to data thus far released by the Valuer General – is more than 20% lower than can be recalled for over a decade. Due to our low unemployment rates and relatively healthy economic prospectus, the effect on prices wasn’t quite the demise Prosper Australia manager David Collyer desired. Prosper Australia had its sights set on a crash to make US vendors suffering a 40% drop in the value of their properties look like a walk in the park – thankfully we have better fundamentals.

However, while a drop in median house price won’t cripple a real estate agency – especially as on a national scale it was less than 5%  (Dec 2010 – Dec 2011) –  significantly lower turnover will. Throughout the year, larger real estate franchises shed staff and many smaller companies shut up shop. Those that held on survived only with the support of their rent roll which grew from the flood of first-ome buyers unable – or unwilling – to take a step onto the first rung of the property ladder.  Therefore, whether it was down to Prosper Australia’s’ campaign or not, buyers did indeed “strike” for want of a better word.

Of course, it wasn’t just first-home buyers who decided to abstain from the market in 2011; upgraders, downsizers and investors all kept their cards close to their chest either unwilling or unable to make a housing commitment.  However, we live in a welfare state and have a political and social responsibility to help those most in need. When it comes to purchasing property, there is only one demographic that fits this agenda and thus captures the media headlines – first-home buyers.

Not purchasing property in 2011 didn’t really help the first-home buyer cause.  Like it or not, “opting out” of the housing market just isn’t an option. We all require shelter and if we’re not buying, we’re living with family, renting, or one of the 105,000 nationwide with no permanent abode to call home. Inflation throughout the course of 2011 was roughly 3.1%, however due to the consequence of more than 20% lower turnover and the ensuing pressure on the rental market, yields in areas of high demand increased some 13% (according to research done by RUN property). Therefore even though median house prices have dwindled, which according to the HIA Commonwealth Bank Housing Affordability Index has improved housing affordability by 8.3% in December 2011 compared with December 2010 (something worthy of celebration), the impact certainly hasn’t assisted first-home buyers, who are struggling to save while paying exorbitant weekly rents.

Since the GFC banks have tightened their lending criteria falling hardest on the first-time buyer demographic. It’s now essential to show evidence of “genuine savings”, which should make up at least 5% of the deposit. Gifted, borrowed or inherited one- off lumps of cash don’t always fit the bill. According to Loan Market, 77% of the first-home buyers surveyed found themselves unable to meet the “genuine savings” criteria. It’s also evidenced in various other surveys, including one from ING that found only 21% of first-home buyers approached felt they’d be able to raise the required amount.

This should come as no surprise to those of us who have, at some point in our lives, had to work our way from the rental ladder to ownership.  However saving under the added pressures of a 21st-century “rich” lifestyle, which often requires possession of various big-ticket’’ items such as a car, computer, smartphone and so forth, upon commencement of employment, not to mention the pressures of population growth pushing house prices ever northwards, makes saving the required deposit harder now than ever before. This is one of the reasons I have greatly favoured encouragement of the first-home buyer’s savings account, which so far has had a relatively small take-up.

Due to the interest rate drop late last year and boost in consumer confidence, there has been a marked increase in buyer activity in the beginning of 2012 – most noticeably in the first home buyer sector.

What’s interesting however is where this activity has centralised. Since mid-2011 there’s been an increasing trend towards regional locations, which could have us changing the term “buyer strike” to “buyer vacation”. It seems a growing proportion of this demographic have finally decided to satisfy their need for ownership through a surge towards the substantially more affordable rural or outer-suburban zones. Last year, some of the biggest quarterly and yearly jumps in median value were experienced in regional locations.  Areas such as Ballarat, Bendigo, and Shepparton inVictoria showed rises in excess of 5%, while prices in more popular (and consequently over-populated) suburbs in the inner city dropped some 20% in certain pockets.  Meanwhile in Sydney, suburbs situated some 30 kilometres west of the city, which have historically suffered from low demand, are now showing signs of being future hotspots set for a potential boom in growth.  Of course, any location close to a mining town – such as Rockhampton and Toowoomba in Queensland for example – has also attracted healthy interest and consequent rises in their population and median value.

Recently, conducted a “mood of the meeting” survey on its Facebook page asking first time buyers if they were interested in purchasing rural’ to gain entry into the property market.  The survey attracted an overwhelmingly positive response, with most replying either “yes, considering” or “already done”.

For example, in Melbourne, the population in outer-suburban Wyndham increased by 12,600 (8.8%) in 2010, which was both the largest and fastest increase of all Victorian local government areas. Strong growth was also experienced in Whittlesea (up 8,900 people or 6.1%) and Casey (8,100 people or 3.3%). The rises in median give weight to the assumption that they are gaining popularity with an increasing number of home buyers.

In New South Wales areas such as Blacktown (up 8,300 people), The Hills Shire, and Liverpool (both up by 3,400 people). In Western Australia, strong population growth has boomed in the outer-suburban fringes. The five local government areas of Wanneroo, Rockingham,Stirling, Swan and Armadale) accounted for more than one-third of the growth across the state in the year to June 2010.

The change is a positive move from a social and political perspective, and it’s vital we not only encourage it, but also prevent a reversal by following the population surge with significant investment in infrastructure and industry. Anyone who has experienced rural living or small-town society will vouch for the strength of community that often emanates from the resident population in these towns.  It’s highlighted best when there’s a disaster such as the recent floods.

The neighbourly spirit, camaraderie and social blossoming that results as cleanup and support systems kick into action bring out the true Australian spirit – the same spirit that was witnessed during the early settlement period and which often lacks in inner urban vicinities where people have little connection with those who live in nearby surrounds.  Although some will vacate a town after a national disaster of significant proportions – such as the recent earthquakes in Christchurch NZ – many will develop a deeper connection and respect for the land and the community strengthens.  As a lifestyle option living regional has riches to offer, and yet continually plays the poor sibling to our more populated capitals.

In urban zones, initiatives such as “neighbour day” have highlighted how little we know about those who live around us.  In short, the best asset you can have as a vendor is contained in the community that surrounds your home.  A flourishing community encourages extended periods of residency resulting in a happier and healthier population, lower crime rates, and subsequently helps underpin house prices.

Previously the overwhelming trend for buyers has been to invest in city suburbs with vibrant night life and abundance of well established infrastructure.  However, while regional locations can’t always compete on the same level, they do offer a viable option to secure cheaper housing and a quality of lifestyle which is often more suited to raising a family. It won’t please David Collyer – who wants home buyers to abstain all together, but calling for a ‘home buyer ‘rural vacation’ for those who are willing and able, rather than a ‘home buyer strike’ should have overwhelming support from all of us who hold Australia’s future interests to heart.

For years, state governments have been trying to improve affordability and address population growth somewhat unsuccessfully. However a gradual boost in the regional populous in small satellite towns with already well developed facilities, will hopefully encourage greater investment leading the way for larger institutions to take up shop and thus create opportunities for employment.  Other initiatives already underway, such as the National Broadband Network, will also have a positive influence.

As for investors, the party line has always been to invest as close to the city as possible in order to gain the greatest capital returns, however our cities are now so well populated, it’s clearly not going to always be a desirable prospect for home buyers – particularly families – who are essentially the demographic which fuel capital growth.  Towering high rise developments and crowded polluted roads and transport systems, along with ever decreasing blocks of land, are limiting the larger proportion of our buyer market in inner-urban zones. Instead a view to investment in well established regional towns could be a step in the right direction for those who want to take advantage of what seems to be the start of  a mini boom.

All in all, instead of praying for a monumental bubble burst to improve options for home buyers, the call should be going out from organisations such as Prosper Australia to promote the regional agenda.

Catherine Cashmore is an experienced buyer advocate, property investor and market analyst. 

Australia’s housing market could crash if property’s primary purpose is forgotten:

Australia’s housing market could crash if property’s primary purpose is forgotten: Catherine Cashmore

By Catherine Cashmore
Tuesday, 06 March 2012

There was a time when housing was seen primarily as a place to shelter loved ones, to keep possessions safe, to protect against the elements and through permanent settlement, stake a claim on the land, however securing this shelter has never been an easy road.  Historically, as soon as man began to “settle” housing became a luxury reserved for the rich.  You could argue that it hasn’t changed much – especially in Australia, where rising house prices and a shortage of “useable” accommodation has placed a strain on aspiring home owners thereby gradually reversing the trend from ownership to tenancy.

Since history began, housing was an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for – land.  Land was – and has always been – used as a symbol of power and wealth.  Whether it be a means to make a living through effective cultivation, a form of wielding control over a resident population, a place to build the modern-day castle, or simply a speculative investment, it’s the most valuable commodity mankind owns – a valuable and finite commodity that becomes more so as the population expands.

Back in mediaeval times, there was no set system of ownership.  If you found it, you owned it, and if you wanted it, you fought for it. It didn’t come with recognised rights of ownership or tenancy laws protecting the resident population.  However all this changed on the most important date in England’s history – 1066.  When William the Conqueror took England, he declared all the land ownership of the Crown.  Keeping a quarter for himself as a personal holding, he gave a proportion to the church and split the rest into “manors”, which he distributed out under strict freehold conditions to barons.  He understood the value of land and the emotional envy it could inspire; therefore he was careful not to provide anyone a proportion large enough to invoke rebellion.

However, what he did provide was – as never before – the start of a recognised form of “free ownership” able to be split, used, sold and inherited as a personal holding.  In return for this generosity, the barons were required to pledge loyalty to the king in the form of monitory payment and – when required – military force.  After taking their share, the land was further subleased to knights, who thereby paid for their holding with a requirement to serve the barons’ combative needs.  The knights in turn subleased a percentage to serfs – who paid for their shelter in the form of food production and service on demand.  So started the evolution into the system we have today of “fee simple” ownership and land tenure – and thus, real estate became a valuable personal and recognised asset to be traded, sold and exchanged at the owners’ will.

Land has always equalled more than just a monitory value.  Unlike shares, the physical aspect of the asset and the emotional quality it holds have always underpinned its value.  The more potential the land holds for development or cultivation, the more value can be created.  It’s never been an asset easily liquidated, however because it’s essential to our basic needs, it stands right up there alongside food and water.  Of course, like any other investment, its value is assessed in terms of the demand created by location, potential use (the amount of accommodation it can provide) and health of the overall economy.  It follows the basic rule of any investment model – less supply fuels more demand and in Australia – particularly in the urban areas where most people want to reside – land value has increased through the continuous restriction and scarcity of supply and a population experiencing rapid, unprecedented growth.

You can debate the argument between shares vs property (land), as much as you want.  You can quibble over which will provide the best returns.  You can pull up charts, graphs, complex calculations and genuine examples to effectively win the argument for either side of the coin, because there is no doubt we have investors who have effectively wielded great wealth out of each model. However the one essential overwhelmingly obvious difference granted to investors of real estate is the personal control a privately held piece of useable land in a sought-after location provides – and it’s a lot more than a certificate of shares in the family safe.

It’s not just a case of deciding when to buy and sell; you can control other aspects such as renovation, extension, subdivision, and major development.  Providing you picked the right area to invest initially, the long-term risks of loss are extremely low. Sure, we can look out from our sunny side of the rainbow and wag a finger at Greece and the US as a shining example of “when it all went wrong”, however what went wrong wasn’t peoples need for shelter, or the emotional aspirations and value they placed on property.  Neither was it the mentality of those who invested with a cautionary approach for the long term.  What went wrong was a system that fuelled speculative greed.  A system that encouraged the population and big organisations to treat real estate as nothing more than a vehicle to trade with a get-rich-quick mentality. A system that encouraged lending of “non-recourse” “get out of jail free” 100%-plus loans granted to unqualified recipients.  The irresponsible lumping of mortgages into “pools” to be purchased, sold, sliced and traded, thereby treating property as nothing more than a company share with the unrealistic expectation that what goes up never comes down.  The result was understandably cataclysmal.

You will see it stressed with regularity by Property Observer’s resident panel of authors that real estate is a fantastic investment if basic rules are applied – the first being the rule of long-term holding.  We have fees associated with the purchase of real estate that make selling and buying expensive and therefore not encouraged.  As much as real estate is a sought-after form of equity – particularly in the inner-city suburbs, where land is now just a game of musical chairs between a growing number of players – it’s not one that gains quick profit from “flipping” (buying/renovating and immediate selling) as programs like The Block on Channel 9 have duly demonstrated.

It’s not akin to a company that can increase its customer base considerably without length of time being a critical factor.  Rather, it’s a steadily climbing asset dependant on many economic factors – the most fundamental being peoples need for it.  Only those vendors who have owned their acquisitions for 10-plus years will have experienced substantial returns (even taking into account the recent downward phase of the property cycle.)  Furthermore, they have been protected from any US-style “crash” by Australia’s prosperous status of low unemployment, regulation of loans, a growing population and a sunny long-term economic outlook.

It must always be remembered that our best insurance against a housing crash is not an investor, but an owner-occupier – they make up 70% of home owners. In recent times owners, not suffering under any prospect of forced sales, have underpinned the overall value of the market.  Over the past year, those who have needed to sell have – in due course – dropped expectation (in some instances lowering prices by as much as 15% to 20%).  However, even though we bandy around that popular adage of a vendor needing to meet the market – we might as well be talking to the wall, because owners – most of whom are in gainful employment – simply don’t need to meet the market, they’re perfectly happy to hold until the next boom totters along.  So, all in all – so far as Australia’s concerned – property’s been a pretty safe bet – but maybe the tables are starting to turn?

Thus far, we’ve been used to measuring patterns of growth over a number of years, not the volatility of days. But this is all about to change with the introduction of Australia’s first “daily house price index suite”, which will track timely market movements (without being unduly influenced by compositional biases).  It’s been put together by the most accurate real estate data provider we currently have – RP Data/Rismark.

Most property graphs show smooth lines of movement taken from data updated on a monthly or quarterly basis.  They have not been subject to the more volatile day-to-day movements that show clearly to all who work in the property.  By updating property sales as and when they are recorded, the line on the graph starts to look a little more unstable and provides a fascinating insight into a microscopic view of market sentiment.

However, while daily house price movements avoid the violent volatility associated with various companies floated on the share market, they have the potential to inspire a similar reaction.  Furthermore, the index has been produced with the prospect of being openly traded, thereby swinging it into the hands of large overseas hedge funds that want to start betting (hedging) against future movements our property market may take.  It’s not only large institutions who can play “casino” with the daily index, it’s everyday folk like you and me who don’t want to lay down a large deposit on the real thing (which is a growing demographic).

No one can be against the concept of having increased transparency in market movements.  Australia’s residential property market is worth about $4 trillion, so access to reliable timely data is critical for institutions such as the RBA. However, encouraging anyone to view property as something to take short-term bets upon is moving away from the fundamental understanding of property’s primary purpose, which is essentially a place for shelter. This has the dangerous potential to bubble and topple under a mentality that rides on “get-rich-quick” speculation.  Even though many will argue that on the current view, volatility is marginal compared with a day’s ASX trading, it does not take away the fact that we’re encouraging people to gamble on something that should never be used for such a purpose.  We’re effectively opening the gates to a different and dangerous mindset.

As I said above, the property market is underpinned by an owner-occupier mentality, but easily tradeable assets are not.  Furthermore, investors make up an increasingly dominating proportion of certain volatile sections of our real estate market (principally high rise and mining towns) and even in the “nothing safer than bricks and mortar” side of things they’ll be quick to bail if Australia hits that sticky point. Instead of looking at graphs, we should be encouraging real ownership by providing greater promotion of solid well qualified models such as the first-home savers’ accounts.  It might be an old-fashioned view, but it’s a much safer one that taking short-term bets in a property casino.

For those tempted, feel free to lay your chips on the table because based on the information so far, it doesn’t look overly dangerous.  However, I would heartily encourage you weigh long-term risks carefully.