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.