We’re in the Money!

There seems to be a perceptible ‘sigh of relief’ across Australia now that spending has started once again.  As Deputy Governor of the RBA, Phil Lowe, pointed out in a recent speech earlier last week entitled; “Internal Balance, Structural Change and Monetary Policy”

“Nationwide measures of house prices have increased by around 4 per cent since mid last year, after having declined for around 18 months. Home lending approvals and auction clearance rates have both risen. Equity prices are up over 20 per cent since the middle of last year. And the level of consumer confidence is now well above its long-run average level. Despite what one often hears, households do appear to be feeling better about both their finances as well as Australia’s medium-term prospects.”

Mr Lowe is correct in his assessment of the housing market – conditions have improved and people are once again out and about leveraging against existing assets, and pooling their savings into bricks and mortar.

In Melbourne, according to the REIV, the overall value of residential sales at auction has increased substantially compared to this time last year. Transactions sold at auction over the first few months of 2013 currently total $1.8 billion, compared to $1.5 billion in March 2012 – and the value of private sales has also risen from $3.9 billion to $4.5 billion. It’s a remarkable improvement considering overall turnover last year was back at levels not seen since 1996 as we limped through 12 months of no perceptible growth, aside from a slight ‘uplift’ in the numbers attending both auctions and ‘open for inspections’ in December.

So is it back to business as usual? Well, for the time being maybe – except of course for first home buyers who are struggling to join the party in any significant proportion – a segment that seems to be discounted amongst those calling ‘recovery.’  Albeit, it’s clear from the Governors speech that the post GFC period, during which we’ve been encouraged to save and pay down debt, is drawing nigh.

I suspect, outside of the daily grind most endure to keep their mortgage repayments under control whilst squirreling away funds for retirement, scant thought is given to the broad concept of ‘money’ – or indeed where money essentially comes from.

Whenever we hear a speech on the housing market from the RBA, it’s accompanied by a short history lesson on the major influences that have lead to our fortuitous years of ‘boom’ appreciation, during which we’ve seen median house prices balloon some 200 per cent – outpacing both wage growth and inflation over the same period.

For example, in one of their most recent publications cautioning on a lower growth atmosphere, we were educated thus;

“Over the past 20 years or so, upturns in the housing market have been accompanied by an increase in the growth rate of credit. But those years were also a period of structural change as the economy moved to a higher level of household indebtedness. Generations of households yet to buy their first home, or still wanting to trade up, were taking advantage of easier access to credit, which among other things had been facilitated by the shift to lower inflation and lower interest rates in the early 1990s.”

It’s a seemingly fitting ‘non emotional’ explanation to explain away the dramatic increase in prices – albeit it doesn’t quite paint the full picture of where this supply of money actually originated from.

It was perhaps the economist JK Galbraith who ‘coined’ the best explanation of our monetary system when he commented “the process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.”

I’m sure some reading this that will be well educated in the dynamics of ‘debt’ creation – it’s no hidden secret, just rarely discussed.

However, there will be a good proportion who have yet to be initiated into the remarkable system of monetary supply that has allowed the majority of our ‘currency’ – some 95 per cent of it – to be ‘created’ out of thin air through the process of bank lending.

In fact the story behind this great supply of money would make a fitting accompaniment to the unfolding plot in the film ‘Oz The Great and Powerful’ – as long as we ‘believe’ it doesn’t really matter what’s occurring behind the scenes – processes which in arguably ‘less responsible’ hands, ultimately lead the world to the brink of economic collapse.

And as countries around us wake up to the devastating re-percussions of what can happen when ‘things go awry’ – organisations campaigning for a ‘better way’ are slowly gaining traction.

If you have an innocent understanding of economics, you may still be under the illusion that banks make their profits by leveraging against depositors funds and thus, charging interest on the loans they advance through a process called ‘reserve ratio’ or ‘the money multiplier’ – keeping a proportion of the balance safely aside whilst extending the rest to a borrower as credit.

However, whilst no one would disagree that economics is a complex subject in its own right – this myth, was ‘debunked’ a long time ago  – although perhaps more publicly so since the on-set of the GFC.

Importantly, the central bank doesn’t control the amount of money circulation – commercial banks do – based on their own models of risk assessment, which are arguably developed and manipulated behind closed doors.

You see, when a bank extends a loan, the figures typed into your loan account are just that – simply numbers put there on the premise that the bank has assessed you a ‘credit worthy’ individual who will honour the terms of their contract.

In the simplest sense, this loan – the figures typed into your bank account created from ‘diddlysquat’ – are counted as a ‘deposit’ – money you owe to the bank, and therefore instant ‘wealth’ upon which the bank can extend further credit into the economy.

Banks don’t have to limit themselves to lending out this somewhat ‘fictional’ money based on any ratio set by the RBA – or the funds they receive from depositors – in other words, it’s commercial banks that control the level of ‘money’ (debt) which circulates in the system.

Consequently, almost all the currency ‘out there,’ is money which has been created and expanded through an increasing variety of financial models. Money ‘loaned’ into existence with interest attached – for which additional funds are required to service the extra repayments. As the money supply increases – so does inflation on the goods for which it ‘funds’ – principally real estate.

Let me briefly re-cap. In almost all modern countries operating under the same system, only 3-5 per cent of ‘real’ money originates from government owned mints, the rest is conjured up with the words ‘I believe’ when a bank makes a loan.

As Adair Turner, Chairman of the FSA, Speech: ‘Credit Creation and Social Optimality’, eloquently put it following the GFC in Sept 2011

“The banking system can thus create credit and create spending power – a reality not well captured by many apparently common sense descriptions of the functions which banks perform.  Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy.  But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit.”

Considering banks favour lending against existing collateral over and above the support of say small business and enterprise, it should come as no surprise that the vast majority of bank lending has been towards the purchase of ‘bricks and mortar’ – and whilst the only constraint on the amount of money ‘created’ is people’s ability to service the debt – we should not be under any illusion that the RBA wouldn’t welcome a return to ‘business as usual’ in our revolving system of finance.

According to RPData, Australia’s property market is worth an estimated $4.86 trillion, which is three and a half times the value of Australia’s stock market and combined superannuation funds. Therefore, it’s no surprise that the health of our property market dominates the conversations of both those in and out of the real estate industry – an asset class towards which banks are highly exposed.

Without going into further detail, the one problem with our economic model is the requirement for boundless growth – more debt requiring more activity just to maintain the amount of money we have in circulation. Without it, we lose our jobs and our ability to service this growing supply of credit.

Collectively, we’re all in debt – and for those who aren’t, the remainder pick up the slack.  And although its broadly recognised that the initial boom in borrowing which occurred in the decades leading up to the GFC is unlikely to continue at such a rapid pace – you would be foolish not to recognise the risks associated with an economy which has its foundations pinned on a future which has to forever ‘be bigger & better’ in order to stay afloat.

I came across a cartoon the other day – “Oh, The World is $40 Trillion in Debt? Please, tell me who the world is in debt to?”

The answer of course, is the banks. Albeit, whilst we’re rocking along under the protection of the mother of all mining booms, underpinned with increasing demand from China, and in the throes of relatively rapid population growth the party can seemingly continue ad infinitum.

Albeit, make no mistake – the rocky foundations are there – a younger generation slowly ‘priced out’ – for which the government can only assist through the extension of a further easing of ‘cheap’ credit, which thus far, has not produced any lasting effect.

Not to mention an aging population who will eventually outnumber the workers – leading the ‘big Australia’ advocates to shout out ‘populate or perish!’

The game of checkmate won’t change, until the system changes, and the system won’t change until its hand is forced.

With these thoughts in mind, perhaps it’s time to remind ourselves what Citi’s Global Head of Credit Strategy, Matt King, cited late last year as “‘The Most Depressing slide” he had ever created.

 “In almost every country you look at, the peak in real estate prices has coincided – give or take literally a couple of years – with the peak in the inverse dependency ratio (the proportion of population of working age relative to old and young).

In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children’s generation. Unfortunately, that doesn’t work so well when there start to be more pensioners than workers.”


Food for thought is it not?

Catherine Cashmore


Can you really call “price growth” in a housing market that locks a growing percentage of first home buyers out a ‘recovery?’

Can you really call “price growth” in a housing market that locks a growing percentage of first home buyers out a ‘recovery?’

I wrote a few weeks ago regarding the potential stagnation that is likely to affect our property markets into the future, due to an increasing number of first home buyers failing to enter onto the initial ‘rung’ of the property ‘ladder’ – and the evidence continues to mount.

Despite the widely spruiked improvement in ‘affordability’ which comes on the back of continual low lending rates and renewed optimism from investors, in turn helping transaction figures increase from a very low base – first home buyers are simply not responding.

As Larry Schlesinger reported last week – overall numbers for this demographic have fallen to a near eight year low with the latest ABS data showing a drop of 11 per cent in mortgage commitments between December 2012 and January 2013 – it paints a woeful picture buried in an economy which remains the envy of our Western counterparts, and has subsequently left some wondering if prices can continue to rise without a consistent contribution from the first home buyer sector?

Recent research from RPData is also emphasising the potential side effects of our stagnated ‘home buyer’ market, with the average length of ownership for both houses and units now sitting at 9.3 and 8.2 years respectfully.

Cameron Kusher from RPdata assessed the increased holding periods in light of an overall lower volume of transactions. He concluded that high property prices along with inflated agent commissions and stamp duty charges, were acting as a disincentive for owners wanting to sell.

However, considering there’s been such a marked increase in the length of time property owners choose to ‘stay put’ – periods which have jumped well over 30 per cent on those recorded 10 years ago, I’d suggest deeper concerns are playing into the equation.

For units, the rise in the relative holding period over this ten year period is even more so than that of houses – pushing towards a 39 per cent increase. As apartments are generally considered the ‘foot through the door’ property type that attracts a younger ‘first home buyer’ demographic, and a forthcoming supply of new unit developments has been fairly robust across the major capitals, you could be forgiven for expecting the turnover of home buyers ‘upgrading’ to larger dwellings to be evidenced by a shorter holding period rather than longer as shown.

However, the vast majority of inner city established unit and apartment stock is investor owned, (close to 70 per cent in some localities,) therefore, it’s fair to assess the – ‘buy and hold for the long term’ – mind set is bearing a significant influence in restricting supply for the lower priced sector of the market which consequently results in a ‘bottle neck’ of demand and longer holding periods – demand a proportion of first home buyers struggle to compete against.

As I previously pointed out, property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading (and then downsizing) a ready market to sell to in order to make the move.

When this flow is intercepted and holding periods subsequently increase, a growing minority of low income workers find themselves sandwiched between rising rental prices and scant opportunity to exit the merry-go-round of funding someone else’s investment.

It has puzzled some that, regardless of this first home buyer lull, there’s been a marked improvement in most markets across Australia. The latest RPdata mortgage index is also showing a strong surge in the number of loans advanced over the eight weeks to March 10, reaching “the highest reading since August 2009.”

The question remains whether the upsurge in price growth can be sustained without the first home buyer sector – to produce the annual 10 per cent rise for 2013 many ‘economists’ are now all but ‘assuming’ based on barely three months of ‘daily’ somewhat ‘bumpy’ data?

This would once again push median values past both inflation and wage growth – good for those who already have a property and for the real estate industry as a whole – but increasingly painful for a younger generation who will no choice but to take out increasing levels of ‘debt’ to fund their accommodation.

As the Champaign corks are being popped, a few moderating voices have come to the fore – David Llewellyn-Smith in his piece ‘Is Australian Property worth the Risk?’ was one such voice to provide a balance to some of the bullish commentary we’ve seen of late – commentary which on the one hand ‘happily’ informs how ‘affordable’ property is, whilst blithely ‘high fiving’ an onward return to ‘peak’ prices with the other.

David suggested that due to APRA enforcing banks to lend dollar for dollar against deposit growth, (“growing at 7% per annum and falling”) credit availability was bound to be constrained.

It’s a fair point, although I often wonder exactly what APRA is doing to ‘constrain’ lending considering individual bank risk models are arguably developed and manipulated behind ‘closed doors.’

This aside – inflation has to some extent has less to do with the overall money circulating in the system, and more to do with where the current supply of money is being channelled.

In other words, although constrained lending has an impact (particularly for first time buyers), and GDP data highlights a fall in disposable household incomes by approximately 0.2 per cent over the past year, Australians are still saving more, and aiming to ‘shore up’ these remaining funds into ‘safer’ long term assets.

Therefore, as housing acquisition continues to be the preferred model of ‘investment’ for around 42 per cent of our current buying market – even with constrained lending – inflation can be expected, at least for the short term.

In essence, it’s the investor demographic that are primarily placing a floor under the ‘affordable’ bracket of our estimated $4.86 trillion” (RPData) housing market thereby preventing any ‘setback’ in price growth resulting from a lack of first home buyer participation.

Last week Michael Yardney defended investors against any suggestion that large numbers choosing to invest in inner city terrains were adversely affecting first home buyers.  Michael Matusik was another voice that came to the fore suggesting first home buyer expectations are ‘out of wack’ considering 60 per cent of those purchasing last year chose properties with four bedrooms or more.

In light of the low percentage of first home buyers overall, and taking into account that most take loans around the $300,000 level, I’d suggest those purchasing 4 bedrooms or more are likely to be couples taking advantage of various stimulus grants to purchase in fringe localities – the price point of which is often comparable to a small inner city unit.

Albeit, this should not overshadow core trends which hold the potential to lock up ownership between a reducing number of owners and investors, who in turn have to provide accommodation for an ‘increasing’ number of renters.

To sit on the sidelines and argue that a growing percentage of investors have not played a substantial part in the dramatic growth of capital city property values and consequently placed a strain on first home buyer numbers, is lunacy in light of the data we have to hand.

It’s not a case of labelling individual property investors as ‘greedy’ – the majority are not – they are simply responding to, and taking advantage of, current Government policy which assists using property to provide an income stream into retirement – a issue we all need to attend to through the course of our working lives.

It’s also important to understand, that as proportion of any property market, investors are absolutely essential.

However, when reports are released, such as the one we saw last week on ‘Housing Supply and Affordability’ by The National Housing Supply Council (NHSC) stating;

 “Couples, both with and without children, have experienced the largest falls in home ownership. There has also been an increase in the share of those approaching retirement age that still have a mortgage. Many of these changes are likely to have been at least partly driven by the increase in house prices over the decade, making it harder for people to get onto the housing ladder and taking out proportionately larger mortgages when they do.

Then surely everyone with an interest in the health and wellbeing of their children and grandchildren, should be actively seeking solutions which threaten to adversely affect their future, at the expense of ‘pumping’ up prices and labouring them with an ever increasing mountain of debt?

In the UK, they have focused on forcing better use of existing homes with policies such as a ‘bedroom’ tax and ‘mansion’ tax – however taxing people who choose to pay more to live in larger properties, or assessing a single individuals ‘need’ for ‘2’ bedrooms rather than ‘1’ without an understanding of their personal circumstances is not the solution.

Rather, the answer lays in making sure lower priced stock that comes to market is directed towards the ‘buying’ demographic most in need – and currently, this is not the investor, it’s the first home buyer.

Under current policy, we’ve managed to lock the established housing market up in a hotbed of ‘speculative’ demand, producing a weak construction sector which is further impacted by years of poor planning for population growth.  This has consequently resulted in an increasing number of ‘potential’ first home buyers pushed into a rental market of rising yields.

Only through a number of changes to current Government policy is it possible to slowly reduce inflation in the established sector and open up the potential to provide feasible and affordable ‘new opportunities’ in both inner and outer suburban regions. However, if we sit back and do nothing, then warnings coming from organisations such as The National Housing Supply Council, or McKell institute, will increasingly come to fruition.

Catherine Cashmore

They’ll be no housing recovery, until we see a construction recovery.

There’ll be No Housing Recovery, until there’s a Construction Recovery.

Last week Michael Yardney re-published his rundown of Australia’s market cycles from the 1980’s onwards.  The premise was to calm any ‘would be’ property investors into recognising the various historical trends that traditionally affect the ‘ebb and flow’ of Australia’s real estate market.

If you’re a regular reader of Property Observer, you will have no doubt had your fill of where each individual state sits on the ‘property clock.’ It’s an arguably overused term to provide a fairly limited theory for our frequent ‘boom and bust’ cycles.

Question why property prices are so high and you’ll receive a basic lesson in ‘real estate agent’ property economics’ – top of which will be supply vs. demand – “We have a growing population and not enough homes” – and on and on it goes.

Indeed, various commentators have already extrapolated out two months worth of housing data to ‘conclude’ a rise of 10 per cent ‘+’ over the course of 2013.

Certainly if you want to ignite an emotional debate, housing is right up there with politics and religion.  Since history began, it’s remained an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for – land.

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 ever more so as the population expands.

Indeed, ‘Property rights’ are a foundational component of a capitalist economy, and under our current system of ownership, government’s profit nicely from the advantage.  In Australia, state government revenues from property related taxes alone, equate to around 23 per cent of the total balance sheet – hence why ‘stamp duty addiction’ and the consequential need to incentivise buyers to keep transaction figures high, has such a strong hold.

However, no one should be under the impression that property prices are high due to demand factors from home buyers.  Prior to the GFC, following a global “borrowing” shopping spree of cheap credit, Australia’s ‘too big to fail four’ were amongst the world’s most heavily exposed to the residential real estate market, with a grand total of 59 per cent of loans offered to this sector alone.

Australia’s banks are as ‘pinned’ in their reliance to the ever expanding growth of our resident population’s desire to ‘borrow and buy,’ as everyone else is who has a hand in the pie.

In this ‘boom and bust’ merry-go-round culture, we’ve simply borrowed more to pay more, the vast majority of which has gone into residential housing – inflating prices disproportionally.

It’s a somewhat inevitable conclusion – made all the worst due to restrictive planning laws which have failed to accommodate for substantial Capital City population growth – that the ease of credit has advantaged those at the beginning of its issuance, to the expense of those at the end.

Baby boomers who got in at the start of the ‘lending boom’ have certainly profited over those who are now at the ‘sticky’ peak, where prices have already had their ‘golden years’ of growth and the big profits have been made.

Mortgage debt – the largest component of all debt in Australia – is aptly living up to its original French meaning for the first time buyers paying inflated prices, that being a “death contract.” However, as long as those purchasing are able to meet their repayments, the banks can continue to create money ‘selling’ their loans – (backed up by overly generous wholesale funding guarantees) – and there’s little incentive to improve the situation for a growing minority sitting at the bottom of the pile.

Albeit, there’s no doubt the property market has once again started to simmer – most agencies are reporting a ‘spike’ of active enquiry – some declaring levels equal to those seen back in 2009 during which the Federal “first home owner boost” was fuelling a post GFC boom.

Glen Stevens also conceded as such, stating that residential investment seems to be “slowly increasing (Australia wide), with higher dwelling prices and rental yields.”

Share markets have trended higher, and there’s been a marginal uplift in retail spending all of which filters through to the property market. Confidence that we’re on the ‘up and up’ again, combined with ‘cheap credit’ simply adds fuel to the fire.

AFG is once again reporting a ‘record’ month of borrowing with their February figures up 5.3 per cent on this time last year – (albeit with ‘subdued’ first home buyer activity.)  Australia’s largest mortgage broker was reporting increasing activity as far back as February 2012, fuelled by a strong investment sector (which currently makes up roughly 42 per cent of the residential market.)

As Michael Matusik pointed out a few days ago, ‘Australian’s borrowed $200 billion to buy residential property last year – 7 per cent less than the market peak in 07/08.”

In Melbourne, clearance rates are up, the auction market is bubbling – and if ever there was an ‘out on the street’ example of the ‘boom and bust’ physiology in motion, it can be viewed in the inner suburban streets of Melbourne on any bumper ‘super Saturday.’

By their very nature, auction sales have played a significant part in igniting golden periods of rapid inflation in the established residential sector.  Bidders evidently have their confidence underpinned when they see others competing for the same property – budgets tend to be pushed, and the under-bidder walking away with that ‘gut retching’ feeling of empty disappointment, is the one who’ll stretch their finances for the next auction they attend.

As buyers see prices go past expectation in an open and arguably ‘transparent’ atmosphere, there is a feeling of ‘act now or miss out’ – it’s a feature of any rising market, whether stocks or property and the build in intensity is rapid.

As an example, if two buyers are going head to head during an auction – and the ‘winning’ bidder exceeds by just $1,000 – there is another buyer – the under-bidder – who has a similar budget and, with a determination not to lose twice, needs little persuasion to bid to the same level (or higher) on another property.

If you want a really good demonstration of this scenario – congregate around ‘investment grade’ properties in the popular markets of ‘Elwood’ and ‘St Kilda’ (as an example) – whilst the general consensus remains that emotional ‘home buyers’ push the market – they don’t shine a light to a couple of investors going ‘head to head’ for a negatively geared asset, which will produce a fairly robust rental income and decent depreciation schedule to boot.

Albeit – do not mistake this for a market recovery – once again, it’s all confined to the established sector.  Everyone is effectively fighting over the same pool of existing dwellings in a never ending game of ‘musical chairs.’ We’re simply paying higher prices for an ageing stock of second hand homes.

Indeed, there’ll be no housing recovery until we have construction recovery. As the first ABS building approvals update for 2013 indicated – approvals in January fell for a second consecutive month, lingering back below the 13,000 mark.

Spokesperson for the HIA – Harley Dale – commented that even with a rise of 3.3 per cent in detached house approvals – overall approvals for this sector are still down by 1 per cent over the three months to January 2013.

Fletcher Building LTD is also flagging the weight of the issue, stressing that the ongoing weakness in Australia’s new housing sector, is likely to last until the end of the year. Along with the others, they are crying for lower rates and a return of incentives for first home buyers.

Last week, the Federal Government’s housing supply council revealed the nation faces an “an impending very substantial fall in home ownership” – the report goes onto state that “Baby boomers will be the last generation to live the home ownership dream” with the so called ‘trend’ towards renting, a “natural response to higher house prices.”

A younger generation are now being told the only way they can get ‘into’ the market is by either tapping into ‘mum and dad’s’ equity, or living in the family home longer and perhaps getting a foot through the door as an ‘investor,’ rather than an owner occupier.

All in all, so long as the profits keep rolling in, there is no incentive what-so-ever to address these concerns. The powers that be can keep their ears covered, whilst singing loudly to any ‘forthcoming’ pain which may be experienced by a future generation that ‘no longer can.’

Catherine Cashmore

Home buyers should be the core focus of any real estate market:

I read an interesting column this week penned by Madeleine Morris – a Melbourne based journalist and writer for the BBC.

The focus of her piece was our ‘lucky country’ status and the inevitable costs that accompany that title’s privilege.

After starting her piece lamenting the inflated cost of limes – pointing out with an outlandish splutter that limes cost $2.25 each (in the UK they’re roughly $0.49c each) and consequently “storming out of the shop limeless” – I had to have some sympathy.

For every dollar of wealth we’ve gained as a nation, it’s been speedily called upon to pay for the rising costs of essentials such as food, water, electricity, and housing – all of which are stretching the limits of any supposed wage growth which for certain sectors of the community has been woefully inadequate.

Madeleine has been living in the UK for the past 12 years, so the recent price rises were more than a nasty shock.  When commenting on the insanity of paying over $2 for a single lime, the response from her father was as follows:

“Darling, look around. People here are rolling in money. We live in an unbelievably wealthy nation.”

In case that statement caused you to splutter over your cup of coffee – wondering where your slice of the pie has disappeared to, it should have perhaps been framed a little better. The money we’re rolling in isn’t falling out of back pockets. In fact, an overwhelmingly large proportion of our national wealth – roughly 70% of it – is locked up in housing.

It’s certainly not a desirable situation. I’ve read more than enough property articles cutting and pasting ABS ‘wage growth’ graphs along with international comparisons – using them alongside housing inflation charts, with an abstract wave of the han, to brush away any concept that our residential real estate is overpriced.

Worse still are those which reference ‘property cycles’ without any qualifying data to show the ‘whys’ behind their research and the reason a future Australian profile may not be quite so sunny.

All stress the ‘underlying fundamentals’ of our market – supply, demand, population growth, so called ‘responsible’ lending practices, lower rates of interest, dual-income families – in an attempt to waylay any fears which may be induced by the oft-quoted property bears who commonly stress their case underneath lofty headlines of a ‘housing crash’.

However, it would be hard to protest that such large excesses of wealth, sitting in one comparably ‘illiquid’ asset class is favourable to a more balanced portfolio. Especially as the purchase of prime residential property in part of a self-managed super fund has outstripped growth of other SMSF investments by 50% over the previous four years and looks set to continue along this path.

Put simply, a larger proportion of Australians are relying on the increasing value of residential real estate to fund their retirement – hanging their hats on the old mantra that ‘property always goes up’ with little to qualify the data or paint the broader picture in real terms.

Furthermore, recent insecurities over prospected changes to current superannuation rules have encouraged a greater proportion to look towards an improving housing market as a relatively safe environment to park funds.

It’s all well and good whilst values are increasing, however thus far in Australia, those increases have been primarily inflated through careful – some would say intentional – market manipulation.

Decades of poor planning for population growth has ensured land values and the slowly reducing pool of established dwellings – favoured by most negatively geared and SMSF property investors as well as the vast majority of home buyers – inflate disproportionately under growing demand from the larger proportion of people who want to park themselves – and their investments – in our established capital city residential market.

A very real victim to come out of this is the construction industry. The overwhelming consensus amongst investors and home buyers – buoyed on through the heady experience of a decade’s worth of capital growth which has been arguably and “unsustainably” forged through periods during which it has outpaced the rate of inflation – is that ‘established’ is better than ‘new.’

We’re not effectively developing, planning or building infrastructure to lure demand away from this sector and it’s resulting in a construction industry that is dying on its foundations. Even with the recent ABS release of New Home Sales data, which saw a modest rise of 4% for houses and 4.9% for units over the month of January – it follows a long declining spiral in which the industry suffered its biggest job losses throughout the course of last year.

Outside of the carrot-and-stick approach of FHO grants or artificially low interest rates, new property remains a hard sell and, consequently, we have an increasing number of buyers fighting for a decreasing pool of ‘established’ second-hand property.

We’re effectively sentencing large swathes of home buyers to the relative ‘Aussie’ equivalent prices of London and New York, principally because we’re not producing a large enough recourse of ‘new’ alternative options which have the essential elements to attract the attention of home buyers and consequently ease demand.

When land is released in fringe locations, prices are artificially inflated with needless taxes and development overlays.  Furthermore, a woeful lack of infrastructure to facilitate the new estates – which every ‘Joe’ on the street recognises is needed at the start of a project, not 20-plus years down the line if we’re to lure buyers outwards – leaves many developers struggling to offload stock to a dwindling market which ‘booms and busts’ on the back of cash grants and ‘would you like an extra bedroom with that’ special offers.

The other ‘alternative’ is ‘tower blocks’ which, as I point out here, are hardly suitable.

It should concern us all that construction lives in a state of relative stagnation – hobbling along despite the low-interest-rate environment – especially if we’re not going to start unravelling demand from established real estate sector and ease supply.

Building a portfolio of real estate investments and locking up wealth in property is all well and good for one generation – but not so good for the one following – unless we’re providing feasible alternatives.

Furthermore, a reducing pool of first home buyers entering the real estate market also isn’t so good for the mortgage-free 60-plus individuals looking to tap into their pool of equity and downsize.

Pyramids need the beavers at the bottom to keep the top pumped, and at the moment in our capital city established terrain, the beavers are coming from an increasing pool of investors which jolly along on the back of that unpredictable thing called consumer sentiment. I’d argue that it’s not the best foundation for a healthy real estate environment, which should ideally be built around the needs of its community.

Viewing housing as merely a tool to build wealth and drive the economy takes a fair amount of manipulation.  It’s not hard to keep prices inflated – if the worst happens, relaxing rules on foreign investment and providing a boost of cash grants as we did during 2008 – is effective enough.

Needless to say, the best investment any economy can manipulate is to look after the newer generations who will face their own fight to build enough wealth for retirement. The last thing we should aim to do is burden them with an increasing cost of residential housing.  In this scenario, what one generation gains is a shot in the foot for a large proportion of those not inheriting the ‘goodies.’

As it is, there is a limit to the tax deduction you can claim against super, however there is no limit to the tax deduction you can claim against negative gearing. It has been the best policy imaginable for property investment – that is investment into the established real estate market – but a largely dysfunctional policy to buoy up the new home market or assist the needs of younger residential home buyers.

Ideally, home buyers should be the core focus of any real estate market as it’s home buyers who bring true investment into a country – buy a piece of land and the propensity to ‘settle’ and contribute to the local community, environment, and neighbourhood culture, provide the foundation blocks often only ownership can inspire.

However, for the inner-city areas where most want to live, the biggest furphy going is that it’s not possible to cope with a population squeeze without building a host of ‘rising oracles’ in the order of 100 metres or more.

A movement entitled Create Streets in the UK is one such report that has forged inroads into the case for low-rise accommodation – rightly claiming the exact same number of residents currently situated in the aging tower blocks can be accommodated in low-rise dwellings taking up no extra space.

Another such figure to take note of is Robert Dalziel, the London-based architect for Rational House. He has visited nine cities around the world, including Mexico City, Shanghai and Berlin, to examine how to make high-density living agreeable for a broad demographic of home buyers – with author Sheila Quershi, he’s detailed his findings in a book – commissioned and published the Royal Institute of British Architects: entitled A House in the City — Home Truths in Urban Architecture.

I’d suggest the construction industry would improve two-fold if we placed the same level of intelligence and innovation in Australia’s future design. However, at present, there’s little hope because it’s far more ‘profitable’ to build apartment blocks or multi-story dwellings, aimed at investors and housed by student renters, than it is to increase the supply of new accommodation for our home-buying demographic.

Where have all the price quotes gone?

When did agent price quotes become a state secret?

By Catherine Cashmore

I must have missed when price quotes became a state secret because – barring a few exceptions – they used to be listed on just about every property advertisement for sale.

Anyone in Victoria who has searched though one of the online real estate websites recently will understand what I’m talking about –and judging from Australia’s real estate obsession with property and wealth building it would no doubt be a fair few million.

Putting a price on a real estate, particularly with homes offered as private treaty, is not difficult.

Ideally, an assessment of the property is undertaken by the sales agent – one familiar with market sales in the immediate locality – and in conjunction with the vendor, a price is set that produces a happy balance between both vendor expectation and local comparable sales.

If interest is lagging in the two weeks following, the agent can negotiate with the vendor to reduce the range.

If sales enquiry is healthy – or an offer in excess of the range is achieved and subsequently rejected – the agent has the ability and ethical responsibility (in conjunction with their vendor) to change the quoted range to reflect the heightened level of interest.

For a proportion of agents acting within their “reasonable” duty of service, this still is the norm.

However, now it seems – in Melbourne at least – every second advertisement you click upon, whether auction or private treaty, has “contact agent” in bold letters underneath the subheading “price”.

An enquiry then produces a roundabout of guessing games with somewhat wishy-washy lines totted out, such as “it’s too early to tell”.

In other words, the agent is indicating he has no idea where to place his price quote, because Joe Blogs hasn’t yet walked through and in some occurrence of pure fiction (which I have yet to see with my own eyes) stopped to tell the agent exactly what he’s prepared to offer.

While we all agree in part that a market can only be valued on what a buyer is prepared to pay, this is precisely why sales agents appraise property against recent comparable market sales in the first place.

When combined with good local knowledge, a market appraisal will give the agent a very good indication of buyer demand – at least to the degree of being able to publish a negotiable price range that falls in line with vendor expectation at the outset.

I should pre-empt before going further that a proportion of agents I speak to will give me a realistic idea of vendor expectation upon enquiry – however, after years of complaints within the industry regarding those who still choose to lowball their price ranges or quote using a ‘+’ price that can mean anything from 5-30% – it seems the practice has now moved into the verbal domain, allowing a number of agencies to continue their lines of deceit with no fear of reprimand.

It’s time we valued the ethical side of our sales industry with a little more seriousness than pricing an auction on e-bay. The continual problem with different methods of quoting – or lack thereof – runs to the very base of mistrust most buyers have against the real estate industry as a whole – and it’s a brush that tars us all.

Furthermore, considering the current atmosphere, in which Victoria has been through roughly two years of minimal movement in actual house prices with the market barely shifting week to week (that is, unless you’re following the “daily house price index”, which seems to bump along, offering its own short-term interpretation of price growth). No agent can use the excuse that he’s been caught out by any dramatic shift in market movements or buyer sentiment. Most homes are selling at their comparable appraised value, and they have been doing so for an extended period of time.

It seems silly to point out the obvious, but no buyer likes to play guessing games when it comes to putting a price on an advertised listing – and neither should they have to. Everyone understands real estate is a negotiated asset, however, the verbal game playing that now surrounds the sales industry in Victoria is often laughable – ranging from “we don’t know yet” to “properties in the area are selling in the $400,000 and $500,000 range” – an insulting response at best.

If we were operating in an ideal world, buyers would ignore price quotes altogether and do their own research to establish market value prior to spending hundreds on a pest and building inspections or solicitor fees chasing an unobtainable dream. However, closely comparable sales data is not readily available for buyers.

Computer-generated “estimates”, as Patrick Bright pointed out last week – are, more often than not, hopelessly inaccurate.

Suburb reports are equally unhelpful, and while median data will give an indication of the dollars the majority market is spending, it’s no help when evaluating individual property prices.

In Victoria auctions often result in “undeclared” results, and private sales are just that – private. The street name will be listed, but the other relevant and essential data is missing.

Using a buyer advocate who has access to such information combined with the market knowledge to offer an educated opinion is one option – however, unless we’re going to place a rule of law that every single buyer should pay a few thousand for such a service, it’s reasonable to suggest buyers deserve a “hint” of vendor expectation by way of an accurate price quote before wasting time and money chasing a dream.

A handful of agencies dealing with the more volatile luxury end of the market, in which interest is discretionary, understandably choose to sell via expressions of interest. However, the decision to drop the quoted range all together from a large percentage of real estate advertisements seems, in a good number of cases, to have been employed as “self-protection” from accusations of “underquoting” – a feature of which results in the price published bearing no relation whatsoever to the vendor’s reserve.

Vendor expectation can often be inflated.  It’s made worst by the commission based competition that rages between real estate agents and their respective agencies – it unfortunately promotes the need to buy a listing or risk missing out to a competitor who promises more. There then follows a process called vendor education – where high expectations are hopefully modified.

In Victoria, if the vendor does not disclose the reserve on the documentation, quoting below the written estimate of market value on the authority is officially “underquoting”. With no reserve written, the written estimate does not necessarily need to reflect vendor expectation.

It may not be admitted as such, but when agents list a property it is common practice to encourage the vendor to withhold their reserve price. This enables a conservative estimate of value – as either a verbal or published quote range – to glean as much buyer enquiry as possible.

The idea is sold to the vendor via explanation of the “buyer pyramid” – it works a little like step quoting – get the lower priced bidders to build momentum during the auction to fuel those bidding with healthier bank accounts to step in at the end.

Without the lower budget bidders, auctions can pull up short without the usual frenzy that has in our boom eras of growth significantly contributed in pushing prices to unsustainable levels.

Needless to say, by the time the auction occurs any gaping hole between the quote and reserve can be waved off with the excuse that the vendor changed his mind – or ‘upped’ expectation.  Hence why it is so easy to get away with purposefully placing the price range below the level at which you know the vendor will sell – when the price range is verbal, it’s even easier to manipulate the figures.

To suggest that a vendor’s expectations fluctuate to such an extent as to not be represented in the price quote is highly questionable. Having worked as a sales agent in previous years, I can categorically say there was never a time where I didn’t know my vendor’s approximate reserve well enough in advance of the auction to place a reasonable quoted range on a listing from day one.

Furthermore, vendors are not without blame. Assuming the price quote is a estimate based on “recent comparable sales” and the vendor isn’t in the dark when it comes to the price quoted on his or her vendor-paid advertising campaign, why would he or she agree to list the property and quote at a level he or she would not be willing to sell in the first place?

In such instances, I would suggest this is a pretty good example of a lowball quoting – conservative at best, deceitful at worst.

This weekend I’ll be bidding on a property quoted at $430,000-$470,000. I already know from my own research of comparable data it will sell closer to $550,000 – I also know from my conversations with the agent, that over 160 groups have inspected the home and he now has “the low $500,000s covered”. The price quote has not changed throughout the campaign.

It’s time vendors took responsibility for their own paid advertising campaigns and ensured their reserves – or ranges in which they’re prepared to negotiate – are published at the outset. If minds are changed, quotes should be changed, but leaving such a large question mark for buyers who are increasingly growing frustrated at having their time, money, and energy wasted is damaging for all concerned.