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.