Obsessive perceptions with Australia’s housing market.

Obsessive perceptions with Australia’s housing market.

Like many others, I was somewhat taken aback by the comments put forward by Margaret Lomas last week in relation to negative gearing – significantly, the suggestion that any change from the current status quo would lead to ‘600,000’ homeless individuals and an ‘investor exodus.’

The comment attracted a range of humorous responses – in particular, Fairfax reporter Chris Vedelago who suggested rather accurately on twitter, that Margaret Lomas had derived her research from the ‘Magic Stat Tree.’

And whilst I agree that a sudden and complete retraction of the policy would be foolish – favouring a slow wind-down whilst other policies are implemented – in particular strategies to aid development and increase supply – the notion that touching the ‘golden egg’ of negatively geared property assets in a way which may dissuade buyers from ‘banking’ on the established market to fund their retirement would be disastrous – seems to be one that’s culturally ingrained in the real estate fraternity.

I won’t go into detail on why I feel the policy of negative gearing needs to be altered, it’s an issue I have detailed in previous columns and therefore feel I’ve made my opinion clear.

However, I do feel it is worth touching upon the obsessive preoccupation with real estate investment in general, which has played a prime role in pushing the price of property to ever escalating levels, resulting in the yearly assessment made by a number of publications – most recently “The Economist” – that Australia’s property market is ‘overvalued’ – with many off shore and local analysts speculating a fall in prices will eventuate in either the near – or distant ‘post mining’ future.

Even the RBA, who recently gave a speech entitled “Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between” have not ruled out a ‘major housing downturn’ at some distant point – stating;

“We certainly can’t rule out the possibility of a major housing downturn in the longer-term future. It is hard to know exactly what the outcome would be because it depends on how we got to that point.”

The paper makes an interesting read, because it highlights just how ‘uncertain’ the RBA are of… well, ..anything much at all;

“We don’t have a strong view about whether the ratio of prices to income should be mildly rising, falling or constant from here”… “we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again”

Leading one to speculate that if the sophisticates at the RBA are so unsure about the longer term future of Australia’s housing market in a lending environment of which they have marginal control – so much less the rest of us.

And it’s easy to look at the sub-prime crisis in the USA – wag a finger – and preach the safety of our arguably ‘regulated’ Aussie banks.  However, whilst the sub-prime crisis played a role in the great American property bubble – it was not the cause.

The rapid escalation in both prices and private debt was born from a culture of expectation that the future would look like the present or as Alan Greenspan – an American economist who served as Chairman of the Federal Reserve from 1987 to 2006 put it, in the publication of his 2007 book “The Age of Turbulence”

“Flippers” – speculators in places like Las Vegas and Miami.. would use easy credit to load up on five or six new condos aiming to sell them at a large profit even before the apartments were built.”

Albeit, for readers feeling a little nervous at the above revelations, a few sentences later he provides at least some reassurance;

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy”

And as we’ve seen in Australia – irrespective of lending rates which reached close to 9 per cent in the lead up to the onset of the GFC – when such an attitude takes hold, it is remarkably difficult to break or ‘deflate.’

For example in China, despite strict measures such as preventing unmarried couples purchasing more than one residence, or requiring higher deposits for second homes coupled with an increase in the capital gains tax when selling, it has done little to suck air out of a country which has few investment options for individuals outside of real estate.

And in Australia – regardless of the recent comparative blip to property prices since the peak of 2010 (when compared to Europe or the USA) – we remain a nation completely obsessed with housing.

You only have to turn on the TV to be bombarded with programs from ‘The Living Room’ to ‘The Block,’ which make everyone feel like a rooky renovator able to ‘tap into’ the wealth of their property investments with a quick makeover or fuel the perception that you can pick up a good property ‘below its intrinsic value’ and ‘add value.’

And yet bubbles when/if identified are undoubtedly unhealthy from the broader perspective of ‘society,’ leaving a widening gap between owners and renters as speculation pushes prices northwards which, following decades of poor planning for population growth, leave governments firing shots at the market in the form of short term first home buyer grants as the only ammunition they have to reverse the trend – which of course leads to the intended side effect of pushing the market higher still.

As John Howard declared back in 2007 during prime minister’s question time – and good on him for being honest because without exception, I would think most other politicians from all sides of the table would view a ‘crisis’ in similar terms;

“A true housing crisis in this country is when there is a sustained fall in the value of our homes and in house prices”

And perhaps it’s worth mentioning that Howard’s response was in reply to a question challenging the plight of first home buyers from soon to be elected Kevin Rudd – who upon taking office less than 12 months later promptly inflated the market three fold with his first home buyers ‘boost,’ which bore the consequence of leaving many new owners in subsequent negative equity once it was stripped away.

And indeed it is a conundrum.  Considering the levels of private debt – mostly leveraged against housing, and the long term acceleration in the investment sector, which currently makes up around 44 per cent of Australia’s buying market, prices are once again moving northwards as a number of social and economic factors collide.

Increased confidence, availability of cheap credit (such as our current low interest rate environment,) and more importantly, the continuation of a cultural illusion that forgoes any financial prudence as investors pull their finances out of savings accounts before it’s purchasing power is diminished completely – in an attempt to beat the well contained genie of inflation and shore up future security in an environment where basic living costs are high and growing.

There are no quick fixes to the housing affordability conundrum. In light of our high private debt ratios it would be extremely damaging to the economy if there were a crash.  High levels of debt – when followed by downturn in house prices generally result in a greater reduction of economic growth and subsequently an increase in unemployment.

And yet, negatively geared investors, mortgage lenders, leveraged home owners, future state and federal budgets are all counting on rising house prices for future spending needs and long term security.

So the question remains, how much higher can prices possibly go at the expense of a new generation of renters (or as they put it in the UK ‘Generation Rent,’) who have long given up on the Australian dream?

It can’t be solved with short term thinking, however, neither are we sitting in a revolving chorus of ‘There’s a Hole in my Bucket’ –  our economy is strong and there are plenty of sustainable long term policy decisions that would benefit a structured plan to allow a greater number to take ownership and contain inner city inflation.

The key of course is to slowly unpick the current distortions that tie up established market such as negative gearing as one example, and first home buyers grants as a second, whilst at the same time employing policies to increase supply and raise the dollars needed to fund essential infrastructure through (as suggested by economist Leith Van Onselen) bonds, or encouraging large superannuation funds, who are clearly open to the idea, to fast track some of our major projects.

What we can’t afford to do, is kick the can down the road and continue with the same obsessive lines of limited thinking.

Catherine Cashmore



When Booms Bust…

When Booms Bust…

Melbourne is well known as the real estate auction capital of Australia – and possibly the world. Year to date, over $4 Billion homes have been sold via auction (compared to $2.9 Billion for the same time last year,) a number which would include properties sold ‘prior to’ and via a ‘passed in’ negotiation, all of which count towards the weekly clearance rate. 

In the current atmosphere in which sentiment has improved, larger percentages are gaining enough competition to sell ‘under the hammer’ and this has certainly been so from an anecdotal perspective. 

The auction process obviously thrives in an atmosphere where confidence predominates and most selling agents are well educated in the means of manipulation to inspire buyers to openly state their interest in front of a crowd of individuals on a Saturday morning. 

If a couple of bidders are brave enough to commence the battle, others have their initial attraction to the property demonstrably ‘fed’ by the competition and join in – conversely, if no-one openly states an interest, the reverse can be the case, leaving potential buyers wondering ‘what’s wrong with the home?’

Each scenario – played out in the public arena – causes a roll on effect across the market either boosting sentiment, or delaying the onset thereof; however, once confidence does take hold, the ‘act now or miss out’ frenzy is perpetuated, laying down the foundation for a typical boom bust cycle.

Auctions are marketed as a transparent way to sell real estate; however aside from the openness of the public event itself, the pre-sale process is anything but transparent.

 Like a good retail sale, the key for the three week campaign preceding the auction is to get buyers through the home initially which in Melbourne, results in agents encouraging the vendor to withhold their reserve price to enable a “conservative” estimate of value – as either a verbal or published quote range – to glean as much buyer enquiry as possible.

In my own experience, I have seen these ‘conservative’ estimates as low as the nominal value the current vendor paid some six or so years ago – with a ‘+’ thrown in for good measure.

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 ‘deeper pockets’ to step in at the end.

In reality – real expectation is often a good percentage above the quoted range with excuses such as “the vendor’s reserve can change” used to waylay future complaints.

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

In a market where auctions predominate, the price multiplier effect buoyed on through the physiological stimulant this method of selling promotes, results in prices gaining much stronger traction that would be possible in most private sale campaigns – something that has been well documented in various scientific studies.

Although other states have a larger percentage of private sales, the auction system, when used, is just as opaque. In Brisbane for example, it’s apparently ‘the law’ to dodge any responsibility to give an accurate indication of vendor expectation – with an act that reportedly ‘limits’ what real estate agents are ‘allowed’ to disclose. 

As if deliberately designed to confuse buyers – selling agents are ‘unable’ to indicate a likely selling range, any hint of a reserve, or an opinion of value. 

I can see this methodology eking its way into Victoria if ever we get to the stage of national licensing, with many agents already using their own liberal interpretations of current published ‘guidelines’  – and whilst I’m sympathetic to the task an agent undertakes when selling a property, I hold the opinion that vendors – who foot the advertising bill – should take a greater responsibility and ensure published price ranges are updated to accurately reflect the range in which they are willing to negotiate.

I’ve commented previously that the “boom years” of capital growth in Australia’s property market – and in principle the inner and middle ring metropolitan areas of Melbourne (which sits at the top of the ‘boom’ chart see here) – have not been lead by population growth as such, rather speculation, ease of credit, and a general expectation from investors (as well as home buyers), that prices will continue to rise.

This is evident from the amount of investor owned stock in the inner and middle ring city suburbs.  These areas contain a larger percentage of units and townhouses for which well over 50 per cent, and in some states over 70 per cent, is rented and owned typically by ‘mum and dad’ baby boomers buoyed on by the policy of negative gearing. 

As mentioned previously, the success of negative gearing relies on speculation of capital increases, ensuring supply and vacancy rates sit at a lower percentage than would be the case if we instead concentrated on strategies to increase the supply of affordable ‘quality’ accommodation – (a subject I’ve explored at length before) – and a policy which goes some way in encouraging the ‘head to head’ investor battles I witness weekly, which significantly inflate the value second hand stock on the suburban streets of Melbourne.

And it’s not all that easy to directly align other market variables such as the unemployment rate, wage growth, or even rising rental prices which many assume in theory, will push a greater number of first home buyers onto the ‘ladder’ – with large movements in property prices.  When there’s a rush to invest, it’s more to do with the gold rush spread of optimism that seems to spread like some infectious disease.  

It certainly wasn’t the above general market indicators that inspired four bidders (all investors) at an auction I attended last Saturday for an un-renovated house quoted at ‘$700,000 +’ sell $100,000 above the reserve, which due to the rapid pace of bidding, wasn’t announced on the market until $850,000 – albeit, I suspect had the bidding not been quite as frenetic, the reserve would have been ‘called’ at a lower level.

It was evident from the body language portrayed that the remaining two bidders had pushed far past their limit – based on comparable data, the house itself would have struggled to pass a valuation at the purchase price – yet for future sellers in the surrounding streets, the amount paid will set a new ‘benchmark’ and overall vendor expectation will rise – so too for buyers, who will see it as a comparable sale for a similar property of choice and raise budgets accordingly.

The prices achieved in heated auction markets are unsustainable in the long run, and yet the one thing all bidders have in common when caught up in the momentum of an auction, irrationally stretching their budgets – is a speculative ‘hope’ that at some future date, the next generation will be prepared to pay ‘more’ for the home than they did – enabling them to gain a profit over and above both outlay and inflation.   

All are assumptions which work whilst the majority hold the same view and fail dismally when the ‘bubble’ of positive perceptions pops under the pressure of the opposing view – which is never completely absent.

The boom and bust cycle is evoked by the market dynamics of consumer sentiment, as those feeling ‘good’ borrow the ‘most’ possible to purchase with ‘positive’ thoughts in mind about rising prices, whilst the opposite reaction predominates when people avoid buying under the general perception that prices are going to keep falling – is something we were all witness to following the ‘peak’ of 2010 during which transaction levels were back to numbers not evidenced since the late 1990s despite other relatively good market indicators (low unemployment and the comforting ‘myth’ of a surplus – not to mention falling interest rates etc.) 

For this reason, the real estate industry as a whole makes strenuous endeavours to maintain the perception that prices always rise – or if prices are falling, it’s simply part of the ‘market cycle’ until they start on their upward profit making curve once again.

And they are not the only industry to do so. A vast amount of personal debt is tied up in the property market – not to mention the many retail offshoots that also benefit from rising property prices. Should there ever be a significant downturn – the economy would inevitably suffer as a result.

Therefore, if price rises in our major capital city markets have been primarily inflated through speculative investment, the positive mantra must be maintained to and at the expense of future generations who are going to find it increasingly hard to purchase.

I’ve listened to many an angry agent throw their hands up in pure exasperation at articles produced in the real estate section of The AGE (as one example,) openly remonstrating how any downbeat ‘vibes’ are directly responsible for declines in property prices. Funnily enough, they never complain when the reverse is the case.

And in the USA, where negative equity has affected the larger proportion of home owners, it’s been clearly demonstrated that even occupiers who are employed and own outright, and should arguably be unaffected by a loss in the capital value of their property, resist investing in the general upkeep of their home when values are dropping, spending around $200 less on maintenance and improvements per quarter – favouring instead to buy only those items they can ‘take with them’ such as cars and furniture.

The concept that housing is the ‘best investment’ a person can make has been promoted widely throughout the developed world. In the years of boom growth, during which values rose in excess of 200 per cent, the total amount of money banks ‘lent’ into existence through the gradual easing of restrictions surrounding the mortgage lending market, was the core driver of increasing values, aptly benefitted those who entered at the start of the lending boom, above those who are now tapping into the bank of ‘mum and dad’ or relying on joint ownership, grants, and a low interest rate environment to push their foot through the door.

The recovery we’re currently seeing is largely lead by the investment sector – with an equal perception that values will maintain their upward trajectory. Albeit, to do so, requires a new generation of bidders to buy into the same speculative mantra – 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.  

Whilst I’m a great advocate for home ownership – particularly for those establishing a family – and recognise the need for investment in the property sector with a long term mindset as part of a diversified portfolio – it’s clear we need to pour a far greater proportion of recourses into structuring a plan for effective development, infrastructure being the key.  

Albeit, with an historically reducing pool of first home buyers, an increasing proportion of ‘interest only’ investors, and an aging population which will provoke the big Australia advocates to hail ‘populate or perish’ – a bit like a doctor telling his patients they will never die, the real estate industry will maintain the myth that prices always rise.

  Catherine Cashmore


The Rate Cut – good news? Or Bad news?

The Rate Cut – good news? Or Bad news?

Once again the drop in interest rates has been promoted widely as “good news” for the housing market, with Wayne Swan taking ample credit as he attempts to persuade public ears that record low rates are solely down to “responsible” fiscal policy. To assume this is a reaction to a number of concerning economic indicators would be ‘grossly inaccurate’ we’re told – with Wayne Swan assuring the voting public that “Australia’s economy is resilient.”  

You could be forgiven for believing that we’re living in an environment similar to the old fable “The Emperor’s New Clothes” with only a few short months ago seemingly believable tales of an early return to surplus widely circulated until the pure nakedness of the situation, to the tune of $17 billion was revealed. ‘Woops!’ sorry about that.

And whilst a drop in rates may on the surface bode well for mortgage holders wanting to pay down debt, the bleak reality remains that for savers, many of whom are would-be first-home buyers, the news is not good at all.

Any long term downward direction in rates should always be considered a concern – they sit at the seat of a number of economic problems, and point firmly toward a trend of lower growth. Furthermore, a lengthy period of low rates is harder to reverse as consumers come to rely on cheap credit, unsustainable at higher levels should a ‘bubbly’ environment call for a reverse course of action.

As a tool, they are limited in their effectiveness for stimulating the economy pushing yield seekers into riskier assets. Since the global economic crisis, the world’s banks have been concentrated on lowering rates in order to boost growth. The textbook model indicates the atmosphere will motivate an increase in lending for such items as homes, goods and services; however monetary policy is a pretty blunt instrument and understandably in our post GFC environment, the appetite to reduce debt and accelerate payments on outstanding mortgages has been far greater than the push to consume.

In the UK, putting aside the London housing bubble inflated principally by foreign investment – the housing market has been broadly stagnant.  As with Australia, vendors – have chosen to hold, rather than sell for diminishing nominal returns.  Talk of lowering rates into negative territory and dangling carrots in front of first home buyers by way of ‘Help to Buy’ equity schemes are all last ditch temporary measures to artificially prop up prices which critics emphasise will do little to address affordability in the long run, and artificially inflate prices in the near term. Yet akin to a doctor prescribing placebos, short term relief is better than a long term cure – particularly when approaching election.

As I mentioned previously, although it may seem logical to assume lending rates initiate price changes, other economic factors play a far greater influence, and unless the needed ingredients are combined, interest rates on their own can do little to change the terrain by any significant sustainable degree.

Furthermore, whilst Governments can allocate at their discretion where to spend our tax dollars and pressure the banks to ‘pay forward’ the rate cuts gifted,  they have limited influence on where cheap credit is spent (or for which asset it is lent) into the economy or to direct it into areas where it’s needed most – principally construction.  The banks decide at their own discretion where to make their loans, the majority of which are directed towards the established real estate market, over and above other areas such as job-creating businesses.

Since November 2011 we’ve had 7 drops to the cash rate – passed on ‘in part’ by the banks.  To date it’s failed to evoke any significant improvement to the construction industry with the latest data showing a 35 month consecutive contraction – the fastest rate since September 2012.

Established house prices have also been slow to respond– it took until mid 2012 for any marginal improvement in median values to emerge (principally boosted by consumer confidence,) and only recently have we seen any significant uptick. Albeit, throughout the period, growth in ‘private sector housing credit’ has remained weak and transaction levels low by historical standards.

Melbourne – recorded its strongest first quarter since 2010, however once adjusted for inflation we still sit -11.2 per cent below peak values with a promised ‘softer’ second quarter. According to RP Data, capital city values in real terms have moved little since September 2007.

The new home market sits in a dismal glut.  Last week the HIA released 50 “action strategies” focusing on the economy, taxation, industrial relations and ‘red tape’ in an attempt to lobby Government to allocate a greater proportion of the federal budget to addressing the issues which they assess are needed in order to advance ‘sustainable’ recovery.

Part of their campaign focuses on our ‘housing shortage’- and whilst there’s no doubt a growing population will require an increased surplus of accommodation, ‘population forecasting’ focuses on a number of ‘assumptions’ which are always subject to change. 

For example, between 2001 and 2006, census data indicates we’ve reached a point where number of persons per household has stopped declining and is once again increasing – no doubt in part due to the rising costs of living and accommodation.

The results show how household size has increased from 2.4 people per dwelling to 2.66 in the five interim, and although a few 0.01 percentage points may seem insignificant, this figure is used to calculate ‘underlying’ housing demand, therefore, even a small shift of 0.01 per cent can result in a ‘needed’ reduction of almost 30,000 dwellings. 

Albeit, there is little point building a surplus of homes unless it can be assured the consumer (mortgage holder) will respond, and in this respect, the key issue to our shortage of housing lies in effective planning for population growth, which I’ve argued more than once, cannot be combated from simply building an excess of ‘roof space’ alone – or for that matter, dropping interest rates to historic lows.

To date, the only solution offered has been the channelling of first home buyer grants exclusively into the ‘new’ market – in other words, if no one else will buy it, throw smarties to our most price sensitive demographic and see if they will take the bait – an unsustainable irresponsible policy producing dismal results.

From a home buyer’s perspective, using their hard earned ‘deposit’ to purchase into a ‘new housing estate on the city fringe, where land is in abundance, is quite simply not worth the effort once travel costs and failed promises for the provision of infrastructure have been calculated. Nevertheless without recovery in construction, it remains that any surplus of credit will be poured into the established sector – principally lead by investors fighting over the same dwindling pot of existing dwellings.

Viewing housing as merely a tool to build wealth and drive the economy takes a fair amount of manipulation yet this is the reality. According to RP Data, tax revenue generated from property taxes alone, account for a collective 46 per cent of total revenue for local and state government. In the recent Victorian State budget, it was revealed ambitious plans for a new east west link are in part reliant on an increase of 33 per cent to 37 per cent in property related taxes.

In a statement to The AGE, the property council of Australia warned “Any budget that relies on property taxes to pay for 40 per cent of the bills is too dependent” – and it’s been noted that the prospected increase in transactions needed to fund Victoria’s bills is somewhat ambitious considering it was only a few weeks ago in the RBA’s  Financial Stability Review that  Melbourne’s property market was singled out with specific warnings of a ‘softer outlook’ ahead.

The long and short remains that Australia is pinning its future outlook on a robust housing market with both the RBA and Treasury looking towards the construction sector to fill any void from a slowdown in mining.  And whilst low interest rates can keep the mantra to first home buyers going that ‘housing affordability is at its best level in a decade,’ despite prices continuing to rise, then the only way affordability can be sustained for those entering the market, is if the RBA hold down the cash rate over a lengthy period as seen in the UK and USA.

All things being equal, this option may sound feasible – however, equality in is not under the control of either the RBA or Government when they cannot dictate where a larger supply of cheap credit is directed. 

Without addressing the real issues causing weakness in the housing sector, it encourages central banks and investors to believe that market manipulation is the only feasible answer. Should a bubbly environment start to emerge in an atmosphere where low rates have become the norm, a favourable outcome will be far harder to wield than may be imagined.

Catherine Cashmore 

The true purpose behind housing policy.

The true purpose behind housing policy.

Any regular reader of Property Observer will be well aware of the industry wide aversion to first home owner grants.  Steven Keen was one of the first to highlight their effect on the market when he aptly named them ‘Vendor Grants,’ and last week Ray White chairman Brian White made a similar call when he termed the increased Victorian stimulus for first home owners purchasing new accommodation, nothing more than a “builder’s incentive.”

Even the REIV who have been broadly in favour of retaining first home owner grants, have expressed their frustration at the liberties State Government take when ‘manipulating’ the market through annual ‘tinkering’ with our most price sensitive demographic.

Treasurer Michael O’Brien has suggested “Victorian families (purchasing new accommodation) will be over $16,500 better off with the combination of the increased grant and stamp duty cuts” however; surely no one is under the false conception that this move has anything to do with easing affordability?

Its basic economics – if you channel an increased supply of money by way of ‘candy’ style incentives into any one sector, competition increases and so to do prices. Any advantage the grant offers is quickly wiped away and buyers invariably end up paying ‘more’ rather than less.

As an example, in 2008/9 during which the first home owners ‘boost’ was offering an extra $14,000 on top of State grant of $7,000 for anyone purchasing new accommodation. The rush of buyers to ‘get in quick’ before the grant was inevitably stripped away resulted in prices escalating in excess of 20 per cent in fringe suburbs such as Tarneit and Werribee South.

If you work out the dollar equivalent on the median house price in these localities, the ‘extra’ paid is in excess of $70,000 – so no saving there – and as with all smarty style incentives, as soon as they’re stripped away, first-home buyers who were encouraged to buy on a “whim” are left sitting on a nice pot of negative equity with no ‘rainbows’ on the horizon.

Of course, State Governments are well aware of all these facts – so to openly mislead the public with affordability ‘sound bites’ is at worst, lying, and best insulting – they don’t deserve a seat.

Rather the policy takes advantage of the inexperienced property buyer luring them in with a seemingly ‘generous’ handout, in order to provide a much needed boost to the construction industry which, as indicated by the RBA – is expected to ‘buffer’ any void resulting from a slowdown in the mining sector, and in the near term, will assist in soaking up the oversupply of ‘new’ accommodation prospected to hinder growth in Victoria’s property market, as we traverse through the remainder of 2013.

All such grants which are primarily aimed at the new home market play their part in increasing demand – but they are temporary measures only.  Is it too much to ask for ‘real’ sustainable policies which address the hefty taxes, levies and fees currently making up what the HIA estimate to be 40 per cent of the cost of a new home?

Or am I making the mistake once again of being brainwashed by “policy speak” – imagining our housing market is designed to provide the population with affordable shelter over and above a simple revenue raising tool?

As every Joe on the street will tell you – if you really want to encourage the buying market to “spread over the land,” the simple answer is to raise the dollars needed to fund essential infrastructure at the start of the process – principally roads and public transport – not 20+ years down the line.

In this regard, economist Leith Van Onselen is at the forefront of ‘good’ ideas when he suggests raising money through bond financing and recouping it from ratepayers over a period of 30 years.

Similar ideas can be found in Houston Texas in which a successful expansion of their city boarders is funded with policies such as ‘MUD’ – a ‘deductable’ Municipal Utility District tax – in which a panel of property owners sit on a government appointed board to oversee utility and infrastructure distribution in the area. The amenities are initially funded by a bond which the residents pay back proportionally over a lengthy period of time. It works as less of a disincentive to migrate outwards than an upfront fee which is piled onto the capital cost of their initial purchase, with residents openly active in allocating where and how the funds are distributed.

Buyers typically follow train lines – if they can commute to existing work places whilst living further afield, the increased population encourages small business and larger job centres away from the centre thus releasing cities from their ‘donut’ outlook.

However, currently, our outer suburbs are developing into what some term would term ‘ghetto’s’ – on the recently released ABS data which ranks geographic areas across Australia in terms of their relative socio-economic advantage and disadvantage.  A map can be constructed which highlights diversities such as incomes, education levels, occupations, rent and mortgage payments, family structure and unemployment.


The ‘fringe’ suburbs are beetroot red and bright orange and sit well away from the affluent dark blue vicinities.  They are suburbs first home buyers or families – supposedly ‘moaning’ about inner city house prices – are encouraged to “migrate” and raise their children – areas without adequate schools, transport, and recreational facilities.

Throughout 2011-2012, the City of Wyndham in Victoria has experienced the biggest population growth of any municipality in Australia – attracting 12,822 people. Point Cook, a suburb of Wyndham which was expanded in line with Melbourne’s 2030 plan – was initially marketed as “A thriving neighbourhood … just 22 kilometres from Melbourne’s CBD” with “convenient access to established schools, shopping, recreational facilities and public transport.”

However, last year Bill Forrest – director of advocacy with the Wyndham City Council – painted the true picture when he was quoted ”They [the state government] have not kept up with schools, they have not kept up with arterial roads, more than 50 per cent of Point Cook is more than 400 metres from a bus stop,”

In response to the long winded cries from residents situated in Melbourne’s outer west, $72 Million is to be set aside in this week’s Victorian Budget to upgrade existing roads and infrastructure as the capital of Wyndham – Werribee – continues to expand into what is intended to be a major new ‘job hub’ – East Werribee.

Planning Minister Matthew Guy has stressed the “Government is doing everything we can, within Budget constraint, to invest in the west,” however, whilst the funding is welcome, it’s quite honestly, too little too late. Notwithstanding, the blame sits as much on previous government’s shoulders as much as it does the current.

It’s all very well talking about further land releases – once again under the guise of ‘aiding’ affordability – however, without fixing the above issues we’re simply sitting on a merry go round of repeated mistakes. There’s little sense creating new suburbs of sprawling Mc Mansions where the trade-off of a bigger house is of little consequence once you step outside the front door.

As for the inner suburban locations – our housing market is a private debt laden bubble riddled with a broad demographic of buyers and investors competing for the same golden nuggets of established real estate – typically in the lower to middle median price bracket.

Whilst Melbourne may be making headway in the lead to population supremacy, it’s not the growth that has inflated the cost of our established housing market – rather it’s policy that encourages credit expansion based on speculation. Sydney – which has made fewer inroads to effectively their increasing their housing stock in response to population growth sits in a worst position.

Reports released from the ATO show from the one in seven who own an investment property, whilst one in ten tax payers’ are negatively geared.

It’s broadly assumed the policy of negative gearing subsidises renters. However, the offset of increased competition in the established market (which is further inflated through capital acquisitions in SMSFs) inflates the price of existing accommodation in a never ending game of musical chairs.

In this respect, negative gearing has done an excellent task of ensuring renters stay renters as lower and middle income individuals find themselves priced out all together – unable to save enough in the race to ‘keep apace.’

Considering the same report highlights a collective lost in excess of $13 billion over the 2010/11 financial year for those who employ the strategy, it’s no wonder the focus centres on the established market with the hope history will repeat itself and enable investors to compensate through the capital growth of their asset, without which there is little sense to the purchase.

Unfortunately, the latest media release from R P Data may disappoint those chasing an increase in the core value of their investment as it seems ‘real’ growth in the Australian property market is at a current or “similar level” to that recorded almost 6 years ago.

Or to quote R P Data’s research analyst – Cameron Kusher  “Although nominal values have risen over recent years, in real terms, capital city home values are currently at a similar level to what they were in September 2007.”

Once again, it emphasizes the need for investors to adopt a ‘low growth’ mindset as we move into an atmosphere which the RBA have termed in their “Housing and Mortgage market” outlook, to be the ‘new normal’ – principally, lower capital returns that typically track the rate of inflation.

All in all, we make nice puppets for our governing bodies. Bombarded with stats that suggest inflation is well contained, whilst in reality, the cost of living has rocketed with many still waiting for the wage rises for which ‘we’re told,’ have more than compensated.

If nothing else, let’s celebrate the freedom we have to make our distaste for current Government policy evident. It’s a tad more satisfying than staring blankly at a ballot paper in September, knowing the next ruling party will no doubt provide more of the same.

Catherine Cashmore




Australia’s Housing Market – The uncertainties and Certainties.

Australia’s Housing Market – The uncertainties and Certainties.

Balancing a real estate market is not an easy task.  Too much supply and prices fall – too little and they rise and in this respect, years of rapid population growth has played an influence on the Australian real estate terrain. 

Additionally, various incentives – negative gearing, grants for first-home buyers, reduced stamp duty rates for off-the-plan sales and new homes, relaxed FIRB requirements – to name but a few – have been introduced, changed, and intermittently withdrawn by government “movers and shakers.”

All have the effect of falsely influencing consumer demand one way or another – sometimes it’s done in favour of the investor, sometimes the home buyer, however in all circumstances any so called improvement in ‘affordability’ invariably results in price increases, of which I have no doubt was the intention in the first place.

The housing boom has fed Australia’s obsession with real estate – and I can fully understand the emotions that surround the debate.  I attended a dinner over the weekend and enjoyed the company of a group of retirees who have all benefitted nicely from rising property prices over our golden years of growth. 

Most around the table owned a small portfolio of investments and once they discovered my current employment status, wasted no time recounting how investment in property – of which their parent’s generation had been unable or too cautious to explore – had paved the way into what was now, a relatively comfortable retirement.

When they purchased their first homes – Melbourne and Sydney were growing rapidly. Supply was good, low rise apartment blocks were popping up along local streets; there was massive investment in infrastructure – roads, schools hospitals, public transport etc. The then ‘outer suburbs’ were far more facilitated than our current comparable ‘fringe’ localities and the higher inflationary environment benefitted their footsteps into property investment nicely.

However, the question all wanted answered was – ‘are we in a bubble’ and if yes, ‘will the housing market crash?’

It’s possibly the most common question I’ve been asked to date when talking about real estate – and understandably so.  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% of loans offered to this sector alone.

Mortgage debt – the largest component of all debt in Australia, has ensured Australia’s banks are as ‘pinned’ in their reliance on the ever-expanding growth of our resident population’s desire to borrow and buy, as is everyone else who has a hand in the pie – aptly benefitting those who got in at the start of the ‘lending boom’ against those who now find themselves in a far more challenging environment.

As Canstar’s Steve Mickenbecker recently commented during a video interview on Yahoo Finance last week, Australian’s are “paying double what they were 10 years ago to get into the (property) market”, despite wages rising “by half that.”

Although property cycles are evident in all market economies, I’ve said previously that assessing the immediate future based on our long term past will not produce the desired result for those imagining that the property market can sustain an inflationary upward curve, in line with our previous ‘golden years of growth.’

Notwithstanding, RPData have not been slow in suggesting a range of suburbs predicted to double in value over the next ten years.  Under such a suggestion, buyers could find themselves faced with a bill for close to $1Mil for a basic inner city second hand unit.  No wonder RPData caution investors to view the ‘free’ report as a ‘starting point’ – general advice only in return for an email address.

Last week the RBA expressed concerns about growth expectation in an address to the Citibank Property Conference entitled “Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between.”

The speech was interesting, but perhaps should have just lead with the word ‘uncertainty’ because whilst they make it quite clear the future is not going to look like the past – for which they employ the term a ‘new normal’ – it’s also clear they have little concept of how this ‘new normal’ will look.

Understandably, they note a recent recovery in dwelling prices which they advocate ‘makes sense’ given the steady decline in interest rates. This is the one reason we’re being bombarded with ‘how affordable’ the market is at present.

However, it’s a funny old world where house prices can romp past the rate of inflation and wage growth ending at historic highs, and despite the recent ‘slump’ in transactions and values, which saw a fall of some 6 per cent nationally, be back on the road to recovery, with established metro prices romping on towards their 2010 peak.  Yet, at the same time, first time buyers are consistently told – it’s ‘never been more affordable to buy’ because ‘cheap credit’ is currently in abundance.

Of course, there’s no mention of what will happen to those homebuyers when rates do eventually rise – which, if not in the foreseeable future, they inevitably will.

The RBA have voiced little concern regarding our high personal debt levels (household debt to income ratio remains stubbornly at some 150 per cent) noting thus far, serviceability is well maintained.

However, the risk is ever present.  High levels of debt – when followed by downturn in house prices generally result in a greater reduction of economic growth and subsequently an increase in unemployment.  In other words – the debt level is fine, as long as the party continues – but are there any rumblings on the horizon?

As referred earlier, one we approached any question of a ‘bubble’ the conversation I had round the table Saturday evening was an interesting one.  When the subject of lending standards arose, the general consensus of opinion reiterated was the ‘new’ prudent environment which all imagined went hand in hand with the assumption banks no longer lend ‘more’ than an individual’s income can service.  Or as the RBA termed it;

“Broadly speaking, mortgage lenders decide how much to lend to a household by working out the repayment they can reasonably make, given the household’s income and other factors. For a given interest rate, this then backs out to a loan amount.” 

I only wish I had evidence of this to hand.  Whilst first home buyers may find it challenging to gain finance for their initial purchase, and the environment is admittedly more ‘prudent’ – the last few conversations I’ve had with investors have revealed some concerning trends.  Even in our post GFC environment, most were offered loans far in excess of what they could comfortably service, yet understandably, all chose to accept less.  I readily admit this is only anecdotal evidence – however, clearly, for those who hold existing assets, lenders are unsurprisingly not averse to pushing the boundaries – with loan to value ratios still available at 95 per cent.

But as for the future predictions, it’s somewhat ironic that Luci Ellis – who holds the title ‘Head of Financial Stability Department’, can give what is essentially a speech full of ‘unknowns’ and a few well publicized inaccuracies, which, if anything, it reads like a thesis of ‘mights’.. 

“We don’t have a strong view about whether the ratio of prices to income should be mildly rising, falling or constant from here”… “we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again”

“We don’t know exactly what the saving ratio will do in the period ahead”

“We don’t think it will necessarily return to the level in the 1960s and 1970s,” 

 “We think it is very unlikely to return to its 1970s levels, or to rise rapidly once again”

They make the point that they don’t want “banks to ease their lending standards to make more loans and bring back the boom times. Nor would we want them to cut costs in a way that impinges on their risk-management capabilities.” As if wishing for some kind of ‘goldilocks’ outcome in an environment in which they have marginal control.

However, for my friends around the dinner table on Saturday evening, hotly debating a potential property bubble, the following comment from Ms Ellis would have perhaps been worth a mention.

“we certainly can’t rule out the possibility of a major housing downturn in the longer-term future. It is hard to know exactly what the outcome would be because it depends on how we got to that point. Institutions differ across countries, so we can’t simply extrapolate from experience elsewhere. And there would need to be another boom first.”

In light of our personal debt levels, I don’t believe a drop in house prices need be pre-empted by another boom.   Albeit, keeping property prices afloat is no hard task in a country awash with policies that encourage investment into our limited established housing market.

We can argue the case for and against such policies with passion, citing old concerns that many first time buyers have ‘inflated expectations’ or an un-willingness to move into cheaper markets, however what cannot be argued, is the widening gap between existing owners and initial buyers which has slipped to the lowest ‘seasonally adjusted’ level since March 2004. 

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 – and if the worst happens, relaxing rules on foreign investment and providing a boost of cash grants as we did during 2008 would – based on recent history – be the accepted move.

Therefore, whilst there’s no doubt even in the collective mind of the RBA, that property prices are sitting at a peak – there are plenty of variables to the question of when, if,  and how likely they are to drop.

Rather the question remains – how much higher can they possibly be pushed at the expense of a new generation of renters, who have long given up on the Australian dream?

Under the current system, we’re speedily widening the economic gap between the asset rich and asset poor. In this respect, the belief in giving the underdog a “fair go” as a key part of our collective culture – doesn’t quite extend across the socio economic boarders manipulated through high housing costs.

Catherine Cashmore