The property industry’s twisty statistics’

The property industry’s twisty statistics’

The REIV have released their June quarterly statistics which show a seasonally adjusted 2.4 per cent rise in the median house price with the comment

“The release of the REIV’s June quarter median prices should help encourage a few more sellers into the market over spring as it shows the price falls recorded in 2011 have been recovered.”

This takes Melbourne’s median house price from a ‘revised’ $549,000 in the March quarter of this year which – (as Terry Ryder also noted Tuesday last week and myself on Monday Last week) – is a ‘not so insignificant’ drop of – 2.23 per cent decrease to the figure the REIV initially published in April of $561,500 – to the now ‘seasonally adjusted’ June median of $562,000.

In other words, had the numbers been taken on face value, without subsequent revision, Melbourne would have simply been treading water.

All of this means little to the average buyer who simply reads the headlines and has little time to dig into the detail – however at the time, the REIV heralded the first quarter of 2013 to be the ‘strongest March quarter in a decade’ which was somewhat surprising considering the ‘unadjusted’ March median actually dropped -0.9 per cent.

Of course, the only reason it could be stated as such, was because their December 2012 median had also been ‘seasonally adjusted’ & revised from $555,000 to $534,000 – a drop of -3.7 per cent.

The REIV only started seasonally adjusting figures at the start of this year, therefore the December adjustment was made ‘post’ the initial release in which the REIV claimed a 7.8 per cent jump in the median house price (!) under the heading ‘Growth returns to Melbourne housing market.’

I remember this well, because it prompted a joyful remark I overheard one agent relay to his ‘investor’ client, that this would equate to more than “30 per cent capital growth for Melbourne over the following 12 month period if it maintained pace” – thankfully a comment that will remain pure fiction.

As a general rule, seasonal adjustments are calculated by looking at the ‘average’ seasonal shift during the same quarter over a lengthy time scale. The information is then used to calculate the amount to either add, or subtract, from the raw data. And whilst it can be useful from a trend perspective (smoothing out the bumps,) there is scant information on the REIV website to explain how a drop of -0.9 per cent can be converted into in to a somewhat robust ‘rise’ of 5.1 per cent in a market which, although improving, was – at the time – certainly not doing as well these numbers would indicate.

The reason figures are revised, is because all data providers suffer from a lag in reported results that typically filter in over the 3 month period ‘post’ the quarterly release from valuer general data – the most authoritative and comprehensive source of sales information we have.

Therefore, the median price home buyers and investors are reading for this quarter, and the emphasis that is put on it as newspapers go to town with boom or bust headlines, is likely to alter significantly when the next release is due and is therefore is arguably a misleading ‘quarterly’ indicator of true market movements.  In other words – any ‘newly’ released quarterly data needs to be taken with a ‘pinch of salt.’

With this in mind, it makes the daily index – which is neither seasonally adjusted and would also miss a wide proportion of lagging results – laughable.

Investors are often fixated on median prices.  The major investment magazines have extensive tables of figures and percentages covering the back pages. Agents use them to their own ends with comments such as ‘prices have increased 10 per cent year on year over the past 5/10 years for such and such a suburb.’

However whilst the median figure may have increased – the ‘middle’ figure of all cited sales – individual property prices, and the changes a property may go through in terms of renovation and extension, which would therefore warrant a higher capital price outside of natural increases, is not always represented in the information provided, and it should also be noted, that each provider uses a slightly different methodology when collating their statistics.

For example, the REIV record a ‘seasonally adjusted’ 8.4 per cent rise to the median from this time last year which seems to suggest Melbourne is coming on leaps and bounds.  However, the ABS show an increase of just 1.1% (to March 2013) – APM: 6.1% (to June 2013) and RP Data: 3.3% (to June 2013) making the REIV’s median figures higher that of every other data provider.

However, the REIV are not the only culprits when it comes to published data misnomers. As economist Leith Van Onselen pointed out to me in a conversation we had regarding APM’s results.

“In its March quarter release, APM reported that Melbourne house prices led the nation, rising by 3.6 per cent over the quarter to $538,922. What was not mentioned in their commentary, however, was that some of Melbourne’s reported strong price growth was caused by a -1.1 per cent downward revision to the December quarter……And in their June quarter results, APM once again reported that Melbourne led the nation, recording 5.0 per cent growth over the quarter and 6.1 per cent growth over the year. However, part of this strong quarterly rise was caused by a downward revision to March’s median house price to $527,245, without which Melbourne would have recorded 2.7 per cent growth…..As Leith points out, without the subsequent revisions “ Melbourne’s annual price growth would have come in at a more moderate 4.2 per cent.”

One indication towards the stark contrast in REIV statistics is because unlike the other indexes, they do not stratify their median figures to reflect different aspects of each housing type outside of the broad description of ‘units’ and ‘houses’ and this creates significant problems for those using the information as a source of market analysis.

In REIV terms, a unit could be a small villa on a subdivided block of typically six to eight free standing or attached dwellings – a one or two bedroom apartment or flat, in either a low rise or high rise block – a high spec townhouse on a ‘side by side’ subdivision – or a bedsit.  Obviously, this can create distortions when assessing the information.

The same is the case for housing.  Median house prices cover detached houses, terraced houses, semi-detached houses, residential warehouse conversions, holiday houses and duplexes.

Because the REIV don’t distinctly classify their results, we also see big differences in individual suburb changes. For example, according to the June stats, Hawthorn’s unit median has increased 20 per cent from the last quarter (!?)

However, there should be no confusion here – individual unit prices in Hawthorn have not increased 20 per cent – this is median data, and without stratified statistics, the median price can easily be boosted with different property types being lumped under the ‘unit’ banner – to publicize these figures, with full knowledge of the reaction it will create, should be an area of concern – yet one which is ignored in the main stream press.

Albeit, from an anecdotal perspective, property prices in Melbourne have increased throughout the course of 2013 – as an example – a unit which based on comparable data from late 2012 and early 2013, would be worth anything in the region of $420,000-$440,000 – under current competition, often ends up selling 2-3 per cent higher, an effect which is primarily noted in the inner and middle ring established suburbs of the city where auction sales predominate and an intense level of investor and speculative activity is evident.

Most results are staying broadly within these parameters, however; notwithstanding, I’ve seen some crazy activity of late as mini bidding wars in various pockets have rippled across all price brackets.

This can have quite a dramatic impact on both vendor expectation (as owners see neighbouring properties sell above their pre-estimate of value) and buyer physiology, as property shoppers realise they need to ‘up the budget’ to exceed what is perceived to be some kind of boom time terrain producing gains that cannot be sustained over the resulting period – and in the current economic environment – will most likely eventuate to be nothing much more than a short term rally.

However, as most sales across Melbourne are conducted private treaty, the effects on the median data across the board would be minimal, and really only feed into inner city figures where auctions are the preferred method of sale.

In truth – from a macro perspective, as the latest RPData report highlights, “In five and a half years, growth in capital city home values has not increased at a rate higher than inflation” and it should be noted, Australia is facing some significant headwinds which will have an impact on the property market in the months and years ahead.

Full time jobs growth is weak and both hours worked along with levels of underutilisation are deteriorating.  As the mining construction boom unwinds, non mining industries underperform, and we pull in our belts with fiscal consolidation, it’s likely we’ll see little change over the months ahead. The short term data is volatile and somewhat unreliable albeit, the long term trend is clear.

We’re entering an era of slow growth – and it’s yet to be seen if it will be stable growth. In this respect, when you lift the blanket on unemployment data the trends are concerning and certainly not as good as the headline rate suggests.

Outside of keeping interest rates low, or offering grants for new homes to enable buyers to take on a larger proportion of capital debt in an effort to boost the construction sector is producing minimal impact for new home owners – and as I wrote last week, there are no long term sustainable solutions offered from either side of politics.


The speculative behaviour we’re currently seeing in various pockets of Capital city markets as investors lead the widely spruiked ‘housing recovery,’ neatly packaged under the words ‘typical market cycle’ as different states go through their own ‘wax and wane’ periods of supply/demand activity, will have far wider impacts for our younger and future population of buyers than I would argue is fully recognised across the broader population that already own a home, or are paying off a mortgage.

Catherine Cashmore


The political narrative on housing – Woe unto the one who suggests prices may fall..

A political paradox – Woe unto the one who suggests prices may fall..

Housing affordability has been the name of the game this week.  We’re coming up to a general election and ‘lo and behold,’ much to the distaste of those who deny Australia has a housing affordability crisis – and first home buyers are just being spoilt and picky – research by ‘Auspoll’ has revealed that 84 per cent of Australian’s put housing affordability top of the charts when rating election issues by areas of importance.

The article which appeared last week across various ‘News Corp’ publications, focused on key electorates in which ‘housing affordability’ came streets ahead of other hot topics such as ‘education’ or ‘border control’ – accompanied with case studies where 50 per cent or more of family income is going towards mortgage or rental payments alone.

Cited within the report was a 2007 comment by the then Opposition leader Kevin Rudd, who in an attempt to boost his popular vote, told former Prime Minister John Howard that;

“housing affordability is the barbecue stopper right across Australia.”  

It’s interesting to chart the political narrative regarding housing matters – because after years of lousy half hearted initiatives, which have done nothing to markedly advantage the two most venerable demographics of our market – principally first home buyers and renters – we have no sustainable interventions in place to affordably accommodate a rapidly expanding population, all of whom will need some form of shelter.

And whilst Australia has sailed the ship of good fortune, sheltered within a resource rich environment, and most families have adjusted their lifestyles to suit their income and as such, never feel particularly ‘well off’ even when earning substantially more than the median income – for those working at, or falling below the median, the cost of accommodation is an increasing drain on the economy and well being of our society, resulting in areas of socio-economic advantage and disadvantage in an English-style cultural or class divide.

Since 1974 during which Gough Whitlam aroused passions in his ‘It’s Time’ speech by pointing out: “The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it” political advocates from both sides of the playing field have weighed into the debate.

Policies such as the NRAS, the first home buyer’s savers account, and spruiked initiatives to increase infrastructure have all failed to make significant or sustainable inroads to either supply based concerns, vacancy rates, or first home buyer percentages.

A few decades on, and it seems whilst everyone wants to be popular and ensure housing is ‘affordable,’ – years of easy capital gains and tapping into the housing equity ATM machine, have made any contemplation that prices should drop – or even stabilise for a lengthy period of time – downright out of the question.

Or as John Howard worded it during prime minister’s question time approaching the end of our 2007 housing boom;

“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 our most inexperienced buying demographic in subsequent negative equity once it was stripped away.

Earlier this year, the question of housing affordability once again raised its political head, however this time it was in the form of ‘point-scoring.’

In a television program back in May, Joe Hockey made the call that house prices in Canberra would lose capital value under a Coalition Government.

“There is a golden rule for real estate in Canberra – you buy Liberal and you sell Labor,” Said Hockey.

The response from Kevin Rudd – the ‘then’ former PM – who ‘championed’ the cause of first home buyers with his ‘vendor boost’ as Professor Keen aptly named it, was;

“Can I just say, Joe, I’m not sure that will go down well with all the voters in Canberra,”

Labor politician Andrew Leigh who represents the Canberra seat of Fraser was not slow to weigh in on the debate;

”When the Liberals came to office in 1996, they wiped $25,000 off the price of a Canberra home….Today, Joe Hockey proudly jokes about how he’ll do it the same again”

A comment that was promptly disputed by ACT Liberal Senate candidate Zed Seselja, who – whilst paddling frantically against any suggestion that prices might drop under a Liberal Government, cited the ‘moving annual median house price’ from the Real Estate Institute of Australia with the comment

‘‘Prices dropped more in last two years of the Keating Government than they did under Howard’s first 1.5 years, and to its lowest point,’’

As I said, – woe unto any politician who suggests market prices may actually fall.  Far better it seems to burden buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask rising costs under the false premise that residential real estate is getting ever more affordable – particularly in light of a construction industry that’s struggling to make any headway.

In 2007 in a report Entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary (hat tip @bullionbarron) which contains quite a broad analysis on various actions that can be employed to ease the strain on first home buyers and renters – once again the paradox of protecting the capital value of property whilst still aiding affordability is underlined;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

As for the policy of Negative Gearing, which was introduced and subsequently advocated to assist the lowly renter and reputedly ease the burden on social housing, (waiting lists of which are increasing) – the very same policy which property commentator Margaret Lomas suggested to ‘Property Observer’ would make “600,000 individuals homeless” if scrapped – coupled with the CGT discount of 50 per cent introduced by John Howard in 1999, which resulted in a 30 per cent increase in investment activity alone. It’s been by far and away the best incentive for the individual investor, fuelling speculation into the real estate sector and consequently creating a massive bubble of undiversified private debt.

And whilst I am not against investment into the residential real estate market, it makes little sense extensively encouraging it from a policy perspective if it doesn’t achieve;

1)      An improvement in housing affordability and supply;

2)      An increase in vacancy rates;

3)      A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; and

4)      Lower rents for the most venerable in our society

All of which negative gearing has failed to do.

As I pointed out in my column last week – whist it would be unfair to condemn individual investors for taking advantage of various tax incentives in an effort to secure their financial future, any Government that puts in place policies to fuel speculation and subsequently inflate prices in a vehicle that suffers from inelastic demand side levers, yet is essential to the development of both individual and community culture –  is a Government creating a difficult paradox as to how to advantage those who entered at the beginning of the lending boom – (during which capital price to income was lower) – compared to those who find themselves at the sticky end of housing’s historical journey in which mortgage debt has inflated fourfold.

Now we have a situation where household debt to income sits close to 150 per cent with ‘Moody’s Analytics’ in a paper entitled “Trends in Australian consumer lending demonstrating how Australian banks have the highest exposure to residential mortgages in the world.

It was years of dizzy speculation into the established real estate market which resulted in prices escalating to their current heights, with banks only too eager to create credit through the extension of mortgage lending which in the ten years to the GFC, increased in-excess of 450 per cent.

And despite the innocent impression some try to imprint suggesting we have a stable and responsible banking sector.  Global measures to date, which aim to ensure a similar GFC crisis does not occur again, do not go far enough in ensuring financial institutions fund their investments with substantially more equity than current regulations dictate.

As Moody’s Analytics managing director Tony Hughes and senior economist Daniel Melser suggest;

“Irrespective of the complacency of local analysts, who sound a lot like many US housing cheerleaders circa 2006, this exposure (to home loans) represents a major concentration risk for banks and the Aussie economy,” comments not to be taken lightly.

The influence of investment into the property sector was noted as far back as 2003 in a Productivity Commission Inquiry on First Home Ownership submitted by the RBA.

The study concerned itself with the effect of “strong and rising house prices which were burdening new home owners.” And noted

“The most sensible area to look for moderation of demand is among investors.”.. “In particular, the following areas appear worthy of further study by the Productivity Commission”

The report noted some key investor incentives which in light of the comments above, could be moderated

1.)            “The ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;”

2.)            “The benefit that investors receive by virtue of the fact that when property depreciation allowances are ‘clawed back’ through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.”

3.)            “The general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.”

This was 10 years ago – and without putting too blunter note on it – we’re no further forward.

In addition – for those who continually suggest house prices are as high as they are simply because we have a ’shortage’ of accommodation, the same report highlights;

“At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing”

There are plenty of initiatives which can be employed to ease affordability – albeit an active attempt to gradually ease investor demand in our established housing sector, whilst facilitating the construction sector, should be one of priority.

A few days ago I read an interesting blog by R P Data investigating why the current upward cycle may be different and more tapered to the last.

The comment was made that first home buyers ‘tend to push prices higher…. because their behavior can be more emotional than other segments of the market’ whilst investors are ‘more clinical’ when acquiring real estate.

It may seem a sensible assumption to conclude, however as is often the case when assessing behavioral economics, the reality can sit some distance away from the broadly held perception.

There has without doubt been a push in home prices from first time buyers in periods during which easy credit has been offered on a plate by way of incentives and grants to the inexperienced proportion of our buying market.

However, without these dynamics, investors play (and have played) a far bigger contribution to price rises in Australia’s real estate market – and from my own anecdotal experience, seeing an investor pay over and above what a property is worth, (based on an educated assessment of recent comparable data,) is a work related Saturday pastime.

As it stands, compared to last year, all states are experiencing an investor lead boom. Victoria’s numbers are up 11.3 per cent, Queensland 4.3 per cent, South Australia 8.3 per cent, Tasmania a more modest 1.5 per cent, ACT is up 11.1 per cent, the Northern Territory up 28.5 per cent with the outright winner, Sydney up 35 per cent.

You don’t have to be Einstein to work out where all this is heading.

Catherine Cashmore

You’d be hard pushed to find a first home buyer shopping in our largest capital cities, who had not been ‘outbid’ by an investor over recent times.

You’d be hard pushed to find a first home buyer shopping in our largest capital cities, who had not been ‘outbid’ by an investor over recent times.

The ABC has been running an interesting and somewhat anecdotal study on the cost of living pressures for a range of ‘typical’ household types across Australia, assessing how they perceive and experience the current headwinds facing our population, in what’s broadly considered to be one of the most expensive countries to live in the world.

According to the IMF, we sit within the top ten of per capita GDP data and PPP (purchasing power parity) data making us officially ‘very well off’ – and whilst both are pretty poor in appraising what’s ‘really’ happening compared to the perceived ‘on paper’ analysis which dictates what we ‘should’ be feeling, ask any economist and they’ll relate a similar story.

Ben Phillips from the ‘National Centre for Social and Economic Modelling (NATSEM);’ has been studying cost of living pressures over the last decade and concluded Australian households are doing “exceptionally well,” and any poll boosting political speak suggesting ‘we’ve never had it tougher’ is a furphy.

His analysis is based on our golden years of growth during which strong and growing incomes have outpaced the official inflation data which has stayed within the RBAs preferred range of 2 to 3 per cent over the past ’10 or 20 years,’ leaving Australian’s ‘a long way ahead of their cost of living’ – which is a lot different from the ‘rhetoric’ we commonly hear expressed he concludes.

According to the study, we just ‘think’ the cost of living has increased.  And here’s the graph to prove it. (Roy Morgan)


No doubt, for a proportion of Australians this is a reality. However, it’s more likely to be the proportion of our population that entered the property market early and have subsequently offloaded much of their housing costs whilst still earning and investing – or higher wage family units living within their means. Because, not surprisingly, by far the largest complaint from the ABC study and other such reports assessing similar concerns, is the escalating cost of accommodation and the lack of suitable well located options for those who have a view to entering the property market should they be able to achieve the relatively mammoth task of saving a deposit on the median disposable household income which is around $43,000 for a single person.

(For those wanting a deeper analysis of typical household incomes, I highly recommend Mat Cowgill’s blog “What is the typical Australian’s income in 2013?” or Grog’s Gamut which follows a similar line and sheds light on the broadening gap between the different income percentiles.)

One mistake made when assessing affordability, is to concentrate only on the principle cost of the home – calculating the percentage of income needed to service the repayments – which is usually appraised next the widely considered 30 per cent of disposable income ‘manageable’ bench mark.

However I sometimes think a better assessment would be to take into account what’s left over “post” housing costs, and whether it’s enough to afford the ‘actual’ non Consumer Price Index ‘cost of living’ which all would agree has escalated considerably.

It’s not only commodity prices that have spiked such as gas and electricity but an overload of other essentials such as insurance premiums, housing maintenance costs or owner corporation fees, school fees and child care for working mothers, medical and dental expenses and so forth – transport costs are substantial for those commuting daily as are the ‘needs’ of a modern generation who enter commission/performance based jobs which expect them to have 24 hour access to mobile phones and email.

Obviously, for a lower income individual, there’s far less in the pot once the 30 per cent has been extracted than would be the case for higher income workers. But once the bank has taken their share of principle and/or interest repayments, or tenants have paid their rent, which the ABS assess to be a similar percentile income proportion to accommodation costs serviced by mortgage holders, it’s the remainder that’s needed to service the other ‘not so cheap’ requirements of modern day living that’s an increasing area of concern, as cited by organisations such as ‘Shelter.’

For duel income households, the expenses can be shared, however single buyers would need at least $350,000/$360,000 to purchase within commutable distance of our major capitals – the ‘job hubs’ of Australia, and even in our current low interest rate environment with variable rates around 5.5 per cent, on a median income of around $40,000, buyers are ‘priced out’ unless they have additional assistance from friends or family.  

From the participants surveyed as part of the ABC report, a range of comments reflected these concerns, yet one prominent cry which I hear expressed from many first home buyers, is resentment towards investors – or as the ABC case study put it, “people” that;

“have three or four homes who are going into that market because they’re earning money and getting a lot more profit on it..” leaving a “lot of my friends say(ing) that they think ‘I’ll never own a house, I’ll never be a home owner, it’s too expensive”

If you ask any non home owner if they would like own a property, 9 out of 10 would say ‘yes’ – yet most accept they will need a period of renting prior to purchasing, so you could ask – ‘Why the resentment against the investor, the majority of which, only own one or two investment properties, not the 3 or 4 cited above?’

To answer the question, we need to assess whether investment into the property market has aided the first home buyer, or hampered their journey into ownership – the latter of which is this demographics’ majority view.

To date, house price increases have been primarily fuelled by households taking on an increasing proportion of mortgage debt – debt which outpaced both wage rises and inflation for the same period.


At the same time investment into property was broadly encouraged through various government incentives, such as negative gearing and reductions in capital gains tax – and most recently, the ability to borrow and buy real estate as part of a SMSF.

Currently, investors make up a little over 40 per cent of Australia’s buying market with scant information on the percentage of foreign acquisitions.

The number of landlords lodging a tax return in 1991 was 750,000 – compared to the latest data of 1.8 Million in 2011. 

The increase in outstanding investor mortgage credit since May 1993 is 1970 percent compared to 837 percent for owner occupied housing (Macro Business.)

Yet with all our initiatives to boost the share of private investment into the property market under the misleading concept that it would somehow lower demands for social housing and provide a greater array of options for renters, the shameful fact remains that it has done little – if anything – to increase supply. 

Loans to investors for the purchase of new property come in at less than 5 per cent – which essentially means, the vast majority of Australia’s buying market – over 90 per cent – competes for a reducing pool of second hand dwellings.

Apartments are generally considered the ‘foot through the door’ property type that attracts a younger ‘first home buyer’ demographic. However, the bulk of inner city established unit and apartment stock is investor owned, (close to 70 per cent in some localities.) Therefore, both typically compete for the same property types within a similar price bracket.

Most investors are speculating on capital gains and employing a negative gearing strategy which promotes speculation into established terrains and a ‘hold for the long term’ mentality.  As a consequence, unit holding periods over the past decade have increased 39 per cent (RP Data) which further promotes a ‘bottle neck’ of demand.

And we’re not alone, a recent study in the UK by the Strategic Society Centre notes similar figures – with the number of private landlords as a proportion of the population more than doubling between 1991 and 2008.

The study has caused an outcry due to the large disparity between owners and renters, which they cite as an ‘enormous financial gulf’ with calls for a massive increase in additional supply to attract new owners. 

Unfortunately, the only option considered has been an injection of easy credit by way of the UK’s ‘Help to Buy’ scheme which will produce inflationary elements into the market and further hamper affordability.  

First home buyers in the USA are also struggling, with reports of ‘cash only’ investors soaking up large swathes of affordable family homes in city locations. 

As just one example, close to a third of all homes purchased in LA during the first quarter of 2013 went to ‘cash only’ buyers, compared to just 7 per cent in 2007. First home buyers and families simply can’t compete.

In Sydney, investors make up roughly 50 per cent of the buying market – and with the level of residential property listings falling to 2009 lows which accounts for a -23.1 per cent yearly decrease in stock (SQM), it’s no wonder that the proportion of first home buyers in NSW sits below 5 per cent – a shameful statistic.

I still regularly hear industry professionals talking up property investment to their clients, speculating on an 8-10 per cent annual return as was the case for those that purchased prior to the spending spree which spurred accommodation costs to an all time 2010 peak.

However to continue on such a trajectory would take the average nominal apartment price in our two major capitals close to, and over a million. If you think getting a foot into the housing market is tough now – it will be nigh on impossible if the wishes of those benefitting from swelling property prices get their way.  In all honesty – if anyone spruiks this mantra to you – walk the other way.

Of course it’s not just investment into property that has played a part in prices being as high as they currently remain – a comprehensive study would bring many other issues to light, with significance given to reducing the inflationary elements around the limited supply of established accommodation whilst at the same time, exploring new ideas to massively boost infrastructure investment into regional and fringe locations which would aid an increase of demand in the construction sector.

Yet it remains, that the capital cost of property for initial owners in areas where they are feasibly able to live whilst servicing a combination of other essential necessities is out of bounds for a significant proportion and as far as perceptions go, you’d be hard pushed to find a first home buyer shopping in our largest capital cities, who had not been ‘outbid’ by an investor over recent times.

Despite the higher interest rates, for those who purchased in the late 90s or start of the 2000s, a cheaper capital cost although not easier to service, allowed the principle to be paid down at a faster rate than the longer mortgage terms required for the higher nominal capital prices which sit at peaks in today’s market and over the course of the loan, require the borrower to pay back substantially more.

The risks of taking on a higher proportion of private debt despite our low interest rate environment should not be discounted simply because the serviceability of those expenses is assessed to be ‘affordable’ – yet to get into the market, this is precisely what we are asking first home buyers to do.

Investors are an important sector of any residential property market – and should not be blamed for making efforts to secure their financial future.  Instead, we need to look towards our Governing powers that have the political clout to level the playing field.

As those who have their heads out the sand are aware – Australia faces some significant headwinds over the next decade and even with modest improvement of first home buyer figures in the latest ABS finance data – no doubt buoyed by the rush to enter prior to grant withdrawals – it remains to be seen whether we can start producing any long term sustainable solutions for this sector.

Catherine Cashmore


Does population growth result in rising house prices?

Population density, demand and house prices.

As most people are aware Australia’s population has now tipped the 23 Million mark.  Coming originally from the UK, where over 60 Million individuals reside in a land area which could be fit into Australia more than 58 times over, the 4.25 Million living in my home town of Melbourne and its surrounding suburban sprawl, feels noticeably different.

Victoria has exceeded all states in the population stakes. According to the ABS, over the year to 2012, we welcomed an additional 99,548 new residents.  Of that number, 56.4 per cent were overseas migrants, 41.8 per cent from births, and only 1.7 per cent from interstate migration.

As demographer Mark McCrindle recently reported, the number of people residing in Australia has increased by 8 per cent over the past 5 years and (under current forecasts) Melbourne is set to eclipse Sydney as Australia’s largest city by the middle of this century.

However, whenever population statistics are released, it inevitably follows that we get a host of articles directly aligning population density to rising house prices. While it’s not unreasonable to assume that an increase in the resident population will swell demand for home sales, its far harder to directly align the statistic to burgeoning house prices. This is especially the case when you consider that, despite Victoria’s booming population, Melbourne currently sits about 15 per cent below the five year average in total annual sales turnover, and throughout 2011/2012, was tracking at levels not seen since the late 1990s.

Turnover is an important figure in real estate – more important than median price rises.  Strong sales turnover keeps the industry, along with its retail offshoots, ticking along.  Without a good supply of buyers and sellers agreeing on property transactions, the market becomes somewhat stagnated and the resulting consequences can be felt across the broader economy.

However, whilst a higher sales turnover in any area where both land and supply is limited can result in rising median values, it isn’t necessarily correlated with increased population density; rather it generally relates to the amount of debt taken on by mortgage borrowers, a good proportion of which will be investors.

Investigating the potential for a surge in housing values involves a lot more than following population increases.  If you were to follow the population in Melbourne, for example, you’d be including locations such as South Morang, Tarneit and Dallas. Median house prices in these areas haven’t done much – in fact over recent times they’ve been falling despite an increasing population.

The last significant price rises in many of these regions was during 2009 – when some suburbs rocketed by 20% or more.  However, it’s important to understand that population growth didn’t fuel that surge – rather it was credit growth.

The post GFC boom which took us to the ‘peak’ of October/September 2010 was stimulated initially by the first home buyer boost (Reflecting the Rudd governments attempt to ward off a GFC inspired slowdown by injecting easy credit into a number of economic sectors.)

This resulted in a price multiplier effect across the market as generous amounts of cash were wafted in front of inexperienced buyers – many of whom took the additional dollars offered for new accommodation.

Once again, it shows the futility of first home buyer grants as a savings mechanism, further establishing the fact that the more money you pump into the market, the higher house and unit prices inevitably become.

Significantly, our fringe locations have an abundance of land along with ample off the plan packages waiting to be snapped up for those willing to pay the relatively high prices. There is certainly no shortage of supply in our fringe suburbs, meaning that any increased demand from home buyers is most unlikely to result in the same ‘pent up demand’ which can trigger price surges typical of inner suburban markets.

Furthermore, these areas sit in what is commonly referred to as the ‘mortgage belt’ regions – areas which – according to a recent Fitch report – remain venerable to delinquencies.

In contrast, the more affluent inner city regions – areas such as Boroondara in Victoria’s inner east for example – where it’s impossible to secure housing below the metro median, have lower delinquency rates and a far higher proportion of residents employed as professionals and managers.

Evidently, costly house prices in these vicinities are stimulated by above average median incomes in occupations most likely to have benefitted from strong historical salary growth, facilitating greater debt serviceability as well as the ability to leverage off existing assets.

But even this doesn’t mean that increased population density capital city suburbs, which seemingly have no room left to swing a cat, is directly correlated to price rises.  It’s not. For example, over 60 per cent of the apartment stock in the larger capitals is investor owned. Obviously, it increases demand from renters – a large proportion of which are priced out – but the investors evidently reside elsewhere.

Of course, as mentioned above, supply is a significant factor, and in our current high density culture (where historical development limits have been stretched), the inner suburban regions are not immune.

Over recent years Melbourne has experienced a high density boom with CBD high density development and inner suburban towers producing a significant over supply of one type of accommodation – relatively small one and two bedroom apartments, primarily suited to the student market.  The buyers for this type of accommodation typically don’t reflect an increasing local population.

For example, when Melbourne’s Docklands were established the apartments were swiftly offloaded by sales agents – taking a generous cut directly from the developers – predominantly to off shore investors.

However, supply was never tight enough, or the developments attractive enough, to ensure ongoing demand.  Subsequently the rental guarantees expired, prices stagnated and dropped, and despite its close proximity to the city, vacancy rates in the suburb remain close to 10 per cent.

The housing shortage debate is one that gains regular media traction yet is rarely understood.  If the supply equation is a simple case of putting every newly prospective household in our country into a new home, then the short answer is yes, we have a housing shortage – we’re not building enough.

But demand for housing comes from consumers, and the real shortage is for affordable accommodation that meets the current needs of our modern home buying demographic – young couples most likely at the stage of their life where they are planning (either immediately or in the near future)  on forming a family.  First home buyers as a proportion of the buying market have been diminishing – and currently make up only 14 per cent of the market.  The rise in prices is being fuelled by up-graders and investors – not new purchasers.

Put simply, the properties we are currently building are not attracting a greater proportion of local buyers, who quite clearly prefer established properties over new development for a variety of reasons – which can be summed up somewhat under the heading inelastic short sighted development policies.  This is why residential construction is currently experiencing its ‘longest trend decline in post-war history.’

Take Sydney for example.   Significantly more expensive than any other capital city in Australia, by the year 2000, affordability levels were at a crisis point. However, from around 2003 the market remained stagnant and, despite continued population growth, it didn’t renew its’ upward trajectory till 2009.

A shortage of supply and solid demand may have prevented prices falling – however population density was not the main driver of them subsequently rising.  Significantly, Sydney’s buying market is comprised of almost 50 per cent investors – all borrowing to take advantage of well spruiked prospective gains, as an increasing number speculate on the market in an attempt to pump their savings into anything that ‘promises’ a better return than the stock market or a long term deposit account.

And let’s not forget foreign investment and the impact this can have.  London is a good example.  The scream for housing in the UK, and London particularly, due to ‘shortages’ and rapidly rising prices, is because over 50 per cent of prime London land and property is owned by offshore buyers and developers who have no interest in building ‘affordable’ accommodation to fulfil ‘real’ home buyer demand from middle income workers.  The gains are coming from those who have hundreds of thousands to invest in what’s perceived to be a relatively safe haven, and to date it’s been channelled into the premium housing sector.

The recently imposed UK mansion tax may impact on these statistics, however there is no doubt England’s “help to buy” scheme will do a fair job of propping up the lower end of the market as, once again, the ‘proof’ of rising prices comes policies facilitating increased debt access and take up.

We all know the reality behind our golden years of growth.  The 250%+ increase in house prices over the last decade has been fuelled by increasing debt, financial deregulation, duel income households, first home owner’s grants, and a rapid increase in the purchase of investment properties.

People were able to borrow more to fulfil their desire to not only own their own castle and add an extension (further inflating median values,) but also to leverage the accrued equity and “invest” over the duration (usually in more real estate), with banks emerging as the real winners.

The rapid increase in house prices over the period has had little to do with population density per se, but everything to do with credit growth – and you’ll find similar stories repeated across the globe.

Price rises are more often than not fuelled by speculation that the next generation will pay double for the second hand house in – how does it go – 8 or so years time? But whilst population growth certainly is a factor, and will push demand, actual house price appreciation more directly stems from from a higher proportion of mortgage holders shopping within an area of limited supply, rather than  a higher population density. It’s an important distinction.

We may be consistently told that house prices are as high as they are because we’re not building enough supply, but the reality is, house prices have been pushed up in line with the banking system’s ability to lend and the consumer’s appetite to borrow, and considering banks favour lending against existing collateral over and above productive investment, it should come as no surprise that the vast majority of bank lending (about 60%) has been towards the purchase of ‘bricks and mortar’ – with the only constraint on the amount of money ‘created’ being mortgagees ability to service the debt.  For those who got in at the beginning of the lending boom, the party continues.

However this is in many ways inherently unstable and the only way to stop the whole system collapsing is to prop up the debt levels we’ve already created, and find new ways to pump cheap credit into the system.  For those renting and facing the challenge of their first purchase, this means continuing to be saddled with high capital prices which they are expected to service for ever longer periods – now sometimes extending out though mortgages of 30 years or more – and a continuous low interest rate environment, or shared equity schemes and other funding innovations all pitched to maintain the perception that housing has never been more ‘affordable.’

Catherine Cashmore