Auctions – In the current atmosphere, what effect are they having on buyer psychology?

Auctions – In the current atmosphere, what effect are they having on buyer psychology?

There’s no denying that Melbourne is the ‘auction capital’ of Australia – at time of writing – year to date there have been over 18,291 auction sales, which according to REIV figures, is an increase of 13 per cent on this time last year.

As a proportion, auctions only account for around 20 per cent of total sales; the vast majority of transactions take place behind closed doors via private treaty negotiation.  However, for the bulk of buyers focused on sourcing properties in the middle, and particularity inner ring localities of Melbourne (followed by Sydney) – a large proportion of which are investors – ‘for sale by auction’ tends to be the preferred method of marketing, therefore, at some point, attendance on a Saturday for a game of ‘deepest pockets wins’ is all but inevitable.

As mentioned above, whilst auction transactions only capture a relatively small sample of sales, they can be a good indicator to the current ‘heat’ of consumer sentiment toward the purchase of residential real estate (particularly in the investment sector.) And in a country which has effectively hamstrung development ‘outwards’ with inelastic supply side levers, ensuring we’re all squashed in a doughnut like shape around the affluent capital city established localities – the concentration given over to the clearance rate each weekend is somewhat understandable – even if it does irk the larger proportion of agencies that work in outer suburban ‘non’ auction locations.

For an inexperienced buyer in a ‘hot’ speculative fuelled market, auctions can present a pit fall of dangers.  The typical four week campaign – three weekends of ‘opens’ with the auction taking place on the fourth – is designed to act as a stimulant, effectively putting a ‘end by’ date on the period of time they have to conduct any needed due diligence.

And as clearance rates rise (the curve of which prices typically follow) the chance of a listing attracting enough attention to sell ‘prior’ also increases – shortening the marketing period further still.

Added to this is the general confusion over auction price quotes. It seems silly to point out the obvious, but no buyer likes to play guessing games when it comes to putting a price on an advertised listing.

Everyone understands real estate is a negotiated asset, however, the verbal game playing that now surrounds a proportion of the sales industry is laughable.

Responses to a ‘price enquiry’ range from a paraphrase of “we won’t know until buyers have ‘told’ us” to a general comment such as “properties in the area are selling in the $400,000s and $500,000s” – effectively giving any said purchaser $200K bracket in which to ‘work it out.’

It’s part of the market insanity that surrounds our residential real estate sector. If we were operating in an ideal world, buyers would ignore price quotes altogether and do their own research to establish market value prior to spending hundreds on a pest and building inspections or solicitor fees chasing an unobtainable dream.

However, closely comparable sales data is not always readily available – computer-generated “estimates”, are, more often than not, hopelessly inaccurate. Suburb reports are equally unhelpful, and while median data will give an indication of the dollars the majority market is spending, it’s no help when evaluating individual property prices.

In Victoria published auction sales often result in “undisclosed” blank figures and private sales are just that – private. The street name will be listed, but the other relevant and essential data is missing.

It’s one reason I advocate a requirement for vendors to take responsibility for their own (typically) ‘vendor paid’ advertising campaigns, and ensure reserves – or ranges in which they’re prepared to negotiate – are published at the outset.

Whilst you can argue one way or another at the lunacy that often surrounds Australia’s addiction to all things real estate, we’re not talking about an ‘item’ on e-bay – we’re talking about the biggest financial transaction most make in a lifetime.

Hence why we need transparency in the real estate sector – information should be openly available to enable buyers to make informed decisions without the need to play ‘guessing games’ and risk poor financial decisions that can have a broader impact on the economic landscape.

According to RPData, Australia’s property market is worth an estimated $4.86 trillion, which is three and a half times the value of Australia’s stock market and combined superannuation funds.

Assessment by ‘Moody’s,’ shows Australian banks are ‘way ahead’ of global counterparts in their exposure to property – with two-thirds of their lending tied to the residential sector.

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And as we start to tick into what most assess to be a relative ‘boom’ of activity in various states – with auction rates once again approaching record highs, and analysts carefully assessing sharp price rises in the established sector – yet sitting a long way from a point at which the RBA can pull the traditional ‘rate rising’ lever to offset a dangerously overheated market – we remain in a precarious position.

To argue that this is in anyway ‘good news’ or to suggest as RBA board member John Edwards did last week in A WSJ interview that “we’re a long way from it being a problem,” – in an environment as Michael Matusik pointed out in his blog, is set against a construction sector currently on its knees – with first home buyers reducing significantly in key markets such as NSW in which they are down from 14.2 per cent in 2011, to a current 7.3 per cent, the ‘lowest’ share on record – (illustrating aptly the failure of initiatives such as the first home buyers grant) – would be a sharp disconnect from a country that also champions the motto of a ‘fair go’ for all.

No matter where you sit in the world’s ‘rat race’ we all have a core requirement for secure accommodation – a place of residence which is safe, clean, and warm enough to rest at night – it’s the compass that navigates the our wellbeing and performance both in and out of work, therefore, it’s no surprise that the health of our property market dominates conversations across all demographics and remains at the top of concern for voters.

As I said last week, whilst the current rally seems set to last into 2014, the prospect of higher rates coupled with higher unemployment will in my opinion, pull up any lengthy capital city market ‘boom’– however in the meantime, we’re in ‘overdrive’ and the sales industry is predictably doing everything in its nature to add fuel to the fire.

Agents are deriving auction campaigns that last as little as two or three weeks with comments from Sydney agents highlighting;

“There are so many buyers …we don’t need to wait four weeks to identify the likely buyers, two to three weeks would be plenty..”

Reports show homes selling 15-20 per cent above their reserve which is typically derived from a mix of recent comparable sales combined with current interest – and even allowing for emotion, gives way to ‘jaw dropping’ results as ‘war stories’ filter in from varying pockets within our capital city markets.

In this atmosphere, auction sales ignite the problem further.  Allowing for the odd exception, I’ve yet to meet a buyer who ‘likes’ bidding at auction – and for that matter, I’ve yet to meet a vendor who doesn’t dread their ‘day in the sun’ as it’s so often termed by sales agents, which in most instances for a purchaser, will result in a battle of sorts, with a group of people guaranteed to lose all sense of rationality if heated bidding happens to occur – which in the current atmosphere holds high probability.

And whilst in a downward market, I would fully agree with advocates such as Neil Jenman who campaign against auctions as a method of sale claiming “better results” can be achieved via ‘private negotiation’ – the opposite is the case when the market turns and we start to see mini rallies within certain pockets of the city.

When buyers see properties openly selling above their pre-conceived perception of ‘market value’ (something that generally doesn’t happen when the sale is conducted via negotiation) it provides very visible reality that the market’s ‘moving’ and the effects on the mindset act like a kind of contagion.

There’s no doubt a winning bidder will only ever be ‘one step’ above the under bidder – and in that sense, it could be argued the ‘highest’ price is never achieved – however having spent years working with buyers, I can confirm – without shadow of a doubt – that during an rapid moving auction, buyers spend far less time thinking about exceeding budget constraints than they do when, in a rational, ‘pre auction’ moment, they take time to discuss – usually with their partner – where to draw a sensible limit for the property in question.

And it’s rare to find an agent with the sharp negotiation skills to achieve similar results in private sale scenario.

There have been plenty of academic papers outlining why auctions can achieve significantly higher prices in competitive markets compared to other methods of sale.  The effects broadly fall under the title of a ‘pseudo-endowment effect.’

Without going into too much intricate detail, as buyers bid for a property, there is a ‘feeling’ of partial possession in those who take part.

If the bidding starts low – as it tends to at most auctions – the multiple bids and length of time needed to get the price to its ‘reserve’ creates momentum and in addition, fuels the emotional attachment and sense of ownership the participants gain towards the property.

The results of the many scientific experiments conducted on auction sales show a strong propensity for buyers to re-assess their pre-estimate of value ‘upwards’ which stimulates a ‘win or lose’ mind set, in which the main focus is to beat the competition, above and beyond simply purchasing a home.

To put it another way – when buyers bid at auction, they bid to ‘win’ and in the process, lose connection to the initial goal of achieving a purchase within a predetermined budgetary limit.

With a talented auctioneer doing all in his power to convince bidders to ‘buy their weekends back’ with ‘just one more shot’ – it doesn’t take much for an inexperienced buyer to stretch past his comfort level and ‘lose it.’

Smaller increments and repeated bidding can magnify these results.  Hence why you’ll often see buyer advocates attempt to ‘nip’ the momentum in the bud, with an initial high bid or by using what’s known as a ‘snip’ technique – coming in right at the end an giving the impression to already stretched buyers, that there’s ‘plenty more in the tank.’

And whilst it can be very successful in gaining the vendor an outstanding result – it has little advantage for a buyer, who can end up with a healthy dose of remorse once the initial fervour has worn off.

I attend at least four to six auctions on any said weekend and have witnessed the effect this method of sale has in both downward and upward ‘cycles.’ In Melbourne, it plays an active part in driving our boom and bust mentality.  And whilst you can argue on the advantages and disadvantages in comparison to other sales techniques, in the current environment, the bidding wars erupting in both Sydney and Melbourne, are doing a good job at pushing prices into unsustainable territory.

 

If you’re a buyer – be warned.

 

Catherine Cashmore

 

 

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The very real crisis of ageing and gender homelessness – it affects us all.

The very real crisis of ageing and gender homelessness set to swamp all previous expectations, discussions and plans

When discussing issues of housing affordability, the conversation is often weighted toward our first home buyer demographic – principally those locked on the ‘ladder’ of rising rents. However, last week ABC Radio National’s ‘Background Briefing’ report focused on the ‘new face of homelessness’ – with a quarter of a million older Australians approaching retirement with little super, and no house to call their own – importantly – many only ‘a couple of rent payments away’ from homelessness.

I’ve commented previously on our aging headwind of retirees, who hold roughly half of Australia’s housing stock as their principal retirement fund, and the potential consequences resulting from any downturn in home values or dwindling activity from a first home buyer demographic, who are currently outbid by demand from a higher percentage of investors focused on the established sector.

However, as highlighted in the program – a growing demographic of older working Australians, are facing ‘dire financial straits’ as they reach retirement.

Some of the most venerable victims are women, who having ‘worked hard, and raised children,’ due to divorce or circumstance, are now finishing employment with less super than their male counterparts, (some with no more than $40,000 in a fund) and finding themselves once again as ‘tenants,’ paying more than 50 per cent of their income in rent.

Within the report, Ludo McFerran – from the University of New South Wales and national director of the Safe at Home, Safe at Work project stressed the urgency of the problem;

‘This problem of ageing and gender and homelessness is so big the reality is it will swamp all previous expectations or discussions or plans,’

Her comments are insightful, because as I’ve pointed out on many an occasion, the accommodation we’re currently building (which many argue is in undersupply) is neither affordable nor suitable for average single workers or elderly downsizers – being predominantly McMansions on the sparsely facilitated fringe locations, far away from our inner and middle suburban ‘job hubs’ or low grade over-priced apartments with high owners corporation fees, which offer little more than a roof and four walls.

It’s a sobering reality, because if you think the numbers are significant now – without immediate action, the story’s set to get worst.

The traditional model of an aging population who have in the past, purchased a house, enjoyed tax free capital gains, and when the children have left home, sold it onto the next generation, not only starts to break down as the dependency ratio (the proportion of workers to non workers) falls from peak – but with more demands on the tax payer dollar, coupled with a lower growth environment as we face the challenges of a tighter macro economy than previously experienced the trend indicates a reducing number of first home buyers who purchase later in life, marry later in life, start their family later in life, and significantly, tap into their housing equity to fund the rising cost of living, earlier in life.

The bias is a significant one, because parents often find themselves digging into their own retirement equity stream to assist their children onto what’s too often termed ‘the property ladder’ – as if it’s something to be conquered.

Importantly, for those who don’t partner and cannot harness the power of a duel income or do not have funds to draw upon from relatives – retiring whilst still renting, is a very real possibility.

The issues were also highlighted in last week’s AFR in which Simon Kelly – author of a CPA Australia study entitled ‘Household Savings and Retirement – where has all my super gone?’ makes comment;

“People approaching the age of 65 have considerably higher debt than in the past. Mortgage averages and other property loans have more than doubled since 2002 and credit card debt has increased 70 per cent.. Superannuation is clearly being used to reduce debt.” 

The report goes on to highlight how;

People approaching retirement age are using the equity in the family home as a source of funds to assist their children into homeownership…”

And considering we’re in the ‘second half’ run up to the Federal Election, it’s hard not to take further opportunity to highlight such concerns which have to date been ignored by our two major contenders – hence Peter Chittendon’s comments in Property Observer last week that the “elephant in the room” is “housing policy.”

Whilst our two major political contenders are busy focusing on a ‘stronger’ Australia – promoting ‘economic growth’ a ‘return to surplus’ all coupled with ‘reduced cost of living” – which as highlighted by St Vincent de Paul in their recent campaign for a ‘relative price index’, bears little relation to official CPI measures. By far and away the biggest financial cost most Australian’s face is that of accommodation.

As Australians for Affordable Housing correctly point out, – between 2003-04 and 2009-10 the amount households spent on housing has outpaced other expenses – increasing by 55 per cent. Therefore any policy debate with ‘cost of living’ on the agenda should have this top of list.

Needless to say, the first question on ABC’s ‘Q&A’ debate between Joe Hockey and Chris Bowen last week, was precisely this, as a young professional living in Western Sydney expressed her dismay at the now ‘near impossible dream’ of becoming a ‘home owner.’

As I’ve written previously – it’s an unfortunate reality that neither political party can see past burdening buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask the rising cost of accommodation under the false premise that they’re doing ‘something.’

As Chris Bowen commented “There (are) two big things that we can do to help with housing affordability. That’s keep unemployment as low as possible. Because you have got a job, that’s the best thing you can do to get into the housing market. And also to keep interest rates low and interest rates are as low as they’ve ever been in Australia”

However,  in answer to his first point – Australia faces challenges ahead – with a falling participation rate due in part to an aging population, fewer full time positions coupled with a rise in part time work inflating the ‘underemployment’ figures – it’s clear job creation is not keeping pace with increases in our working age population. Whilst moves are underway to improve the situation, the role of private debt is overlooked in favour of paying down government debt; hence consumers are weighted toward saving rather than spending money into the economy.

As for low interest rates, they have done little more than inflate established property prices and speculation on financial markets which is scant benefit to those facing rising yields, or paying an inflated cost to secure a property at the offset.

Joe Hockey’s comments took a similar stance – except he did touch on the issue of supply;

“..the fact is you’ve got to increase the supply. I mean it’s a market. There is plenty of demand and increasing demand but what are we going to do for supply? I have some plans on that which we’ll be talking about before the end of the election.”

However, releasing more land and building more supply is not the answer when the land is neither affordable, or the supply desirable enough to attract the surplus of buyers forced to live within commutable distance from essential facilities.  In this respect, any plans for new supply need to be specifically targeted to combat both issues – let’s hope this is the case.

It also doesn’t touch upon the difficulties developers have gaining funding without a large proportion of pre-sales – generally only possible to the foreign market – and I mentioned last week, due to cultural tendencies, a significant proportion of these apartments often remain empty once sold – which once again has an impact on measuring the true effectiveness of any increase in underlying supply.

With the rise of the internet and the ability of those searching for answers to delve a little deeper than they perhaps would have done before the world became a mirror of reflections, as every action and movement is recorded, posted and photographed in real time, and offered up for an immediate judgement on social media – it can only be hoped, that a majority, not minority, are taking opportunity to look past the frivolity of what I think most would agree, (whether by design or purpose) have been fairly meaningless debates – particularly if their searching for answers on housing policy.

Indeed, the home ownership dream – which resulted in prices ‘trebling’ between 1997 – 2007 in the UK – and performing a similar feat in Australia, was not built on the fundamentals so often advocated – that of a rising population’s demands for a ‘home’ – although of course, supply/demand constraints do a good job of exaggerating the figures when inelastic policies hamstring development.

Rather a great inflation in property prices was the direct result of the dramatic increase of mortgage debt built on the back of a housing market which had fast progressed into what Faisal Islam comments in his new book ‘The Default Line’a multi faceted investment vehicle financed through an unrestrained system of credit and deposit creation.”

As I said last week – in this respect, it’s not the health of the housing market that needs to be tacked, it’s the disease, hence why a growing number of influential economists are pushing for monetary reform – importantly, regaining control of the money supply and the dictates of where that supply is allocated, as a basic prerequisite for coming to grips with the banking and financial system.

Albeit, this aside – what cannot be argued is the conditions that took values to their 2010 peak following our golden decades of growth, will not be replicated as we enter a very different and challenging decade than previously experienced – therefore all LNP comments that start with ‘under the Howard era’ as evidence for their management of employment figures and surpluses, bear little relevance to our new reality.

As it stands, the environment in various capital city pockets has gone into overdrive and among others, AMP have now weighed into the debate commenting “Australian houses are 7 percent overvalued based on long- term trends” referencing how “Home prices rose last quarter at the fastest pace in more than three years, and sales of dwellings reached the highest since 2011 in June, government and industry data show.”

Whilst the current rally seems set to last into 2014, the prospect of higher rates coupled with higher unemployment, should temper the gains and therefore, I expect we’ll see shorter durations to the traditional boom and bust market cycle.

As Christopher Joye aptly commented in a recent AFR column “ride the housing and equities wave for as long as you can. But remember … You are not surfing a swell in Bali.”

Catherine Cashmore

The mother of all dwelling booms? A short term rally? A bubble or recovery?

The jury’s out on whether Australia is entering the ‘mother of all dwelling booms’ as Robert Gottliebsen took note to warn in Business Spectator last week.

And whilst the construction sector continues to fall short of expectation, the established housing market, most notably in Sydney although also reflected in other states – has moved.

’War stories’ are emerging from buying and selling agents of auctions attended where the prices have exceeded the reserve by 10-20 per cent.  In turn, vendors are reassessing their expectation of value based on neighbouring results – and with more talk of prospected drops to the cash rate, purchasers are shopping lenders to see how far their budget will stretch.

When prices start to rise – in some areas quite dramatically so – there is always heated debate over whether it’s a bubble.  The term itself is somewhat over used perhaps because of the image it invokes.

A bubble gives the impression the market is a flimsy airless balloon which – like a row of standing dominoes – will quite suddenly, irreversibly and dramatically ‘pop’ falling into an endless abyss.  For some commentators – the very fact that this hasn’t yet occurred in Australia is enough to demonstrate the theory incorrect. In other words, you can only define a true bubble whilst viewing the devastating aftermath.

However, a bubble or the recognition thereof does not have to fall into the definition posed above. They are not always easily deflated, and there are plenty of different particularities between the policies and lending requirements that have played into the house price ‘corrections’ other countries have already experienced post GFC, that differ from those we have in Australia.

Furthermore, in economies highly exposed to the residential sector, where central banks and governments have the ability to manipulate policy and the amount of cheap credit that flows into mortgage lending, it’s possible to ‘prop’ and temporarily prevent falling house prices that would otherwise occur in line with a challenging macro outlook.

In Australia this would include, rising unemployment, lower prospects for wage growth, an aging headwind of retirees lowering the participation rate, and the gradual winding down in the mining sector – to name but a few.  And whilst this will bear relevance in moderating the level of price appreciation long term, there are plenty of ingredients in the pot to ignite the current environment which is causing a range of voices to warn of bubble like conditions in fragmented areas of our established capital city terrains.

The main force behind the buying market is a mix of investors and up-graders who – in turn are boosting the premium housing sector using funds from the sale of lower priced properties to leverage up which coupled with lower rates reduces the size of their loan – distorting the forward analysis of the lending data in relation to price growth somewhat.

In contrast demand from first home buyers has weakened significantly – waxing and waning only on the back of various grants and incentives.

Each are buying for different reasons, and as we know, in this sense, the environment has been nicely manipulated by supply side constraints which keep Australia in a donut like geographical outlook.

However, as Robert Gottliebsen points out in his column, and as I mentioned last week – a very low interest rate environment is once such condition that encourages investors to pull back on saving in favour of a spend/borrow mentality.  And in our property obsessed culture – following years of woeful planning for population growth, most of this pent up demand is being fed into the second hand housing sector.

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 – eight or so years time? And whilst population growth can push demand – as I’ve commented previously – actual house price appreciation more directly stems from a higher proportion of mortgage holders, not necessarily home buyers, shopping within an area of limited supply.

In this respect, the money Governments have donated through tax breaks alone to encourage investment into the established residential real estate sector, with policies such as negative gearing which has disproportionately inflated existing property values and created a growing gap between rental yield – rises of which cannot keep pace – is another area of significance which has propped up the prices. It’s also one of many policy measures that should be addressed if affordability were really an issue of concern for our competing political parties.

And whilst there may be heated debate over the recognition of a bubble, in every instance speculation is a significant driving force in the pace of any said increases – which rings nicely with US economist Robert Shiller’s analysis when in his book “Irrational Exuberance” he defined a bubble as;

“a situation in which news of price increases spurs investor enthusiasm – spreading by psychological contagion from person to person, in the process amplifying stories that might justify the price increase attracting a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

This mentality is evident when we enter what is so often termed the ‘recovery’ phase of our market cycle – usually after a period in which home values have declined in real terms.

It’s an interesting turn of phrase, giving the impression to the uninitiated that prices have dropped so low they needed to ‘heal’ like a sick patient – however seeing prices overshoot the mark as greed along with expectation of another boom inevitably takes a force on investor mentality, is a common feature of this part of the cyclic psychology.

The effects are often amplified in areas where auctions sales predominate.  When buyers see properties openly selling above their pre-conceived perception of ‘market value’ (something that generally doesn’t happen when the sale is conducted via ‘private’ negotiation) it provides very visible reality that the market’s ‘appreciating’ and the effects on the mindset act like a kind of contagion.

Interestingly enough, the reverse is the case when a larger proportion of properties pass in at auction – leaving buyers with the worrying impression the market’s ‘tanking.’

During a competitive auction buyers spend far less time thinking about exceeding budget constraints than they do when – in a rational ‘pre auction’ moment, they take time to discuss (usually with their partner) where to draw a sensible limit for the property in question.

In truth, when the market is buoyant, and competition evident, buyers don’t bid for the property – they simply bid to ‘win’ – something I witness weekly.

And of course, whenever rising prices openly occur, stock inevitably reduces. After-all, who wants to sell an asset that’s increasing in value, when the observation prevails that a vendor can get ‘more’ if they hold and wait for further gains to come?  Especially as additional rate cuts are still widely predicted.

The other issue which Robert Gottliebsen touches upon is foreign acquisition. The falling Aussie dollar has given Asian property investors an opening to look favourably once again upon dwelling investment in our capital city markets.

As reported in the Australian Financial Review last week “A Sydney Property developer sold 90 off-the-plan apartments at the opening of a new tower in Bondi Junction in 5 hours” and whilst a large proportion of funds will be fed into off-the-plan construction, assisting developers in the approval process somewhat, it’s arguable as to how many of these new apartments will actually make it onto the rental market.  With limited options for investment, real estate acts like a magnate for Chinese buyers – who are not averse to purchasing speculatively whilst leaving apartments sitting empty.

There will be plenty of argument yet to come as to the level of the current ‘boom’ and its longevity. But what cannot be argued is the conditions that took values to their 2010 peak following our ‘golden decades’ of growth, will not be replicated as we enter a very different and challenging macro environment than previously experienced – hence why I hold the opinion that we’ll see shorter durations to the traditional boom and bust “market cycle.”

Furthermore – whilst rising established house prices may be perceived as ‘positive’ – particularly for those who want to downsize or ‘tap’ into the equity – is worth remembering that it’s doing little for the productive areas of our economy such as manufacturing, small business or job creation.

The oft quoted perception that the ‘feel good’ factor from rising house prices stimulates consumption has been disputed in several studies – the most recent of which can be found here.

And whilst those who purchased early in the 2000’s have seen their assets ‘boom’ the consequences have forced a social divide as purchasers priced out are forced into areas where schools, transport and local amenities have not been funded to keep up with the flood of lower and middle income households in search of affordable options.

Rising yields ensure renters find it particularly hard to locate close to work hubs (not to mention the pressure it puts on students battling for a university qualification) – and unless we face up to the ‘non voter friendly’ challenges that prevent sustainable solutions and reduce unwarranted inflation in the established sector at the expense of construction, nothing will change.

New Zealand – which is experiencing its own property boom principally in Auckland – has released details of plans to moderate mortgage demand through ‘speed limits’ on high loan to value lending. However, it’s widely acknowledged that without effective polices to enable home building over a wider footprint of land, first home buyers will suffer inevitable pain, and debate circulates as to whether it will lower prices in the long term or just produce a blip on the radar.

Even if it were possible to effectively implement and audit similar restrictions – thereby tapering the flow of money into mortgage debt, it won’t necessarily stimulate lending for productive purposes.

Furthermore, although in real terms, values remain below peak, the property market chills at the thought of prices adjusting downward materially – yet not at the bank controlled credit creation process that inflated the huge increase in the first place, in so much as banks create money every time they make a loan, and then decide where the bulk of lending is directed – building up the price of their preferred assets at their own discretion.

In this respect, it’s not the health of the housing market that needs to be tacked, it’s the disease.

Lastly on interest rates – since November 2011 we’ve been on a downward rate cycle – some of which was only passed on ‘in part’ by the banks. Yet it took until mid 2012 for any marginal improvement in median values to emerge (boosted by consumer confidence,) and only fairly recently have we seen a significant uptick.

Despite it all the building industry is not picking up enough pace to compensate for the tapering of construction in the mining cycle, and we’re a long way from a point at which the RBA can start raising rates to offset any unwelcome boom in established asset prices.

For the time being, existing owners and investors will continue to fuel demand, and despite loan service affordability costs improving – those looking to enter the housing market, will continue to compete with a challenging heated environment.

Catherine Cashmore

Low rates infuse a bubbly atmosphere in the established housing market

Low rates infuse a bubbly atmosphere in the established housing market

There’s an ongoing discussion between our politicians as to whether low interest rates indicate ‘good’ or ‘bad’ economic management, with Joe Hockey warning – correctly – that a further cut indicates a slowing, if not, “struggling,” economy, and Kevin Rudd shoring up his corner with the backhanded comment that this merely implies the opposition think ‘high interest rates’ must be a ‘good’ thing.

The last time the RBA moved interest rates so close to an election was back in August 2007 just prior to John Howard’s demise from office – except of course, at that point, the cash rate was lifted +0.25 per cent to 6.75 per cent with the comment from Governor Glenn Steven’s that;

“The world economy is still expected to grow at an above-average pace..” and noting the need to contain medium term inflation.

After Kevin Rudd entered office, house prices were at a peak, and two further increases in both February and March took cash rate to 7.25 per cent, after which the contagion of the GFC resulted in a swift ‘six’ consecutive rate cut cycle as we felt the worldly repercussions of a highly interconnected financial system regulated by fear and greed, teetering on the brink of economic collapse.

The swift reversal which sent us right back into a rate ‘hike’ cycle occurred in line with the Rudd stimulus packages, including the first home owner ‘boost’ which applied to contracts entered into between 14th October 2008 and 31st December 2009 and consequently, swathes of easy credit entered the housing market creating a short term price multiplier effect across all ranges and arresting the downward decline in household ‘debt’ growth.

The party could only last so long, and in response to the high Aussie dollar, subdued credit growth, declining asset prices and continued underperformance in the construction sector, the current rate easing cycle, which commenced 2nd November 2011, has been going on for 18 months.

The resulting eight cuts which leave us with the lowest cash rate in at least 50 years have been successful in taking some of the air out the Aussie dollar, albeit newly revised forecasts from Government indicate a worrying trend in rising unemployment, and cautionary words are emerging from the RBA as Governor Glenn Steven’s evaluates that;

“One’s assessment of prospects for consumption will be driven mainly by one’s assessment of the outlook for income, but will also be affected by expectations about asset values and in particular one’s view on whether housing prices are overvalued..”

Job ads fell by 1.1 per cent in July – the 5th consecutive monthly decline, and a cumulative 19 per cent over the past 12 months. Business confidence is waning with conditions at a 4-year low, household income dynamics worsening, and considering we have a tightly contested Federal election on the door step, there is little prospect of improvement in the near-term.

With the above in mind, it ‘seems’ a sensible move to pull the one economic lever the RBA have to hand, and provide ‘relief’ to “interest-sensitive spending and asset values.”

However, 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 as we know, monetary policy is at best, a blunt instrument and 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 – which in terms of housing, would principally be construction.

In this sense, relying on interest rates to stimulate demand in new home building is akin to banging your head against a brick wall and hoping the pain will subside.

I happened to catch the Sunday morning “Financial Review” show on Channel 9 last week to witness and interview with Harry Triguboff – chief of Merriton – who happily concluded that the reason demand from Australian buyers for his high rise apartment blocks was so low, was directly correlated to the RBA’s monetary policy.

To paraphrase, his comments “They should have dropped rates earlier.. I don’t know how many more drops they need to do….they just need to keep dropping till Australian’s start buying my high rise apartments again”

Albeit, whilst a drop in rates may assist the construction industry to some extent, unless it goes hand in hand with policies to sustainably finance the provision of essential infrastructure, such as public transport arterials to ease the cost of commuting to fringe localities, tackling planning constraints, reducing hefty tax overlays, or assisting finance for development of ‘quality’ accommodation – to name but a few – consumer demand will remain subdued – nothing will change outside of intermittent First Home Buyer ‘new build’ incentives, and the issue will remain a topic of discussion.

The other problem with a long-term low interest rate environment is the air of dependency it creates as economies struggle to ‘repair’ whilst desperately trying to encourage consumers back into a spend/borrow mentality.

This is never more evident that the current circumstance in the UK.  Whilst a proportion of home owners will take advantage of lower rates to pay down outstanding debt, there is no shortage of borrowers living week to week who would topple over if rates were to moderately rise.

In the south east of England where, not unlike Australia, rates of home ownership are elevated, house prices haven’t ‘corrected’ perhaps quite as far as they should have done considering the underlying and ‘high unemployment’ economic challenges the UK faces.

This is partly related to foreign ownership of prime London real estate – which makes over 50 per cent of the buyer market – but also a dramatic increase in investor activity, which now accounts for more than one in ten mortgages.

Add to this the newly introduced ‘Help to Buy’ scheme allowing first timers to purchase houses with as little as a 5 per cent deposit, whilst the tax payer foots an underwritten Government guarantee for 15 per cent of the capital value should the buyer default, and you have an inevitably bubbly environment devised and costed on the assumption interest rates will remain close to zero for the foreseeable future.

The UK is far more interconnected with the US than we are in Australia, and therefore the hint a few weeks ago from Ben Bernanke indicating FED may begin to slowly unwind its era of quantitative easing which would inevitably put upward pressure on rates, provoked a response from the new Governor of the Bank of England who swiftly inaugurated what’s been termed a new ‘policymaking revolution‘ of ‘forward guidance’ guaranteeing to keep interest rates at their low of 0.5 per cent until the unemployment rate falls to ‘at least’ 7 per cent.

Understandably savers are up in arms – which isn’t so different to the atmosphere we’re now experiencing in Australia – albeit, our economic prospectus differs considerably.

However, pushing interest rates lower, discourages saving and predictably forces people to seek out any area of speculation that can provide a better return on their dollar as cost of living pressures slowly inflate it away.

And in our ‘all things property’ obsessed culture, coupled with policies such as negative gearing and the increasing trend to buy real estate as part of a self managed super fund, a large proportion of ‘mum and dad’ investors are pooling their funds into the second hand housing market usually with a budget that competes directly against the slow decline of our “first home buying” sector.

Break the data down and as pointed out here it’s clear that the larger share of mortgage demand is investor lead “ Since March 2009, the average FHB mortgage has grown by only 1.8 per cent, whereas the average mortgage for the market as a whole has grown by 9.6 per cent.”

The pent up demand and as we suffer the consequence of another interest rate cut, and the supply of easy cash bubbles the air, comes with a warning from UBS analyst Jonathan Mott indicating;

 the “ingredients are now in place for another bout of sustained house price inflation in Australia and Sydney in particular” remarking “Given Aussie housing is already expensive by most metrics we see this as undesirable and dangerous.”

Housing finance approvals rose solidly in June ahead of expectation, with ABS figures showing a seasonally adjusted 2.7 per cent increase in owner-occupied finance commitments which are now tracking 7 per cent above the five year moving average with the series up +14.2 per cent on the same time last year.

Loan sizes also increased – up 0.7 per cent for the month and 0.9 per cent for the year (a marked improvement from the beginning of the year) with the value of investor finance commitments up 18 per cent over the year.

ABS housing data shows nationally, prices have exceeded their 2010 peak – primarily lead by Darwin, Perth and Sydney, with the other states still playing a game of catch up in median terms. And as I explained last week, for those of us who work ‘on the ground’ assisting purchasers, to describe the atmosphere as ‘challenging’ would be an understatement of terms.

In a recent conversation with a contact of mine, who runs a buyer advocacy agency in Sydney, he spelt out clearly the difficulties purchasers are now facing with the comment;

“Definitely already a seller’s market here in Sydney. Auction clearance over 80 per cent in many suburbs. Saw a property where after just 2 Opens, the agent had 25+ contracts out. Price guide revised immediately after first open from 1.2m-1.3m to now 1.4m-1.5m. Tough market to buy in!”

And although Victoria faces stronger headwinds – as I explained last week, it’s not so anecdotally different in Melbourne.

As property once again ramps up in capital value, becoming more expensive in a domain riddled with speculative behaviour – supply side constraints prevent any sustainable recovery in the construction sector and – as commented in a discussion on housing affordability during last week’s ABC1 ‘Question and Answer’ – political parties refuse to touch negative gearing or make the tough decisions that might just prevent an increase of ‘cheap’ credit being fed directly into boosting second-hand home prices  – (instead trying to solve with their right hand, problems created with their left) we’re effectively washing away any efforts to assist our young home buying generation.

In this respect, Australia is remarkably similar to the UK and Canada, and also parts of the USA. House prices rising against the gravity of the broader macro environment, with all who have a hand in manipulating the situation, imagining the story will somehow have a happy ending.

Catherine Cashmore

Why we need a sensible conversation on the future of Australia’s housing market.

Why we need a sensible conversation on the future of Australia’s housing market.

Language is an important tool in the real estate sector and skewing data to either the positive or negative is a well honed skill which, as I explained last week, more often than not masks the underlying trends actually taking place.

However, when it comes to property, there are no words more inflammatory, and drama inducing than ‘Bubble’ or ‘Bust.’ Flag a headline which suggests either, and it will evoke a barrage of abuse from market speculators. Hint we have a pending housing crisis in Australia citing affordability concerns which are voiced loudly and clearly across a number of sectors, and you’re promptly labelled a ‘doomsayer’ ‘laughably’ predicting an instant 40 per cent market crash.

Try and have a sensible discussion on the matter and it’s marred with vested interests – in the case of politicians, it’s the need to lobby for votes from the majority, above and beyond the need to improve the ‘home’ buying environment for a small, but increasing ‘non owning’ minority.

As I suggested a few weeks ago – “woe” unto any politician who suggests capital values may fall, thereby reducing the entry level of ‘borrowing’ a new home buyer needs to fund.

And for anyone who has even a basic grasp of how the world’s debt based monetary system works, which provokes a continuous consumer driven need for spending and growth, you’ll understand precisely why there is little concentration on policies to reduce debt, and instead a greater concentration on how to make higher capital prices ‘more affordable,’ with low interest rates, tax incentives, grants, and arguably failed attempts to boost supply.

However, Australia is heading into prevailing headwinds which will have an inevitable impact on our younger generations as we navigate our way into what’s undeniably an environment of weaker economic growth.

All the conditions that were at play during the golden years of capital gains in which household incomes were rising strongly, and the commodity boom was impacting the overall size of the Australian economy are slowing.

We have a growing in-balance of the proportion of working age individuals relative to retirees which will bear heavily on the percentage of Government funding (the tax payers back-pocket) over the next 40 years or so.

In 2009-2010 financial year 26 per cent of the government’s budget was directed towards age related services (health, age related pensions, and aged care) – however, according to treasury projections, this figure’s expected to increase substantially over the next 40 years “pushing the share of spending to almost half.”

In response, a range of tax concessions currently enjoyed by Australian’s will need re-addressed, and judging by the reaction to the abolition of the ‘statutory formula’ for valuing fringe benefits on employer provided cars – it will be far from palatable, albeit, an unavoidable necessity.

In addition, I would expect at some future/future point, the current claims on negative gearing will also inevitably fall into question – not an opinion that meets wide agreement, however time will tell.

Income growth is slowing – as chief economist of Macro Business, Leith Van Onselen recently pointed out in relation to the latest ABS “Biannual Household Income and Income Distribution report“ covering the 2011-12 financial year;

“An examination of biannual income growth since 1996 shows that average real inflation-adjusted household income (pre-tax) has essentially flat-lined since 2008 when measured on a equivalised basis (i.e. adjusted for household size and composition)”

Full time job growth is weak, with both hours worked and levels of underutilisation deteriorating.  Even NAB have come onboard with a recent research release highlighting Australia’s ‘ongoing sources of weak domestic demand’ and in relation to the overall outlook for Australia’s economy make the rather startling, albeit sobering comment ‘We are not optimistic.’

Significantly, they picked up on comments offered by RBA Governor Glen Stevens in suggesting that Australia cannot rely on housing and consumption to plug the ‘growth hole’ – bringing into line an almost certain August interest rate drop – further eroding savings.

However, whilst this may assist lowering the Aussie dollar, which will have a positive impact in the longer term, GDP growth is slowing and as we’ve seen over the past 12 months, as a tool, interest rates are limited in their effectiveness to stimulate those sectors of the economy most in need.

For example, in relation to housing, the marginal upward trend in building approvals evident since the low of 2011, has been moderated with the latest ABS figures showing new houses and apartments falling -6.9 per cent over June (seasonally adjusted) – posting their third large fall in the past four months.

Even allowing for the usual volatility of short term data, this is low by historical standards and falls short of RBA forecasts.   In contrast the established market is enjoying an investor lead rally as funds are increasingly shifted from cash into residential real estate with 36 per cent of loans going to this sector alone.

In May of this year, 18.4 billion worth of housing finance for investment purposes was committed to – the highest level since January 2008.  Prices in Sydney, Perth and Canberra are now reportedly back to their previous peaks – and with the cash rate set for a further fall to 2.5 per cent, it could be argued, that we haven’t even started to touch the surface.  As reported a couple of weeks ago from the new “SMSF Professional’s Association of Australia and Macquarie Bank” according to the ATO, between 2006 and 2013, SMSF property assets grew in value by 230 per cent – ‘a higher growth rate than any other asset class.’

Ahead of the hugely popular auction episode of ‘The Block,’ the REIV commented that the result could not be taken as a reflection of the current market.  However, I attended the auctions on the day, and the buoyant competition that was clearly evident from those bidding, was not at all at odds with what we’re currently seeing ‘on the ground’ in inner and middle ring Melbourne localities.

If you have a sensible head on your shoulders, and think it somewhat bazaar that a buyer would pay around 1.5 Million for a three bedroom apartment that has four bathrooms, five toilets – with some hefty owners corporation fees thrown in for good measure, along with fixtures and fittings which are ‘arguably’ dramatically overcapitalized for the property type – when the same dollars could purchase a renovated period terrace in one of the better streets of Albert Park, Middle Park or South Melbourne then you get a small sense of some of some of the  crazy activity I’ve witnessed of late.

Most recently, the price of a 2 bedroom apartment in Melbourne’s bay-side suburb of Elwood, which achieved $830,000, yet an exact – or at least a very comparable – replica in the same block sold just two months prior for $715,000.

Or another from a local Woodard’s agency, who sold a three bedroom period home in Prahran with a reserve of $950,000, yet with approximately 200 in the crowd and six bidders, delivered a result of $1,325,000 with no recent comparable to suggest a price even moderately close to this level.

There is nothing particularly outstanding or unusual about these properties – neither in each circumstance – are the results driven by ‘home’ buyers looking for their ‘dream’ dwelling and therefore, to some extent, a justifiable balance between price and desire for ‘the one.’ I could sight off the top of my head at least a dozen similar examples of investors overpaying for real estate, despite figures being somewhat inflated by lowering levels of stock.

Conversations with colleagues in Sydney, Perth and certain areas of Brisbane are full of similar tales of sheer amazement. Yet, as anyone who has an active interest in property or shares will tell you, markets run on fear and greed.

Or as Schiller said in his book ‘irrational exuberance;’

A “speculative bubble,” is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.”

And although they were written with the USA housing market in mind, they’re words which aren’t wholly irrelevant when it comes to Australia’s current buying terrain.

As for first home buyers; the news is less joyous. The latest ABS housing finance commitments note that first home buyers continue to play a long term decreasing role in the purchase of property accounting for only 14.6 per cent of Australia’s buying market – which year on year is down -10.6 per cent, with movements in percentages only fluctuating on the back of various grants an incentives.

Compare this with the 31.4 per cent share during the 2009 ‘boom’ – invoked by the first home buyer boost – and you’ll get the idea.

And whilst it can be argued that this figure is manipulated by the proportion of buyers who bought forward plans to buy under the Rudd stimulus, the longer term trend is particularly noticeable when looking at census data, with a sharp decrease in ownership between 1975 and 2010 for the age groups between 25-34 and 35-44 which has fallen from a peak of 61 per cent to ‘around and about’ 45 per cent currently.

Whilst demographic and lifestyle changes will inevitably result in a proportion delaying a purchase until later in life, it’s prospected a significant and growing percentage will remain – like it or not – trapped in the rental or social housing sector.

Rental rates have inflated strongly since 2007 – RPData estimate a cumulative rise of 32.1 per cent. Any non-home owner locked in a ‘Catch 22’ of being employed in one of the capital city ‘job hubs’ of Australia, will be hamstrung as they try to make headway against the escalating cost of accommodation.

So, when does affordability become an issue?

It’s wonderfully easy to create well worded speeches about halving the rate of homelessness with emotive ‘sound bites’ filtered in for effect.

However, wishing a better life for the disadvantaged, who perhaps haven’t had the good fortune of inheriting the rewards of our golden years of growth, remains a charitable gesture without hard hitting policies which would inevitably impact the level of ‘growth’ existing home owners could expect to ‘achieve.’

Albeit – unless we do so, Australia’s political powers are merely searching for answers with their right hand to problems they created with their left.

Instead, we need a sensible conversation on how we want the housing market to look in ten to twenty year’s time, which isn’t dependant on pointless ‘pot shots’ between bulls and bears.

If you listen to some market commentators, it will be an environment in which median prices in capital city localities will sit over a million in ten year’s time (a misguided prediction that has been lingering for some years – here’s another example written in 2003) – so how about listening to the voices of those who have a degree of concern about their children’s future in an environment as I explained above, is not prospected to be quite such an easy ride.

Catherine Cashmore