Australia is blinkered when it comes to property

Australia is blinkered when it comes to property

Australia has a completely blindsided view when it comes to property, and never more so than in those sectors that profit from it directly.

The fool hardly assumption that increasing values in the established arena, which outpace both wage growth and inflation over a period of years, is somehow ‘good for the economy,’ as buyers play a generational game of musical chairs for a limited number of second hand dwellings, gives little attention to the broader social and productive economic impact this mindset inspires, as rental affordability worsens, and construction fails to meet the effective rate of demand.

Whilst there is overwhelming advocacy for keeping basic essentials such as food prices low – crunching farmers profits with $1 dollar litres of milk, and shipping cheap materials from markets in Indonesia and china, to fuel a consumer passion for all things at marginal cost. We seem happy to let our established house prices inflate away on the back of unrestrained credit expansion by the “all too willing to lend” private banking sector. Devoid of strong policies to ensure there are feasible and affordable alternatives, for a younger generation of buyers who increasingly have to rely on ‘donations’ from family or friends to assist with a deposit, battle rising yields or harbour student debt, and find themselves part of the ballooning house price story as they compete at an investor dominated price point.

The latest housing finance data from the Australian Bureau of Statistics shows the value of investor finance commitments is currently 30.6 per cent higher than at the same time last year. As a proportion, first home buyers now account for a mere 8.8 per cent of the buying market. This is their lowest proportion of market activity since June 2004 – yet for investors it’s the highest.

As I discussed in my column last week, we have a trend of falling home ownership in Australia which Chief Economist Saul Eslake made note of in his speech at the 122nd annual Henry George commemorative dinner, is further pronounced when you look the  “through” the effects of our aging population.  In other words, an increasing proportion of homeowners are understandably in the older age groups.

And whilst the statistic cited above can be in part attributed to lifestyle factors (labour mobility, getting married later in life etc) thereby producing a downward shift in the measured rate of home ownership—but not in the lifetime rate of home ownership – you cannot take affordability out of the equation.

For example, the increase of cheap credit, deregulation, supply shortages, and duel income households that has over a period of decades, inflated the capital cost of the underlying asset in areas where most owner occupiers need to locate for work purposes, has ensured the level of Australia’s private household debt-to-income ratio remains stubbornly high at 147.3 percent.  And despite low lending rates assisting mortgage serviceability somewhat, this is offset by rising prices – increasing the total debt the buyer has to service, and the liability banks hold.

As Christopher Joye noted in his AFR column last week, relatively sharp increases in median values evidenced in particular in Sydney, coupled with our dependency on a long term low interest rates, is a point of concern.

History attests, when property prices visibly rise, increased confidence from both borrowers and lenders tends create a sense of ‘euphoria’ that the party will ‘forever continue.’ However, there should be a strong warning to purchasers about over stretching against a macro backdrop which presents a number of headwinds.

Not least, the August labour market report reflects ongoing weaknesses, with the largest contraction in monthly trend employment in more than a decade, a fourth consecutive fall in full-time positions, a rise in the unemployment rate, falling participation and a lift in the underutilisation rate to its highest level since February 2002. Therefore, you have to question how long the rally we’re currently seeing in the established sector can reasonably continue before things start to unwind?

Accordingly, APRA has released a report warning the banking sector not to let lending standards slip, noting;

“..almost 15 per cent of all approvals are now for borrowers with deposits of less than 10 per cent.” And; “It’s also noteworthy that a large proportion of the lending would appear to be investors on interest-only terms,” clearly demonstrating the dangerous speculative nature of our current buying market.

New Zealand regulators have already moved to place limits on loan-to-value ratios banks can hold on mortgages – aiming to restrict new loans to an LVR of no more than 80 per cent. However, inevitably the action will place a squeeze on first home buyers, rather than the speculative investment sector that have existing assets to leverage against.

Other areas of the globe are also suffering a similar conundrum. In Sweden, private debt levels have reached record highs and there’s talk of forcing households to start amortizing their mortgages, with Martin Andersson, director-general at the Swedish Financial Supervisory Authority commenting “If household debt accelerates, as we’ve seen before, well, then we must do something.”

This brings me briefly to issues of supply. When the question arises over how we can make housing more affordable, the argument tends to get little further than simply advocating the need for construction of a ‘lot more’ dwellings. However, there are a number of complexities that need to be addressed to ensure the supply built, meets the wants of those who ‘need’ it most.

The reversing decline in the number of individuals per household in census data, showing household size has increased from 2.4 people per dwelling to 2.66 in the five interim, is another cultural shift of which affordability plays its part.

This figure is used to calculate ‘underlying’ housing demand; therefore, even a small change of 0.01 per cent can result in a ‘needed’ reduction of almost 30,000 dwellings, so it’s important we assess the cause of the shift correctly when planning the supply of additional stock.

Indeed, it’s the figure the National Housing Supply Council grapples with yearly, as they try and equate ‘shortage’ of dwellings relative to the ‘underlying’ demand – currently estimated to be of the order of 228,000.

As an offside to this, it is also to be acknowledged we have a widespread under utilisation of our current housing stock – for example, at 44 per cent; the typical Aussie home still has three bedrooms, with the majority only occupied by only one or two residents.

In fact, only 14 per cent of lone-person households live in one-bedroom dwellings, and there’s been a big increase in the number of four-bedroom homes, which now make up almost a third of the housing stock.

I’ve argued before, that increasing supply per-se is not going to assist low-income households if it is not tailored specifically to their needs.  And to date, in a market where developers are pressured to provide 100 per cent debt security, all but guaranteeing they design and sell to an international arena, a proportion of which let the stock sit vacant for extended periods, rather than fulfil the needs of an Australian demographic, we’re not making effective headway. However, this problem is one with multiple layers.

For example, stamp duty stagnates existing housing supply as it imposes a direct transaction cost on top of property prices.  Yet reform to a land tax system as advocated in the Henry Tax Review, would over the long term discourage the hording and land banking of homes that often sit vacant for lengthy periods of time.

A study in this field was most recently taken by AHURI – the Australian Housing and Urban Research Institute – in their evidence review entitled “Why tax policy is housing policy.”

The paper researched the effects of replacing stamp duty with an annual land tax and showed that in doing so, it encouraged a more efficient utilisation of the amenity.  Additionally, the modelling also showed that falls in house prices would exceed the value of land tax payments “leading to more affordable housing for both owner-occupiers, and rental tenants.”

I recommend reading the paper, which answers many of the questions, such as how to transition from our current stamp duty system to a land tax based model.

Notwithstanding, if we could combine this reform with ideas of which economist Leith Van Onselen is at the forefront, when he suggests raising money through bond financing and recouping it from ratepayers over a period of 30 years – or similar initiatives such as those found in Houston Texas, in which a successful expansion of their city boarders is funded with policies such as ‘MUD’ – a ‘deductable’ Municipal Utility District tax – in which a panel of property owners sit on a government appointed board, to oversee utility and infrastructure distribution in the area. We would inevitably create a better mix of housing stock aptly suited to a range of demographics.

For example, most properties built on the fringe are Mac-mansion style ‘house and land’ packages, because it is perceived that families will only move ‘outwards’ if there is due compensation of a ‘shiny’ estate sized home to compensate for the relative commutable distance from city centres.

In these areas, lack of recreational recourses encourages most entertainment to take place within the constraints of the house – and this is what feeds a reputation of Australian’s desire for large dwellings.

However, with decentralisation and an increase of basic area amenity – units along with smaller subdivisions would be in demand, thereby providing a very attractive price point for first homebuyers and renters.

Obviously there is plenty more to discuss when it comes to policy reform – albeit, to sit back and do nothing aside from ‘keep interest rates low and job security high,’ as advocated by our current government In their pre election ‘housing affordability’ spiel – not only indicates a lack vision, coupled with a short term mindset, but ensures we continue to kick the can down the road, snowballing the problem for future generations to come.

As if to demonstrate the foolhardy nature of the oft-quoted phrase by Einstein “We cannot solve our problems with the same thinking we used when we created them.” it’s clear policy reforms to date, have done little to assist the makeup and vision of a country that champions a ‘fair go for all,’ and highly regards the famous speech ‘It’s Time’, which inspirationally points 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” as words that have subsequently proven to be little more than fancy rhetoric.

Years of failed first home ownership schemes and tax policies that encourage speculation in the established arena, have done nothing to increase long term vacancy rates which consistently sit below 5 per cent – and In some established areas, less than 2 per cent.

The consequence of this has forced a social divide and exacerbates the very real reality that more Australians will reach retirement paying their mortgage or servicing high yields, with whatever superannuation they have used to fund the difference.

It’s time we campaigned for change.

Catherine Cashmore

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14 thoughts on “Australia is blinkered when it comes to property

  1. George Peters says:

    The Fed in US made the same mistake. While one of their mandates is to keep price inflation under control, for inexplicable reasons, there is no such mandate regarding asset inflation (such as housing).
    This of course has led to catastrophic results whose after-shocks continue to this day.
    Bubbles are very simple to grasp, and a seeming constant in human nature.
    A bubble is no more than asset prices rising at faster rate than incomes. US has seen two major bubbles in the last 15 years, the “cure” for the first (the market crash of 2000) leading inexorably to the second (housing prices).
    The bursting of a bubble is always ugly.
    Will wee see the same outcome in Australia?

  2. castor says:

    won’t you consider a political career?

    • I would love to Castor – although always wary about boxing myself into a party that has set of other views I don’t necessarily agree with – but it is in consideration. I feel passionately about the subject.

      • Alex says:

        Catherine, I’ve been following your writing for the last couple of months and found that you’ve best articulated the housing affordability problems facing young people and Australians more generally. I would totally support a venture into politics from you. Surely running under a ticket to argue for affordable housing is just as plausible as running to represent the interests of “motoring enthusiasts”?

  3. castor says:

    i’d of thought you’d make a good democrat, but in all honesty, i’m no political guru and don’t really know about the democrats past david collyer. with one-fifth of all young australians not even registered to vote, the other four fifths equally disenfranchised, there are strong signs we are desperate for new leaders and new parties.
    well whatever you may do, you got my vote.

  4. I agree with you Castor – watch this space – I think the time is ripe for change.

  5. Don't Prop Up the Ponzi says:

    Catherine, the time is ripe for change, and I love your articles – they speak the truth in areas where no other politician dares tread, but you’re preaching to the converted. Every day the articles in the MSM tell us that property affordability has “improved” with lower interest rates, property is booming, get in now, never a better time to buy, and make the most of your SMSF by buying property. The comments are almost always switched off.

    I was listening to the panel on 3AW this morning, and someone raised the point about areas like Glen Waverley which are very popular with Chinese buyers because of the good schools, and the fact that in local shopping centres there, they market property directly to Chinese who are constantly outbidding Australians. The reason I mention this is because of Nick McCallum’s response, ” we have to be very careful about limiting foreign ownership because then it is a slippery slope to property prices falling.” He then asked for a real estate agent to ring in and maybe explain whether foreign investment is having an impact on prices. One did call in, and said that property prices double every 7 years regardless, and it’s a fact, so no, foreign investment investment is not making any difference. End of subject.

    I was flabbergasted that there was absolutely no recognition of the fact that prices have by far outstripped incomes. But of course, the bubble has been going on for so long that most Australians think it’s normal.

    You talk about the Leith Van Onselen’s Houston solution. Houston isn’t in a bubble though. The difference with us is that we are, and no politician or in fact anyone with a property wants this bubble to pop. Why on earth would they instigate anything that makes prices fall?

    We need someone in politics who is vocal on the subject of housing affordability. Neither of the two majors is even remotely interested. It’s a shame David Collyer didn’t do so well in the Senate. The whole system is skewed towards maintaining the bubble. All we can hope for is that it bursts under its own weight, but that will be years off, and will hurt a massive amount of the population.

    • I agree with your points. And I would be more than happy to take this into the political arena – albeit it must go hand in hand with monetary and tax reform which will take time to implement.

      The media is largely hijacked by those with vested interests and it’s time things changed. This will be going up on Property Observer tomorrow – perhaps you could repeat your comment there? It’s not as widely read as some outlets, but it does reach a group of influential people who would at least take note of your sentiment.

      Your support is appreciated. I’m not thanked by my industry fellows for the words I write.

  6. Don't Prop Up the Ponzi says:

    Thanks for your reply and I’d be happy to repeat my comment on Property Observer tomorrow. I’m sure you’re not thanked by your industry colleagues, and appreciate your courage and outspokenness.

  7. Dan Gliebitz says:

    Catherine, isn’t Leith van Onselen the blogger who said Melbourne house prices would fall 6% over the past year (but they rose 6% instead). I don’t think you can put too much faith in these internet bloggers. Calling him an “economist” is a stretch.

    • From the peak around Oct 2010 Melb median price dropped roughly 6 per cent and only started picking up late last year. How long the current rally will last is debateable. We are all guessing somewhat when we assess future forecasts. Leith is well respected as an economist however you’re entitled to your opinion and I appreciate you taking the time to comment.

  8. aussie spruiker says:

    Entering the political arena would require more than assessing the housing problem and then exclaiming ‘change is needed’.
    A firm position on the changes you would champion would be required and a plan to further those positions should be offered.
    The mainstream media may have been highjacked by the real-estate industry, but the cause for truly affordable housing may be hijacked just as easily by those that have no actual interest in attaining it.

    • As you say, there are various steps for attaining housing affordability some of which have been clearly set out by organisations such as housing stressed, and shelter – as an example. However, I also believe long term changes cannot be implemented without reform of our monetary system. This is a longer battle, however, not impossible, as some nations more affected by the GFC than Australia are currently finding (I will go into more detail on subsequent posts.) I can understand you scepticism over media advocates of housing affordability – however a significant step in the battle is creating awareness, and a media platform enables me – and others – to do this.

      I don’t gain any profit from writing about housing affordability – and as you can imagine, in the business I am currently working in, exposing fragilities in the property market doesn’t generate personal revenue – quite the reverse.

      As for ‘doing something’ – I’ll be moving into a political arena over the next 12 months to assist advocating some of the changes I’ve addressed here and elsewhere.

      Hopefully that answers your point.

      • aussie spruiker says:

        More clearly stated, my point was, ‘What do you plan to do in the political arena?’
        The only position you’ve actually given in your articles has been, ‘to create awareness’ Fine, we’re listening and we’re more aware.
        When you say you ‘believe long term changes cannot be implemented without reform of our monetary system’ what do you actually mean?
        Does it mean you have policies in mind but you can’t reveal them until we reform fractional reserve banking and the taxation system?

        I know that you don’t earn money talking about housing affordability but you do earn the public trust. With the public so clearly starving for an effective champion for their cause, that too is substantial capital. Unless you can share your plans for potential reforms, that trust can only be considered largely unearned.

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