Australia Day traditionally flags the end of the real estate ‘vacation’ period – but what of the road ahead…. ?

Australia Day traditionally flags the end of the real estate ‘vacation’ period – but what of the road ahead…. ?

Australia Day traditionally flags the end of the real estate ‘vacation’ period with the long weekend being the last chance most agents have to take a breather before the auctions begin, and weekly clearance rates once again come under intense scrutiny.

Predictions for the remainder of the year are generally undivided. Most conclude the upward trajectory to continue – with particular focus on some of our largest capital cities, Sydney, Melbourne and Perth (with the first and last already past their previous peaks in non-inflationary terms.)

Whilst the pace of growth will differ for each capital with a correction expected in 2015, it’s a conclusion I generally agree with – despite the talk of a sooner than expected rise in rates.

The momentum that has built up throughout 2013 has come primarily from investors, driven in large by local speculation.

In Sydney, where city supply has been hampered by stringent planning requirements, allowing larger developers with a greater financial capacity to hold the upper hand, – the shortage of stock to cater to the needs of a market share of over 50% investors, has resulted in a spike in prices which has diverged considerably from other states, and continues to drive the herd mentality.

Louis Christopher, managing director of ‘SQM Research,’ suggests Sydney will have its strongest start to the year in more than 15 years, and even assuming the prediction is too bullish, it’s unlikely to be far from the mark.

The extra boom of apartment supply will assist in cooling demand and boosting the number of rental dwellings, but it will take more than one interest rate hike before we see the evidence translate into lower median values, hence why the run will last the duration.

Whether you celebrate or commiserate news of a continued increase in house prices will obviously depend on circumstance, – with investors benefitting most. However, the higher entry cost will continue to impede first time buyers and low-income earners, and with no immediate solution by way of a structural reform to housing policy, the debate won’t move far from headlines.

I made clear in my column last week, why we have an affordability problem and how that translates across the different demographics, and see little advantage detailing the evidence once again, which to any reasonable mind should be overwhelmingly obvious.

In our most populous capital cities, house prices have gone from three times median income to nine times, and the impact on low-income families – in particular those renting, or teetering on the edge of ownership due to divorce or job loss – is particularly disturbing. In Melbourne alone, from 1991 to 2011, metropolitan housing CPI rose by 50%, compared to 188% for rents across the LGA.

The swell of concern coming from the ground up is the best chance we have to push significant reform forward, and therefore it’s encouraging to see results from a recent Ipos poll, conclude that most Australian’s disagree that rising prices are a ‘good thing.’

Notwithstanding, a huge portion of private debt for the appropriation of business and commerce is secured against residential real estate. It’s Australia’s largest domestic asset class with an estimated aggregated value of over $4 trillion, pinned to a banking sector, which has the highest exposure to residential mortgages in the world.

From homeowners counting on their principle place of residence to fund retirement, to Governments chasing the popular vote.  The sensitivity to maintain high prices is evident not only in the NIMBY style practices that protest at all attempts to either increase density, or assist development, but also in the inability politician’s have to move ahead with structural reform to housing policy.

Consequently, Governments tend to treat affordability issues reactively rather than proactively.  Words always mean more than the actions, demand side policies are favoured, and when supply is released, it’s done in such a way that it feeds a monopolist culture – designed to maximise profit over the delivery of land at ‘affordable’ prices.

To illustrate the point – economics ‘101’ suggests the most effective way to reduce prices is to simply increas supply, and in Melbourne, planning minister Matthew Guy was joyful last week, in announcing the city has “decades worth of land” more than “400,000 potential house lots in growth areas” of which 5 new precinct structure plans have been approved for development (amounting to 19,000 ‘potential’ bocks,) and a “potential” 180,000 apartment blocks (more than enough keep all our off-shore investors happy.) Clearly – we’ve got supply in spades!

Furthermore, broadly speaking, population growth in the outer suburbs of Greater Melbourne – predominantly in the newer greenfield developments to the west, north and south-east – continues to be faster, and larger, than anywhere else in the greater Melbourne districts – so demand in theory, should not be lacking.

But what Mr Guy fails to mention, is, in a five-year period from 2006 to 2010, the median land price in outer growth area suburbs jumped from $136,000 to $212,750, a difference of $76,750, according to Oliver Hume Real Estate Group, and with the typical starting price for a house and land package on a compact 450sqm block of land, now transacting for a little over $400,000 – where is this cheap supply?

Of course, it all comes down to the development process. As soon as the urban boundary was implemented speculation began; existing landowners were able demand a premium for land now potentially available for residential purposes. Of those who decided to cash in, hectares were duly auctioned off to the highest bidder – resulting in a massive inflationary boom in values,

Precinct structure plans must be finalised before construction can commence – a process of which takes 2 to 3 years.

Funds for the provision of infrastructure – arterial roads, kindergartens, child health centres and so forth, are passed onto the buyer (initially the developer, who simply factors it into the final cost.)

However, there is no timetable for the construction of this infrastructure. Councils can wait years for the funds to arrive because they are usually only payable upon subdivision, and notably land within PSPs can be held by landowners, who have little incentive to bring it to market unless it’s financially beneficial to do so. The result is homeowners pay for infrastructure, which they may never receive.

Any areas of land a developer unwittingly acquires which is subject to ‘biodiversity conservation’ must be set aside.  Ten precent of their land must be donated for ‘community open space.’ Add to this GST, along with sales and marketing, costs – and you begin to get the idea of why supply does not immediately equate to lower prices.

Developers with a desire to maximise profits, time their releases carefully. A process over which the government has no control – in other words, the state has auctioned away any chance of a plentiful supply of cheap fringe dwellings – and in light of the evidence, Mr Guy is unable to claim otherwise.

Meanwhile, whilst inner city development may assist renters, to what extent is debatable.  Of the new supply constructed, most is high-density, and there is strong anecdotal evidence from agents that off shore Asian buyers are driving the apartment pre-sale market, with rumors of random Melbourne auctions conducted in Mandarin.

Investors seem undeterred by the higher vacancy rates in Melbourne, which have hovered around 3% for the past 12 months – and we can see from work undertaken by Philip Soos at ‘Prosper Australia’ last year, that a percentage of newer units are allowed to sit vacant for much of the year – unclear whether they are being used for speculation, or as temporary vacation homes.

Building approvals data for apartments do not indicate commencement – the process of approval, to release (off plan pre-sales,) and finally completion, takes a number of years.

Charter Keck Cramer track each project from start to finish – and using the data as a forecasting tool, estimated back in July 2013 that 39,155 apartments will be added to the stock in Melbourne during the three year period of 2013 to 2015 (not including those for which subsequent planning approval has been granted.)

To maximise yield and meet financial requirements, most apartments are small one and two bedroom dwellings (no more than 70sqm in size.) Unsurprisingly, they offer little attraction to the vast majority of local homebuyers – being far more apt to meet the needs of student renters.

All in all, it’s an appalling state of affairs.

Conclusion.

Australia is now entering its 23rd year of continuous GDP growth – the history of which is outlined briefly in HSBC’s recently released global research paper “still in second gear.”  And in light of the above, it should come as no surprise that, land is always the eventual beneficiary from the wealth of a burgeoning economy.

As productivity increases, jobs are created, the population grows, infrastructure is built, areas gentrify, land values increase, and owners benefit. The uplift in values finances additional development and so the speculative process continues.

From the trough of 1996 to the peak in 2010 land values have roughly doubled as a percentage of GDP – and the policies we have in place simply fuel the cycle.

There is no secret to why this should occur – in countries that have promoted home ownership both a means of ‘saving’ for retirement and valuable asset to leverage against to accumulate additional assets, along with tax strategies, and inelastic supply side policies that have encouraged speculation in rising land values (with both the monopoly and restriction of the resource stagnating effective and affordable supply) – the eventual consequence is always the same.

Until any sharp ‘correction’ is experienced (and eventually it will be,) the advantage lay with those who hold the appreciating assets above those who don’t – particularly if acquisition was early on in the cycle, as suburbs initially gentrified.

However, whilst gains over the period wax and wane spurred on by low rates or intermittent grants, the party can only continue whilst there is consistent demand at the entry level – hence why so much attention is focused on mortgage ‘serviceability’ rates, rather than the overall level of ‘affordability’ by way of calculating the gross amount borrowed.

It is possible to create a stable housing market that doesn’t subsist on ever rising prices, however, it can only be achieved by significant tax reform moving toward a broad based land tax, as was advocated in the Henry Tax Review – coupled with structural changes to the way we manage supply.

Without such reform, the social cost to our country and welfare system as a whole, will only worsen.

Catherine Cashmore

 

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The debate over whether housing is, or isn’t ‘affordable’ continues…

I’m know I’m not alone in feeling an immense amount of frustration at the circular debate amongst commentators in the mainstream media, that surrounds our first homebuyer demographic, and the question of ‘affordability.’

Last week, the November 2013 housing finance data was released showing continued strong demand in the mortgage market, with owner-occupier commitments 15.3% higher than they were a year ago – their highest level since December 2009.

Unsurprisingly, demand from investors continues to increase, rising 1.5% in November, and up by 35% over the course of the year – the highest level on record – whilst on the other hand, first homebuyers remain at record lows, with a recorded market share of just 12.3%.

Whichever side of the coin you sit, “first homebuyers” like “housing bubbles” make a good headline, and therefore, instead of productive advocacy into improving the housing market so it’s equitable for all – we’re left once again battling a ‘Looney Tunes’ debate over whether housing is, or isn’t ‘affordable.’

Denalists

For those in denial all sorts of excuses are found – the most common of which is the accusation that first home buyers are just ‘spoilt and picky’ – or as was sent to me in email last week by a fellow contributor on “property Observer” – “you just have to save hard and start with a flat – isn’t that how it’s always been?

Well to some extent ‘yes’ – when there’s a budget, compromises need to be made. But how it’s always been? “No.” It’s not how it’s always been.

  • Whilst in the late 1990’s a typical first homebuyer’s budget would have secured a modest family home, in a reasonably facilitated suburb, for 3 times median income. Today you’d be hard pushed to find accommodation on the fringes of our capital cities for a similar expense.
  • Thirty years ago the land component of a house and land package represented 20% of the total cost – today it is more like 60%.
  • Forty years ago, housing policy ensured land was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure. Today land prices have soared; unduly inflated by constrictive urban zoning policy, with infrastructure prices, loaded onto the upfront cost.

Furthermore, a CIE study commissioned by the HIA, demonstrated how imposed taxes on developments, when added together, come to 39% of the marketed house and land price.

By the time you add “necessary” ‘energy and safety standards,’ coupled with the cost of labour on top of already inflated land values, developers find it increasingly difficult to provide ‘affordable’ accommodation whilst still making a profit.

Glenn Stephens, Governor of the RBA, summed it up best in 2011, when, he addressed a Parliamentary Committee and exclaimed how he could “not understand why a country as big as Australia seemingly had a shortage of land” and could therefore not provide ‘cheap’ housing.

Notwithstanding, ‘we don’t’ have a shortage of land – we have poor housing policy driven by vested interests to keep inner city land prices high.  I cannot find any other reasonable explanation.

Asking first home buyers to purchase into a market where, capital city house prices have been artificially inflated, from three times median income to nine times, should not leave us scratching our heads wondering why they don’t feel ‘OK” about it. It’s perfectly understandable.

Who is a first homebuyer?

According to the ABS, the average age of a first homebuyer is between “31-33 years,” and due to high entry costs, “partnering often precedes home purchase” (the majority of which already have children.)

Therefore unsurprisingly, only a relatively small proportion (19%) make up single households, and outside of those who pit themselves against stronger financial arm of the investment sector, to purchase an apartment, the options we’re currently providing our first homebuyers, fall dismally short of where that main demand centres – demand which often calls for more than tiny apartment which will last no longer than a year or so before an upgrade is necessary.

The data must be wrong…numbers can’t be this low?

Others challenge the data, with various claims that first home buyer numbers are only ‘significantly’ reduced, because a percentage are ‘slipping through the net,’ perhaps entering ownership as ‘investors’ or – due to dated brokering software – not being entered as first timers, unless applying for a state based grant or incentive.

On the latter point, I did speak to the ABS department of financial statistics directly about the notion that ‘significant’ numbers are missing, and further investigation is underway which I’ll follow up at a later date.

Albeit, currently they deny the implication, claiming it doesn’t accord with APRA’s instructions to lenders when collecting statistics – which stresses that a first home buyer, must be one in which ‘none of the borrowing parties has previously borrowed housing finance for owner occupation’ – making no distinction between an investor, or one who does, or does not, apply for the grant.

Therefore, outside of colloquial evidence, the above ABS statistics are the most accurate ‘current’ indicator we have of a downward trend in first homebuyer numbers – and for most ‘reasonable’ minds it should come as no surprise, considering we’re in an environment where the entry cost to obtain ownership is further impeded by rising prices, transaction taxes, and an uptick in unemployment raising concerns over job security.

Housing is ‘affordable’ because mortgage rates say so…

As Michael Janda pointed out in his excellent report last week – housing affordability should not be confused with mortgage serviceability.  

Mortgage rates are set up with different structures, dependant on circumstance, and subject to interest rate changes influenced by the macro environment.

  • They do not take into account the up front cost of a home and expenses incurred from associated utility costs.
  • They do not question rising rental prices, falling vacancy rates, wage growth, unemployment figures, or changes in household demographics and structure.
  • They make no distinction between the cost of building a home and the underlying value of land, or analyse constraints in supply, or make mention of the limited options available for low or single income households and families.

To assume on interest rates alone that housing is ‘affordable’ is lazy reporting and generally only applicable to existing owners

Those who fail to make the above distinction commonly come from the standpoint of vested interest – or entered ownership at the beginning of the lending boom (in the early 2000s or before,) and have benefitted considerably from a rapid period of inflation – which unsurprisingly enough, includes most of our politicians.

Housing is affordable because data from other countries says so…

Neither is it complementary to compare ourselves to international terrains which – having been through somewhat harder lessons than our own – are also battling to induce first home buyers out from underneath their ‘rental’ blankets.

Yet this is what Stephen Koukoulas attempted to do last week in Business Spectator when he ‘favourably’ compared Australia to Norway, Canada, Sweden and New Zealand.

All of these markets have suffered from large increases in levels of private debt whilst at the same time limits were placed on supply.

In Norway, Sweden and New Zealand, central banks have recently employed capital constraints in an effort to moderate demand, and Canada, with a household debt to income ratio of 163.7%, is being watched closely, as investors and economists start to voice alarm.

Letting house prices escalate, funded by a colossal amount of private mortgage debt, can be a dangerous game.

As I pointed out last week – in the USA prior to the sub-prime crisis, the median income in California was not enough to afford the average Californian home, or even a starter home.  Once the financial crisis hit, rapidly falling prices quickly eroded any equity homebuyers had achieved.

Whilst on the other hand, states such as Texas, where house prices did not deviate from three times median income, values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

….The renters that Terry Ryder rudely labelled ‘generation whine’

Renters, on the other hand, have not benefited directly from low interest rates. Roughly 33% of Australia’s housing market is made up of tenants and since, 2006, rises in the median cost of rental accommodation has outpaced both wage growth and inflation.

In Sydney, where supply is particularly constrained, APM recorded a 5.4% yearly increase to the median rental price, and according to a new report compiled by the Northern Territory Council of Social Service (NTCOSS,) the average cost of rental housing in Darwin has risen by 7.9%.

Before we get into a further debate over whether or not rents are ‘affordable,’ it’s worth turning to a previous report from the now disbanded ‘National Housing Supply Council’ to highlight the real impact demand side policies like negative gearing have, when coupled with a gradual erosion of supply.

Reports highlight that the increase of rental accommodation in the private sector has not outweighed the decline in social housing – and from the stock added, most have rents outside of the affordable threshold for lower income households.

To assess this, the NHSC broke income groups into deciles, and demonstrated of the ‘affordable’ private accommodation available,’ supply is quickly soaked up, leaving 60% of low income groups, paying more than 30% of their income on rent, and 25% paying more than 50% of their income on rent

In Conclusion

Gains from high land prices, do not trickle down they flow up. This is what the ‘National Housing Supply Council’ was trying to emphasise in their reports, and what I went to great pains to point out last week in trying to answer the questions over what exactly a ‘housing shortage’ means.

Our market is not just about buyers, it’s about renters too – and our Governments are elected to ensure that the price of land is not unduly inflated by either the monopoly of this resource, or undue restrictions placed on its development.

Worrying still – the arguments over affordability encourage us to lose sight of the real issue – which is not localised to the first homebuyer sector, but the general crowding out of low income residents across all demographics – some of which drift in and out of ownership

Reform is never easy, but there is a way to break the cycle and ensure land is fully utilized for the purpose intended, without prices blowing out to levels that can only be sustained through keeping interest rates low, or household debt high.

One way is through freeing the barriers hampering the type and supply of accommodation offered, and the other is through imposing a broad based tax on the underlying value land – of which I went into more detail here.

The focus of attack should be not those individuals who have advantaged from the system, but on the law that allows the system to operate – and in response, the commentary should not focus on defending what is plainly obvious, but advocating the policies we need to fix it, and ensure our house and land market is equitable for all.

Catherine Cashmore

Debating the ‘housing shortage’…..

Debating the ‘housing shortage’…..

Do we have housing shortage?

It’s a well spruiked ‘fact’ that Australia has a ‘housing shortage.’  I frame the word in italics because of the general misunderstanding that surrounds the concept.

People imagine a shortage of housing at an aggregate level, to mean not enough homes to meet the demands of an active buying market, and whilst this may be evident in various tightly held localities – in popular schools zones for example – the evidence used to substantiate a national housing ‘shortage’ means nothing of the sort.

Last week the ABS released its dwelling approvals data for the month of November 2013, showing modest fall of 1.5%, which follows a similar decline of 1.6% in October.

On a ‘trend’ basis, the overall direction of dwelling investments is positive – some 22% higher over the year – the highest level since September 1994.  However, as Callam Pickering corrects asserts in Business Spectator, on a population-adjusted basis, approvals are at best, weak.

For example, between 1947 and 1961, housing stock increased by 50% -compared to a 41% increase in Australia’s population, and between 1961 and 1976 there was a further increase of 46%, compared to a 33% increase in Australia’s population

This was a continuing pattern until the early 1990s, after which the growth in dwellings started to slow, and since 2007; the former has outpaced the later.

Did a shortage cause the rise in house/land prices?

1996 was the point at which land prices started to rise, and from 2001 onwards they skyrocketed.  Whilst it’s hard to draw an exact correlation between the fall in stock and a rise in prices, supply, when produced must be suited to need – being both affordable and well serviced with infrastructure. Get the ingredients wrong and a surplus can quickly amass. Therefore, it would be wrong to assume a shortage of effective supply means a shortage of ‘roof space’ – it doesn’t.

However, when evidence shows a gradual reduction of demand for new dwellings, during a period in which population growth and a resilient economy should have dictated otherwise, coupled with land values that have grown from 3 times median income in the early 1990s, to their current 6-9 times median income in 2013 – (dependant on location of course,) alarm bells should be ringing in the offices of our housing ministers.

So what does the term ‘housing shortage’ mean and can it prevent a housing bubble?

Obviously there cannot be more households than homes, and whilst in the private sector, homes can only be constructed if there is demand from the consumer market, it is important to understand what a housing ‘shortage’ means.

Firstly, it covers total housing system, both private and public, therefore, it should not be used – as it so often is – as evidence Australia can’t suffer a significant downfall in prices, or produce a ‘bubble.’ It certainly can.

In fact, it should be fairly obvious that the effects of a housing crash are far more severe in areas where high levels of private debt have been used to service inflated home values, due to a shortage of affordable home buyer supply, coupled with heightened speculative activity – as is the case in the most populated areas of Australia

To be clear – it’s not a shortage of homes that prevents a housing crash, but a shortage of buyers – buyers unwilling, or unable to service high household debt due to broader economic conditions.

There are plenty of international examples of this  – most recently in the USA, in states such as California and Los Angeles.

Both areas had a ‘critical housing shortage’ in the early 2000s, with speculative demand and lack of affordable supply disproportionately inflating values in the lead up to the sub-prime crisis.

When the (unforeseen) bubble burst, rapidly falling prices quickly eroded any equity homebuyers had achieved, and for those with non-recourse loans, where the mortgage balance greatly exceed value, there was little incentive to avoid foreclosure.

On the other hand, states such as Texas where – despite rapid population growth, – had structured housing and supply policy to maintain prices at no more than 3 times median income. Values fell by only -2.5% (from the peak of 2007 to the trough of 2011,) and the state suffered far fewer foreclosures.

What was the role of the National Housing Supply Council and was it needed?

When Rudd established the National Housing Supply Council in May of 2008, just prior to the last Senate enquiry into housing affordability in June of the same year, it should have been a step in the right direction, however the council’s role was broadly mis-understood by many main stream commentators who often failed to read the reports in full.

(For those interested, thanks to the Brown Couch blog, here’s a link to the archived website)

The council was given the role to assess the difference between supply and ‘underlying demand’ – in other words, the amount of extra housing needed per annum over the past decade, ‘if’ (using ABS data,) Australia had continued to produce enough homes for a rapidly growing population of home buyers and renters, based on existing household composition figures.

Whilst the findings showed a dramatic shortfall of 228,000 dwellings (as of 30 June 2011) the figure was hotly debated and in many cases, concerns were justified. However, in the council’s defence, it should be noted that planning for population growth is not an easy task, it’s predictive in nature and makes many assumptions along the way.

Whether you agree or disagree with the methodology or the resulting recommendations contained within the report, it’s essential we undertake some type of detailed analysis, if only to chart demographic changes and readdress growing community needs.

This is no different to studies conducted in other countries suffering similar concerns.  For example – the latest UK data shows 221,000 additional households are formed in England annually, yet only 108,000 homes were built in the year to September 2013.

If the goal is affordability – a vital part of which is supply side policy – we must address the reasons ‘why?’  Only in doing so, can we have a valid base for discussion on housing policy initiatives within the political arena.

However, supply wasn’t the NHSC’s only area of concern, it also instructed to produce a comprehensive evaluation of Australia’s affordability problems which included the status of those impacted most – homeless, renters, first homebuyers, low wage families, and tenants in the public and social housing system.

For example, reports showed utility costs such as electricity, gas, water, and sewerage, have been increasing at more than 10 per cent per annum. They gave a good statistical overview to show a dramatic shortfall of affordable rental accommodation for low-income families – (details of which I’ll examine in another column) and clear evidence that our housing crisis is embedded within the fact that we don’t produce enough affordable and feasible options for low-income households across the sector – both public and private.

Despite this, the Abbot government – with the rather weak excuse that its role is ‘no longer needed’ – recently disbanded the NHSC along with their website and archived findings, and in doing so, have made it quite clear that affordable housing is not part of their political agenda.

Why do we have a shortage of affordable supply?

Issues surrounding housing affordability are at a peak predominantly because town planners, along with state and federal governments, have failed to adaquatly cater to the demands and needs of a rapidly increasing population.

If you didn’t know better, you’d be forgiven thinking there’s been a “vested” conspiracy to keep inner-city inflation high, with everything possible done to prevent a fall in established house prices by way of generous tax incentives for investors favouring old over new – or intermittent policies to inflate the prices of new housing by way of Mickey Mouse incentives.

Infrastructure sparse fringe land prices are inflated due to ‘false scarcity’ imposed by constrictive urban zoning policy.

However, it hasn’t always been this way – in the post-war population boom, the Commonwealth ‘State Housing agreement’ was concentrated on building rental accommodation and affordable housing for low-income families.

Under the Whitlam Government, land commissions were set up in each state and territory, and in agreement with the commonwealth, were instructed to ensure land and housing was ‘readily available at fair prices,’ with commonwealth funding provided for essential infrastructure.

However, in the 1990’s (the point at which demand for new housing started to diminish and prices began to balloon,) the game plan changed, key infrastructure agencies once corporatised were required to show “a return on investment.”

Stricter zoning regulations were imposed in the name of, ‘urban consolidation,’ land values increased, and larger developers needing to maximise profit, carefully controlled the timing of newly released plots in response to consumer demand (land banking.)

I know sprawl is not a popular word with many Australian’s – however it should be understood, that to create affordable supply in inner city brownfield land, is extremely difficult when land values – already high – prompt the chase of profit over community need.

Hence why we have so many poorly constructed high-rise monstrosities, with 2 bedroom apartments, offering little more than 60sqm in floor area, with high vacancy rates (in excess of 10% in some cases) and banks unwilling to take a gamble and provide first home buyers with finance due to fears of oversupply.  This is why they are generally marketed to investors fooled (by rental guarantees) into thinking they can get a positive yield.

Further more, they do nothing to produce affordable accommodation for our largest demographic of buyers, families with children who require 3 bedrooms and some resemblance of a private outdoor area. If anything, this is an appalling and inappropriate waste of valuable inner city land.

In the NHSC’s final report in 2012/2013 it stressed  “Underpinning much of this work will be the understanding that tackling the housing shortage is not simply about increasing the number of homes being built; it is also important to build a diverse range of dwellings. Producing the right mix of homes contributes to developing sustainable communities that work for the population at large.”

As I’ve said previously – it’s not about creating endless sprawl, it’s about building communities and this can only be achieved with investment into infrastructure supported by long term funding measures, which include consideration of bond financing and a more equitable tax system that assists the cause.

The subject deserves deeper analysis, but the above touches on some of the issues that should be debated and acted upon.  And it can only be hoped, that any future senate enquiry into housing affordability, endeavours to do so.

Catherine Cashmore

My prediction for 2014 – winds of change…

My prediction for 2014 – winds of change…

Data concluding the last 12 months of real estate activity is slowly filtering through and not surprisingly, gains were recorded in all capital cities as well as some regional localities.

Louis Christopher was first out the ranks on New Year’s Day with a fairly comprehensive ‘twitter’ update from his vendor sentiment index – the most accurate timely indicator we have on market movements.

SQM’s index shows over the course of 2013, national asking prices increased +7.2% for houses and +2.3% for units, and whilst Canberra recorded the weakest result from all capital cities, with the asking price down -1.5% for houses and -3% for units, Sydney was unashamedly the stand out performer, with a remarkable uplift in the advertised price range across all regions.

Additionally, ‘RP Data’s’ December Capital City home value index hit the press, showing a gain of +9.8% nationally over the 2013 calendar year, and charting a dramatic increase of +15.2% in Sydney’s house values, compared to a more subdued +2.9% in Hobart.

The accompanying statement from ‘RP Data’ reads; “this is the fastest annual rate of value growth since August 2010, and the largest calendar year increase in values since 2009 when home values were up by 13.7%.”

According to ‘RP Data, despite a new record median house price in both Sydney and Perth, at $655,250 and $520,000 respectively, compared to other ‘growth cycles’ this is a ‘somewhat muted’ recovery;

“..home values increased by 9.8 per cent in 2013 (however) the growth follows a -3.8 per cent annual fall in values in 2011 and a further -0.4 per cent annual fall in 2012. Cumulatively, from peak to trough, capital city dwelling values were down 7.7% prior to this current growth cycle…” therefore “…although value growth has been strong compared to recent years, the current growth cycle has been somewhat muted.”  Mr Kusher said.

However, this ‘muted recovery’, which according to ‘RP Data’ is somewhat justified by the decline in values in both 2011 and 2012, is little consolation when you consider the gains that lead to the previous peak were initiated by the first homeowner boost, which formed part of the Rudd stimulus packages post GFC.

Whilst the packages introduced over the period helped to buffer a rise in unemployment, the ‘FHOB’ did little more than enrich vendors and developers at the expense of inexperienced purchasers, thereby stemming any fear that house prices might suffer a significant fall, and played to the needs of an aging population who have been encouraged to used capital gains in their principle place of residence, to fund retirement.

It also flooded the lower end of the property market with swathes of easy credit, arresting the downward decline and deceleration in household debt growth, as the effects rippled across the rest of the segments, and upgraders, downsizers, and investors all shifted seats predominantly in the second hand sector.

You don’t need to be an economic master, to understand throwing easy credit at a limited division of the market, does nothing to stabilise prices over the longer term, instead working pro-cyclically to exacerbate the swings, bidding up prices and encouraging young buyers to take on an inflated percentage of mortgage debt, before the inevitable withdrawal of the grant produces the expected ‘slump.’

Albeit, it doesn’t prevent the REIA lobbying Government for a return of the policy along with other ideas, such as allowing first homebuyers to access their Superfund to purchase which, in the absence of substantial supply side reforms, would result in a similar effect.

Meanwhile, market analysts tend to adopt the premise that as long as prices are below, or not at previous peaks, or – as mentioned in the ‘RP Data’ media release – moving as strongly as those witnessed in past cycles, during which no major downturn occurred, (however manipulated a prevention may have been,) any upward trend is merely a ‘recovery’ and an understandable symptom of record low rates in a post GFC environment

In other words, in an era where investment activity in the housing market is at record levels, with speculation on market movements broadly encouraged by incentives such as negative gearing and SMSF acquisitions stewing the pot, ‘up’ is good, and when it follows a downward trend, it can be safely termed a ‘recovery.’

Another factor that plays into the analysis is that the heat is generally focused on contained geographical areas – such as the inner and middle ring suburbs of Sydney and Melbourne – again, allowing analysts to conclude the offsetting data from regional and outer localities balances the distortions.

As ‘RP Data’s’ Melbourne analyst Robert Larocca commented in The Age “..I don’t think you could mistake what’s happened in Melbourne over the past year as a boom. It’s not been, it’s been a recovery (here we go again) and we’ve still got some way to go (reassuring!) …..there’s   a ”vast swath of suburbs” in middle and outer Melbourne where a dwelling – house or unit – could be bought for below the median of $563,000.”

However, whilst investors may be able to pick and choose the suburb, state, or territory they wish to leverage in order to fall in line with their budget and long term requirements, home buyers and renters are restricted to fairly limited areas where they can access their place of work, ferry the kids to the local school, and facilitate their family’s requirements – therefore if we’re to provide plentiful accommodation for our largest home buying demographic (families with children,) we must cater in a timely fashion, to both housing and infrastructure needs.

Such remarks show we have lost all sense of what ‘recovery’ really means – to paraphrase a comment made by economist Steve Keen – being a thousand metres below the peak of Everest does not mean that prices at their current levels, are in anyway acceptable, or in need of ‘recovery.’

Purchasing a home has never been easy, however years of poor public policy by local, state, and federal government, has paved the way for a downward trend in the number of homes constructed each year – produced rapid increases in residential land values – a worrying degree of investor speculation in the established market – a consistent shortage of rental accommodation in most capital cities – an increase in over crowding of accommodation – a decrease in home ownership -a drop number of first home buyers entering ownership outside of grants and incentives – double the number of Australians aged 50 to 65 since the turn of the century still paying off their mortgage as they approach retirement – and this is before we have even touched upon the quality and supply of Public housing

The fact that median house prices in most capitals are now more than six times the median income, simply highlights the long-term symptoms of a failure to adequately cater for a rising population, and ensure the options in our housing market cater for all, and not just ‘a few.’

Those who entered ownership toward the start of the lending boom when it was possible to purchase and service a mortgage on a single wage for roughly 3 times the median income, have basked in the halo of the above consequences of housing policy failure, and enjoyed a substantial increase in asset wealth.

To a limited extent, this has ‘gifted’ their children’s foothold onto the ‘property ladder.’ However, it’s also promoted the dangerous cultural conception, that rising house values are a ‘public good,’ with perhaps the only niggling worry from most mainstream economists, being the pace at which they are sustainable to protect existing gains.

In the face of swelling levels of unemployment and politicians who are focused on paying down Government debt at the expense of increasing levels of private debt, along with record numbers of inexperienced investors speculating on gains in the established sector, this is understandable. However, politicians – ever worried about their rating in the polls, will always play to the majority, as Howard openly admitted in 2007 when he delivered the comment;

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

What Howard failed to acknowledge, is a sustained rise in land values, funded by a dramatic increase in our house­hold debt to income ratio, which at 148%, has more than off­set any fall in inter­est rates over the resulting period, has caused a gradual erosion of affordability which has broad reaching consequences for Australia’s community as a whole. Yet, despite in-depth studies – such as the five year old senate enquiry I mentioned prior to Christmas, which was comprehensive enough to educate our political movers and shakers to some of the complexities surrounding the provision of affordable accommodation, little if anything is done.

Over the coming month, predictions on yearly market movements in each state and territory will occur from all spectrums of the property sector. Sydney is expected to continue it’s acceleration in house prices, and some analysts have picked Brisbane as this year’s ‘hotspot.’  However, I have only one prediction to offer – the ground swell from a younger generation of non-home owning residents which has gained pace throughout 2013, will continue to shift the debate on prices from one in which gains are considered ‘good’ – to one where inequality and anger will increasingly bite.

The main stream media has played into this to some extent, with one hit headlines suggesting that simply scrapping negative gearing (for example) or restricting foreign buyers alone, will be enough to solve the problem – it won’t – rather a real recovery in Australia requires significant political reform and a broad spectrum of changes (many of which myself – along with numerous others from various advocacy groups – covered in detail last year.)

Whilst none of the above is achievable overnight – it is important we continue foster effective advocacy of the issues at hand, and push for better representation from politicians who may have personally benefitted from restricting supply, to those who recognise the social and economic inequities produced, and work consistently to push through the difficult reforms needed to fix them.

Catherine Cashmore