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

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