Regulation and Speculation

Regulation and Speculation in Australia’s Housing Market

Despite, the recent gains in dwelling values being fragmented across the States, it’s always interesting to chart the reaction when making the assertion that the rapid run up in values, occurring in areas such as Sydney and to some extent Melbourne, have been stimulated by little more than an investor lead rush to ‘get in quick’ as capital gains visibly overshoot the mark, and cheap money coupled with a honeymoon period of post-election confidence, forces buyers to seek out any area of opportunity that can provide a better return on their dollar.

However, for those who work in the commission driven residential sector and derive their living from Australia’s $600 billion property industry, any negative sentiment indicating potential instability it is strictly taboo.

Indeed, it’s easy times for agencies when the market is booming – investors come knocking buoyed on by recent gains, sales agents don’t have to chase buyers in order to achieve the needed competition to exceed their vendor’s reserve, and as we start to witness a period of accelerated growth, the self perpetuating circle of certainty that keeps the ball of optimism rolling, is proof enough for all imagining there can be no end to the festivities.

Those who work in the industry understand that it’s this type of confidence that underpins investor activity, and therefore if prices are dropping ‘opportunity knocks,’ and if they are rising it’s merely proof markets always recover and values trend ‘upwards.’

In other words, there’s never a bad time to buy property – to insinuate as such, would result in a personal conflict of interest

I received an auto-generated email this week from one commentator suggesting we have become a nation of ‘so-called experts’ – people with opinions, but very little expertise.

According to the theory set forth in the email, the criteria for expertise in our property market to enable impartial advice, is simply someone that walks the talk – ‘a successful property investor’ with a large portfolio of dwellings.

However, for those that entered the property market at the beginning of the lending boom, and benefitted from our golden decades of growth – becoming a ‘successful property investor,’ wasn’t incredibly hard.

Over the period, the rise of dual income households – intermittent buyer grants, tax incentives aimed at investors – stronger wage growth buoyed on by a robust economy riding the dizzy heights of a mining boom – poor planning for population growth with both the monopoly and restriction of land stagnating effective and affordable supply – a propensity toward high loan to value ratios in the lead up to the GFC – and a culture that veers disproportionately toward property investment as a vehicle for ‘wealth creation’ to name but a few – ensured the baby boomer generations who hold roughly 50% of Australia’s housing stock, didn’t need much more than a basic foundation of market knowledge, to reap the resulting capital gains.

Having never lived through a real estate crash, boomers matured in a market where the industry driven mantra dictated that nominal values double every 7-10 years or always goes up 7-10% per annum, as the wax and wane of a property cycle progresses.

Some of the various stimulators that lead to these gains are not to be repeated, and whilst there will always be periods of inflation and deflation in any modern market economy, it’s important to have a good understanding of the dynamics fuelling those gains and the longevity of such, or you risk falling into the trap of thinking the good times will ultimately always outweigh the bad.

Whilst the real estate profession differs little from any other sales industry in so much that it has to maintain a positive narrative.  It also promotes Australia’s largest domestic asset class with an aggregated value of over $4 trillion pinned to a banking sector, which has the highest exposure to residential mortgages in the world.

Therefore, pumping the line that it’s always a good time to buy, with inflated capital prices simply an indicator of a “healthy economy,” can potentially hold serious consequences – If housing is going to be used as an investment vehicle, the advice being given requires strict regulation.

As it stands, Sydney’s buying market is almost a 50/50 equal split between investors and upgraders, with first homebuyers holding less than a 5 per cent share.

Whether it is negative gearing, land banking or borrowing to purchase in a self-managed super fund, all such strategies are solely reliant on capital growth to compensate for the growing gap between price and yield. Therefore demand is overwhelmingly concentrated on a reducing pool of established property and the recent acceleration in prices represents this.

Notwithstanding, the so called ‘fundamental’s presented that are intended to calm any negative spirits into believing our economy faces no immediate danger, are startling similar to those projected in other countries immediately prior to the financial crisis.

Whilst there’s no doubt in Australia we have a shortage of affordable and effective supply, to assume this alone will always generate nominal price gains, or even place a firm floor under current valuations, concludes we can keep playing a game of musical chairs with second hand stock, against a backdrop of rising unemployment, weak wage growth, an aging population and stubbornly high levels of personal debt.

I’m referring in particular to arguments such as demand outstripping supply, population growth, a stable economy, and other indicators such as housing affordability measures, which maintain that capital increases aren’t negatively affecting first home buyers, because the proportion of income needed to service the loan, is balanced in a low interest rate environment. And whilst I’m not suggesting we face an imminent crash, one thing all crises have in comment, is the majority never see them coming.

Ireland is one such example. In the lead up to the GFC which wiped over 50 per cent of the value off properties in markets such as Dublin, all available economic indicators were firmly pointed toward the positive.

Since the middle of the 1990s, growth in real disposable income per head had been stronger than any other industrial country.  Residential demand was fuelled principally from robust net migration, coupled with trending fall in household size.

By 2007, 75% of the population owned outright or were renting, and the proportion of buy to let investors had increased to 27%.

The overwhelming mantra from the real estate sector fervently claimed a property crash was impossible. Strong GDP growth and low unemployment figures supported a feeling that the environment was protected, and average mortgage payments were estimated to be no more than 30 per cent of household income.

When supply did respond to demand, it was generally too late, and urban growth restrictions ensured new homes were built in locations far from existing amenities, and therefore not appealing to the home buying demographic.

Brownfill sites were filled with low-grade high-density unit stock, and subsequently, in the two years leading up to 2007, almost half of all new home purchases stemmed from the investment sector rather than a first homebuyer demographic.

Following the crash, large swaths of theses ‘new’ properties sit vacant, and the lingering lack of quality supply has started to once again to disproportionately inflate established values as the economy starts to show slow signs of recovery.

The rhetoric stemming from the media also played its part in underpinning the confidence; Various titles from the Irish Times prove the point aptly, ‘Bricks and Mortar Unlikely to Lose Their Value’ (11 December 2002), ‘Prices to Rise as Equilibrium is Miles Away’ (18 March 2004), ‘House Prices “Set for Soft Landing”‘ (22 November 2005), ‘Property Market Unlikely to Collapse, Says Danske Chief’ (2 February 2006) and ‘House Prices Rising at Triple Last Year’s Rate’ (29 June 2006).

Similarly the UK was also suffering a housing shortage; with data analysis given to parliament suggesting the UK needed “an overall total of 203,000 homes each year during the period 2001 to 2021 to keep pace with newly-arising household growth.”

Whilst it’s impossible to compare against every measure when drawing international comparisons, the spirit of certainty that keeps prices rocking along all too often masks underlying instabilities. Hence why so few see a crash looming.

This is why it is vital and long over due, for our politicians to work hard at establishing a political ‘road map,’ that will unpick the current distortions tying up the established market, such as tax incentives which encourage speculative activity and underutilisation of the existing stock, whilst at the same time, lowering land prices and increasing effective and quality supply for buyers and renters.

Without such action, potential rises in unemployment and future interest rate hikes will simply exacerbate the boom and bust cycles resulting in a slow and painful demographic shift, as an increasing wave of younger Australian’s find themselves in a position where they need to take on a greater and greater proportion of debt just to enter the market.

It’s easy to palm off the risks by citing that only Sydney and Melbourne are experiencing heated activity – but somewhat foolhardy to think that this won’t have a broader impact as the RBA fight with the conundrum of balancing rates in a multi speed economy,

Whilst we continue the ‘Are we? ‘Aren’t we?’ or ‘Might we be?’ bubble debate and both the RBA and Government sit on their hands and look sideways, assuring us there’s nothing to worry about ‘yet.’  A largely unregulated housing market, which in some areas is full of pent up demand from cheap money and speculation, has well and truly taken the bit.

Catherine Cashmore

 

 

 

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A housing bubble or the potential for one?

A housing bubble or the potential for one? Why not call it as it is Australia…..

I wrote a few weeks ago about housing bubbles and the misconceptions commonly related to the term.  A bubble is typically an illusion of economic strength which draws buyers in, whilst masking underlying fragilities – and in some areas of Australia, the recent investor lead rally in property prices from an already inflated base is concerning.

However, unlike other economic bubbles, housing markets have plenty of complexities which can delay a severe correction – not least the stimulus of easy monetary policy, incentives, and speculation buoyed on by tax policies that encourage heated investor activity in the established housing terrain around our most desirable capital city locations.

Even in markets where housing has suffered dearly from the 2008 financial crisis, such as the UK, and USA – there is a fragmented nature to the falls dependent on location and the openness to attract foreign speculation.

In the south eastern regions of England for example, where foreign money has propped up London’s prime central market, creating a ripple across the outer lying suburban towns, the falls in capital have been far less severe than the northern districts, where the market has dipped some 20%, and in regional areas, even more.

Not that this has in anyway helped Briton’s younger population who are now commonly termed ‘generation rent,’ with the numbers of unemployed living in the family home almost doubling between 2008 to 2012, and the productive areas of economy failing to pick up fast enough to drive innovation and generate new sources of growth.

Although house prices in the UK have started to rise again with the help of various schemes such as ‘funding for lending,’– other areas of productivity aren’t fairing so well.  As UK regulator Lord Adair Turner pointed out in a recent speech to London’s central bankers and economists, only 15% of total financial flows in the UK have gone toward investment projects, the rest have instead been used to support unsecured personal finance or existing assets – significantly real estate.

However, do we really fair much better in Australia? Our low interest rate environment, coupled with a honeymoon period of ‘post election’ confidence, is predictably forcing investors to seek out any area of imagined opportunity that can provide a better return on their dollar.

This runs the risk of stimulating higher levels of household debt (currently at around 150%) directly tied to speculative behaviour.  And in the Australian culture which veers towards the perceived safety of bricks and mortar, based on the somewhat fool hardy view promoted widely in the industry, that limited supply and rising population growth can forever prevent a sharp correction, you don’t need a second guess as to where a large proportion of undiversified debt is currently being allocated.

Some interesting research was released last week by Jonathan Mott of financial services firm UBS, highlighting the above point aptly;

“If we compare Australia, New Zealand and the UK, all three countries have similar cultures, demographics and home ownership. However, investment property contributes 32% of Australian mortgages, 20% of NZ mortgages and 12% of UK mortgages. ….57% of Australian landlords are leveraged (ATO data suggests this is closer to 81%) compared to 28% in NZ and just 13% in the UK”

This would be less of a concern if effective supply was keeping pace to soak up the overflow of demand, and thereby reduce volatility in values. However, in areas of limited supply, the bubbly nature of the price gains disproportionally advantages those with existing assets, at the expense of those struggling to get a foothold.

When viewed against a less than desirable economic backdrop of rising unemployment, an unwinding mining boom, and weak wage growth, with a rise in the cash rate at some future point inevitable, you’d be foolish to think the current trend can continue without some correction.

Notwithstanding, our politicians continue to miss the point, as Tony Abbot said on 3AW last week;

“Don’t forget … if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset,”

What a sad world it is, when the most essential item young and old aspire to alike, for both their health and continued well being, gradually becomes less affordable over time, requiring a greater level of debt to be serviced despite the somewhat falsely perceived advantage, that low interest rates somehow make the buying environment and purchase of property easier.

And yet as a direct consequence, we have falling rates of ownership – particularly in the younger generations, an increase in overcrowding of accommodation, rising waiting lists for social housing, and the average age of ownership for those not benefitting from a gifted deposit, pushing closer to 40 years.

The housing market no longer revolves around promoting home ownership for the sake of personal well being, it’s Australia’s largest domestic asset class with an aggregated value of over $4 trillion, and understandably it’s now suggested that ASIC should recognise it as such.

Countless hours can be spent arguing what the term ‘bubble’ actually means – definitions are numerous. Equations are done regularly comparing price to rent, debt to GDP, price to wages (a somewhat skewed calculation due to the inclusion of compulsory super,) however do we really need a meteorologist to tell us what the weather’s like outside?

Whether you call it a bubble matters not, Australian house prices have been pumped up with many ingredients over the decades to get to such elevated levels.  As a result, we have a market that is both over priced and under supplied, with the first-home buyers’ share of new home loans sitting at its lowest point in a decade.

Monetary policy alone is a blunt instrument, and whilst Governments can allocate at their discretion where to spend our tax dollars, they have limited influence on where cheap credit is spent, or for which asset it is lent into the economy.

Nor do they currently have the ability to direct it into areas where it’s needed most – which in terms of housing would principally be construction. Hence why the sector continues to call out desperately for another rate cut.

Instead buyers are punting a lot of unproductive dollars on second hand houses, and the proportion of cheap money finding its way into a limited pool of dwellings, should not be brushed aside as merely part of a typical ‘property cycle,’ when we have a number of economic and social factors combining, which left unregulated, have the potential to create the ‘perfect storm.’

Much commentary has been written on this matter of late, and it’s not isolated to Australia. The Bank of England this week voiced how it was watching the UK market “closely” as price rises in London reached 10% in the year to July, warning “that if risks to the stability of the financial system were to emerge from the housing market, both it and the microprudential regulators had a range of tools available to address those risks.”

However, the RBA continue to sit on their hands, not wanting to pull a regulatory lever, instead taking on a stern expression and wagging a finger at investors whilst pleading with them to employ caution, as if they will all fall into line like a bunch of secondary school kids in a playground.

This idea that investors will employ a sense of rationality is ambitious in a market that has corporate regulator ASIC, once again warning against the propensity of spruikers.

But even without these ‘spruikers’ buyers face difficulties – fed ‘daily’ with house price statistics from RP Data, which could be somewhat relevant if we were monitoring petrol prices. Closely comparable sales data is not readily available – computer generated “estimates” are a guess and more often than not, hopelessly inaccurate.

Furthermore, there are plenty of other variables that need to be assessed prior to investing in any residential listing.  Prospected development projects which may spike the stock being taken to market, thereby diminishing the level of capital growth being ‘assumed’ based on a cursorily look at historical data.

Local vacancy rates, the time on market you can expect your rental property to reasonably sit before finding a tenant, the predominant area demographic any said property will appeal to in order to attract and maintain consistent buyer demand – the list continues.

I mention this, because the broader implication of a large proportion of inexperienced buyers making unwise acquisitions without educated due diligence, is a worry unto itself. However, the number of real estate investors is set to rise. Although presently, only a relatively small proportion of total investment in the property market stems from SMSFs, it’s going to rapidly increase.

As mentioned in the AFR this week, the most mobile pot of cash is in the self-managed super system. About 1/3 of the $500 billion in SMSFs is held in cash, or about $150 billion.

On the back of this, there is a theory that self-managed super will have a mean reversion to normal cash weightings of about 10%. If that proves accurate, about $100 billion in cash will move – leading to the question –‘where will it move?’

As it stands, only 23% of investment into residential property comes from SMSFs, against 77% invested in commercial.  Albeit, when the direction of that percentage is into established areas suffering an elastic band of restricted supply, the recent boom in Sydney for example, against the backdrop of slow credit growth – will have no doubt been exaggerated by SMSF demand.

However, banking regulation aside, our politicians should be moving to restrict policies that encourage disproportionate speculation, such as the tax treatment of negative gearing (which should be phased out) and capital gains, or implementing a transition toward a broad based land tax system which is long over due.

My only comment to those with short-term spectacles on who think the recent ‘boom’ is good news, – enjoy it whilst it lasts, because I suspect it won’t end without unpleasant consequences.

Catherine Cashmore

Since when did the future of the first homebuyer market become ours to erode?

Since when did the future of the first homebuyer market become ours to erode?

I was fortunate enough to attend the SQM seminar last week as Louis Christopher – one of the most well respected voices in the real estate industry for his balanced assessment of market data – presented a state by state rundown of projected activity over 2014 – details of which can be found in the SQM ‘Boom and Bust’ report.

Louis predicts Sydney’s established housing market will see a 15-20% ‘rapid rise’ over the course of 2014, highlighting the middle suburbs in particular to capture the overflow of demand, as inner city development constraints force consumers outwards.

With this in mind, there’s been plenty of talk regarding housing affordability and the very real risk associated with an unsustainable ‘boom’ in values, with some claiming – based in part on our low interest rate environment – that any mention of a concern is a mere ‘myth.’

When asked from an audience member at the seminar if first homebuyers were being crowded out of Sydney, Louis concluded they were – and indeed it would be hard to deny.

Investor activity has dominated the Australian property market over the last 12 months or so.  Banks are bidding for buyers in a highly competitive environment, and the lion’s share of mortgage demand is being eaten up between investors and upgraders.

A third of all new loans are with loan to value ratios of more than 80%, and 40% are on interest only terms.  Clearly investors are speculating on a continued pattern of price gains from an already high plateau – an ambitious projection.

Under the existing financial system, inevitably, it’s none other than rising debt that fuels accelerated growth.  However, since March 2009, whilst the average first homebuyer mortgage has increased by only 1.4%, the mortgage for the market as a whole has grown by 7.9%.

Meanwhile, first-home buyers have seen their savings eroded, and as the latest ABS housing finance data outlines, wishful thinking that rising yields are pushing greater numbers into the market, has had scant effect.

According to research by Rate City “First home buyers now account for just 11% of home loan commitments. This is below the 20 year average of 15% and has not been this low since 2004.” And whilst interest rates on their own can have little impact on price rises or falls in the near term – a long period of low rates and the dependency it invokes, can be dangerous in inelastic areas of limited supply.

Current competition coupled with pent up demand, has done little more than push values further out of reach of a genuine entry buyer demographic.  And as complex as it may be to slowly unpick the current distortions that tie up the established market and hamper construction, the implications of not doing so, are potentially worst over the longer term.

No one should be fooled by the rhetoric from various industry commentators concluding current inflationary gains are of no concern. Hence why we are seeing a conundrum in Central Banks across the globe employing “precautionary policy activism” in an attempt to cool asset inflation without hampering the broader economy by raising rates.

In New Zealand in particular it’s a point of concern and not just a localised issue. House prices currently sit at record highs, with the Government property valuer ‘QV’ residential index showing gains of 8.5% in the 12-month period ending August 30.

As reporter for Real Estate News on Sky Business 602, Iggy Damiani pointed out to me last week – as well as our local market, Australian bank’s ownership of New Zealand’s ‘big four,’ places them in a precarious position – currently having the highest exposure to residential mortgages in the world. Therefore asset gains, which outpace both wage growth and inflation, must be addressed.

Even assuming low rates are assisting first home buyers, saving a deposit and sourcing a suitably affordable property, is no easy task for a demographic who are often burdened with a hangover of student debt, and in many cases can’t conceivably ‘buy in’ until they partner with a second income earner.

With this in mind, it must be pondered what the effect will be when rates do inevitably rise, considering our household debt to income ratio remains stubbornly high, at around 148 per cent.

Property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading (and then downsizing) a ready market to sell into in order to make the move.

However, when investors predominantly negatively gear into the asset class most favoured by first-home buyers – inevitably resulting in inflated established property values – and the state government fails to come to the party with feasible affordable alternatives, our property wheel of upgrading and downsizing risks stagnation.

In the near term, heated investor activity may keep everyone dancing, however over the longer term we’re losing a valuable demographic of property buyer, which will no doubt have a flow-on effect across the property chain as a whole.

As these changes push through the generation gap, it’s fair to assess, increasing numbers will retire whist still factoring as short-term renters.

Investors tend to hold property for extended periods of time in order to build equity – many choose to invest as part of their self-managed super funds and subsequently do not sell until retirement. Therefore the ready supply, which usually comes from initial homebuyers selling and upgrading, will start to slow.

Additionally, we have the first world problem of an aging population creating future headwinds across the economy, with Government Intergenerational Reports forecasting the already reducing workforce participation rate, to drop to around 60% by 2050.

Considering the predominant home buying activity takes place within the ages of 22-44, it seems reasonable to assume that there’ll eventually be proportionally greater demand from those downsizing as we progress through these buyer type changes.

However, if the flow-on home buyer effect doesn’t follow through, the mismatch of household size comparable to property type will continue to stagnate our property buying and selling terrain, further tying down supply in the areas most want and need to reside – areas within easy commutable distance to city suburbs, jobs and essential amenities such as schools, hospitals, doctors, public transport systems and so forth.

Therefore, the last thing we should be doing, is advocating the ‘spruik’ that rising property prices are somehow ‘good for the economy’ having a supposed ‘flow on effect’ into retail spending, which in itself is currently not producing the desired result.  First homebuyers may head out to purchase ‘white goods’ and furniture for their new abode, but our investment sector certainly won’t.

Additionally, choices are limited in a market that has been turned into a speculative terrain.

If we were building homes that were viable for first home buyers to gain a foothold which would not only maintain consistent market demand in order to upgrade, but also provide feasible accommodation for this demographic to settle for an adequate period of time, then having an investor-dominated inner-city terrain, could perhaps be balanced somewhat so as not to affect the stagnated flow of the home buyer chain.

However, as we all know, the new home options are either limited to outer-suburban estates lacking in infrastructure, which every Joe on the street recognises is an essential component needed at the start of each project if we’re to lure home buyers outwards, or alternatively, inner-city high-density low grade developments.

Our census data already demonstrates that most lone person households are tottering around in accommodation that’s far too big for their requirements. Building an abundance of one-bedroom apartments therefore won’t suffice; only 14% of the total single person households of all ages opt for one-bedroom units.  We instead need a wider diversity of options, in particular, accommodation suited to families – with the decrease of ownership for this demographic showing a fall from 79.5% in 2006 to 77.2% in 2011.

As I’ve mentioned previously, the percentage of investor-owned apartments in both Darwin and Brisbane falls close to 70% – and in the other capitals, it comes in between 60 and 70%.

And whilst this generation of existing investors may continue to enjoy short-term speculative gains of the oft quoted ‘property cycle,’ since when did the future of the first homebuyer market become ours to erode?

I’ve assisted numerous first homebuyers and renters over the past few years, and it’s no exaggeration many perceive the capital price of property and the risks associated with taking on a greater proportion of debt a potential liability. For those who argue based on textbook analysis that property is not ‘over priced’ I suggest they change their frame of reference. There may be historical logic behind the long-term growth in values, but this doesn’t change the consequence. It is both over priced and under supplied.

Therefore, pressure on the rental market is unlikely to ease in the near to far future, with ABS data showing almost two-thirds of ‘new residents from overseas’ are long-term property renters along with half new residents from ‘within Australia’ who also class themselves within the same bracket.

Furthermore, economic conditions such as wage growth, unemployment, consumer confidence and frequent changes of work placements all reduce the likelihood of a strengthening owner-occupier market over the next decade.

Current policy is built around the general assumption that renting is a ‘step’ on the road to ownership – however it’s fair to suggest, unless the trend takes an about turn, tomorrow’s generation will hold a growing percentage of residents for which renting is ‘for life,’ and as such, we also need to consider their welfare.

Policy should be steered towards the creation of a fairer partnership between owner and renter.  This would include longer terms of tenancy; protection from exorbitant rent rises coupled with enforcement of basic standards of accommodation in both the private and public sector.

As it stands, in the rental market, and the property ‘buying/selling’ market ‘short termism’ dominates.  No surprise, as we’re governed by those who derive personal and political benefit from the existing system, polling for the popular vote from homeowners and investors, pinned to our flawed debt based financial system that relies on an ever inflating future to under-pin existing gains.

Catherine Cashmore

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

Is Australia’s housing market ‘unaffordable?’

The debate over the supply of affordable housing and the policies surrounding the framework is a topic that rightly inspires heated emotions – particularly in respect of the lead up we had to Saturday’s Federal election and the  thundering silence from either major political party, outside of a commitment to ‘keep rates low’ and ‘job security’ high.

However, what we really lack in Australia is a realistic vision of how our housing market should appear.

There are too many conflicting voices smothering the debate – from an ingrained cultural mindset looking to profit from rising values in the established sector, hoping to outpace inflation and enable retirement on a pot of ‘property gold,’ to consumer organisations struggling to address the growing need of citizens requiring public housing or rental assistance.

Obviously vested interests across the real estate and finance industry as a whole, mitigates the commentary somewhat, concluding – based on a narrow contextual view of low interest rates alone – that affordability has in no way worsened, but rather improved – whilst at the same time applauding the recent ‘recovery’ in prices.

Sydney, in particular is outperforming other states, and whilst there are differences to the macro back drop compared to 2007, it’s bounded into Spring as the ‘best (and consequently most expensive) performing capital city in Australia,’ – with clearance rates (the curve of which prices typically follow) mirroring ‘boom’ peaks, and AFG (Australia’s largest mortgage broker) reporting an 49.5 per cent unprecedented level of home loans written for investors coupled with the comment;

“This is the highest level of investor activity the company has ever recorded for any state.”

RP-data have Sydney prices up +5.4 per cent for the quarter, and although the information is subject to revision, it leads the annual growth rate to its fastest pace since 2010.

So where do we stand on issues of affordability?

I’ve written previously on the various ‘war’ stories witnessed on the ground, as auction results exceed reserves by some 10/15 per cent – and on occasion, reach a level, which defies all rationality.

In this respect, any benefit derived from lower interest rates is somewhat offset by the inflationary pressure placed on prices.

Indeed – you’d be hard pushed to find a first homebuyer shopping in our largest capital cities, who has not been outbid by an investor through the course of this year. Investors understandably have a stronger financial arm.

Albeit – at least for existing owners – the relative cost of servicing a mortgage has reduced considerably.

This influence is evident in the latest “Housing Occupancy and Costs” survey from the Australian Bureau of Statistics, which calculates affordability to be at the same level it was some 17/18 years ago from the date of which the survey relates.

According to the findings, in 2011-2012 owners with a mortgage and private renters spent roughly the same proportion of income servicing the repayments, as they did back in 1994-1995, despite the fact that the capital price of housing has more than tripled over the corresponding period and the subsequent duration of mortgages lengthened.

Those paying down a home loan were assessed to spend 18 per cent of their income servicing the payments, with private renters just a fraction above this figure, at 20 per cent of income.

It is this, and other indexes such as the Adelaide Bank/REIA housing affordability report, released last week, claiming affordability is at its “best level since 2003,” that encourages commentators to ‘stamp and seal’ further discussion of the issue, with a dismissive waft of the hand to ‘would be buyers,’ accusing them of being both ‘spoilt and picky’ in their expectations, if complaints about the cost of accommodation are voiced, or any suggest that first home buyers are ‘locked out.’

Neither is there any comment on the inevitable future consequence of rate rises.

However, any release of statistical data, always needs to be assessed in context.  A little like median prices, which bear scant relation to individual house prices, and often require an additional understanding of distortions such as ‘stock on market,’ the shadow effect of buyer grants and incentives, and a full appreciation of how the data is stratified prior to making a surface assumption of the material at hand.

As ABC’s Online Business Reporter Michael Janda points out in his own balanced assessment of the ABS release, there are some distinctive trends worthy of appreciation prior to drawing a conclusion that ‘housing has never been more affordable.’

Firstly, home ownership is falling.  In 1994-1995, 71 per cent of Australian’s owned – or were servicing a mortgage – and the proportion of households renting – 18 per cent.

By 2011-2012 the ownership rate had dropped to 67 per cent with a relatively steep rise in the number renting at 25 per cent.

Families with children (one of our biggest demographic of buyers) in particular seem to be suffering.  The decrease of ownership for this demographic has fallen over the latest census period from 79.5 per cent in 2006 to 77.2 per cent in 2011.

There are a number of factors that have played into the percentile changes. Firstly on issues of supply – restrictive growth boundaries, hefty development overlays in new estates, along with a woeful lack of planning for population growth and the consequential reluctance of home buyers to move ‘outwards,’ has produced a downward slide in the number of new dwellings completed per annum, and further inflated the capital price of the stock marketed.

For many first home buyers, the choice, price and location of accommodation offered in these areas, where commute times are inflated as infrastructure development fails to keep pace – gives no incentive to ‘buy in’ outside of various government grants – and based on historical data, it’s fair to conclude if they do purchase a house and land package, the growth of the underlying asset base of their investment in the new estates, will unlikely improve much past the rate of inflation – hamstringing the ability to progress or ‘upgrade’ when desired.

When older generations purchased – the outer suburbs were some 10/15 kilometres from established job and commercial hubs, not the 40 plus kilometres we see today, and financial deregulation, the emergence of duel income households, and the very real realities of our ‘golden decades’ of growth, assisted their steps up the ‘property tree’ to the current environment in which ‘baby boomers’ hold roughly half of Australia’s housing stock – a mix of owner-occupied dwellings and investments – many relying on the value of their properties to fund retirement.

Another direct consequence of our now inflated values, buoyed further by restrictive supply, and policies such as negative gearing – which encourage investors to speculate in the established arena, thereby inflating the value of second hand stock – is a national rise of 49.2 per cent in yields over the five year census period (not accounting subsequent increases) – which outpaced growth in home loan repayments for the same duration.

Other trends indicating affordability pressures – (although agreed cultural tendencies also play a hand) – is between the 2006 census and the 2011 census, the single-person household was no longer the fastest rising demographic.

In the 2011 results, lone-person households dropped from 24.4 per cent to 24.3 per cent – this was the first decrease in this statistic since the census was initially conducted in 1911 – over 100 years – and therefore requires attention.

Against this group households (those sharing accommodation) jumped from 3.9 per cent to 4.1 per cent.

‘Crowded houses’ – with three or more families sharing accommodation, also rose nationally by 64 per cent to 48,499, and other data from the ABS shows that over 40 per cent of renter households receive some form of housing assistance – once again emphasising the growing crisis in this sector of our community.

With the decreasing proportion of first home buyers as a share of the active buying market, commitments of which are down 10.6 per cent year on year, along with reports that significant numbers are now initially entering into their first purchase at the age of post 40 years, you have to question the stubborn refusal from market commentators to recognise ‘we have a problem’ worthy of attention. 

The AFG data I cited above also notes the drop in the proportion of first time buyers, and is no doubt mirrored by other lenders.

According to their figures, the share is down to 11.3 per cent nationally from 15.9 per cent at the same time last year – and although various state grants and incentives play into the peaks and troughs, the percentage drop in New South Wales is appalling – down from 13.1 per cent in August 2012, to 4.3 per cent as recorded last month.

Another mistake made when assessing affordability, is to concentrate only on the principle cost of the home and the percentage of income needed to service the repayments.

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

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

A privilege I have in my job, is meeting, assisting and talking to current first home buyers (usually couples – singles are all but priced out) looking to get a foot hold. It’s a pleasurable aspect of my work due to the excitement expressed when a successful purchase is achieved.

Albeit, the conversations I have with both first home buyers and renters, keep my feet firmly on the ground in relation to the difficulties achieving the oft quoted ‘dream’ of ownership – it is also what inflames my anger when I read reports such as that offered by Terry Ryder last week – questioning so called ‘false’ perceptions that Australia’s housing is ‘unaffordable.’

I suspect we see things from a different frame of reference.

For this reason, and others, I attended the 122nd Annual Henry George Commemorative Dinner at The Royal Society of Victoria, Melbourne – to listen to respected economist Saul Eslake give a excellently orated speech, entitled “50 Years of Housing Policy Failure.”

As well as his role as chief economist for Bank of America – Merrill Lynch Australia, Eslake is also Deputy Chair for the National Housing Supply Council – set up by the Australian Government to “improve housing supply and affordability” for both home buyers and renters.

He is therefore suitably qualified to provide a detailed assessment the data which is all but ignored by those mentioned above.

As Eslake comments

“..the decline in home ownership has been even more pronounced when one ‘looks through’ the effects of the ageing of the population, which (among other things) means that an increasing proportion of the population is within age groups where home ownership rates are always (and for obvious reasons) higher than in younger age cohorts.”

The transcript and slides of Eslake’s speech can be found here – an absolute must read.

Our affordability issues cannot be solved over night.  The distortions in the market need to be slowly unpicked and the various suggestions by Eslake regarding supply and tax reform, implemented.

However, as I’ve written previously – the reason we have asset ‘bubbles’ is a direct consequence of our current debt-based monetary system,  and in this respect, I hold the opinion that you cannot tackle the health of the housing market without also addressing the disease that funds it.

Catherine Cashmore

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

 

 

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