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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Another senate enquiry into housing affordability – but what’s happened since the last?

Another senate enquiry into housing affordability – but what’s happened since the last?

In the final hours of Federal Parliament for 2013, Labor Senator Jan McLucas succeeded in establishing an enquiry by the Economics References Committee, in addressing Australia’s growing housing affordability crisis, stating;

“…pressures on affordability of housing in Australia have continued to intensify, especially in capital cities and mining communities..”

This appears to be ‘good news’ and something a growing ground swell of homebuyers and renters, limited by budget and feasible supply have been hoping for.

The inquiry is set to investigate the role of all levels of government in facilitating affordable home-ownership and affordable private rental, social, and public accommodation.

Importantly, it will, also look into policies designed to increase the supply of housing – perhaps the most critical and well proven factor in the potential long-term effectiveness of any sustainable solution.

However, as welcome as any enquiry into housing affordability is, I question why we are using taxpayer dollars to produce a repeat version of the investigation undertaken under the Rudd administration, in June 2008?

The 2008 report entitled “A good house is hard to find: Housing affordability in Australia” was detailed in its content, drawing on evidence from organisations such as the Housing section in the Department of Families, the Master Builders’ Association, the Planning Institute, the Urban Development Institute, the Housing Industry Association, NATSEM, and the Treasury.

It addressed Australia’s tax policies, such as capital gains tax and negative gearing, which under the current structure, are widely recognised as having a negative impact on affordability and market activity – and an assessment of the construction industry’s, future skilled labour workforce – a job to be undertaken by the National Housing Supply Council, which has subsequently been abolished by the Abbot government, thus giving a very clear indication where their priorities lie (not with housing.)  It also covered rental accommodation, and social housing policy.

The report correctly stated “the need for greater responsiveness of land release and housing supply to market demand.” Stressing, “efforts to this end should occur in a variety of contexts.”

Some of the highlights included;

  • Recognition that state and local governments’ planning processes are too complex and often involve long delays and high costs.
  • Housing supply not adequately facilitated with community infrastructure.
  • Developer infrastructure charges being too excessive and further restricting supply and inflating purchasing costs.
  • The negative impacts of the ‘urban growth boundaries’ implemented by the Victorian and South Australian governments, resulting in land banking and increased prices.
  • The type and quality of housing being constructed – i.e. not appealing to elderly downsizers or single parent buyers.
  • And notably – a critical assessment of New South Wales, with the suggestion it had ‘probably’ done more than any other state in Australia to restrict the opportunities for urban growth on fringe land.

The 238 page document contains many submissions, including this one, by the New South Wales Division of UDIA (Urban Development Institute of Australia)

in which Mr Blancato recommends the Commonwealth government expedite the release, rezoning and servicing of Commonwealth land with critical lead infrastructure to support the supply of new dwellings to the market;

“We are proposing that there should be an amount of land—a forward train

of land of maybe 20 years—that is released and serviced.

The word ‘released’ is something that is very difficult to get a handle on. You will

have successive governments release the same patch of land five times but

not a dollar will be spent on infrastructure. ..

The government used to invest in it—20 years ago you would go out to a release like Blacktown and the main sewer carriers were in and the sewage treatment plant was built. You would go out there and you could develop this five-acre parcel or that five-acre parcel. You might do a little bit of a lead-in, connecting infrastructure, but it was affordable.”

Whilst I wouldn’t advocate all the recommendations concluded in the paper, it’s five years later and we seem to be no further forward.

Prices continue to rise from a bull run on established property in our most populated states – and first homebuyers are barely treading water against a speculative investment sector.

Urban boundaries and a propensity towards land banking, hefty tax overlays and poor infrastructure development, ensure land on the outskirts, continues to be priced at a level that doesn’t incentivise buyers to correctly evaluate the trade-off between price and time, and therefore demand remains marginal, with a downward slide in the number of new dwellings completed per annum.

There is no forward thinking on infrastructure financing, or a full understanding that people don’t purchase houses as much as they buy into communities.

Additionally, there is little diversity on the type of housing built in greenfield developments to enable newly created suburbs to market to a broad socioeconomic mix of residents, who do not just want McMansions built to the edges of a 400-500sqm blocks of land.

Rents continue to rise, with vacancy rates in areas such as Sydney, close to 1%.

Crowded houses – with three or more families sharing accommodation, has increased nationally by 64% to 48,499 (ABS.)

The ACT is abolishing stamp duty over a slow transitional 20 year period and reverting to a land tax system, and some states have reduced stamp duty payments for first home buyers, however there has been no action federally on recommendations in the Henry Tax review on negative gearing, capital gains tax, or the rapid rise of residential investment and gearing in SMSFs.

So what happened?

In one respect it’s the deluded thinking perpetuated by policy makers, who theorise urban sprawl to be essentially bad, imagining it’s possible to develop affordable housing on expensive land in inner urban localities, whilst painting a picture of a bright ‘future’ where residents live a handbreadth apart, compacted in small apartments around existing infrastructure hubs within computable distance to the CBD, as if nothing exists outside of our capital city gates – questioning ‘isn’t this where everybody wants to be anyway?’

As if to prove their point – when fringe land is released, and an additional abundance of ‘roof space’ is built, it fails to lure a diverse range of homebuyers because – as the 2008 report correctly highlighted – the housing lacks diversity, the cost of raw land remains too high, and the developments are burdened with hefty taxes transferred onto the buyer.

More importantly, the surrounds are not adequately facilitated with infrastructure such as schools, transport, medical and recreational facilities, to cater for an individual and family’s personal needs.

Therefore, our outer suburbs tend to be black listed as low socio economic hubs, populated by those who are deemed to sit at the ‘bottom’ of the housing ladder.

I listened to an auctioneer’s pre-amble a few days ago, which summed it up perfectly.  After he elucidated the various attributes of the modest 2 bedroom home, he threw his hand’s up and with a flourish, exclaimed, “and let me tell you what you get for free!” – and proceeded to point out the local school, shopping strip, and park.

Accordingly, if a buyer is able to travel to work, the supermarket, and any other amenity on the priority list within a 30-40 minute period, the distance from the CBD is not an imposing factor – the decider is in the time it takes to drop the kids off to school in one direction, and travel to work in the other.

Furthermore, an acknowledgement that the value of land, and the capital gains achieved by its owner lays in the facilitated connections around it, forms the argument for broad based land value tax, as I explained here.

The Annual Demographia International Housing Affordability Survey has aptly demonstrated, in cities where supply is not artificially constrained by poor policy and planning, which fails to cater for community needs, house prices remain affordable and relatively stable.

Realistically, a well developed city, which has policies flexible enough to meet the demands of its home buying demographic, should see price rises track only the rate of inflation, with growth in household incomes somewhat influential in those areas in which there is greater demand.

Not the well spruiked figures of 7 per cent + median growth per annum we experienced in some suburbs prior to the GFC, – or figures outpacing both wage growth and inflation

Across Australia, every state faces its own intrinsic economic and geographical challenges, for which housing policies need to be flexible enough to adhere, local resident voices need to be heard, and councils need to have the freedom to respond.

However, if the only options we offer first home buyers are candy style incentives in a low interest rate environment, which must stay at rock bottom levels in order to support the inflated levels of debt it encourages – then over the longer term our real estate obsession from which so many feed, will become a noose around the neck, provoking broader concerns.

It’s very important we correctly understand where our policy makers have let us down in the delivery of affordable housing stock, because a worrying trend is starting to emerge which was highlighted in a recent news report, showing footage of Julia Gillard’s Altona house auction.

In the post auction interview, the sales agent said that the Chinese purchaser wanted her to express to everyone that ‘she is an Australian citizen…

The comment speaks volumes – emphasising how important it is to stop blaming current high prices solely on ‘foreign buyers’ whilst at the same time, singling out a unique demographic – a large proportion of which are Australian citizens, work and pay their taxes, and have a right to purchase residential real estate.

One of the most powerful tools for the regulation of any market is transparency. Without it, speculation ensues and leads to undesirable assumptions – such as the belief that every Asian face seen at an auction is ‘foreign’ – and clearly this Chinese lady has noted the negativity.

The reason real estate prices are high in Australia, is due to years of poor government policy and planning – and this is where the blame should be placed and this is where the pressure should be directed.

Catherine Cashmore

 

Housing – apparently the only item than can be both affordable and unaffordable at the same time….

Housing – apparently the only item than can be both affordable and unaffordable at the same time….

The latest affordability index by the Adelaide Bank and Real Estate Institute of Australia has once again flooded the real estate headlines with the jolly news that housing is growing ever more affordable.

This pre Christmas gift of optimism from the newly updated ‘affordability’ studies commissioned by the financial and real estate sectors, comes with a host of commentary – usually from those with a vested interest – who happily advise aspiring homeowners that ‘they’ve never had it so good’ – in other words, to paraphrase Terry Ryder’s thoughts, first home buyers should ‘put up, or shut up.’

Of course, it wouldn’t be half as palatable if it didn’t come accompanied with the seeming contradiction that not only is it more affordable than it’s been in the last decade (according to the HIA-Commonwealth Bank affordability index,) it’s also substantially more expensive than its ever been – yes, housing is only item than can be both affordable and unaffordable at the same time.  Work that one out Einstein.

In fact, according to Residex, median prices in both Sydney and Melbourne have already exceeded their historical highs, ‘nudging’ $750,000 in Sydney and $600,000 in Melbourne – additionally, Perth has also reached its previous peak of 2008, with a median price of $521,000.

RPData’s dwelling price index shows a year to date increase of 14.3% in Sydney, 6.4% in Melbourne and 9.7% in Perth.  For homebuyers, the benefit derived from lower lending rates has been all but offset by the inflationary pressure placed on prices.

Rarely is it mentioned that housing affordability and the cost of servicing a mortgage are two separate entities.

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

To take out a 25 year mortgage requires the expectation of secure employment in a terrain where frequent job changes or part time work are becoming a norm.

They may influence house prices through a cycle, but they do not take away the fact that home prices now – even with lower lending rates – require longer terms to pay down, with the interest over the duration of that period adding considerably to the capital cost.

In fact I couldn’t put it any better than current governor of the Bank of England – Mark Carney, when he warns;

“Think about the mortgage you are taking on, the debts you are taking on…You are taking at least a 25-year mortgage, maybe a 30-year mortgage.  Are you going to be able to service that mortgage five years from now, 10 years from now, if interest rates are higher? Or are you counting, even subconsciously, on the price of your house keeping going up and if something happens an ability to sell it quickly and not facing the consequences of not being able to pay?”

Carney’s cautionary words pre-empt the Bank of England’s decision to scale back its inflationary ‘Funding for Lending’ scheme amidst fears of a rapid escalation of house prices in the south-eastern regions of the country.

From next year Funding for Lending will only be available for business loans -not mortgages – and if the banking sector’s concerned about signs of frothiness in an industry in which it’s heavily invested, so should we also be.

The BoE governor is not alone. Central banks in Sweden, Hong Kong, Norway, New Zealand, Canada and Switzerland (to name but a few) have all adopted macro prudential measures to buffer against the associated risks of a boom/bust investor lead recovery in a post GFC environment – highlighting the importance of keeping lending standards robust – all, that is,  except Australia.

Having weathered the impact of the GFC a little more effectively than others – the RBA seem to think we live in some ‘magic faraway tree,’ effectively doing little more than wagging a cautionary finger to a sector which, for the duration of the year, have outstripped owner-occupier lending with well over a third of all new loans on ‘interest only’ terms and roughly the same proportion with LVRs of over 80 per cent.

In other words, there are still over a third of all loans in which the principal is not being reduced – with 37.3% lent on these terms for the September quarter alone.

In NSW, investment lending is at record highs, making up over 50% of the market, and although many use the well worn argument that the unwanted boom is predominant ‘only in Sydney’ – let’s not forget, Sydney is not some nether land off the coast of Tasmania, what happens in our biggest capital with the largest and most diverse economy in Australia, inevitably impacts us all.

Historically, this sector is more sensitive to interest rate changes with a tendency to wax and wain pro cyclically with market movements, exaggerating both gains and falls.  A housing recovery built on the back of small mum and dad investors pouring their money predominantly into negatively geared established dwellings – especially considering our current levels of private debt to income ratios – is not ideal for the long term stability of our housing market, or house prices.

The common Aussie term ‘spruiking’ – which APRA warns against in the self managed super sector, is not only a contributing aspect of what inspires our culture to see property as the undiversified road map for building wealth for retirement – it is also part and parcel of what has kept our property prices high by both local, and international standards.  Yet the risks associated with spruiking in SMSFs is simply the tip of a much larger iceberg.

Having worked in many aspects of the housing industry, I have seen first hand the type of material that’s presented at seminars not just from those who receive under the table commissions from developers, but also from advocates working as independent advisors for either the seller or buyer.

It really isn’t unusual to see slides presented at seminars with straight lines charting the difference between investing in properties that supposedly “grow” at steady 5% per annum, compared to those that grow at 10%, using historical median data as ‘evidence’ that future returns can replicate those achieved in the past, without any distinction of how such data is correlated or the difference between individual “house prices” and “median values.”

This information borders on financial advice and comes with no mention of risk or the type of rigorous analysis, which you would reasonably expect when choosing to invest in a single asset.

Another widely used industry favourite is the statement;

“FACT: fewer than 5% of properties are investment grade”

A myth if ever there was one.  Perhaps the well-known companies that use this as an advertising tool, would like to point to the person who researched every property in Australia to correlate such a statistic? Maybe we could also ask for a comprehensive definition of what ‘investment grade’ really is – because I guarantee there would be no shortage of differing opinions from industry ‘experts.’

This endless promotion of residential property, with rows of investment magazines lining newsagency shelves, promoting subjective ‘hotspots,’ or as I pointed out a few weeks ago, agencies cold calling households, and sending ‘advisors’ round to ‘educate’ and encourage inexperienced investors to negatively gear against their principal place of residence, is toxic.

Meanwhile, the RBA continue to sit on their hands, not wanting to pull a regulatory lever, instead warning investors to employ caution, hoping they will fall into line like a bunch of good school kids. However, whilst macro prudential tools may assist in ensuring banking lending standards remain robust – can they have any long-term sustainable or lasting impact on property prices?

In a recent research paper by BIS (Bank for International Settlements) entitled “can non-interest rate policies stabilise housing markets?” – evidence was gathered from 57 countries spanning more than three decades, investigating the effectiveness of nine non-interest rate policy and macro prudential tools on restraining credit growth and house prices.

The analysis used a new dataset going as far back as 1980, making it the most comprehensive study to date in terms of both scope and time span.

The paper concluded that whilst reductions in the maximum LTV (loan to value) ratio can restrain demand, its effects can be partially or wholly offset by a rising market enabling the investor to borrow more, therefore, changes in the maximum DSTI (debt service to income) ratio were assessed to be more substantial.

But importantly;

Only tax changes affecting the cost of buying a house, which bear directly on the user cost, have any measurable effect on prices” and,

None of the policies designed to affect either the supply of or the demand for credit has a discernible impact on house prices.”

The study puts this down to the ‘can buys’ still outnumbering the growing pool of credit constrained ‘can’t buys’ – stressing that the importance of housing supply was not explicitly considered. Therefore if we want to lower house prices or put in place policies to aid affordability, we need to look outside the limited powers of the RBA alone

As has been proven time and time again, intermittently stoking at the bottom end of the market with FHB grants and incentives does little more than provide a short term ‘happy pill’ for vendors, as the price multiplier effect ripples across the rest of the housing terrain, stimulating both an inflationary and volatile environment

Instead, we need to focus on the real problem in Australia – and it’s not property prices, it’s land prices – as economist Leith Van Onselen effectively points out when he analyses the difference between commercial and rural land compared to residential land values, and building costs.

“Whilst commercial and rural prices have remained relatively stable over the last 24 years relative to GDP, residential prices have skyrocketed…”

In other words, the cost of residential fringe land, which without constraint, should be close to its ‘raw’ value, is not cheap at all – and it’s all down to ineffective urban planning policy.

As I (and others) have pointed out previously, even within a wide expansive boundary as mooted in Melbourne’s new urban growth strategy, the government limits land use until they have gone through a lengthy process of mapping out areas for infrastructure known as a ‘Precinct Structure Plan’ – it is a slow laborious process and as soon as you restrict the supply of anything, scarcity inevitably inflates values.

Larger developers are not slow to purchase swathes of acreage prior to rezoning, and then once ‘Psp’s’ have been finalised, drip feed it onto the market. Not only do Government bodies have little understanding of how released plots respond to consumer demand, they have no policy in place to deter the practice. It’s therefore a failure.

Furthermore, facilitation of infrastructure is currently financed via hefty development overlays, which are passed onto the buyer rather than initiatives such as bond financing, where residents pay back proportionally over a lengthy period of time, as was the case historically.

We must remove these barriers with effective policy and let land prices revert back to normal levels to reflect a ‘real price’ closer to commercial values.

Without doing so, we can’t gain a true indicator of the trade-off buyers are prepared to make between price and distance. Currently, the average price of a newly built house and land package is around $400,000, this is not serviceable on the single median wage, and therefore can hardly be deemed affordable.

Get the land supply – price – and infrastructure equation right, and I suspect there would be no lack of demand from genuine aspiring homebuyers.  Only when this is done, can we have a truly transparent debate on first homebuyers wiliness to ‘spread over the land.’

Catherine Cashmore

Empty words as FHBs sold out on housing policy…

Since I started writing about housing policy and citing the growing concerns many are having with the rising price of accommodation, it’s been somewhat heartening to see a greater array of individuals acknowledge an undeniable widening gap between existing owners, and a growing pool of ‘wannabe” renters.

Most recently, ALP member for McMahon in New South Wales, Chris Bowen, was reported saying “”I can see the difficulties for young and first home buyers of getting into the market,” citing an ‘affordability crisis’ to be a“serious national issue”.

Whilst many parents would recognise the struggle first homebuyers face and wish for an easier path to enable their children, to gain a foothold into what’s too commonly termed the ‘property ladder’ – as if it’s something to be conquered – emphatic remarks such as those offered above are easy to make when decision-making is out of party hands.

Yet, it was only a few months ago, when challenged over affordability on Q&A, and lacking any real policy initiative going into the federal election, that Chris Bowen remarked:

“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”

No one would doubt keeping unemployment numbers low is an important component to a steady housing terrain – however, 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.

On the same program, 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.”

When making these comments, it’s unclear whether Joe Hockey had prior awareness of the Coalition’s plan to abolish the National Housing Supply Council, which was established specifically to identify gaps between housing supply and demand.

Apparently, the council’s activities are ‘no longer needed’ and will be ‘absorbed’ into other departments which aren’t entirely transparent, as Scott Ludlum found when questioning as such. Whatever the reason, it’s clear the current government does not hold supply policy high on the priority list.

As it is, saving hard on an average wage is no longer a guaranteed ticket into the breastfed dream of home ownership – especially if you live anywhere close to Sydney.

Martin North Principal of Digital Finance Analytics demonstrated this on a recent blog entitled “The Truth about House Price and Income Growth” charting house prices compared to average disposable income across the NSW market back to 2002.

ScreenHunter_509 Dec. 03 07.20

Whilst the higher quartile’s income has kept pace with house price inflation, the other quartiles have only seen their wage grow marginally, his study clearly demonstrates that prices are now outpacing earnings for the larger proportion of residents and therefore effective solutions need to be found.

Of course, each state faces its own challenges, and some are fairing better than others. But presently first homebuyers are clashing budgets with an equal to larger proportion of investors and downsizers and therefore targeting similar stock against those who have an existing equity stream to tap into.

Unfortunately, aside from some tinkering around the edges of housing policy with schemes such as the NRAS, which quickly became over subscribed and jumped upon by SMSF spruikers, it remains a reality that neither political party has yet seen past burdening new 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.’

And Australia faces challenges ahead – with a falling participation rate due to an aging population, fewer full-time positions coupled with a rise in part-time work inflating the ‘underemployment’ figures – job creation is not keeping pace with increases in our working age population.

This was outlined in the freshly released Productivity Commission paper entitled “An Ageing Australia: Preparing for the Future” which projected:

“Australia would have four million more people aged 75 years or older by 2060, with 25 centenarians for every 100 newborns, compared with one centenarian for every newborn in 2012.”

Not only will aging Australian’s have to work to the age of 70, to bridge a shortfall in savings, but the report suggested retirement should be funded in part through a house value ‘equity release scheme,’ claiming:

“House prices have risen over time in real terms, a trend that is likely to continue. Against this backdrop, even under conservative assumption allowing households aged over 65 years to easily access their home equity to help fund health and aged care costs could have a significant impact on reducing fiscal gaps”.

However, under such schemes, not only do Governments have a vested interest in keeping house prices high and rising, they are pinned to the necessity of such to fund future budgets.

Balancing an economy for an aging demographic is not unique to Australia. However, if house prices weren’t as burdensome, requiring an increasing proportion of savings just to enter ownership, not to mention the longer mortgage terms needed to pay down the loan, it would be possible to invest a greater proportion of the household budget into areas of productivity and small business development, as well as channeling savings elsewhere for retirement without the need to use the principle place of residence as a sole equity fund.

In this respect, Australia differs little from its closest Neighbour, New Zealand, where the costs of rising accommodation also bites a good way into a household’s budget for new buyers.

In an article in the New Zealand Herald concentrating on an increasing difficulty accessing ownership following a sensible requirement on lenders by the RBNZ to maintain an 80% loan to value ratio, a young couple were highlighted as a somewhat typical case study.

Putting aside the additional ‘useful’ tips for saving the $90,000 deposit needed for their $450,000 purchase, such as ‘take a packed lunch to work’, it seems the only way this couple were able to purchase adequate accommodation in the Auckland locality was to tap into the ‘bank’ of their respective parents, who borrowed against the accumulated equity in their own home to shore up their children’s deposit.

The couple’s take home pay is $6000 per month, therefore a weighty 50% will go toward mortgage repayments – yet the price of their accommodation is not out of step with what we expect our own duel income first timers to pay for a modest sized home which will provide adequate facility for more than 2 or 3 years.

New Zealand resident and Co-author of the Annual Demographia International Housing Affordability Survey –Hugh Pavletich – makes some sensible comments in relation to this:

“Within normal housing markets with properly functioning Local Governments that have not lost control of their costs, young Jamie Clark and Jenna Close on their household income of $70,000, should be able to buy a new home for about $210,000 with a sensible mortgage load of $175,000 requiring a deposit of about just $35,000.”

Pavletich’s comments are endorsed by Australian Senator – elect Bob Day who in reply to the comment above stated:

“For more than 100 years the average New Zealand family was able to buy its first home on one wage. As you have frequently reported, the median house price was around three times the median income allowing young homebuyers easy entry into the housing market.

As discussed in your report, the median house price is now, in real terms i.e. relative to income, up to nine times what it was between 1900 and 2000…a family will fork out approximately $500,000 more on mortgage payments than they would have had house prices remained at three times the median income.”

The demographica survey rates 337 different housing markets using a “Median Multiple” (the median house price divided by gross annual median household income) to assess affordability. The methodology is a measure recommended by the United Nations and World Bank Urban Indicators Programs and employed by Harvard University’s Joint Centre for Housing – to name but a few.

An affordable market is therefore deemed to be one with a median multiple of 3.0 or less, and whilst it’s never easy to draw an exact correlation between the complexities of international policies compared to our own, the report does provide a basis for research into precisely how other markets with rising populations and relatively healthy economies, manage to maintain their affordable nature.

Supply

The reports primary focus is on supply – removing barriers such as urban boundaries and tax overlays, and portrays the model employed in Texas, where aside from environmental compliance there are no zoning restrictions outside the city outskirts, and planners see themselves as regulators rather than interested parties in town design.

Texas is also a market, which has successfully financed infrastructure by electing local residents onto boards and providing them with access to tax free bonds, which are subsequently allocated for the provision of essential amenities.

Property rights in Texas are clearly strong in nature with limited regulation, covering little more than the land itself – therefore, housing affordability isn’t a burning concern for Texans, and judging by the number ofAmerican’s moving there, the market is an attractive one.

Tax

Secondly, as I highlighted last week, markets such as Pittsburgh in the USA, which has a median multiple below 3.0, is an example where land value tax has been successfully employed.

When land value tax is implemented – with the burden taken of buildings and their improvements ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Speculation and strong tenancy laws

Another commonality shared amongst ‘affordable’ markets is the lack of speculation that inspires the ‘get in quick’ feeling for aspiring owners. Germany is one such example where until fairly recent times; real house prices had remained stable since at least the 1970s.

Home ownership in Germany is not embedded in their culture. And as I pointed out a few weeks ago, strong tenancy laws along with liberal supply policies ensures when time does come to purchase, there is plentiful option to do so without breaking the budget.

Australia?

Whether we will ever achieve the significant reform needed to turn Australia’s housing market into an affordable one is debatable. However, 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 to date been fairly meaningless and unsatisfactory open government debates on housing policy.

In the end, it will be up to the growing generation of struggling first timers and priced-out renters to vote for the brave advocates who enter politics with what are currently deemed unpalatable plans for true and meaningful reform.

Property Tax and Housing Affordability

 

Property Taxation and Housing affordability.

There’s been a lot of debate around property taxation in Australia – significantly negative gearing, which allows an investor to use the short fall between interest repayments and other relevant expenditure, to lower their income tax

The policy promotes speculative gain meaning the strategy is only profitable if the acquisition rises in value rather than holding or falling – therefore, in Australia, investor preference is slanted toward the established sector  – the sector that attracts robust demand from all demographics and as such, in premium locations, has historically gained the greatest windfall from capital gains.

Aside from the impact this creates in terms of affordability – pushing up the price of second-hand stock, burdening new buyers with the need to raise a higher and higher deposit just to enter ownership.  It also negatively affects the the new home market, which traditionally struggles to attract consistent activity outside of targeted first homebuyer incentives– albeit, the headwinds resulting from planning constraints and supply side policy should also not be dismissed.

Additionally, Capital Gains Tax and stamp duty have also received much debate. Both are transaction taxes, and therefore have a tendency to stagnate activity, acting as a deterrent to either buying and selling.

Stamp duty as modelled by economist Andrew Leigh, is shown to produce a meaningful impact on housing turnover, leading to a potential mismatch between property size and household type – a deterrent to downsizing and therefore selling

Additionally, it burdens first time buyers by increasing the amount they need to save in order to enter the market, and frequent changes of employment concurrent with a modern day lifestyle, are hampered as owners, unwilling to move any meaningful distance outside their local neighbourhood, search for work in local areas alone.

But, outside of academia and intermittent articles, there is scant debate in Australian mainstream media regarding land value tax and it’s practical impact.

The theory is taken to its extreme, and best advocated by American political economist and author Henry George who wrote his publication ‘Progress and Poverty’ 1879.- an enlightened and impassioned read – and subsequently inspired the economic philosophy that came to be known as ‘Georgism.’

The ideals of Henry George reside in the concept that land is in fixed supply, therefore we can’t all benefit from economic advantage gained from ‘ownership’ of the ‘best’ sites available without effective taxation of the resource.

George advocated a single tax on the unimproved value of land to replace all other taxes – something that would be unlikely to hold water in current political circles, however his ideals won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman and other influential capitalists such as Winston Churchill, who gave a powerful speech on land monopoly stressing;

“Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.”

In essence, raising the percentage of tax that falls on the unimproved value of land has few distortionary or adverse affects.  It creates a steady source of revenue whilst the landowner can make their own assessment regarding the timing and type of property they wish to construct in order to make profit without being penalised for doing so.

However when the larger percentage of tax payable is assessed against the value of buildings and their improvements – through renovation, extension or higher density development for example – not only can those costs be transferred to a tenant, there is less motivation to make effective use of the site – having a flow on effect which can not only exacerbate urban ‘sprawl’, but also increase the propensity to ‘land bank.’

The Henry tax Review commissioned by the Government under Kevin Rudd in 2008 concluded that “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases” proposing that stamp duty (which is an inconsistent and unequitable source of revenue) be replaced by a broad based land tax, levied on a per-square-metre and per land holding basis, rather than retaining present land tax arrangements.

The Australian Housing and Urban Research Group attempted to mimic the proposed changes using their AHURI-3M micro-simulation model in a report entitled The spatial and distributional impacts of the Henry Review recommendations on stamp duty and land tax

And whilst it’s difficult to qualify how purchasers may factor an abolition of stamp duty into their price analysis, perhaps adding the additional saving into their borrowing capacity, and therefore not lowering prices enough to initially assist first homebuyers.  It does demonstrate how over the longer-term falls in house prices have the potential to exceed the value of land tax payments, assisting both owner-occupier and rental tenant as the effects flow through

Additionally, increasing the tax base would provide developers with an incentive to speed up the process and utilise their holding for more effective purposes.

And importantly for Australia, it can provide a reliable provision of revenue to channel into the development of much-needed infrastructure.

The rational for this is coined in the old real estate term ‘location location location.’  Everyone understands that in areas where amenities are plentiful – containing good schools, roads, public transport, bustling shopping strips, parks, theatres, bars, street cafes and so forth – increases demand and therefore land values, invoking a vibrant sense of community which attracts business and benefits the economy.

The idea behind spruiking a ‘hotspot’ – such a common industry obsession – is based on purchasing in an area of limited supply, on the cusp of an infrastructure boom, such as the provision of a new road or train line for example, enabling existing landowners to reap a windfall from capital gains and rental demand for little more effort than the advantage of getting in early and holding tight whilst tax payer dollars across the spectrum fund the work

Should a higher LVT be implemented, the cost and maintenance of community facilities could in part, be captured from the wealth effect advantaging current owners, compensating over time for the initial outlay.  Imagine the advantage this would offer residents in fringe locations who sit and wait for the failed ‘promises’ offered, when they migrated to the outer suburbs initially

Take New York for example – between the years 1921 and 1931 under Governor Al Smith, New York financed what is arguably the world’s best mass transit system, colleges, parks, libraries, schools and social services shifting taxes off buildings and onto land values and channelling those dollars effectively

The policy influenced by Henry George ended soon after Al Smith’s administration, and eventually lead to todays landscape – a city built on a series of islands, with limited room to build ‘out’ facing a chronic affordable housing shortage with the population projected to reach 9.1 million by 2030

More than a third of New Yorkers spend half their paycheque on rent alone yet like London, there is little motivation for developers to build housing to accommodate low-wage workers concentrating instead on the luxury end of market, broadening the gap between rich and poor as land values rise and those priced out, find little option but to re-locate.

New York’s Central Park is the highest generator of real estate wealth.  The most expensive homes in the world surround the park with apartments selling in excess of $20 Million, and newer developments marketed in excess of $100+ million.

Like London it’s a pure speculators paradise – in the ten-year period to 2007, values increased by 73% – owners sit on a pot of growing Gold and there’s little to indicate America’s richest are about to bail out of their New York ‘addiction’ with an expansive list of ‘A’ class celebrities, high net worth individuals, and foreign magnates, owning apartments in the locality.

New Mayor-elect Bill de Blasio who won his seat, based on a promise to narrow the widening inequality gap – preserve 200,000 low and middle income units, and ensure 50,000 affordable homes are constructed over the next decade, will struggle to subsidize plans whist facing a deficit reputed to be as much as $2 billion in the next fiscal year.

Yet economist Michael Hudson has recently assessed land values in New York City alone to exceed that of all of the plant and equipment in the entire country, combined

Currently more than 30 countries around the world have implemented land value taxation – including Australia – with varying degrees of success not only based on the percentage split between land and property, but how those funds are channelled back into the community, and the quality of land assessments in regularly updating and estimating value.

Pennsylvania is one such state in the USA to use a system which taxes land at a greater rate than improvements on property – I think I’m correct in saying nineteen cities in Pennsylvania use land value tax with Altoona being the first municipality in the country to rely on land value tax alone.

Reportedly, 85% of homeowners pay less with the policy than they do with the traditional flat-rate approach. When Mayor of Washington county Anthony Spossey who also served as Treasurer from 2002 to 2006, and under his watch enacted an LVT was interviewed on the changes in 2007, he commented;

“LVT ..helps reduce taxes for our most vulnerable citizens. We have an aging

demographic, like the county, region and the state. Taxpayers everywhere are less able to keep up with taxes, and that hurts revenue. LVT helps us mitigate the impact both to them and the city. It’s a win/win..”

Until fairly recent times, another good example to cite is Pittsburgh. Early in the 1900s the state changed its tax system to fall greater on the unimproved value of land than its construction and improvements.

Pittsburgh’s economic history is a study in itself, and has not been without challenges.  For those wanting to research further, I strongly advocate some of the writings of Dan Sullivan – (former chair of the Libertarian Party of Allegheny County, (Pittsburgh) Pennsylvania) – who is an expert on the economic benefits of LVT and has written extensively on the subject.

Sullivan demonstrates that Pittsburgh not only enjoyed a construction boom whilst avoiding a real estate boom under a broad based LVT system, but also effectively weathered the great depression whilst maintaining affordable and steady land values along the way.

In comparing it to other states struggling to recover from the recent ‘sub-prime crisis’ he points out;

“In 2008, just after the housing bubble broke, Cleveland led the nation in mortgage foreclosures per capita while Pittsburgh’s foreclosure rate remained exceptionally low. Since then, the foreclosure rates in Las Vegas and many Californian cities, none of which collect significant real estate taxes, have passed Cleveland’s foreclosure rate. However, on September 15, 2010, The Pittsburgh Post-Gazette reported that while at the end of the second quarter of 2010, 21.5% of America’s single-family homes had underwater mortgages (the American term for negative equity), only 5.6% did in Pittsburgh. As a result Pittsburgh was top of a list of the ten markets with the lowest underwater mortgage figures.”

When land value tax is implemented – with the burden taken of buildings and their improvements, ensuring good quality assessments and sensible zoning laws – it not only assists affordability keeping land values stable, but also benefits local business through infrastructure funding, discourages urban sprawl, incites smart effective development of sites, reduces land banking, and as examples in the USA have demonstrated – assists in weathering the unwanted impacts of real estate booms and busts.

Despite the numerous examples across the world where a broad based land value tax has been deployed successfully, changing policy and bringing about reform is never easy and rarely without complication.

Additionally, the implications of a yearly tax on fixed ‘low-income’ retirees must be handled with care and understanding, as there are ways to buffer unwanted effects whilst changes are implemented.

Therefore, the process adopted in the ACT which is abolishing stamp duties over a slow transitional 20 year period to phase in higher taxation of land is not altogether unwise.

With any change to the tax system, the headwinds come convincing the public that it’s a good idea. In this respect balanced debate and conversation is necessary, as questions and concerns are brought to the fore.

The increased tax burden also falls on those who have significant influence across the political spectrum; therefore strong leadership to avoid lobbying from wealthy owners with vested interests is essential.

Albeit, as I said last week, we have a new and growing generation of enlightened voters who are well and truly fed up with battling high real estate prices, inflated rents, and care not whether it’s labelled as a ‘bubble’ – but certainly care about their future and that of their children.

Therefore – I do see a time when all the ‘chatter’ around affordability, will finally evolve into ‘real’ action – and a broad based LVT should form an important part of that debate.

Catherine Cashmore

Can lessons from German culture assist in changing the environment for Australia’s rental population….?

Can lessons from German culture assist in changing the environment for Australia’s rental population….?

Land.  Since history began, it has remained an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for.

Indeed, property rights are a foundational component to a capitalist economy, and under our current system of ownership government’s profit nicely from the advantage.

In Australia, revenue from rates and land accounted for $20 Billion in 2012 – hence why ‘stamp duty addiction’ and the consequential need to incentivise buyers to keep transaction figures high, is all-but a national obsession.

Housing and construction are a driving force behind our economy, and the banks are as ‘pinned’ in their reliance to the ever-expanding growth of our population’s desire to ‘borrow and buy,’ as everyone else is who has their hand in the pie.  And let’s face it, there are plenty of sticky fingers profiting from our national past time, spanning not just the ‘FIRE’ (finance, insurance and real estate) sector, but also its numerous retail, TV and ‘chat forum’ offshoots – often encountered in the land of social media

Following a pre-GFC global (‘borrowing’) shopping spree of cheap credit, Australia’s ‘too big to fail four’ have subsequently become the worlds most heavily exposed to residential real estate.

Therefore, economists such as Christopher Joye, have not been slow to point out the ‘potential’ dangers an acceleration in property prices may herald, if the recent boom in some of our most populated states, is not reigned in.

Leading fund manager James Gruber, (who writes an excellent weekly newsletter entitled “Asia Confidential”) most recently commented;

“…banks have an average leverage of 20x (equity/assets), it would take less than a 10% fall in residential property prices for equity in these banks to be wiped out….”  And the warnings continue.

Whilst you can argue whether to call a bubble or not, house prices in Australia, where most need to live if they wish to maintain good access to hospitals, schools, social amenities, and a healthy job market, are high by anyone’s standards, and certainly so on an international scale.

Comparative countries include the UK, New Zealand, Canada, Denmark, and the Netherlands, all of which experienced an unprecedented house price boom in the lead up to the GFC.

Like Australia, all suffer restrictive planning and zoning laws, which have subsequently placed stress on supply.

I pointed out last week, how the complexities of urban zoning by state governments who publicly advocate affordable housing initiatives, are doing quite the reverse.

Poor policy has ensured we have sparse facilities to meet the demands of those who choose to live in fringe suburbs. Therefore the price of commuting on over-crowded roads, frequently forgoes any benefit gained from paying a ‘marginally’ lower price for the privilege of more space in regional areas.

Additionally a CIE (Centre for International Economics) study, commissioned by the HIA two years ago, demonstrated the total tax expenditure on the land and price of a new home once rolled together, equates to 39% of the sale price. Therefore, aside from constipated supply side policy, expecting developers to deliver affordability as well as profit from their efforts is unduly burdened

The speculative culture that results from restrictive planning laws, coupled with tax incentives that benefit the home owner and investor above that of the ‘lowly’ renter (as is the case in the countries I cited above,) was clearly highlighted in the recent Grattan report entitled ‘Renovating Housing Policy.

Consequentially Australian investment in real estate is pinned to the cyclical nature of the oft termed ‘property clock,’ where valuations seem to forever trend ‘upwards,’ and ownership rates amongst younger generations struggle to maintain their historic ‘norm,’ in a post GFC macro environment where higher unemployment and slower wage growth is all but certain

The nicely manipulated tax incentivised environment promotes speculation into a limited pool of established stock, leading investors to compete against each other in a game not unlike ‘musical chairs,’ as they attempt to shore up funds for retirement.

Yet other countries have accepted a culture far more adapted to renting than owning, where lower demand for the purchase of property and better levels of affordability, coupled with stricter lending requirements, have protected them from the economic woes brought on by the domino effect of the USA sub-prime crisis.

Germany is one such relatively well-known example, and France isn’t much further behind

Whilst home values in Australia over the last 10-15 years have doubled (and in some cases and localities trebled,) property prices in Germany have struggled to track the rate of inflation.

Subsequently, the feeling of ‘buy now, or pay more later’ is not evident in their cultural mindset, with a little less than 50% of the population happy to accept a rental lifestyle.

It’s not always been as such.  In the 1990s generous tax benefits heavily favoured the investor, so much so, a complete renovation could be written off against a property owner’s tax bill.

This inevitably lead to speculation into rising values, resulting in a boom of high-density inner city development with little due diligence taken into the analysis of genuine demand from a home buyer market.

A glut of supply consequently occurred and the boom came to a painful end in the late 1990s.  Tax incentives were stripped away and the  ‘euphoria’ ceased – but the hard lessons were learnt, and Germans remain wary of booming real estate values, which to some extent has kept them insulated from manipulating a repeat scenario.

The subsequent Dot Com bust in the early 2000s added insult to injury as unemployment peaked and the country suffered through periods of recession.

However, a lengthy duration of stagnated home values in the lead up to the GFC, coupled with strong laws protecting tenants, and restrictions on high loan to value borrowing ratios, arguably created a normal ‘supply/demand’ environment, where home buyers looking to ‘settle’ were able to save and acquire accommodation outside an inflationary atmosphere, and renters did not suffer undue discrimination.

Minimum tenancies in Germany are long – often starting at 2 years, with most ‘unlimited’ – meaning a landlord cannot easily evict without good reason to do so (and then only through a court process.)

Rent increases are strictly regulated – at a minimum occurring only once every 12 months, with limits on the incremental rise over any given period. For example, as a general guideline, a maximum could be 20% over 3 years (although this varies across different municipalities.)

Reasons for eviction can include a landlord needing to use the premises to reside in, however the ‘need’ must be justified – and not simply because they would ‘like’ to do so (as in Australia.)

Properties must be presented in good condition – painted prior to each new tenant moving in, with renters often responsible for the provision of various fixtures and fittings, such as lights and window furnishings.

If the landlord wants to sell, they must provide proof that selling without a tenant would profit their cause more so than selling with.  Therefore due to the length and roll over of tenancies, rental stock is generally sold onto investors rather than owner-occupiers, with the renter protected from eviction.

Bonds equivalent to 3 months rent, are placed in interest bearing accounts, so renters don’t lose out on the rate they could expect to achieve if the cash was deposited in a normal savings account.

Long-term tenants are permitted to decorate accommodation and change the decor to suit their own tastes, promoting at least the feeling of ‘ownership’ over that of a temporary dwelling.

Property investors can expect a 7% yield, which at current borrowing rates is, particularly attractive to larger off shore equity firms and this sector is growing.

‘Publicly subsidised housing,’ or ‘housing promotion’– the terms generally used for social housing – is controlled by local government and refers to shelter provided below market rent for low-income families.  This type of accommodation represents around 5% of the national housing stock – although recent sales of a large percentages to off shore yield seeking investors by local government has lead advocates to warn of a shortage.

As for home-buyers, when Germans purchase accommodation it’s for an extended period of time – usually life – and in the absence of highly restrictive planning and zoning laws such as those experienced in Australia and the UK, many choose to self build – therefore adding, not diminishing from the housing supply.

According to the ‘National Association of House Builders’ in the UK, who have compared self-build rates across the EU, 60% of German housing stock is classified as such, and competition between small homebuilders high

When large tracts of farmland are identified for housing developments in Germany, the local municipality acquires the land, paying only a small sum of compensation to the landowner.

The blocks are then sub-divided and sold at an affordable level with priority given to local homebuyers, who then approach a builder of their choosing to construct their preferred accommodation.  Hence why the atmosphere is more competitive than our own, leaving larger developers no opportunity to ‘land bank.’

Building in both the city and regional areas faces fewer restrictions than Australia.  Developers are not burdened with lengthy periods during which holding costs accumulate whilst waiting for planning approval, and outside of a general ‘master plan;’ developers are free to commence construction upon demand

For those wanting to investigate this further, I recommend reading the writings of Mark Brinkley, author of the ‘House builder’s Bible’ who has a good grip on the comparative details.

Unlike in Australia, banks don’t court the buyer market – there are no property grants and few tax incentives.  Deposits are a minimum of 20%, and there’s a general, inbuilt, reluctance to borrow or even spend on credit.  Additionally, interest rates are fixed – thereby avoiding the inflationary tendances changes to a variable rate can evoke.

Whilst, the absence of restrictions on foreign investment and relatively stable economic atmosphere compared to the rest of the EU, has lead to recent and robust off-shore acquisition of residential real estate, producing a somewhat concerning rise in prices and rents in cities such as Munich, Hamburg, and Cologne – for the time being, the Germany market remains attractive to both home buyer, investor and renter.

Drawing comparisons between two countries and their ‘in-built’ cultures is complex and I’m not suggesting we copy the German system in its current form.

However there are attractive elements in the tenancy laws, which in light of a cultural switch toward renting over ownership in a younger generation who change jobs often, and require a longer period to save if they want to enter the market – tighter rental controls, longer tenancies, and restrictions on incremented rises in yields, are worthy of consideration.

The subject deserves deeper analysis, which should be immediately undertaken and funded by local authorities, especially in light of recent headlines showing a sharp rise in evictions due to financial circumstance.

Meanwhile, whilst we continue to exist in a speculative atmosphere with a tax environment that consistently marginalises ‘generation rent,’ instead rewarding a ‘gamble’ on rising valuations in established accommodation – improving affordability, especially in the absence of effective low priced supply, is highly improbable.

 

Catherine Cashmore

 

 

 

 

 

 

 

The complexities of urban zoning by State governments, who openly advocate affordable housing initiatives, yet in truth are doing quite the reverse.

The complexities of urban zoning by State governments, who openly advocate affordable housing initiatives, yet in truth are doing quite the reverse.

The debate about house prices rises or falling, and what is, or isn’t a good for the economy, continues to dominate headlines – and not just in Australia.

Indeed, the cost of accommodation in most developing nations, is often coupled with wide spread reports of a growing divide between those who entered ownership early enough to reap the financial rewards stemming from a substantive period of healthy capital gains, against a generation who are finding the challenge of funding vastly higher capital prices, is coupled with less than desirable choices resulting from poor supply side policies.

Yet the governance of housing supply is hamstrung firstly by the idea that everyone should stay centrally located, squeezed into an area parallel to existing transport networks, which although already over capacity, results in intensive development of high density, low grade, accommodation.

In part this is based on the faulty logic that a larger percentage of residents not only want to live in the city, but if located adjacent to tram and train routes, would ditch the car in preference of either for their daily commute to work.

Whilst my experience as buyer advocate bears evidence that the concept of being close to public transport, is desired by the vast majority of purchasers, various studies have dispelled the myth that increasing percentages are using the crowded networks for their daily commute.  Not to mention the difference between living ‘walking distance’ from public transport, or feeling the house rattle as the train or tram trundles past

In Melbourne – unless you work directly in the CBD – travelling by rail usually entails a second trip by either bus or taxi at the other end. And as around 81% of jobs are located outside this area, with most being scattered broadly across the wider metropolitan regions, road networks are still the quickest and therefore preferred option for the larger percentage of residents – (as evidenced in the study ‘Making Public Transport work in Melbourne,’ by Bob Birrell, Rose Yip and David McCloskey.)

This goes some way in resolving the misadvised notion that dense living can reduce pollution, rendering it ‘environmentally sustainable’ – with studies by organisations such “Sustainable Population Australia” showing;

“…that high-rise housing increases per-capita greenhouse gas emissions by up to 30% due to a total reliance on power switches and being unable to enjoy the natural cooling of shady trees and living sustainability. Department of Planning and Energy Australia study (NSW) and the ACF Consumption Atlas show high-rise buildings emit more greenhouse gases per dwelling and per person than smaller blocks of flats, townhouses or detached homes”

As for those living in outer suburban districts, any concept of fast public transport to attend a football match, a day at the races, or experience inner-city ‘night’ life, is a long gone fantasy.

Some of Melbourne’s non-existent train lines were initially ‘mooted’ as far back as the 1890’s – and following numerous feasibility reports which amount to millions of ‘arguably” wasted dollars, they’ve become no more than dotted lines in the Melways.

Obviously units offer a cheaper entry point into tightly constricted markets.  The price difference in median values between an apartment and house ranges from around 12 to 30% (dependant on area and size – RPData.)

However, In Melbourne, the challenge of keeping apartment prices low is complicated by new zoning regulations, rendering some neighbourhoods immune from dense development, whilst others have the green light.  This further limits the concentration of land where construction can occur, and escalates already inflated land values.

Additionally, to get planning and building approval for an apartment block is a costly venture, requiring 100% debt cover and often resulting in a period of years from concept to ‘lock up.’

The complexities include levies for funding of communal facilities (such as underground parking, street lighting and so forth), which contributes significantly to the cost of the product.

Getting council approval can involve a lengthy period to resolve protests from existing residents and local councils, who fear the social and economic impact on their neighbourhood culture and local environment, and all of the above adds to developer holding costs until the project is finalised.

To obtain the necessary funding, the larger percentage are marketed to overseas buyers using vastly inflated commissions, who face no restriction when purchasing ‘off the plan.’

They are constructed with a ‘squeeze as many as possible’ mindset, compromising natural light and storage space along the way, and providing the finished product at an affordable price point (below existing unit medians) is no easy task.

High owner corporation fees to fund the required security features, lighting in corridors, lifts, lifestyle amenities (such as a gym or roof top garden for example) equates to at least a few thousand a year. Rental guarantees are often marketed to promise a return not possible once the guarantee has expired. – And if the developer encounters financial difficulties during this period, there is no government legalisation backing up any promise of payment.

Hence the supply of high-density accommodation is mostly purchased by the investment sector who find it easier to obtain funding, than the first home buying demographic, yet it seems a significant proportion sit vacant for periods of time.

For example, Melbourne’s Southbank has a vacancy rate close to 8% (SQM) which also falls in line with data obtained from Prosper Australia’s speculative vacancy report, which analyses water usage to assess residential vacancies across the metropolitan region over a 12 month period – the methodology of which is explained in detail here.

The research shows 7.9% of accommodation in the suburb uses no water at all, and over 22% less than 50 litres per day (a statistic which may be influenced by some being serviced apartments.)

All of the above, works on the ‘assumption’ that most people like to live close to the city and whilst this may apply to residents in their early years, who delight in the hub and bub of an inner city lifestyle, including student renters who need to locate close to nearby university campuses, there isn’t much evidence that the rest of us are prepared to give up space, to live in the type of accommodation provided.

Indeed, the idea that demographically we’re becoming a nation of downsizers is somewhat mythological, but it doesn’t stop the flow of regular articles suggesting we’re all becoming a nation of ‘happy strata dwellers,’ with “families are increasingly flocking to high-rise apartments.”

Whilst there’s no doubt we’ll see an increasing shift to apartment living due to lack of feasible alternatives, there is no evidence to suggest this is desired by the vast majority of ‘home buyers.’

It’s been shown the elderly overwhelmingly downsize to medium density accommodation thereby avoiding high-rise developments altogether – younger generations in their 20s and 30s have a better propensity towards high density living ,and the proportion is increasing; however figures still only peak around 14% at the age of 27, and the trend across all age groups is marginal, with only 1 in 20 choosing this form of accommodation nationwide (as of the 2011 census.)

Obviously, most local home buyers prefer houses to apartments – and for the high-rise price tag of a two-bedroom flat, there’s far more bang for buck in established accommodation that doesn’t come with the additional risk of a view being built out, queues to exit the car park, and 150 immediate neighbours traversing through various stages of their housing ‘career.’

Extra supply for the buy to let market should not be diminished, and it’s not my intention to do so.  However, there’s a broader need to establish quality accommodation for a larger proportion of home buyers who will accept townhouse living if locating inner city, but reject high density developments. And contrary to popular belief, it is possible to accommodate an equal number of residents in medium density dwellings without building to the skies.

Movements such as Create Streets in the UK are at the forefront of pushing low rise initiatives, and Robert Dalziel – the London-based architect for Rational House, who visited nine cities around the world, including Mexico City, Shanghai and Berlin, has comprehensively examined how high-density can be made agreeable for a broad demographic of home buyers.  More information can be found in his book –commissioned and published the Royal Institute of British Architects: entitled A House in the City — Home Truths in Urban Architecture.

However, families require houses (not apartments) gardens, green areas and local schools. They need community facilities, a local doctor on hand, good public transport and nearby shopping centres – and they need it all at an affordable price point.

It’s probably for this reason, that the major part of Victoria’s growth has been evidenced in fringe localities such as Wyndham, Melton and Whittlesea. And one thing we’re not short on in Melbourne is land. Yet regulatory constraints in outer suburban localities cause their own complexities that increase land prices making the entry point for such developments effectively double what they should be.

As Alan Moran recently pointed out in the Herald Sun “Without government restrictions on (the) city edge, land … would cost under $100,000. Regulatory-driven scarcity adds $100,000 to $150,000 to costs which the new homeowner must bear.”

Even within a wide expansive boundary as mooted in Melbourne’s new urban growth strategy, the government limits land use until they have gone through a lengthy process of mapping out areas for infrastructure known as a ‘Precinct Structure Plan’ – and as soon as you restrict the supply of anything, scarcity inevitably inflates values.

Larger developers are not slow to purchase swathes of acreage prior to rezoning, and then once ‘Psp’s’ have been finalised, drip feed it onto the market.

Consequently, government bodies have little understanding how released plots respond to consumer demand or control over unnecessary land banking.

There’s little sense creating new suburbs without the necessary infrastructure. However, such facilitation is currently financed via hefty development overlays, which are passed onto the buyer rather than initiatives such as bond financing, where residents pay back proportionally over a lengthy period of time, thereby bypassing an upfront fee which is piled onto the capital cost of their initial purchase (the detail of which I’ll go into in a future column.)

Additionally, a broad based land value tax, as advocated in the Henry review, would recoup a percentage of the windfall developers advantage, as prices increase though urban zoning, providing further encouragement to bring the plots into effective use and provide further funding for essential amenities.

The subject deserves deeper analysis, but the above touches on some of the measures we’re unwontedly subject to, by State governments who ‘spruik’ how they’re bringing affordable housing onto the market, yet in truth are doing quite the reverse.

Catherine Cashmore