The Tale of One Auction – and its impact on the ‘Welfare State’

The Tale of One Auction – and its impact on the ‘Welfare State’

A few weeks ago, I attended an auction in a popular suburb of Melbourne’s inner east

The home was an attractive four-bedroom townhouse on roughly 260 square metres of land, and initially quoted at $700,000 ‘plus’ – very typical of the type of accommodation featured in the area.

As is commonly the case in Melbourne, the quote was ‘stepped up’ in the final week of the campaign to ‘$750,000 ‘plus’ – albeit, the listing agent informed me more than once he had $800,000 “covered” and a mere blink at recent comparable sales, indicated a price well in excess of $850,000, or even $900,000, considering the level of demand and lack of comparable listings being marketed.

This was confirmed during the auction, when a neighbour I’d casually interacted with, leaned over, and in little more than a whisper, told me “I know the vendor – she wants $1 Million” and considering the property didn’t reach its reserve until $900,000, I suspect she was correct.

With competition from nine bidders, the property sold in front of a crowd of 100 or so for $1,011,000, and the agent, delighted with the result, wasted no time swooping in on the ones who missed out, to share information of ‘similar’ listings currently for sale.

Needless to say, it’s a story that drives many Australian’s irate, with the focus inevitably aimed at the misleading way in which it was quoted – which is an issue I’ll explore further in another column. However, this isn’t what should drive our sense of injustice to kick into gear.

The Undeserving Poor..

Debate is currently rife in Australia surrounding the ‘relentless’ costs of our welfare system, with social services minister Kevin Andrews heralding it ‘unsustainable,’ whilst looking for ways the government can cut entitlements to the ‘undeserving’ poor.

The review has concentrated primarily on disability payments, and Newstart ‘job seekers’ allowance, which keeps the ‘income-less’ in relative poverty.

“Work is the best form of welfare!” was the statement Mr Andrews used, and considering the uptick in unemployment, with industries such as Ford, Alcoa, Qantas, SPC, Sensis, Telstra, Shell and Toyota, moving jobs and business off shore. A fall in the participation rate – due in part, to an asset rich, income poor retiring population – and a rise in part time and casual positions over that of full time, concerns are warranted.

In the 2013-14 Budget, the Government correctly stated that, “Australians value a fair society” and underlined its commitment to a tax system that provides a strong and stable funding stream for important public services such as “health, education and, Disability Care” whilst “rewarding innovation and productivity,” for economic growth.  And on an international scale, our tax-transfer system is perceived as ‘comparatively’ generous.

According to the OECD, Australia’s ‘Robin Hood’ economy redistributes more to the poorest 5% of the population than any other member country, whilst the much-criticised policies of ‘middle class welfare’ are seemingly the lowest.

We’re deemed to have the most “unique” and “target efficient” social security benefits in the OECD, apparently yielding “significant gains” to both the economy and society, and when compared to the USA which has the highest income inequality amongst the ‘rich’ nations by some significant degree, we look comparatively ‘healthy.’

Yet, despite its many reforms, and varying degrees of success, shaped in part by demographic changes (more women entering the labour force for example,) and a small reduction in high end salaries during the GFC – widening disparities between incomes have continued unabated since the mid 1990s, and as the labour market struggles, there’s nothing to suggest the trend will stop.

Mind the Gap..

There are all sorts of reasons to narrow the gap between the rich and poor, and prevent an ever-widening chasm – significantly, the way that income is invested into the economy and the roll over effect to society.

Income inequality and economic growth can only work hand in hand, when individuals are enabled to strive for greater heights from a foundation of equal opportunity – the basis of which is education.

As economist and inequality expert Andrew Leigh commented late last year;

“Education is the greatest force that we’ve developed, not only for boosting productivity, but also for making Australia more equal” ensuring “the circumstances in which you’re born don’t determine the circumstances in which you die.”

Yet our schooling system is becoming increasingly segregated. The correlation between poor performance and social disadvantage are stronger here than any other comparable western nation.  If our tax and transfer system were meant to offset this, you’d have to assess its been an abject failure.

Why?

Australia has enjoyed a period of economic prosperity, which over the last 23 years has been nothing short of remarkable.  According to Credit Suisse ‘Annual Global Wealth Report,’ we’re the “richest people in the world,” with a median wealth ‘each’ of US $219,500.

Over the past year alone, Australia added an estimated 21,000 millionaires to the population. Yet, contrary to what the textbook version of economic theory would have you believe – household savings, reaped from an economy surfing the wave of a commodity boom, have not flowed into business investment, or nurtured productivity and education standards in the young.

As noted in the Credit Suisse assessment, our ‘riches’ are “heavily skewed towards real assets” a manifestation of “high urban real estate prices” acquired and generated through the destructive cyclical impacts of a property market, which, as I emphasised last week, sees the gains from income growth and investment, flow directly back to the land.

Both homeowner and speculator..

Home ownership is seen as one of the great pillars of our collective culture.  It’s assessed to improve health and school performance in children, activate social engagement as well as reduce local crime.

However, the way we go about promoting ownership, is to nurture a system that teaches rising land values – outside of any productive activity such as renovation or effective utilisation of the resource – is due reward for having saved hard and got onto the ‘ladder’ in the first place.

Our tax system is skewed toward ownership, with policies, that according to last year’s Grattan report, provides potential benefits to homeowners worth $36 billion a year, or $6,100 on average per ‘household’ through items such as capital gains and pensioner eligibility test exemptions. Investors (or those choosing to rent and invest) reap $7 billion a year, or $4,500 on average ‘each,’ by way of negative gearing rules and the capital gains discount introduced in 1999. Whilst renters, one in four households, see no gain – unless their income is low enough to require welfare assistance.

In effect, we’re an economy that relies on ever-rising values of irreplaceable fixed assets, to fund the individual wealth of its nation – and this is only achievable if policies are in place to ensure values remain high and climbing, and debt levels ‘affordable.’

Capital growth..

Speculation and investment are two sides of the same coin. When we assess a good business model for example, we speculate that the productive activity that flows from that investment, will build on a growing base of demand, and through competition and diversity, go onto produce a profit.

Yet the ‘Capital Growth’ in land values does not occur by way of some abject force of nature. Everything that makes our cities ‘liveable’ comes from the collective ‘investment’ of our taxpayer dollars – which we ‘grudgingly’ pay in the first place, to provide the social amenities needed to form the base from which we can all progress.

This would include, community services such as, transport, parks, roads, trains, trams, medical facilities, and most importantly, schools.

Yet, it is also these facilities that produce the needed demand for real estate that pushes values upwards.  Not through the efforts of the individual homeowner, but the productive efforts of the taxpayer – renter, homeowner and investor alike.

Housing on its own is worth nothing without the infrastructure that surrounds it and rising land values are ‘reward’ for nothing other than unwontedly buying into a system that – under the current structure – promotes inequality and forces social polarisation.

Unlike our business model above, we can’t ‘make’ more land in a particular location to fulfil the demand produced from the facilities our tax system both funds and maintains.  Therefore effective utilisation of the resource is vital.

However, the speculative process alone, along with the added impact of a tax system that impedes turnover by way of stamp duty at one end, and capital gains at the other, simply feeds a process of hording.

This is because most advantage best from investment into housing through the process of “buy and hold” – leveraging the ‘equity’ to produce needed funds, rather than selling. A system that drives underutilisation and ‘land banking.’

But land is fixed in location; therefore we must always ‘hop’ over it to find the next predicted ‘hot spot’ to raise our families, until this too becomes out of reach through the process described above – like a cruel game of musical chairs.

Back to the beginning. 

Let’s go back to the case study I cited at the start of this article.  The reason the four-bedroom townhouse attracted such strong demand in the first place, is because it’s located in a top government school zone.

Only high-income earners can afford to live in this zone, and no doubt they feel – through their income tax contributions alone – they pay their fair share toward facilitating the opportunity for their children to obtain that higher education. As the OECD said, our tax and transfer system is high progressive – the “rich” pay more.  Or do they?

Allowing for stamp duty, the new owner who purchased the townhouse would have paid $1,066,605 yet despite two years of effectively ‘stagnant’ growth in 2011/2012, the median price in the suburb has escalated close to 60% from $850,000 in December 2009, to $1,355,000, therefore they probably assess it a ‘worthy’ investment.

As for those who arrived early in the process, to paraphrase what one homeowner relayed to me some time back – she has earned more from the ‘capital growth’ of her home over the past 10 years or so, than she has in earnings.

Outside of a ‘crash’ or the demise of the education facilities provided, there is nothing to suggest prices in this school zone will drop. From the tight zoning regulations alone, and rising population of immigrants and local buyers looking to advance their children’s education, the very ingredients to attract a consist source of buyer demand are set in place – and rents will rise accordingly.

The taxpayer continues to subsidise the school, whilst the gains are capitalised in rising land values, which flow directly to the individual homeowner not the school or community, keeping values high and placing further pressure on the public purse to fund additional services, whilst underfunded schools, in the over populated ‘fringe’ suburbs, start to produce an English style education ‘class divide.

Under such a system, we are not subsidising the ‘poor,’ we are ‘paying’ the wealthy.  Yet, it’s clear, if we’re to navigate the structural changes ahead and keep unemployment low, whilst at the same time, reduce the projected burden on the ‘welfare state,’ our economy is reliant on maintaining a highly skilled work force, and for this to occur, an elevated level of tertiary education and business investment is vital.

A better model of ‘Welfare..’

Notwithstanding, the correct way to fund local schools would be via broad based and effectively administered land value taxation, which in its purest form – as advocated by the Classical Economist, Henry George – would result in a single tax on the unimproved value of land to replace all other taxes, which hamper productivity – significantly income tax.

George’s ideas won favour amongst many, including the great economist and author of “Capitalism and Freedom” Milton Friedman as well as other influential figures including Winston Churchill, Adam Smith, and more recently, Chief economics commentator at the ‘Financial Times’ Martin Wolf, and author and economist Fred Harrison – aalthough, notwithstanding, a single tax would be unlikely to hold water in current political circles.

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.

Whilst arguments over school funding will likely continue, centred in the political battle over funding of the suggested Gonski reforms. Unless we narrow the gap in education, we’ll never narrow the broadening gap in income, and consequently, the growing burden on our welfare state.

Therefore – when times comes that the ‘chatter’ around affordability, finally evolves into ‘real’ action – a broad based LVT should form an important part of both the debate, and solution.

Catherine Cashmore

Regular journalist, blogger, advocate, policy thinker, and well know media commentator for all things property. www.catherinecashmore.com.au, @ccashmore_buyer.

 

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The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

The Question the Government must agree to, before the Senate Enquiry into Housing Affordability can commence.

As the deadline for the senate enquiry into housing affordability approaches, some notable submissions have thus far been made

  • Saul Eslake, One of Australia’s most respected chief economists, and previous member of the now disbanded ‘National Housing Supply Council,’ has submitted the address he gave last year at the 122nd Annual Henry George Commemorative Dinner, in which he eloquently outlines Australia’s “50 Years of Housing Failure.”  Eslake advocates the need to remove policies that stimulate demand, such as negative gearing, in favour of those that increase supply. ‘Rethinking’ infrastructure financing and removing stamp duty, in favour of a broad based tax system on the unimproved value of land, as was recommended in the 2009 Ken Henry tax review.

Any detail Eslake misses on the supply side, is dutifully covered by Senator Bob Day.

  • Senator for South Australia, a registered builder and founder of major construction companies, such as ‘Homestead Homes and Home Australia,’ Bob Day’s submission, is his May 2013 policy paper – ‘Home Truths Revisited,’ – in which he shares an intricate understanding of the history and complexities of supply side policy, which have seen land prices increase more than ‘tenfold,’ in comparison to the cost of building, which has seen ‘virtually no increase at all.’   Importantly, for my industry colleagues who ‘blog’ that price rises were simply down the increase in demand stimulants, (such as dual income households.) Senator Day notes, “while influential bodies like the Productivity Commission and the Reserve Bank focused their attention on demand drivers, like capital gains tax treatment, negative gearing, interest rates, readily accessible finance, first home buyers’ grants and high immigration rates” … the real culprit, the real source of the problem, was the refusal of state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet the demand.”
  • Other notable submissions come from ‘Grace Mutual Limited,’  – a not-for-profit entity who “designs investment mechanisms to attract wholesale funding into the social sector” – in particular -“the National Rental Affordability Scheme.”  GML outline the ‘unduly complex’ regulations that have disadvantaged investors, noting; “Large numbers of NRAS incentives (at least 4,000) were awarded for the construction of student housing,” yet “There appears little evidence that this has any positive impact on the middle to low-income families that were the target of the original policy.”
  • And the last two submissions to date (2/2/2014) come from “Home Loan Experts,” who want an abolishment of negative gearing, but predictably think that the first homebuyer grant should stay.  And an anonymous letter, with an overview of the points made by both Saul Eslake and Bob Day, noting as I did back in December 2013 that nothing has been done since the last Senate enquiry.

Rinse and Repeat

To emphasise – The 2008 Senate report, entitled “A good house is hard to find: Housing affordability in Australia”

  • Made the same points regarding Australia’s tax policies, such as capital gains tax and negative gearing, which impact affordability and market activity.
  • It made the same points regarding each states planning laws, overviewing the construction industry’s future skilled labour workforce, the impact of urban boundaries on land prices, and the funding of community infrastructure.
  • It made the same points regarding the need for a diverse range of accommodation suited to both young and old alike, advocating greater competition within the building industry.
  • It made the same points in relation to both the both the public and private sector, addressing tenancy laws, and renters rights.

It was both comprehensive and detailed in content, and yet – 5 years later – at every level – both state and federal government have failed.

Failed to provide a ready surplus of ‘cheap land.’

Failed to overhaul infrastructure funding.

Failed to boost a sluggish construction sector in relation to population growth.

Failed to reign in speculation.

Failed to overhaul a system that results in too few rental properties for low-income households. And;

Failed to reduce the need for social housing or raise standards in the public sector.

Instead – we’re left with a new record median house price, which sits close to $600,000 ($597,556 APM.) – Following the highest quarterly rise for 4 years – built on the back of a diminishing first home buyer sector, which is instead supported by a record number investors, benefitting from a pace of growth in Sydney, which all agree, is ‘unsustainable.’

As far as affordability is concerned, we’re simply sitting on a merry-go-round of repeated mistakes.

Housing affordability a Mystery – too complex?

This is not due to any lack of understanding on the Government’s part. There is no secret or mystery to housing affordability. The solutions are well understood.

  • They were discussed at length in the previous senate enquiry.
  • AHURI has repeatedly tacked both supply and tax  policy.
  • And this senate enquiry will do the same.

The recommendations fall in line with other countries and states that have successfully achieved a consistent correlation between gross median house price and income – and so to some degree of detail or other, share the following two points in common;

1) They have taxation system that discourages speculation, but encourages productivity. The most successful of which is well-administrated broad based land value taxation system, such as that adopted in various cities in the USA – like Pennsylvania for example – where the tax on the unimproved value of land is heavier than that of property –a process of which I explain in full here – or as in Texas, where property is taxed, yet income isn’t, reducing the level of speculative demand.

And;

2) They have created an environment in which liberal supply side policies ensure ‘fringe’ land is sold close to its agricultural value, ensuring zoning laws do not impede development, and there remains strong competition within in the construction sector.

Why we have failed.

Yet, the reason countries like Australia, the UK, certain states in the USA, for example, fail to successfully move away from the boom/bust cycle, which leaves us counting the minutes on the ‘property clock,’ until a major correction is experienced, – which ultimately offers little help to struggling home buyers, small business, or low income earners, due to consequential restrictions in lending.

Was summed up neatly in a 2007 parliamentary report entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary – in which it confidently stated;

“Improving housing affordability does not mean reducing the value of existing homes, which are usually the primary asset of any individual or family.”

It’s a comment that sits right up there along with ‘saving doesn’t mean spending less’ or ‘dieting doesn’t mean reducing calories.’

If only it were so…!

To create a sustainable and affordable housing market, in line with the majority of recommendations put forward in the senate enquiry, would inevitably have a dampening effect on existing house and land values, in particular sites which are banked for ‘idle’ speculation.

Fear over falling prices justified?

The fear is understandable when you consider residential real estate is Australia’s largest domestic asset class, with an estimated aggregate value of over $4 trillion, pinned to a banking sector which has the highest exposure to residential mortgages in the world, in a country in which most Australian’s are home owners.

However, please don’t fall into the trap – once again as many of my industry colleagues do – of thinking just because a large number of homeowners in Australia own their own properties debt free, it prevents a potential ‘crash’ in prices – because the level of commentary on this matter is really very low.

A huge portion of private debt for the appropriation of business and commerce is secured against residential real estate.

A lack of active buyers in the market – (which produces an atmosphere in which price falls are inevitable) – stagnates turnover, prevents those who need to ‘fund’ their retirement through an equity release from doing so. Prevents those that need to move state to find employment else where, from doing so. It locks people into their homes – unable to downsize or upsize – and the effects are felt across all demographics.

Businesses which run into financial trouble are unable to reach into their house ‘ATM” and secure additional funding, and as a result, industries close, lay offs are invoked, investment ceases – the list goes on.

Importantly, it does not prevent a major economic crisis.

It did not prevent it in Ireland, America, or other countries in Europe, which also had a large proportion of owners, who owned outright.

We are not immune from a major downturn – no market, which exhibits land cycles is – and be assured, when it does happen, it won’t matter whether the banking system is ‘wiped out’ or not (as suggested as another reason we cant ‘crash’) – the Government will rush to their assistance – leaving ordinary people to suffer their debt consequences alone. As has been demonstrated repeatedly on an international scale.

Rising house prices or a stable market?

An economy that relies on high and rising house prices is one that’s ultimately set to fail.  It’s a symptom of poor housing policy and can only supported over the longer term, by making debt ‘ever more affordable.’

Therefore the best protection from such, is political reform, which ensures stability across gross price to income ratios – and if managed proficiently in line with the two points outlined above;

  • It would assist productivity,
  • Boost the construction sector,
  • Aid infrastructure financing,
  • Keep prices accessible for new homeowners and business – which need to buy or rent land to compete with established players.
  • Ensure tenants are not subject to ever increasing yields.
  • Weather the unwanted impact of real estate ‘booms and busts.’
  • Protect vendors from plummeting property values during an economic crisis – (whenever that point in Australia’s future is) – and;
  • Reduce inequality between the asset rich and income poor.

Land speculators would not advantage from it – but ordinary taxpayers would love it.

What the Senate & Government must agree to allow, prior to commencing its enquiry.

Thankfully, we don’t need to have an initial debate with the senate, over whether the market is or isn’t affordable – as has been the case with various commentators across the mainstream media.

Instead, we need collaborative assurance from the government, that any outcome from yet another Senate enquiry, will allow land prices to reduce – the process of which would have an gradual roll-on effect across the established real estate sector

Once – and only once, we have an affirmative answer to that question – can we begin the debate over how this can be achieved – and once we do, it must ensure the following.

1)   That fringe land is immediately available for residential development, overriding existing urban boundaries and zoning requirements that render it otherwise, and ensure it remains close to its agricultural value.

2)   Increase competition within the construction sector, simplifying the planning process, and eliminating ‘upfront’ infrastructure costs.  Additionally, a review of the many ‘hidden taxes’ such as development overlays, application fees, stamp duties and so forth, that are charged through the planning and development process, must be reduced to ensure they are ‘fair and transparent’ as advocated by the HIA.

3)   The removal/phasing out of policies such as the first homebuyer grant and tax incentives, that reward speculation into the established sector, and rely on housing inflation to stimulate demand.

4)   Reopen the discussion to abolish stamp duty; moving instead toward a broad based land value taxation system. Following practices across the world where it has been deployed with success, and noting that the ACT is adopting such measures, over a slow transitional 20 year period. And;

5)   Ensure we build for homebuyers, not just investors – paying particular attention to the needs of an ageing population, for which downsizing into apartments is not the preferred, or readily adopted option.

The above recommendations would assist the rental sector, but additionally, the Government should work closely with organisations such as Shelter and the Tenants Union, to satisfy that the quality, provision and standard, of both rental and public housing, is improved and maintained, along with an overhaul of tenancy laws for long-term tenants.

Conclusion.

The details on how to achieve this will be overviewed in another column, however, if both state and federal government refuse to let land prices drop, acting reactively to affordability issues, rather than proactively. I suggest you use whatever vote you have wisely – ignoring both major parties – and instead, place it behind smaller players, who act in the best interests of community, and not their ‘back pockets.’

Catherine Cashmore

My prediction for 2014 – winds of change…

My prediction for 2014 – winds of change…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

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