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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

Australia is blinkered when it comes to property

Australia is blinkered when it comes to property

Australia has a completely blindsided view when it comes to property, and never more so than in those sectors that profit from it directly.

The fool hardly assumption that increasing values in the established arena, which outpace both wage growth and inflation over a period of years, is somehow ‘good for the economy,’ as buyers play a generational game of musical chairs for a limited number of second hand dwellings, gives little attention to the broader social and productive economic impact this mindset inspires, as rental affordability worsens, and construction fails to meet the effective rate of demand.

Whilst there is overwhelming advocacy for keeping basic essentials such as food prices low – crunching farmers profits with $1 dollar litres of milk, and shipping cheap materials from markets in Indonesia and china, to fuel a consumer passion for all things at marginal cost. We seem happy to let our established house prices inflate away on the back of unrestrained credit expansion by the “all too willing to lend” private banking sector. Devoid of strong policies to ensure there are feasible and affordable alternatives, for a younger generation of buyers who increasingly have to rely on ‘donations’ from family or friends to assist with a deposit, battle rising yields or harbour student debt, and find themselves part of the ballooning house price story as they compete at an investor dominated price point.

The latest housing finance data from the Australian Bureau of Statistics shows the value of investor finance commitments is currently 30.6 per cent higher than at the same time last year. As a proportion, first home buyers now account for a mere 8.8 per cent of the buying market. This is their lowest proportion of market activity since June 2004 – yet for investors it’s the highest.

As I discussed in my column last week, we have a trend of falling home ownership in Australia which Chief Economist Saul Eslake made note of in his speech at the 122nd annual Henry George commemorative dinner, is further pronounced when you look the  “through” the effects of our aging population.  In other words, an increasing proportion of homeowners are understandably in the older age groups.

And whilst the statistic cited above can be in part attributed to lifestyle factors (labour mobility, getting married later in life etc) thereby producing a downward shift in the measured rate of home ownership—but not in the lifetime rate of home ownership – you cannot take affordability out of the equation.

For example, the increase of cheap credit, deregulation, supply shortages, and duel income households that has over a period of decades, inflated the capital cost of the underlying asset in areas where most owner occupiers need to locate for work purposes, has ensured the level of Australia’s private household debt-to-income ratio remains stubbornly high at 147.3 percent.  And despite low lending rates assisting mortgage serviceability somewhat, this is offset by rising prices – increasing the total debt the buyer has to service, and the liability banks hold.

As Christopher Joye noted in his AFR column last week, relatively sharp increases in median values evidenced in particular in Sydney, coupled with our dependency on a long term low interest rates, is a point of concern.

History attests, when property prices visibly rise, increased confidence from both borrowers and lenders tends create a sense of ‘euphoria’ that the party will ‘forever continue.’ However, there should be a strong warning to purchasers about over stretching against a macro backdrop which presents a number of headwinds.

Not least, the August labour market report reflects ongoing weaknesses, with the largest contraction in monthly trend employment in more than a decade, a fourth consecutive fall in full-time positions, a rise in the unemployment rate, falling participation and a lift in the underutilisation rate to its highest level since February 2002. Therefore, you have to question how long the rally we’re currently seeing in the established sector can reasonably continue before things start to unwind?

Accordingly, APRA has released a report warning the banking sector not to let lending standards slip, noting;

“..almost 15 per cent of all approvals are now for borrowers with deposits of less than 10 per cent.” And; “It’s also noteworthy that a large proportion of the lending would appear to be investors on interest-only terms,” clearly demonstrating the dangerous speculative nature of our current buying market.

New Zealand regulators have already moved to place limits on loan-to-value ratios banks can hold on mortgages – aiming to restrict new loans to an LVR of no more than 80 per cent. However, inevitably the action will place a squeeze on first home buyers, rather than the speculative investment sector that have existing assets to leverage against.

Other areas of the globe are also suffering a similar conundrum. In Sweden, private debt levels have reached record highs and there’s talk of forcing households to start amortizing their mortgages, with Martin Andersson, director-general at the Swedish Financial Supervisory Authority commenting “If household debt accelerates, as we’ve seen before, well, then we must do something.”

This brings me briefly to issues of supply. When the question arises over how we can make housing more affordable, the argument tends to get little further than simply advocating the need for construction of a ‘lot more’ dwellings. However, there are a number of complexities that need to be addressed to ensure the supply built, meets the wants of those who ‘need’ it most.

The reversing decline in the number of individuals per household in census data, showing household size has increased from 2.4 people per dwelling to 2.66 in the five interim, is another cultural shift of which affordability plays its part.

This figure is used to calculate ‘underlying’ housing demand; therefore, even a small change of 0.01 per cent can result in a ‘needed’ reduction of almost 30,000 dwellings, so it’s important we assess the cause of the shift correctly when planning the supply of additional stock.

Indeed, it’s the figure the National Housing Supply Council grapples with yearly, as they try and equate ‘shortage’ of dwellings relative to the ‘underlying’ demand – currently estimated to be of the order of 228,000.

As an offside to this, it is also to be acknowledged we have a widespread under utilisation of our current housing stock – for example, at 44 per cent; the typical Aussie home still has three bedrooms, with the majority only occupied by only one or two residents.

In fact, only 14 per cent of lone-person households live in one-bedroom dwellings, and there’s been a big increase in the number of four-bedroom homes, which now make up almost a third of the housing stock.

I’ve argued before, that increasing supply per-se is not going to assist low-income households if it is not tailored specifically to their needs.  And to date, in a market where developers are pressured to provide 100 per cent debt security, all but guaranteeing they design and sell to an international arena, a proportion of which let the stock sit vacant for extended periods, rather than fulfil the needs of an Australian demographic, we’re not making effective headway. However, this problem is one with multiple layers.

For example, stamp duty stagnates existing housing supply as it imposes a direct transaction cost on top of property prices.  Yet reform to a land tax system as advocated in the Henry Tax Review, would over the long term discourage the hording and land banking of homes that often sit vacant for lengthy periods of time.

A study in this field was most recently taken by AHURI – the Australian Housing and Urban Research Institute – in their evidence review entitled “Why tax policy is housing policy.”

The paper researched the effects of replacing stamp duty with an annual land tax and showed that in doing so, it encouraged a more efficient utilisation of the amenity.  Additionally, the modelling also showed that falls in house prices would exceed the value of land tax payments “leading to more affordable housing for both owner-occupiers, and rental tenants.”

I recommend reading the paper, which answers many of the questions, such as how to transition from our current stamp duty system to a land tax based model.

Notwithstanding, if we could combine this reform with ideas of which economist Leith Van Onselen is at the forefront, when he suggests raising money through bond financing and recouping it from ratepayers over a period of 30 years – or similar initiatives such as those found in Houston Texas, in which a successful expansion of their city boarders is funded with policies such as ‘MUD’ – a ‘deductable’ Municipal Utility District tax – in which a panel of property owners sit on a government appointed board, to oversee utility and infrastructure distribution in the area. We would inevitably create a better mix of housing stock aptly suited to a range of demographics.

For example, most properties built on the fringe are Mac-mansion style ‘house and land’ packages, because it is perceived that families will only move ‘outwards’ if there is due compensation of a ‘shiny’ estate sized home to compensate for the relative commutable distance from city centres.

In these areas, lack of recreational recourses encourages most entertainment to take place within the constraints of the house – and this is what feeds a reputation of Australian’s desire for large dwellings.

However, with decentralisation and an increase of basic area amenity – units along with smaller subdivisions would be in demand, thereby providing a very attractive price point for first homebuyers and renters.

Obviously there is plenty more to discuss when it comes to policy reform – albeit, to sit back and do nothing aside from ‘keep interest rates low and job security high,’ as advocated by our current government In their pre election ‘housing affordability’ spiel – not only indicates a lack vision, coupled with a short term mindset, but ensures we continue to kick the can down the road, snowballing the problem for future generations to come.

As if to demonstrate the foolhardy nature of the oft-quoted phrase by Einstein “We cannot solve our problems with the same thinking we used when we created them.” it’s clear policy reforms to date, have done little to assist the makeup and vision of a country that champions a ‘fair go for all,’ and highly regards the famous speech ‘It’s Time’, which inspirationally points out;

“The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it” as words that have subsequently proven to be little more than fancy rhetoric.

Years of failed first home ownership schemes and tax policies that encourage speculation in the established arena, have done nothing to increase long term vacancy rates which consistently sit below 5 per cent – and In some established areas, less than 2 per cent.

The consequence of this has forced a social divide and exacerbates the very real reality that more Australians will reach retirement paying their mortgage or servicing high yields, with whatever superannuation they have used to fund the difference.

It’s time we campaigned for change.

Catherine Cashmore

Is Australia’s housing market ‘unaffordable?’

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

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

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

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

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

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

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

So where do we stand on issues of affordability?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As Eslake comments

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

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

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

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

Catherine Cashmore

Auctions – In the current atmosphere, what effect are they having on buyer psychology?

Auctions – In the current atmosphere, what effect are they having on buyer psychology?

There’s no denying that Melbourne is the ‘auction capital’ of Australia – at time of writing – year to date there have been over 18,291 auction sales, which according to REIV figures, is an increase of 13 per cent on this time last year.

As a proportion, auctions only account for around 20 per cent of total sales; the vast majority of transactions take place behind closed doors via private treaty negotiation.  However, for the bulk of buyers focused on sourcing properties in the middle, and particularity inner ring localities of Melbourne (followed by Sydney) – a large proportion of which are investors – ‘for sale by auction’ tends to be the preferred method of marketing, therefore, at some point, attendance on a Saturday for a game of ‘deepest pockets wins’ is all but inevitable.

As mentioned above, whilst auction transactions only capture a relatively small sample of sales, they can be a good indicator to the current ‘heat’ of consumer sentiment toward the purchase of residential real estate (particularly in the investment sector.) And in a country which has effectively hamstrung development ‘outwards’ with inelastic supply side levers, ensuring we’re all squashed in a doughnut like shape around the affluent capital city established localities – the concentration given over to the clearance rate each weekend is somewhat understandable – even if it does irk the larger proportion of agencies that work in outer suburban ‘non’ auction locations.

For an inexperienced buyer in a ‘hot’ speculative fuelled market, auctions can present a pit fall of dangers.  The typical four week campaign – three weekends of ‘opens’ with the auction taking place on the fourth – is designed to act as a stimulant, effectively putting a ‘end by’ date on the period of time they have to conduct any needed due diligence.

And as clearance rates rise (the curve of which prices typically follow) the chance of a listing attracting enough attention to sell ‘prior’ also increases – shortening the marketing period further still.

Added to this is the general confusion over auction price quotes. It seems silly to point out the obvious, but no buyer likes to play guessing games when it comes to putting a price on an advertised listing.

Everyone understands real estate is a negotiated asset, however, the verbal game playing that now surrounds a proportion of the sales industry is laughable.

Responses to a ‘price enquiry’ range from a paraphrase of “we won’t know until buyers have ‘told’ us” to a general comment such as “properties in the area are selling in the $400,000s and $500,000s” – effectively giving any said purchaser $200K bracket in which to ‘work it out.’

It’s part of the market insanity that surrounds our residential real estate sector. If we were operating in an ideal world, buyers would ignore price quotes altogether and do their own research to establish market value prior to spending hundreds on a pest and building inspections or solicitor fees chasing an unobtainable dream.

However, closely comparable sales data is not always readily available – computer-generated “estimates”, are, more often than not, hopelessly inaccurate. Suburb reports are equally unhelpful, and while median data will give an indication of the dollars the majority market is spending, it’s no help when evaluating individual property prices.

In Victoria published auction sales often result in “undisclosed” blank figures and private sales are just that – private. The street name will be listed, but the other relevant and essential data is missing.

It’s one reason I advocate a requirement for vendors to take responsibility for their own (typically) ‘vendor paid’ advertising campaigns, and ensure reserves – or ranges in which they’re prepared to negotiate – are published at the outset.

Whilst you can argue one way or another at the lunacy that often surrounds Australia’s addiction to all things real estate, we’re not talking about an ‘item’ on e-bay – we’re talking about the biggest financial transaction most make in a lifetime.

Hence why we need transparency in the real estate sector – information should be openly available to enable buyers to make informed decisions without the need to play ‘guessing games’ and risk poor financial decisions that can have a broader impact on the economic landscape.

According to RPData, Australia’s property market is worth an estimated $4.86 trillion, which is three and a half times the value of Australia’s stock market and combined superannuation funds.

Assessment by ‘Moody’s,’ shows Australian banks are ‘way ahead’ of global counterparts in their exposure to property – with two-thirds of their lending tied to the residential sector.

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And as we start to tick into what most assess to be a relative ‘boom’ of activity in various states – with auction rates once again approaching record highs, and analysts carefully assessing sharp price rises in the established sector – yet sitting a long way from a point at which the RBA can pull the traditional ‘rate rising’ lever to offset a dangerously overheated market – we remain in a precarious position.

To argue that this is in anyway ‘good news’ or to suggest as RBA board member John Edwards did last week in A WSJ interview that “we’re a long way from it being a problem,” – in an environment as Michael Matusik pointed out in his blog, is set against a construction sector currently on its knees – with first home buyers reducing significantly in key markets such as NSW in which they are down from 14.2 per cent in 2011, to a current 7.3 per cent, the ‘lowest’ share on record – (illustrating aptly the failure of initiatives such as the first home buyers grant) – would be a sharp disconnect from a country that also champions the motto of a ‘fair go’ for all.

No matter where you sit in the world’s ‘rat race’ we all have a core requirement for secure accommodation – a place of residence which is safe, clean, and warm enough to rest at night – it’s the compass that navigates the our wellbeing and performance both in and out of work, therefore, it’s no surprise that the health of our property market dominates conversations across all demographics and remains at the top of concern for voters.

As I said last week, whilst the current rally seems set to last into 2014, the prospect of higher rates coupled with higher unemployment will in my opinion, pull up any lengthy capital city market ‘boom’– however in the meantime, we’re in ‘overdrive’ and the sales industry is predictably doing everything in its nature to add fuel to the fire.

Agents are deriving auction campaigns that last as little as two or three weeks with comments from Sydney agents highlighting;

“There are so many buyers …we don’t need to wait four weeks to identify the likely buyers, two to three weeks would be plenty..”

Reports show homes selling 15-20 per cent above their reserve which is typically derived from a mix of recent comparable sales combined with current interest – and even allowing for emotion, gives way to ‘jaw dropping’ results as ‘war stories’ filter in from varying pockets within our capital city markets.

In this atmosphere, auction sales ignite the problem further.  Allowing for the odd exception, I’ve yet to meet a buyer who ‘likes’ bidding at auction – and for that matter, I’ve yet to meet a vendor who doesn’t dread their ‘day in the sun’ as it’s so often termed by sales agents, which in most instances for a purchaser, will result in a battle of sorts, with a group of people guaranteed to lose all sense of rationality if heated bidding happens to occur – which in the current atmosphere holds high probability.

And whilst in a downward market, I would fully agree with advocates such as Neil Jenman who campaign against auctions as a method of sale claiming “better results” can be achieved via ‘private negotiation’ – the opposite is the case when the market turns and we start to see mini rallies within certain pockets of the city.

When buyers see properties openly selling above their pre-conceived perception of ‘market value’ (something that generally doesn’t happen when the sale is conducted via negotiation) it provides very visible reality that the market’s ‘moving’ and the effects on the mindset act like a kind of contagion.

There’s no doubt a winning bidder will only ever be ‘one step’ above the under bidder – and in that sense, it could be argued the ‘highest’ price is never achieved – however having spent years working with buyers, I can confirm – without shadow of a doubt – that during an rapid moving auction, buyers spend far less time thinking about exceeding budget constraints than they do when, in a rational, ‘pre auction’ moment, they take time to discuss – usually with their partner – where to draw a sensible limit for the property in question.

And it’s rare to find an agent with the sharp negotiation skills to achieve similar results in private sale scenario.

There have been plenty of academic papers outlining why auctions can achieve significantly higher prices in competitive markets compared to other methods of sale.  The effects broadly fall under the title of a ‘pseudo-endowment effect.’

Without going into too much intricate detail, as buyers bid for a property, there is a ‘feeling’ of partial possession in those who take part.

If the bidding starts low – as it tends to at most auctions – the multiple bids and length of time needed to get the price to its ‘reserve’ creates momentum and in addition, fuels the emotional attachment and sense of ownership the participants gain towards the property.

The results of the many scientific experiments conducted on auction sales show a strong propensity for buyers to re-assess their pre-estimate of value ‘upwards’ which stimulates a ‘win or lose’ mind set, in which the main focus is to beat the competition, above and beyond simply purchasing a home.

To put it another way – when buyers bid at auction, they bid to ‘win’ and in the process, lose connection to the initial goal of achieving a purchase within a predetermined budgetary limit.

With a talented auctioneer doing all in his power to convince bidders to ‘buy their weekends back’ with ‘just one more shot’ – it doesn’t take much for an inexperienced buyer to stretch past his comfort level and ‘lose it.’

Smaller increments and repeated bidding can magnify these results.  Hence why you’ll often see buyer advocates attempt to ‘nip’ the momentum in the bud, with an initial high bid or by using what’s known as a ‘snip’ technique – coming in right at the end an giving the impression to already stretched buyers, that there’s ‘plenty more in the tank.’

And whilst it can be very successful in gaining the vendor an outstanding result – it has little advantage for a buyer, who can end up with a healthy dose of remorse once the initial fervour has worn off.

I attend at least four to six auctions on any said weekend and have witnessed the effect this method of sale has in both downward and upward ‘cycles.’ In Melbourne, it plays an active part in driving our boom and bust mentality.  And whilst you can argue on the advantages and disadvantages in comparison to other sales techniques, in the current environment, the bidding wars erupting in both Sydney and Melbourne, are doing a good job at pushing prices into unsustainable territory.

 

If you’re a buyer – be warned.

 

Catherine Cashmore

 

 

The very real crisis of ageing and gender homelessness – it affects us all.

The very real crisis of ageing and gender homelessness set to swamp all previous expectations, discussions and plans

When discussing issues of housing affordability, the conversation is often weighted toward our first home buyer demographic – principally those locked on the ‘ladder’ of rising rents. However, last week ABC Radio National’s ‘Background Briefing’ report focused on the ‘new face of homelessness’ – with a quarter of a million older Australians approaching retirement with little super, and no house to call their own – importantly – many only ‘a couple of rent payments away’ from homelessness.

I’ve commented previously on our aging headwind of retirees, who hold roughly half of Australia’s housing stock as their principal retirement fund, and the potential consequences resulting from any downturn in home values or dwindling activity from a first home buyer demographic, who are currently outbid by demand from a higher percentage of investors focused on the established sector.

However, as highlighted in the program – a growing demographic of older working Australians, are facing ‘dire financial straits’ as they reach retirement.

Some of the most venerable victims are women, who having ‘worked hard, and raised children,’ due to divorce or circumstance, are now finishing employment with less super than their male counterparts, (some with no more than $40,000 in a fund) and finding themselves once again as ‘tenants,’ paying more than 50 per cent of their income in rent.

Within the report, Ludo McFerran – from the University of New South Wales and national director of the Safe at Home, Safe at Work project stressed the urgency of the problem;

‘This problem of ageing and gender and homelessness is so big the reality is it will swamp all previous expectations or discussions or plans,’

Her comments are insightful, because as I’ve pointed out on many an occasion, the accommodation we’re currently building (which many argue is in undersupply) is neither affordable nor suitable for average single workers or elderly downsizers – being predominantly McMansions on the sparsely facilitated fringe locations, far away from our inner and middle suburban ‘job hubs’ or low grade over-priced apartments with high owners corporation fees, which offer little more than a roof and four walls.

It’s a sobering reality, because if you think the numbers are significant now – without immediate action, the story’s set to get worst.

The traditional model of an aging population who have in the past, purchased a house, enjoyed tax free capital gains, and when the children have left home, sold it onto the next generation, not only starts to break down as the dependency ratio (the proportion of workers to non workers) falls from peak – but with more demands on the tax payer dollar, coupled with a lower growth environment as we face the challenges of a tighter macro economy than previously experienced the trend indicates a reducing number of first home buyers who purchase later in life, marry later in life, start their family later in life, and significantly, tap into their housing equity to fund the rising cost of living, earlier in life.

The bias is a significant one, because parents often find themselves digging into their own retirement equity stream to assist their children onto what’s too often termed ‘the property ladder’ – as if it’s something to be conquered.

Importantly, for those who don’t partner and cannot harness the power of a duel income or do not have funds to draw upon from relatives – retiring whilst still renting, is a very real possibility.

The issues were also highlighted in last week’s AFR in which Simon Kelly – author of a CPA Australia study entitled ‘Household Savings and Retirement – where has all my super gone?’ makes comment;

“People approaching the age of 65 have considerably higher debt than in the past. Mortgage averages and other property loans have more than doubled since 2002 and credit card debt has increased 70 per cent.. Superannuation is clearly being used to reduce debt.” 

The report goes on to highlight how;

People approaching retirement age are using the equity in the family home as a source of funds to assist their children into homeownership…”

And considering we’re in the ‘second half’ run up to the Federal Election, it’s hard not to take further opportunity to highlight such concerns which have to date been ignored by our two major contenders – hence Peter Chittendon’s comments in Property Observer last week that the “elephant in the room” is “housing policy.”

Whilst our two major political contenders are busy focusing on a ‘stronger’ Australia – promoting ‘economic growth’ a ‘return to surplus’ all coupled with ‘reduced cost of living” – which as highlighted by St Vincent de Paul in their recent campaign for a ‘relative price index’, bears little relation to official CPI measures. By far and away the biggest financial cost most Australian’s face is that of accommodation.

As Australians for Affordable Housing correctly point out, – between 2003-04 and 2009-10 the amount households spent on housing has outpaced other expenses – increasing by 55 per cent. Therefore any policy debate with ‘cost of living’ on the agenda should have this top of list.

Needless to say, the first question on ABC’s ‘Q&A’ debate between Joe Hockey and Chris Bowen last week, was precisely this, as a young professional living in Western Sydney expressed her dismay at the now ‘near impossible dream’ of becoming a ‘home owner.’

As I’ve written previously – it’s an unfortunate reality that neither political party can see past burdening buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask the rising cost of accommodation under the false premise that they’re doing ‘something.’

As Chris Bowen commented “There (are) two big things that we can do to help with housing affordability. That’s keep unemployment as low as possible. Because you have got a job, that’s the best thing you can do to get into the housing market. And also to keep interest rates low and interest rates are as low as they’ve ever been in Australia”

However,  in answer to his first point – Australia faces challenges ahead – with a falling participation rate due in part to an aging population, fewer full time positions coupled with a rise in part time work inflating the ‘underemployment’ figures – it’s clear job creation is not keeping pace with increases in our working age population. Whilst moves are underway to improve the situation, the role of private debt is overlooked in favour of paying down government debt; hence consumers are weighted toward saving rather than spending money into the economy.

As for low interest rates, they have done little more than inflate established property prices and speculation on financial markets which is scant benefit to those facing rising yields, or paying an inflated cost to secure a property at the offset.

Joe Hockey’s comments took a similar stance – except he did touch on the issue of supply;

“..the fact is you’ve got to increase the supply. I mean it’s a market. There is plenty of demand and increasing demand but what are we going to do for supply? I have some plans on that which we’ll be talking about before the end of the election.”

However, releasing more land and building more supply is not the answer when the land is neither affordable, or the supply desirable enough to attract the surplus of buyers forced to live within commutable distance from essential facilities.  In this respect, any plans for new supply need to be specifically targeted to combat both issues – let’s hope this is the case.

It also doesn’t touch upon the difficulties developers have gaining funding without a large proportion of pre-sales – generally only possible to the foreign market – and I mentioned last week, due to cultural tendencies, a significant proportion of these apartments often remain empty once sold – which once again has an impact on measuring the true effectiveness of any increase in underlying supply.

With the rise of the internet and the ability of those searching for answers to delve a little deeper than they perhaps would have done before the world became a mirror of reflections, as every action and movement is recorded, posted and photographed in real time, and offered up for an immediate judgement on social media – it can only be hoped, that a majority, not minority, are taking opportunity to look past the frivolity of what I think most would agree, (whether by design or purpose) have been fairly meaningless debates – particularly if their searching for answers on housing policy.

Indeed, the home ownership dream – which resulted in prices ‘trebling’ between 1997 – 2007 in the UK – and performing a similar feat in Australia, was not built on the fundamentals so often advocated – that of a rising population’s demands for a ‘home’ – although of course, supply/demand constraints do a good job of exaggerating the figures when inelastic policies hamstring development.

Rather a great inflation in property prices was the direct result of the dramatic increase of mortgage debt built on the back of a housing market which had fast progressed into what Faisal Islam comments in his new book ‘The Default Line’a multi faceted investment vehicle financed through an unrestrained system of credit and deposit creation.”

As I said last week – in this respect, it’s not the health of the housing market that needs to be tacked, it’s the disease, hence why a growing number of influential economists are pushing for monetary reform – importantly, regaining control of the money supply and the dictates of where that supply is allocated, as a basic prerequisite for coming to grips with the banking and financial system.

Albeit, this aside – what cannot be argued is the conditions that took values to their 2010 peak following our golden decades of growth, will not be replicated as we enter a very different and challenging decade than previously experienced – therefore all LNP comments that start with ‘under the Howard era’ as evidence for their management of employment figures and surpluses, bear little relevance to our new reality.

As it stands, the environment in various capital city pockets has gone into overdrive and among others, AMP have now weighed into the debate commenting “Australian houses are 7 percent overvalued based on long- term trends” referencing how “Home prices rose last quarter at the fastest pace in more than three years, and sales of dwellings reached the highest since 2011 in June, government and industry data show.”

Whilst the current rally seems set to last into 2014, the prospect of higher rates coupled with higher unemployment, should temper the gains and therefore, I expect we’ll see shorter durations to the traditional boom and bust market cycle.

As Christopher Joye aptly commented in a recent AFR column “ride the housing and equities wave for as long as you can. But remember … You are not surfing a swell in Bali.”

Catherine Cashmore

The mother of all dwelling booms? A short term rally? A bubble or recovery?

The jury’s out on whether Australia is entering the ‘mother of all dwelling booms’ as Robert Gottliebsen took note to warn in Business Spectator last week.

And whilst the construction sector continues to fall short of expectation, the established housing market, most notably in Sydney although also reflected in other states – has moved.

’War stories’ are emerging from buying and selling agents of auctions attended where the prices have exceeded the reserve by 10-20 per cent.  In turn, vendors are reassessing their expectation of value based on neighbouring results – and with more talk of prospected drops to the cash rate, purchasers are shopping lenders to see how far their budget will stretch.

When prices start to rise – in some areas quite dramatically so – there is always heated debate over whether it’s a bubble.  The term itself is somewhat over used perhaps because of the image it invokes.

A bubble gives the impression the market is a flimsy airless balloon which – like a row of standing dominoes – will quite suddenly, irreversibly and dramatically ‘pop’ falling into an endless abyss.  For some commentators – the very fact that this hasn’t yet occurred in Australia is enough to demonstrate the theory incorrect. In other words, you can only define a true bubble whilst viewing the devastating aftermath.

However, a bubble or the recognition thereof does not have to fall into the definition posed above. They are not always easily deflated, and there are plenty of different particularities between the policies and lending requirements that have played into the house price ‘corrections’ other countries have already experienced post GFC, that differ from those we have in Australia.

Furthermore, in economies highly exposed to the residential sector, where central banks and governments have the ability to manipulate policy and the amount of cheap credit that flows into mortgage lending, it’s possible to ‘prop’ and temporarily prevent falling house prices that would otherwise occur in line with a challenging macro outlook.

In Australia this would include, rising unemployment, lower prospects for wage growth, an aging headwind of retirees lowering the participation rate, and the gradual winding down in the mining sector – to name but a few.  And whilst this will bear relevance in moderating the level of price appreciation long term, there are plenty of ingredients in the pot to ignite the current environment which is causing a range of voices to warn of bubble like conditions in fragmented areas of our established capital city terrains.

The main force behind the buying market is a mix of investors and up-graders who – in turn are boosting the premium housing sector using funds from the sale of lower priced properties to leverage up which coupled with lower rates reduces the size of their loan – distorting the forward analysis of the lending data in relation to price growth somewhat.

In contrast demand from first home buyers has weakened significantly – waxing and waning only on the back of various grants and incentives.

Each are buying for different reasons, and as we know, in this sense, the environment has been nicely manipulated by supply side constraints which keep Australia in a donut like geographical outlook.

However, as Robert Gottliebsen points out in his column, and as I mentioned last week – a very low interest rate environment is once such condition that encourages investors to pull back on saving in favour of a spend/borrow mentality.  And in our property obsessed culture – following years of woeful planning for population growth, most of this pent up demand is being fed into the second hand housing sector.

Price rises are more often than not fuelled by speculation that the next generation will pay double for the second hand house in – how does it go – eight or so years time? And whilst population growth can push demand – as I’ve commented previously – actual house price appreciation more directly stems from a higher proportion of mortgage holders, not necessarily home buyers, shopping within an area of limited supply.

In this respect, the money Governments have donated through tax breaks alone to encourage investment into the established residential real estate sector, with policies such as negative gearing which has disproportionately inflated existing property values and created a growing gap between rental yield – rises of which cannot keep pace – is another area of significance which has propped up the prices. It’s also one of many policy measures that should be addressed if affordability were really an issue of concern for our competing political parties.

And whilst there may be heated debate over the recognition of a bubble, in every instance speculation is a significant driving force in the pace of any said increases – which rings nicely with US economist Robert Shiller’s analysis when in his book “Irrational Exuberance” he defined a bubble as;

“a situation in which news of price increases spurs investor enthusiasm – spreading by psychological contagion from person to person, in the process amplifying stories that might justify the price increase attracting a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

This mentality is evident when we enter what is so often termed the ‘recovery’ phase of our market cycle – usually after a period in which home values have declined in real terms.

It’s an interesting turn of phrase, giving the impression to the uninitiated that prices have dropped so low they needed to ‘heal’ like a sick patient – however seeing prices overshoot the mark as greed along with expectation of another boom inevitably takes a force on investor mentality, is a common feature of this part of the cyclic psychology.

The effects are often amplified in areas where auctions sales predominate.  When buyers see properties openly selling above their pre-conceived perception of ‘market value’ (something that generally doesn’t happen when the sale is conducted via ‘private’ negotiation) it provides very visible reality that the market’s ‘appreciating’ and the effects on the mindset act like a kind of contagion.

Interestingly enough, the reverse is the case when a larger proportion of properties pass in at auction – leaving buyers with the worrying impression the market’s ‘tanking.’

During a competitive auction buyers spend far less time thinking about exceeding budget constraints than they do when – in a rational ‘pre auction’ moment, they take time to discuss (usually with their partner) where to draw a sensible limit for the property in question.

In truth, when the market is buoyant, and competition evident, buyers don’t bid for the property – they simply bid to ‘win’ – something I witness weekly.

And of course, whenever rising prices openly occur, stock inevitably reduces. After-all, who wants to sell an asset that’s increasing in value, when the observation prevails that a vendor can get ‘more’ if they hold and wait for further gains to come?  Especially as additional rate cuts are still widely predicted.

The other issue which Robert Gottliebsen touches upon is foreign acquisition. The falling Aussie dollar has given Asian property investors an opening to look favourably once again upon dwelling investment in our capital city markets.

As reported in the Australian Financial Review last week “A Sydney Property developer sold 90 off-the-plan apartments at the opening of a new tower in Bondi Junction in 5 hours” and whilst a large proportion of funds will be fed into off-the-plan construction, assisting developers in the approval process somewhat, it’s arguable as to how many of these new apartments will actually make it onto the rental market.  With limited options for investment, real estate acts like a magnate for Chinese buyers – who are not averse to purchasing speculatively whilst leaving apartments sitting empty.

There will be plenty of argument yet to come as to the level of the current ‘boom’ and its longevity. But what cannot be argued is the conditions that took values to their 2010 peak following our ‘golden decades’ of growth, will not be replicated as we enter a very different and challenging macro environment than previously experienced – hence why I hold the opinion that we’ll see shorter durations to the traditional boom and bust “market cycle.”

Furthermore – whilst rising established house prices may be perceived as ‘positive’ – particularly for those who want to downsize or ‘tap’ into the equity – is worth remembering that it’s doing little for the productive areas of our economy such as manufacturing, small business or job creation.

The oft quoted perception that the ‘feel good’ factor from rising house prices stimulates consumption has been disputed in several studies – the most recent of which can be found here.

And whilst those who purchased early in the 2000’s have seen their assets ‘boom’ the consequences have forced a social divide as purchasers priced out are forced into areas where schools, transport and local amenities have not been funded to keep up with the flood of lower and middle income households in search of affordable options.

Rising yields ensure renters find it particularly hard to locate close to work hubs (not to mention the pressure it puts on students battling for a university qualification) – and unless we face up to the ‘non voter friendly’ challenges that prevent sustainable solutions and reduce unwarranted inflation in the established sector at the expense of construction, nothing will change.

New Zealand – which is experiencing its own property boom principally in Auckland – has released details of plans to moderate mortgage demand through ‘speed limits’ on high loan to value lending. However, it’s widely acknowledged that without effective polices to enable home building over a wider footprint of land, first home buyers will suffer inevitable pain, and debate circulates as to whether it will lower prices in the long term or just produce a blip on the radar.

Even if it were possible to effectively implement and audit similar restrictions – thereby tapering the flow of money into mortgage debt, it won’t necessarily stimulate lending for productive purposes.

Furthermore, although in real terms, values remain below peak, the property market chills at the thought of prices adjusting downward materially – yet not at the bank controlled credit creation process that inflated the huge increase in the first place, in so much as banks create money every time they make a loan, and then decide where the bulk of lending is directed – building up the price of their preferred assets at their own discretion.

In this respect, it’s not the health of the housing market that needs to be tacked, it’s the disease.

Lastly on interest rates – since November 2011 we’ve been on a downward rate cycle – some of which was only passed on ‘in part’ by the banks. Yet it took until mid 2012 for any marginal improvement in median values to emerge (boosted by consumer confidence,) and only fairly recently have we seen a significant uptick.

Despite it all the building industry is not picking up enough pace to compensate for the tapering of construction in the mining cycle, and we’re a long way from a point at which the RBA can start raising rates to offset any unwelcome boom in established asset prices.

For the time being, existing owners and investors will continue to fuel demand, and despite loan service affordability costs improving – those looking to enter the housing market, will continue to compete with a challenging heated environment.

Catherine Cashmore

Low rates infuse a bubbly atmosphere in the established housing market

Low rates infuse a bubbly atmosphere in the established housing market

There’s an ongoing discussion between our politicians as to whether low interest rates indicate ‘good’ or ‘bad’ economic management, with Joe Hockey warning – correctly – that a further cut indicates a slowing, if not, “struggling,” economy, and Kevin Rudd shoring up his corner with the backhanded comment that this merely implies the opposition think ‘high interest rates’ must be a ‘good’ thing.

The last time the RBA moved interest rates so close to an election was back in August 2007 just prior to John Howard’s demise from office – except of course, at that point, the cash rate was lifted +0.25 per cent to 6.75 per cent with the comment from Governor Glenn Steven’s that;

“The world economy is still expected to grow at an above-average pace..” and noting the need to contain medium term inflation.

After Kevin Rudd entered office, house prices were at a peak, and two further increases in both February and March took cash rate to 7.25 per cent, after which the contagion of the GFC resulted in a swift ‘six’ consecutive rate cut cycle as we felt the worldly repercussions of a highly interconnected financial system regulated by fear and greed, teetering on the brink of economic collapse.

The swift reversal which sent us right back into a rate ‘hike’ cycle occurred in line with the Rudd stimulus packages, including the first home owner ‘boost’ which applied to contracts entered into between 14th October 2008 and 31st December 2009 and consequently, swathes of easy credit entered the housing market creating a short term price multiplier effect across all ranges and arresting the downward decline in household ‘debt’ growth.

The party could only last so long, and in response to the high Aussie dollar, subdued credit growth, declining asset prices and continued underperformance in the construction sector, the current rate easing cycle, which commenced 2nd November 2011, has been going on for 18 months.

The resulting eight cuts which leave us with the lowest cash rate in at least 50 years have been successful in taking some of the air out the Aussie dollar, albeit newly revised forecasts from Government indicate a worrying trend in rising unemployment, and cautionary words are emerging from the RBA as Governor Glenn Steven’s evaluates that;

“One’s assessment of prospects for consumption will be driven mainly by one’s assessment of the outlook for income, but will also be affected by expectations about asset values and in particular one’s view on whether housing prices are overvalued..”

Job ads fell by 1.1 per cent in July – the 5th consecutive monthly decline, and a cumulative 19 per cent over the past 12 months. Business confidence is waning with conditions at a 4-year low, household income dynamics worsening, and considering we have a tightly contested Federal election on the door step, there is little prospect of improvement in the near-term.

With the above in mind, it ‘seems’ a sensible move to pull the one economic lever the RBA have to hand, and provide ‘relief’ to “interest-sensitive spending and asset values.”

However, since the global economic crisis; the world’s banks have been concentrated on lowering rates in order to boost growth. The textbook model indicates the atmosphere will motivate an increase in lending for such items as homes, goods and services; however as we know, monetary policy is at best, a blunt instrument and whilst Governments can allocate at their discretion where to spend our tax dollars and pressure the banks to ‘pay forward’ the rate cuts gifted,  they have limited influence on where cheap credit is spent (or for which asset it is lent) into the economy or to direct it into areas where it’s needed most – which in terms of housing, would principally be construction.

In this sense, relying on interest rates to stimulate demand in new home building is akin to banging your head against a brick wall and hoping the pain will subside.

I happened to catch the Sunday morning “Financial Review” show on Channel 9 last week to witness and interview with Harry Triguboff – chief of Merriton – who happily concluded that the reason demand from Australian buyers for his high rise apartment blocks was so low, was directly correlated to the RBA’s monetary policy.

To paraphrase, his comments “They should have dropped rates earlier.. I don’t know how many more drops they need to do….they just need to keep dropping till Australian’s start buying my high rise apartments again”

Albeit, whilst a drop in rates may assist the construction industry to some extent, unless it goes hand in hand with policies to sustainably finance the provision of essential infrastructure, such as public transport arterials to ease the cost of commuting to fringe localities, tackling planning constraints, reducing hefty tax overlays, or assisting finance for development of ‘quality’ accommodation – to name but a few – consumer demand will remain subdued – nothing will change outside of intermittent First Home Buyer ‘new build’ incentives, and the issue will remain a topic of discussion.

The other problem with a long-term low interest rate environment is the air of dependency it creates as economies struggle to ‘repair’ whilst desperately trying to encourage consumers back into a spend/borrow mentality.

This is never more evident that the current circumstance in the UK.  Whilst a proportion of home owners will take advantage of lower rates to pay down outstanding debt, there is no shortage of borrowers living week to week who would topple over if rates were to moderately rise.

In the south east of England where, not unlike Australia, rates of home ownership are elevated, house prices haven’t ‘corrected’ perhaps quite as far as they should have done considering the underlying and ‘high unemployment’ economic challenges the UK faces.

This is partly related to foreign ownership of prime London real estate – which makes over 50 per cent of the buyer market – but also a dramatic increase in investor activity, which now accounts for more than one in ten mortgages.

Add to this the newly introduced ‘Help to Buy’ scheme allowing first timers to purchase houses with as little as a 5 per cent deposit, whilst the tax payer foots an underwritten Government guarantee for 15 per cent of the capital value should the buyer default, and you have an inevitably bubbly environment devised and costed on the assumption interest rates will remain close to zero for the foreseeable future.

The UK is far more interconnected with the US than we are in Australia, and therefore the hint a few weeks ago from Ben Bernanke indicating FED may begin to slowly unwind its era of quantitative easing which would inevitably put upward pressure on rates, provoked a response from the new Governor of the Bank of England who swiftly inaugurated what’s been termed a new ‘policymaking revolution‘ of ‘forward guidance’ guaranteeing to keep interest rates at their low of 0.5 per cent until the unemployment rate falls to ‘at least’ 7 per cent.

Understandably savers are up in arms – which isn’t so different to the atmosphere we’re now experiencing in Australia – albeit, our economic prospectus differs considerably.

However, pushing interest rates lower, discourages saving and predictably forces people to seek out any area of speculation that can provide a better return on their dollar as cost of living pressures slowly inflate it away.

And in our ‘all things property’ obsessed culture, coupled with policies such as negative gearing and the increasing trend to buy real estate as part of a self managed super fund, a large proportion of ‘mum and dad’ investors are pooling their funds into the second hand housing market usually with a budget that competes directly against the slow decline of our “first home buying” sector.

Break the data down and as pointed out here it’s clear that the larger share of mortgage demand is investor lead “ Since March 2009, the average FHB mortgage has grown by only 1.8 per cent, whereas the average mortgage for the market as a whole has grown by 9.6 per cent.”

The pent up demand and as we suffer the consequence of another interest rate cut, and the supply of easy cash bubbles the air, comes with a warning from UBS analyst Jonathan Mott indicating;

 the “ingredients are now in place for another bout of sustained house price inflation in Australia and Sydney in particular” remarking “Given Aussie housing is already expensive by most metrics we see this as undesirable and dangerous.”

Housing finance approvals rose solidly in June ahead of expectation, with ABS figures showing a seasonally adjusted 2.7 per cent increase in owner-occupied finance commitments which are now tracking 7 per cent above the five year moving average with the series up +14.2 per cent on the same time last year.

Loan sizes also increased – up 0.7 per cent for the month and 0.9 per cent for the year (a marked improvement from the beginning of the year) with the value of investor finance commitments up 18 per cent over the year.

ABS housing data shows nationally, prices have exceeded their 2010 peak – primarily lead by Darwin, Perth and Sydney, with the other states still playing a game of catch up in median terms. And as I explained last week, for those of us who work ‘on the ground’ assisting purchasers, to describe the atmosphere as ‘challenging’ would be an understatement of terms.

In a recent conversation with a contact of mine, who runs a buyer advocacy agency in Sydney, he spelt out clearly the difficulties purchasers are now facing with the comment;

“Definitely already a seller’s market here in Sydney. Auction clearance over 80 per cent in many suburbs. Saw a property where after just 2 Opens, the agent had 25+ contracts out. Price guide revised immediately after first open from 1.2m-1.3m to now 1.4m-1.5m. Tough market to buy in!”

And although Victoria faces stronger headwinds – as I explained last week, it’s not so anecdotally different in Melbourne.

As property once again ramps up in capital value, becoming more expensive in a domain riddled with speculative behaviour – supply side constraints prevent any sustainable recovery in the construction sector and – as commented in a discussion on housing affordability during last week’s ABC1 ‘Question and Answer’ – political parties refuse to touch negative gearing or make the tough decisions that might just prevent an increase of ‘cheap’ credit being fed directly into boosting second-hand home prices  – (instead trying to solve with their right hand, problems created with their left) we’re effectively washing away any efforts to assist our young home buying generation.

In this respect, Australia is remarkably similar to the UK and Canada, and also parts of the USA. House prices rising against the gravity of the broader macro environment, with all who have a hand in manipulating the situation, imagining the story will somehow have a happy ending.

Catherine Cashmore

Why we need a sensible conversation on the future of Australia’s housing market.

Why we need a sensible conversation on the future of Australia’s housing market.

Language is an important tool in the real estate sector and skewing data to either the positive or negative is a well honed skill which, as I explained last week, more often than not masks the underlying trends actually taking place.

However, when it comes to property, there are no words more inflammatory, and drama inducing than ‘Bubble’ or ‘Bust.’ Flag a headline which suggests either, and it will evoke a barrage of abuse from market speculators. Hint we have a pending housing crisis in Australia citing affordability concerns which are voiced loudly and clearly across a number of sectors, and you’re promptly labelled a ‘doomsayer’ ‘laughably’ predicting an instant 40 per cent market crash.

Try and have a sensible discussion on the matter and it’s marred with vested interests – in the case of politicians, it’s the need to lobby for votes from the majority, above and beyond the need to improve the ‘home’ buying environment for a small, but increasing ‘non owning’ minority.

As I suggested a few weeks ago – “woe” unto any politician who suggests capital values may fall, thereby reducing the entry level of ‘borrowing’ a new home buyer needs to fund.

And for anyone who has even a basic grasp of how the world’s debt based monetary system works, which provokes a continuous consumer driven need for spending and growth, you’ll understand precisely why there is little concentration on policies to reduce debt, and instead a greater concentration on how to make higher capital prices ‘more affordable,’ with low interest rates, tax incentives, grants, and arguably failed attempts to boost supply.

However, Australia is heading into prevailing headwinds which will have an inevitable impact on our younger generations as we navigate our way into what’s undeniably an environment of weaker economic growth.

All the conditions that were at play during the golden years of capital gains in which household incomes were rising strongly, and the commodity boom was impacting the overall size of the Australian economy are slowing.

We have a growing in-balance of the proportion of working age individuals relative to retirees which will bear heavily on the percentage of Government funding (the tax payers back-pocket) over the next 40 years or so.

In 2009-2010 financial year 26 per cent of the government’s budget was directed towards age related services (health, age related pensions, and aged care) – however, according to treasury projections, this figure’s expected to increase substantially over the next 40 years “pushing the share of spending to almost half.”

In response, a range of tax concessions currently enjoyed by Australian’s will need re-addressed, and judging by the reaction to the abolition of the ‘statutory formula’ for valuing fringe benefits on employer provided cars – it will be far from palatable, albeit, an unavoidable necessity.

In addition, I would expect at some future/future point, the current claims on negative gearing will also inevitably fall into question – not an opinion that meets wide agreement, however time will tell.

Income growth is slowing – as chief economist of Macro Business, Leith Van Onselen recently pointed out in relation to the latest ABS “Biannual Household Income and Income Distribution report“ covering the 2011-12 financial year;

“An examination of biannual income growth since 1996 shows that average real inflation-adjusted household income (pre-tax) has essentially flat-lined since 2008 when measured on a equivalised basis (i.e. adjusted for household size and composition)”

Full time job growth is weak, with both hours worked and levels of underutilisation deteriorating.  Even NAB have come onboard with a recent research release highlighting Australia’s ‘ongoing sources of weak domestic demand’ and in relation to the overall outlook for Australia’s economy make the rather startling, albeit sobering comment ‘We are not optimistic.’

Significantly, they picked up on comments offered by RBA Governor Glen Stevens in suggesting that Australia cannot rely on housing and consumption to plug the ‘growth hole’ – bringing into line an almost certain August interest rate drop – further eroding savings.

However, whilst this may assist lowering the Aussie dollar, which will have a positive impact in the longer term, GDP growth is slowing and as we’ve seen over the past 12 months, as a tool, interest rates are limited in their effectiveness to stimulate those sectors of the economy most in need.

For example, in relation to housing, the marginal upward trend in building approvals evident since the low of 2011, has been moderated with the latest ABS figures showing new houses and apartments falling -6.9 per cent over June (seasonally adjusted) – posting their third large fall in the past four months.

Even allowing for the usual volatility of short term data, this is low by historical standards and falls short of RBA forecasts.   In contrast the established market is enjoying an investor lead rally as funds are increasingly shifted from cash into residential real estate with 36 per cent of loans going to this sector alone.

In May of this year, 18.4 billion worth of housing finance for investment purposes was committed to – the highest level since January 2008.  Prices in Sydney, Perth and Canberra are now reportedly back to their previous peaks – and with the cash rate set for a further fall to 2.5 per cent, it could be argued, that we haven’t even started to touch the surface.  As reported a couple of weeks ago from the new “SMSF Professional’s Association of Australia and Macquarie Bank” according to the ATO, between 2006 and 2013, SMSF property assets grew in value by 230 per cent – ‘a higher growth rate than any other asset class.’

Ahead of the hugely popular auction episode of ‘The Block,’ the REIV commented that the result could not be taken as a reflection of the current market.  However, I attended the auctions on the day, and the buoyant competition that was clearly evident from those bidding, was not at all at odds with what we’re currently seeing ‘on the ground’ in inner and middle ring Melbourne localities.

If you have a sensible head on your shoulders, and think it somewhat bazaar that a buyer would pay around 1.5 Million for a three bedroom apartment that has four bathrooms, five toilets – with some hefty owners corporation fees thrown in for good measure, along with fixtures and fittings which are ‘arguably’ dramatically overcapitalized for the property type – when the same dollars could purchase a renovated period terrace in one of the better streets of Albert Park, Middle Park or South Melbourne then you get a small sense of some of some of the  crazy activity I’ve witnessed of late.

Most recently, the price of a 2 bedroom apartment in Melbourne’s bay-side suburb of Elwood, which achieved $830,000, yet an exact – or at least a very comparable – replica in the same block sold just two months prior for $715,000.

Or another from a local Woodard’s agency, who sold a three bedroom period home in Prahran with a reserve of $950,000, yet with approximately 200 in the crowd and six bidders, delivered a result of $1,325,000 with no recent comparable to suggest a price even moderately close to this level.

There is nothing particularly outstanding or unusual about these properties – neither in each circumstance – are the results driven by ‘home’ buyers looking for their ‘dream’ dwelling and therefore, to some extent, a justifiable balance between price and desire for ‘the one.’ I could sight off the top of my head at least a dozen similar examples of investors overpaying for real estate, despite figures being somewhat inflated by lowering levels of stock.

Conversations with colleagues in Sydney, Perth and certain areas of Brisbane are full of similar tales of sheer amazement. Yet, as anyone who has an active interest in property or shares will tell you, markets run on fear and greed.

Or as Schiller said in his book ‘irrational exuberance;’

A “speculative bubble,” is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.”

And although they were written with the USA housing market in mind, they’re words which aren’t wholly irrelevant when it comes to Australia’s current buying terrain.

As for first home buyers; the news is less joyous. The latest ABS housing finance commitments note that first home buyers continue to play a long term decreasing role in the purchase of property accounting for only 14.6 per cent of Australia’s buying market – which year on year is down -10.6 per cent, with movements in percentages only fluctuating on the back of various grants an incentives.

Compare this with the 31.4 per cent share during the 2009 ‘boom’ – invoked by the first home buyer boost – and you’ll get the idea.

And whilst it can be argued that this figure is manipulated by the proportion of buyers who bought forward plans to buy under the Rudd stimulus, the longer term trend is particularly noticeable when looking at census data, with a sharp decrease in ownership between 1975 and 2010 for the age groups between 25-34 and 35-44 which has fallen from a peak of 61 per cent to ‘around and about’ 45 per cent currently.

Whilst demographic and lifestyle changes will inevitably result in a proportion delaying a purchase until later in life, it’s prospected a significant and growing percentage will remain – like it or not – trapped in the rental or social housing sector.

Rental rates have inflated strongly since 2007 – RPData estimate a cumulative rise of 32.1 per cent. Any non-home owner locked in a ‘Catch 22’ of being employed in one of the capital city ‘job hubs’ of Australia, will be hamstrung as they try to make headway against the escalating cost of accommodation.

So, when does affordability become an issue?

It’s wonderfully easy to create well worded speeches about halving the rate of homelessness with emotive ‘sound bites’ filtered in for effect.

However, wishing a better life for the disadvantaged, who perhaps haven’t had the good fortune of inheriting the rewards of our golden years of growth, remains a charitable gesture without hard hitting policies which would inevitably impact the level of ‘growth’ existing home owners could expect to ‘achieve.’

Albeit – unless we do so, Australia’s political powers are merely searching for answers with their right hand to problems they created with their left.

Instead, we need a sensible conversation on how we want the housing market to look in ten to twenty year’s time, which isn’t dependant on pointless ‘pot shots’ between bulls and bears.

If you listen to some market commentators, it will be an environment in which median prices in capital city localities will sit over a million in ten year’s time (a misguided prediction that has been lingering for some years – here’s another example written in 2003) – so how about listening to the voices of those who have a degree of concern about their children’s future in an environment as I explained above, is not prospected to be quite such an easy ride.

Catherine Cashmore

 

The property industry’s twisty statistics’

The property industry’s twisty statistics’

The REIV have released their June quarterly statistics which show a seasonally adjusted 2.4 per cent rise in the median house price with the comment

“The release of the REIV’s June quarter median prices should help encourage a few more sellers into the market over spring as it shows the price falls recorded in 2011 have been recovered.”

This takes Melbourne’s median house price from a ‘revised’ $549,000 in the March quarter of this year which – (as Terry Ryder also noted Tuesday last week and myself on Monday Last week) – is a ‘not so insignificant’ drop of – 2.23 per cent decrease to the figure the REIV initially published in April of $561,500 – to the now ‘seasonally adjusted’ June median of $562,000.

In other words, had the numbers been taken on face value, without subsequent revision, Melbourne would have simply been treading water.

All of this means little to the average buyer who simply reads the headlines and has little time to dig into the detail – however at the time, the REIV heralded the first quarter of 2013 to be the ‘strongest March quarter in a decade’ which was somewhat surprising considering the ‘unadjusted’ March median actually dropped -0.9 per cent.

Of course, the only reason it could be stated as such, was because their December 2012 median had also been ‘seasonally adjusted’ & revised from $555,000 to $534,000 – a drop of -3.7 per cent.

The REIV only started seasonally adjusting figures at the start of this year, therefore the December adjustment was made ‘post’ the initial release in which the REIV claimed a 7.8 per cent jump in the median house price (!) under the heading ‘Growth returns to Melbourne housing market.’

I remember this well, because it prompted a joyful remark I overheard one agent relay to his ‘investor’ client, that this would equate to more than “30 per cent capital growth for Melbourne over the following 12 month period if it maintained pace” – thankfully a comment that will remain pure fiction.

As a general rule, seasonal adjustments are calculated by looking at the ‘average’ seasonal shift during the same quarter over a lengthy time scale. The information is then used to calculate the amount to either add, or subtract, from the raw data. And whilst it can be useful from a trend perspective (smoothing out the bumps,) there is scant information on the REIV website to explain how a drop of -0.9 per cent can be converted into in to a somewhat robust ‘rise’ of 5.1 per cent in a market which, although improving, was – at the time – certainly not doing as well these numbers would indicate.

The reason figures are revised, is because all data providers suffer from a lag in reported results that typically filter in over the 3 month period ‘post’ the quarterly release from valuer general data – the most authoritative and comprehensive source of sales information we have.

Therefore, the median price home buyers and investors are reading for this quarter, and the emphasis that is put on it as newspapers go to town with boom or bust headlines, is likely to alter significantly when the next release is due and is therefore is arguably a misleading ‘quarterly’ indicator of true market movements.  In other words – any ‘newly’ released quarterly data needs to be taken with a ‘pinch of salt.’

With this in mind, it makes the daily index – which is neither seasonally adjusted and would also miss a wide proportion of lagging results – laughable.

Investors are often fixated on median prices.  The major investment magazines have extensive tables of figures and percentages covering the back pages. Agents use them to their own ends with comments such as ‘prices have increased 10 per cent year on year over the past 5/10 years for such and such a suburb.’

However whilst the median figure may have increased – the ‘middle’ figure of all cited sales – individual property prices, and the changes a property may go through in terms of renovation and extension, which would therefore warrant a higher capital price outside of natural increases, is not always represented in the information provided, and it should also be noted, that each provider uses a slightly different methodology when collating their statistics.

For example, the REIV record a ‘seasonally adjusted’ 8.4 per cent rise to the median from this time last year which seems to suggest Melbourne is coming on leaps and bounds.  However, the ABS show an increase of just 1.1% (to March 2013) – APM: 6.1% (to June 2013) and RP Data: 3.3% (to June 2013) making the REIV’s median figures higher that of every other data provider.

However, the REIV are not the only culprits when it comes to published data misnomers. As economist Leith Van Onselen pointed out to me in a conversation we had regarding APM’s results.

“In its March quarter release, APM reported that Melbourne house prices led the nation, rising by 3.6 per cent over the quarter to $538,922. What was not mentioned in their commentary, however, was that some of Melbourne’s reported strong price growth was caused by a -1.1 per cent downward revision to the December quarter……And in their June quarter results, APM once again reported that Melbourne led the nation, recording 5.0 per cent growth over the quarter and 6.1 per cent growth over the year. However, part of this strong quarterly rise was caused by a downward revision to March’s median house price to $527,245, without which Melbourne would have recorded 2.7 per cent growth…..As Leith points out, without the subsequent revisions “ Melbourne’s annual price growth would have come in at a more moderate 4.2 per cent.”

One indication towards the stark contrast in REIV statistics is because unlike the other indexes, they do not stratify their median figures to reflect different aspects of each housing type outside of the broad description of ‘units’ and ‘houses’ and this creates significant problems for those using the information as a source of market analysis.

In REIV terms, a unit could be a small villa on a subdivided block of typically six to eight free standing or attached dwellings – a one or two bedroom apartment or flat, in either a low rise or high rise block – a high spec townhouse on a ‘side by side’ subdivision – or a bedsit.  Obviously, this can create distortions when assessing the information.

The same is the case for housing.  Median house prices cover detached houses, terraced houses, semi-detached houses, residential warehouse conversions, holiday houses and duplexes.

Because the REIV don’t distinctly classify their results, we also see big differences in individual suburb changes. For example, according to the June stats, Hawthorn’s unit median has increased 20 per cent from the last quarter (!?)

However, there should be no confusion here – individual unit prices in Hawthorn have not increased 20 per cent – this is median data, and without stratified statistics, the median price can easily be boosted with different property types being lumped under the ‘unit’ banner – to publicize these figures, with full knowledge of the reaction it will create, should be an area of concern – yet one which is ignored in the main stream press.

Albeit, from an anecdotal perspective, property prices in Melbourne have increased throughout the course of 2013 – as an example – a unit which based on comparable data from late 2012 and early 2013, would be worth anything in the region of $420,000-$440,000 – under current competition, often ends up selling 2-3 per cent higher, an effect which is primarily noted in the inner and middle ring established suburbs of the city where auction sales predominate and an intense level of investor and speculative activity is evident.

Most results are staying broadly within these parameters, however; notwithstanding, I’ve seen some crazy activity of late as mini bidding wars in various pockets have rippled across all price brackets.

This can have quite a dramatic impact on both vendor expectation (as owners see neighbouring properties sell above their pre-estimate of value) and buyer physiology, as property shoppers realise they need to ‘up the budget’ to exceed what is perceived to be some kind of boom time terrain producing gains that cannot be sustained over the resulting period – and in the current economic environment – will most likely eventuate to be nothing much more than a short term rally.

However, as most sales across Melbourne are conducted private treaty, the effects on the median data across the board would be minimal, and really only feed into inner city figures where auctions are the preferred method of sale.

In truth – from a macro perspective, as the latest RPData report highlights, “In five and a half years, growth in capital city home values has not increased at a rate higher than inflation” and it should be noted, Australia is facing some significant headwinds which will have an impact on the property market in the months and years ahead.

Full time jobs growth is weak and both hours worked along with levels of underutilisation are deteriorating.  As the mining construction boom unwinds, non mining industries underperform, and we pull in our belts with fiscal consolidation, it’s likely we’ll see little change over the months ahead. The short term data is volatile and somewhat unreliable albeit, the long term trend is clear.

We’re entering an era of slow growth – and it’s yet to be seen if it will be stable growth. In this respect, when you lift the blanket on unemployment data the trends are concerning and certainly not as good as the headline rate suggests.

Outside of keeping interest rates low, or offering grants for new homes to enable buyers to take on a larger proportion of capital debt in an effort to boost the construction sector is producing minimal impact for new home owners – and as I wrote last week, there are no long term sustainable solutions offered from either side of politics.

 

The speculative behaviour we’re currently seeing in various pockets of Capital city markets as investors lead the widely spruiked ‘housing recovery,’ neatly packaged under the words ‘typical market cycle’ as different states go through their own ‘wax and wane’ periods of supply/demand activity, will have far wider impacts for our younger and future population of buyers than I would argue is fully recognised across the broader population that already own a home, or are paying off a mortgage.

Catherine Cashmore

 

The political narrative on housing – Woe unto the one who suggests prices may fall..

A political paradox – Woe unto the one who suggests prices may fall..

Housing affordability has been the name of the game this week.  We’re coming up to a general election and ‘lo and behold,’ much to the distaste of those who deny Australia has a housing affordability crisis – and first home buyers are just being spoilt and picky – research by ‘Auspoll’ has revealed that 84 per cent of Australian’s put housing affordability top of the charts when rating election issues by areas of importance.

The article which appeared last week across various ‘News Corp’ publications, focused on key electorates in which ‘housing affordability’ came streets ahead of other hot topics such as ‘education’ or ‘border control’ – accompanied with case studies where 50 per cent or more of family income is going towards mortgage or rental payments alone.

Cited within the report was a 2007 comment by the then Opposition leader Kevin Rudd, who in an attempt to boost his popular vote, told former Prime Minister John Howard that;

“housing affordability is the barbecue stopper right across Australia.”  

It’s interesting to chart the political narrative regarding housing matters – because after years of lousy half hearted initiatives, which have done nothing to markedly advantage the two most venerable demographics of our market – principally first home buyers and renters – we have no sustainable interventions in place to affordably accommodate a rapidly expanding population, all of whom will need some form of shelter.

And whilst Australia has sailed the ship of good fortune, sheltered within a resource rich environment, and most families have adjusted their lifestyles to suit their income and as such, never feel particularly ‘well off’ even when earning substantially more than the median income – for those working at, or falling below the median, the cost of accommodation is an increasing drain on the economy and well being of our society, resulting in areas of socio-economic advantage and disadvantage in an English-style cultural or class divide.

Since 1974 during which Gough Whitlam aroused passions in his ‘It’s Time’ speech by pointing out: “The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it” political advocates from both sides of the playing field have weighed into the debate.

Policies such as the NRAS, the first home buyer’s savers account, and spruiked initiatives to increase infrastructure have all failed to make significant or sustainable inroads to either supply based concerns, vacancy rates, or first home buyer percentages.

A few decades on, and it seems whilst everyone wants to be popular and ensure housing is ‘affordable,’ – years of easy capital gains and tapping into the housing equity ATM machine, have made any contemplation that prices should drop – or even stabilise for a lengthy period of time – downright out of the question.

Or as John Howard worded it during prime minister’s question time approaching the end of our 2007 housing boom;

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

And perhaps it’s worth mentioning that Howard’s response was in reply to a question challenging the plight of first home buyers from soon to be elected Kevin Rudd – who upon taking office – less than 12 months later – promptly inflated the market three fold with his first home buyers ‘boost,’ which bore the consequence of leaving our most inexperienced buying demographic in subsequent negative equity once it was stripped away.

Earlier this year, the question of housing affordability once again raised its political head, however this time it was in the form of ‘point-scoring.’

In a television program back in May, Joe Hockey made the call that house prices in Canberra would lose capital value under a Coalition Government.

“There is a golden rule for real estate in Canberra – you buy Liberal and you sell Labor,” Said Hockey.

The response from Kevin Rudd – the ‘then’ former PM – who ‘championed’ the cause of first home buyers with his ‘vendor boost’ as Professor Keen aptly named it, was;

“Can I just say, Joe, I’m not sure that will go down well with all the voters in Canberra,”

Labor politician Andrew Leigh who represents the Canberra seat of Fraser was not slow to weigh in on the debate;

”When the Liberals came to office in 1996, they wiped $25,000 off the price of a Canberra home….Today, Joe Hockey proudly jokes about how he’ll do it the same again”

A comment that was promptly disputed by ACT Liberal Senate candidate Zed Seselja, who – whilst paddling frantically against any suggestion that prices might drop under a Liberal Government, cited the ‘moving annual median house price’ from the Real Estate Institute of Australia with the comment

‘‘Prices dropped more in last two years of the Keating Government than they did under Howard’s first 1.5 years, and to its lowest point,’’

As I said, – woe unto any politician who suggests market prices may actually fall.  Far better it seems to burden buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask rising costs under the false premise that residential real estate is getting ever more affordable – particularly in light of a construction industry that’s struggling to make any headway.

In 2007 in a report Entitled New directions in affordable housing: Addressing the decline in housing affordability for Australian families: executive summary (hat tip @bullionbarron) which contains quite a broad analysis on various actions that can be employed to ease the strain on first home buyers and renters – once again the paradox of protecting the capital value of property whilst still aiding affordability is underlined;

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

As for the policy of Negative Gearing, which was introduced and subsequently advocated to assist the lowly renter and reputedly ease the burden on social housing, (waiting lists of which are increasing) – the very same policy which property commentator Margaret Lomas suggested to ‘Property Observer’ would make “600,000 individuals homeless” if scrapped – coupled with the CGT discount of 50 per cent introduced by John Howard in 1999, which resulted in a 30 per cent increase in investment activity alone. It’s been by far and away the best incentive for the individual investor, fuelling speculation into the real estate sector and consequently creating a massive bubble of undiversified private debt.

And whilst I am not against investment into the residential real estate market, it makes little sense extensively encouraging it from a policy perspective if it doesn’t achieve;

1)      An improvement in housing affordability and supply;

2)      An increase in vacancy rates;

3)      A substantial boost to new housing and consequently infrastructure in ‘growth’ suburbs; and

4)      Lower rents for the most venerable in our society

All of which negative gearing has failed to do.

As I pointed out in my column last week – whist it would be unfair to condemn individual investors for taking advantage of various tax incentives in an effort to secure their financial future, any Government that puts in place policies to fuel speculation and subsequently inflate prices in a vehicle that suffers from inelastic demand side levers, yet is essential to the development of both individual and community culture –  is a Government creating a difficult paradox as to how to advantage those who entered at the beginning of the lending boom – (during which capital price to income was lower) – compared to those who find themselves at the sticky end of housing’s historical journey in which mortgage debt has inflated fourfold.

Now we have a situation where household debt to income sits close to 150 per cent with ‘Moody’s Analytics’ in a paper entitled “Trends in Australian consumer lending demonstrating how Australian banks have the highest exposure to residential mortgages in the world.

It was years of dizzy speculation into the established real estate market which resulted in prices escalating to their current heights, with banks only too eager to create credit through the extension of mortgage lending which in the ten years to the GFC, increased in-excess of 450 per cent.

And despite the innocent impression some try to imprint suggesting we have a stable and responsible banking sector.  Global measures to date, which aim to ensure a similar GFC crisis does not occur again, do not go far enough in ensuring financial institutions fund their investments with substantially more equity than current regulations dictate.

As Moody’s Analytics managing director Tony Hughes and senior economist Daniel Melser suggest;

“Irrespective of the complacency of local analysts, who sound a lot like many US housing cheerleaders circa 2006, this exposure (to home loans) represents a major concentration risk for banks and the Aussie economy,” comments not to be taken lightly.

The influence of investment into the property sector was noted as far back as 2003 in a Productivity Commission Inquiry on First Home Ownership submitted by the RBA.

The study concerned itself with the effect of “strong and rising house prices which were burdening new home owners.” And noted

“The most sensible area to look for moderation of demand is among investors.”.. “In particular, the following areas appear worthy of further study by the Productivity Commission”

The report noted some key investor incentives which in light of the comments above, could be moderated

1.)            “The ability to negatively gear an investment property when there is little prospect of the property being cash-flow positive for many years;”

2.)            “The benefit that investors receive by virtue of the fact that when property depreciation allowances are ‘clawed back’ through the capital gains tax, the rate of tax is lower than the rate that applied when depreciation was allowed in the first place.”

3.)            “The general treatment of property depreciation, including the ability to claim depreciation on loss-making investments.”

This was 10 years ago – and without putting too blunter note on it – we’re no further forward.

In addition – for those who continually suggest house prices are as high as they are simply because we have a ’shortage’ of accommodation, the same report highlights;

“At the macro level there is not much evidence to suggest that the growth in house prices has been due to a persistent shortage of supply of houses relative to underlying demand for new housing”

There are plenty of initiatives which can be employed to ease affordability – albeit an active attempt to gradually ease investor demand in our established housing sector, whilst facilitating the construction sector, should be one of priority.

A few days ago I read an interesting blog by R P Data investigating why the current upward cycle may be different and more tapered to the last.

The comment was made that first home buyers ‘tend to push prices higher…. because their behavior can be more emotional than other segments of the market’ whilst investors are ‘more clinical’ when acquiring real estate.

It may seem a sensible assumption to conclude, however as is often the case when assessing behavioral economics, the reality can sit some distance away from the broadly held perception.

There has without doubt been a push in home prices from first time buyers in periods during which easy credit has been offered on a plate by way of incentives and grants to the inexperienced proportion of our buying market.

However, without these dynamics, investors play (and have played) a far bigger contribution to price rises in Australia’s real estate market – and from my own anecdotal experience, seeing an investor pay over and above what a property is worth, (based on an educated assessment of recent comparable data,) is a work related Saturday pastime.

As it stands, compared to last year, all states are experiencing an investor lead boom. Victoria’s numbers are up 11.3 per cent, Queensland 4.3 per cent, South Australia 8.3 per cent, Tasmania a more modest 1.5 per cent, ACT is up 11.1 per cent, the Northern Territory up 28.5 per cent with the outright winner, Sydney up 35 per cent.

You don’t have to be Einstein to work out where all this is heading.

Catherine Cashmore