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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Catherine Cashmore

 

 

 

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

 

 

Why first home buyers are not buying, and ways to solve it.

Why first home buyers are not buying, and ways to solve it.

The latest ABS data has indicated the percentage of first homebuyers active in the market has once again fallen, from 14.7% in July, to 13.7% in August.

Subsequently we’ve been bombarded with commentary asking why this should be so in a low interest rate atmosphere, where, there are ‘plenty’ of acquisitions available for sub $300,000?

Not withstanding, whilst 10 years ago $200,000-$300,000 would have secured a modest home in reasonably facilitated suburb, today – due to woeful supply side policy – you’d struggle to find family size accommodation on the fringes of our major cities for the same expense.

First home buyers will always wax and wane to some extent, based on their perception of value and ability to save over and above items of affordability alone.

And whilst a lower percentage entering the market can in part be attributed to lifestyle factors such as labour mobility, getting married later in life, numbers falling under the radar on loan applications, and the shadow effects of various grants and incentives being introduced and subsequently scaled back, thereby producing a demographic shift in the timing and age at which buyers enter the market, there are other factors at play which clearly point towards pressures of affordability.

For example just from the last census alone, we can see the percentage of 1 person households has decreased for the first time in over 100 years from 24.4%-24.3% – whilst at the same time group households have jumped from 3.9%-4.1% and crowded houses with 3 or more families have risen nationally by 64% to 48,499.

A closer look at exactly what it costs to rent a modest apartment within commutable proximity to our capital cities gives some indication why this should be so.

For example, in Melbourne – (which currently has one of the highest vacancy rates of any capital – 2.7% (SQM) for the month of September) – if you’re halfway fussy, requiring good proximity to transport, a modest balcony, or internal floor space over 40sqm, you’ll be hard pushed to get a 1 bedroom apartment in original condition under $320-$350 per week.

In Sydney, the equivalent will cost between $450 and $500 per week – therefore it makes sense to share expenses, and this is certainly the case with renters I’m in contact with.

An argument consistently put forward when discussing the first home buyer demographic, is the idea that many want to rent, rather than buy – and it’s certainly one I have sympathy with, whether that be for lifestyle, affordability, or work purposes.

However when two people meet, and plan a family, there is a natural desire to ‘settle.’ And in the absence of long-term lease and rent controls, most would preference purchasing over renting.

Therefore, a drop in ownership for this demographic, falling 79.5%-77.2%, coupled with increasing numbers becoming long-term renters, is concerning.

The Grattan report, released early last week, clearly demonstrated how tax policy is disproportionally weighted toward the owner/investor at the expense of the renter.

Indeed, so imbedded is it in the Australian culture that home ownership is the key to financial freedom, there is an un-witting air of sympathy when we refer to ‘generation rent.’

As for the first home buyer – assuming their initial property is not going to be their last, it would be more apt to term the demographic ‘first time investor’ with the need to purchase a ‘growth’ generating asset in an area with enough projected consistent buyer demand, to ensure equity to ‘tap’ into, when time comes to upgrade.

Notwithstanding, the investment potential of their purchase is always an initial question from homebuyers I assist.  And to get on what’s the commonly termed the ‘property ladder’ today, is markedly different from the post war environment baby boomers were born into.

Much of the newer accommodation being constructed is generally not attractive to consumers – being high-density, low-grade apartment blocks for which first homebuyers can have difficulty obtaining finance.

And whilst it’s not impossible for those who have saved a deposit to enter the established market – the stronger financial arm of the investment sector competing for a similar pool of dwellings around the suburban median price bracket, can present a significant challenge.

Urban boundaries and the propensity to towards land banking, hefty tax overlays and poor infrastructure development, has ensured land on the outskirts is already artificially inflated, rather than representing a cost that would assist purchasers to compensate for the expense of commuting greater distances to work related services.

The residents who purchased in Melbourne’s Point Cook for example, which was expanded in line with the 2030 plan and initially marketed as “A thriving neighbourhood … just 22km from Melbourne’s CBD” with “convenient access to established schools, shopping, recreational facilities and public transport” have seen their home values fall, battled with overcrowded roads, and a minimum 2 hour commute to the CBD in peak hour traffic.

So whilst it’s easy to accuse first home buyers of being picky, one could just as easily ask why they should they forgo a hard earned deposit to accept what’s currently on offer, or exceed the budget to outbid competition for a limited number of established dwellings?

First homebuyers are not a ‘buy anything as long as it’s cheap’ consumer – although some mistakenly assume they should be if they want to get into the housing market.  

And whilst commentators use low interest rates to support the argument that housing affordability has improved, it is important to understand that housing affordability and the cost of servicing a mortgage are two separate entities.

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

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

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

So what can be done?

As recorded by APM, Sydney’s median house price has increased by +4.2% over the September quarter to $722,718 – ‘the first capital to reach this milestone,’ whilst, the unit median has pushed past the half million landmark to $510,000.

The current rental yield for a unit would be around 4%, therefore most new investors would be negatively geared and speculating on capital growth accrued during the period of ownership plus another like minded investor paying more at the end of that duration, to make the strategy productive.

Yet, despite this robust activity from the investment sector making up around 50% of the buying market, Sydney’s vacancy rate recorded the largest monthly decline in September of any capital – now at 1.8% (SQM).

This is because, the concentration of investment is focused overwhelmingly on the established sector through policies such as negative gearing coupled with 1999 decision to tax capital gains at half the rate applicable to other income. Since implementation, supply has not increased; rather investor activity around a limited pool of second-hand dwellings has multiplied. (see next graph)

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Needless to say, common sense dictates that maximisation of policy initiatives to increase supply cannot occur if we don’t address this mindset.

As I touched on last week, prior to negative gearing being quarantined in 1986 – rents were already rapidly rising in Sydney and Perth, with vacancy rates below 1%.

Therefore, it is not clear whether subsequent rises were wholly due to the tax changes.  It is also not clear that a continual sharp increase in rents would have been worst had the policy backflip not occurred.

However, without effective supply side initiatives to offset the inflationary elements investment in established property has produced, the market is simply a game of musical chairs – replacing a property for sale with a property for let.

Solution

I’ve said on many occasions that the challenge of creating a balanced, affordable, attractive market for homebuyer, investor and renter alike cannot be tackled on one front.

There are many distortions that need to be slowly unpicked, whilst robust activity to lower land values and increase supply implemented.

As it stands, considering the number of investors who rely on negative gearing as a tax/investment strategy, we’ve arguably painted ourselves into a corner.

I am a full agreement that negative gearing is a failed policy however; I would hesitate in abolishing it in one foul swoop for the following reasons.

Whilst here is little evidence to suggest there’d be an investor exodus, there’s also scant evidence that first homebuyers would be in a position to immediately soak up any additional stock at current prices – bearing in mind negatively geared investments are most suited to this demographic (being smallish 1/2 bedroom apartments.)

The average first homebuyer borrows around $280,000-$300,000 – therefore we’d need to see more than a light correction in values to provide a competitive entry point – not to mention the difficulties most have saving a deposit

Furthermore, even if established supply were to increase with projected lower demand from investors, to see substantial drops in values assumes vendor’s being forced to sell at a loss.

As evidenced in some of our previous downward cycles (most recently during 2011 to 2012) markets can stagnate rather than truly ‘correct’ with many buyers taking a back seat expecting further falls.

However, a gradual deployment of speculation away from established dwellings, with incentives to investors to purchase new over old, coupled with assistance to potential home buyers to either save, or enter into shared equity schemes, would be a start to meeting any increased supply with new home buyer demand.

The policy could be gradually phased out by limiting it to a fixed number of investments  – 2 for example – or taking the suggestion made by the Henry Tax review of tightening current arrangements with a lesser 40% of interest allowed as a deduction, and capital gains taxed at the slightly higher rate of 60%

This at least would be a starting point toward a fairer market

Additionally, dramatically increasing supply of new ‘quality’ accommodation with some reserved for low-income workers must take priority, as well as a structured plan to increase infrastructure through the consideration of bond financing for example

Over the 17 years to 2012 negative gearing cost Australian tax payers around $33.5 billion (inflation adjusted for the period estimated.)  Considering we have an ageing population requiring increased spending on healthcare and other related services, coupled with a widely spruiked shortage of housing and, as Tim Toohey pointed out in a recent Goldman Sachs publication, forecast income growth of 3.5% in 2013-14 compared to an average of 15.5% over the last 15 years, it’s hard not to see better ways to manage the budget.

Indeed – any politician with more than a short-term mindset – would be blinkered to imagine we can continue with the current status quo for ever.

Additionally, an overhaul of policy surrounding tenancies is also necessary. However, that’s for another column.

Catherine Cashmore

A few thoughts on Negative Gearing – the contradictory policy which benefits investors whilst negatively impacting renters.

A few thoughts on Negative Gearing – the contradictory policy which benefits investors whilst negatively impacting renters.

It’s hard to believe we need to consistently go over the impact a concentration of investment into established housing has on affordability to the detriment of low-income workers and renters.

I’ve written extensively on it in the past, and many papers have been produced to outline the consequences in detail. However, over the past week, I received a string of emails from interested readers and journalists asking for my comments on negative gearing, therefore, I hope you will forgive me for reiterating a few basic points.

To be against negative gearing as a policy incentive is not a stance against investment into the housing market.

Indeed we need a steady provision of rental accommodation because there will always be a proportion of the population unable or unwilling to purchase, or in need of a transitional period of tenancy due to job changes.

Albeit, a drop in ownership rates from families with children falling from 79.5%-77.2% over the last census interim – our biggest demographic of homebuyer, – coupled yields outpacing both wage growth and inflation over the corresponding period and beyond, highlights a growing and somewhat concerning trend.

Leading up to the peak of 2010, Australia had an unparalleled property boom which not only heralded us top of the “Annual Demographia International Housing Affordability Survey” for subsequent years, but placed household debt to income ratios at around 150% which can hardly be called healthy.

I’m sure many have grown tired of being ‘lectured’ on the many ‘viable’ reasons why we’ve seen prices and subsequently household debt increase (ease of lending, lower borrowing rates, and wage growth to name but a few) however, whilst you can argue over the details contained in housing affordability reports as many have done in the past – or fall back on previous statements made by the RBA which conclude’

“Australia is now broadly in line with other comparable countries, having risen relative to other countries since 1980 when it was at the lower end..”

..it’s rather embarrassing that these ‘comparable countries’ include the UK, New Zealand, Denmark, the Netherlands, and Canada – all International terrains which having been through somewhat harder lessons than our own, also battle to induce first home buyers out from underneath their ‘rental’ blankets as high prices and shortages of stock herald arguments similar to those voiced here.

Yes – Australia has a shortage of accommodation in areas most want to live, work, play and importantly purchase. As I argued last week, this pattern of behaviour has predominantly been driven by years of poor planning for population growth, leading many to conclude, they have little option but to situate close to centralised job districts rather than incur the inflated cost and time of commuting on already over-crowded arterials.

However, all of he above has also been exacerbated by our tax policy of negative gearing.

As the Henry Tax review pointed out, Australia has a system that taxes income from work and savings at a higher rate than other forms of investment (including borrowing and speculating,) which are taxed at a lower rate.

In other countries such as the USA, investors of geared properties can only claim tax deductions for interest on borrowings against the income generated by the property until sold.  However, the Australian system allows heavily geared investors to deduct against wages thereby reducing their overall tax bill, which, when combined with various other incentives such as depreciation, makes it a very attractive policy for high income earners to the disadvantage of lower wage individuals, unable to bridge the gap between the income the property generates and the outgoing expenses.

The success of negative gearing relies solely on the growth of the asset.  Without good capital appreciation, negative gearing doesn’t work.  Therefore, investors taking advantage of the incentives are for want of a better word ‘speculators’ who have concentrated their attention on the established market principally in the inner and middle ring suburbs – areas that attract the highest levels of concentrated buyer activity.

Consequently, 92 per cent of residential investors borrow to purchase second hand dwellings, leaving the ‘new housing market’ without enough investment to induce an adequate provision of supply or infrastructure. This inflates the cost of established stock, leaving a widening gap between price and yield – leading investors even more reliant on the band-aid of negative gearing to fund their activities.

With 1.2 Million negatively geared investors (speculators) relying on appreciation, predicting movements in the market place is a national past time.  You’ll hear it trotted out frequently that we’re at “such and such” stage of the “property clock” or “property cycle.”  Second-guessing rises or falls in the RBA rate has become a popular sport on Twitter and various other media outlets.

The RBA noted as early as 2003, when advocating a moderation of demand in the property market amongst investors, by way of tightening of the current negative gearing rules – the rises in Australia’s established market have been inflated principally from a growth in investor demand aimed overwhelmingly at the second hand dwellings.

The RBA described the demand as ‘unprecedented’ with the concentration overwhelmingly on properties around the median price point (currently circa $500,000) where overall demand from homebuyers is also at its highest.

On the surface it may seem somewhat contradictory that a policy benefitting investors could negatively impact renters.  Albeit, rather than having the ‘spruiked’ desired effect of aiding rental affordability and rental supply, the results speak for themselves.

Over the previous five years, Australia’s rental yields have risen 49.2 per cent, outpacing growth in housing loan repayments for the same period. Furthermore, long-term vacancy rates sitting firmly below 5 per cent and in established areas they hover closer to 2 per cent. Does this alone not ring bells that negative gearing as it stands, is doing little to solve rental shortages and consequently a growing affordability crisis?

Some put forward the debate that property investment should be viewed no differently from any other small business such as dog washing and so forth.  However, property is not only a wealth generating asset, but as essential requirement for all – on a par with good medical care and food. Governments have a responsibility to provide policies that balance the market for investor, renter and most importantly the homebuyer alike. Not an easy task – but certainly not impossible.

Then there are those who take you back to the Hawke/Keeting era during which negative gearing was to some extent “quarantined”.  The result was marginal at best, there was a dampening of investor enthusiasm and a small increase in rental yields in two states (Sydney and Perth) both of which were already experiencing vacancy rates below 1 per cent and therefore had other factors weighing into the statistic – however in other states there was no such rise, and in some – such as Melbourne, rental growth actually slowed.

Additionally, the change in policy didn’t stay around long enough to take us through this transitional period and enable effective assessment of the results. Stringent lobbying by the real estate fraternity and property investors ensured at first opportunity the policy was re-introduced.

This is because real estate industry professionals love investors.  The transaction process is generally smoother with less emotional content involved and the selling agency benefits from the rental management once the purchaser has settled.  This helps cement a lasting relationship with their client’ as well as an ongoing potential income stream.  Hence why the majority would rarely voice opposition.

I have no doubt if the policy were removed, or even scaled down, there would be less demand for established stock and a subsequent dampening in prices.  And whilst I agree that a sudden and complete retraction of negative gearing in its current form would be foolish – favouring a slow wind-down whilst other policies are implemented such as strategies to aid development and increase supply – the notion that touching the ‘golden egg’ of negatively geared property assets in a way which may dissuade buyers from ‘banking’ on the established market to fund their retirement would be disastrous – seems to be one that’s culturally ingrained in the real estate fraternity.

You only have to turn on the TV to be bombarded with programs from The Living Room to The Block, which make everyone feel like a rookie renovator able to ‘tap into’ the wealth of their property investments with a quick makeover, or fuel the perception that you can pick up a good property as some magically suggest –‘below its intrinsic value’ and ‘add value’ to create profit – to know obsession with property investment goes above and beyond negative gearing alone.

Indeed, if someone could prove to me that any of our current modes of investment have lead to

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

I would be the first campaigning on the streets in in favour of the plan.  However all of the above, negative gearing has failed to do.

I can’t help thinking back to a talk I attended at a previous REIV conference where a Victorian state minister was lecturing on the state of our economy (I won’t mention names).  During the course of his speech, he revealed he had ownership of nine investment properties – the majority of which are negatively geared. Therefore, you have to wonder who our leaders are protecting when opposing changes to the current status quo – it’s certainly not the low-income earner or renter.

In other words, negative gearing, as been more to do with promoting property inflation ‘growth at any cost’ rather than aiding society – however, for those who want more detail on the consequential impact, I suggest reading the latest research paper from the Grattan Institute which can be downloaded here.

Catherine Cashmore

 

 

 

 

Who are we building homes for? Private local and offshore investors, or low income workers? Melbourne’s growing pains..

Who are we building homes for? Private local and offshore investors, or low income workers? Melbourne’s growing pains..

I’ve written extensively regarding the various issues that adversely affect our home buying demographics.

Within the real estate industry itself, it’s not a popular subject– obviously time spent analysing concerns related to rising capital prices, which will eventually result an undesirable demographic shift in the makeup of our society, do little to promote a profit making business that reaps rewards from inflationary gains.

Any hint that the cost of accommodation may be unaffordable for a growing percentage of potential purchasers, usually results in an accusation that first time buyers are being ‘picky’ or just plain unrealistic in their expectations. And whilst low rates may assist existing owners, the short term frenzy of activity being felt in our largest capital cities is primarily being lead by little more than confidence and speculation, with 50% of Sydney and Melbourne’s current demand is coming from the investment sector alone.

Investors now prop up valuations in the lower price bracket and consequently first-time purchasers without some kind of family assistance to help with a deposit, or dual income, often find themselves forced into a rental trap.

Another reason housing affordability is an unpopular topic, is because it needs to be tackled on a number of fronts.  Hence, why it often seems like an insurmountable problem that successive governments find “too hard” to change within their short-term outlook, albeit, it’s not through lack of educated advice.

Reviews into tax policy, land constraints and development overlays, changes to existing models of funding and so on, have been analysed and researched extensively, however if the trade off risks lowering valuations for an asset class which is the retirement and income stream for a large proportion of Australians, it’s considered political suicide to do much outside of maintain the mantra to keep rates low and job security high.

Housing is evidently more about investment than ownership.  The vast majority of programs, publications, and commentary on the housing market, are focused firmly on the investment sector, coupled with plenty of free advice on the expanding array of mortgage products.

It’s a vehicle for making wealth – a valuable asset to ‘tap’ into when approaching retirement – potentially less volatile than the stock market considering its illiquid nature, and one that when purchased, is held for the long term, with a view to using the equity to leverage into future acquisitions.

Single first homebuyers (if they can be found) need to seek accommodation outside capital city markets to purchase within budget.  Therefore, when you witness half a dozen bidders battling it out for small un-renovated 70s style apartment in an inner area of Melbourne or Sydney, and paying in excess of $500,000 or $800,000 respectfully for the privilege of doing so, with a rental return yielding little more than 4%, you have to wonder at the sanity of it all.

A large proportion of unproductive debt being pumped into a limited area of density, with investors (the supposed ‘unemotional buyer’) playing a game of musical chairs with aging stock, hoping consistent market demand from future speculators, will keep valuations inflated, and provide the needed rise in capital to make the loss yielding investment worth the risk after maintenance costs, periods of vacancy, and inflation have all been accounted for.

Commentators often try and play down this influence in the Australian real estate market by stating that just one in seven households owns a single residential investment property.  However, it’s not so much the overall proportion of investment that matters although this is a factor – but where the concentration is focused.

The percentage of investor-owned apartments in both Darwin and Brisbane for example falls close to 70% – and in the other capitals, it comes in between 60 and 70%. In Australia, investment property contributes 32% of Australian mortgages, compared to 20% in NZ and 12% in the UK

Local buyers leverage this debt into established dwellings with the low grade’ high-density apartments being primarily sold off the plan to offshore purchasers which due to cultural tendencies, often results in a significant proportion sitting vacant.

Considering my statement that housing is more to do with investment than occupation, it could be argued that there’s nothing wrong with this – except of course, we all need somewhere to live, and putting aside a small proportion of Australian’s who make the long term lifestyle choice of renting whilst investing elsewhere, most desire a secure place of residence, debt free, upon retirement.

Hence why affordability and increasing the supply of quality stock to provide a feasible entry point for low-income workers into an area that is not devoid of infrastructure, is primary.

Over the next 40 years, Melbourne’s population is set to expand to a projected 8 million eventually putting the state in front of Sydney as ‘the most populated.’

Planning Minister Matthew Guy is currently responsible for shaping Melbourne and to be fair, he hasn’t got an easy job.

It’s going to be nigh on impossible to please everybody. Years of poor policy have already ensured we have sparse facilities to meet the demands of those who choose to live in “fringe” suburbs and consequently, the price of commuting frequently forgoes any benefit gained from paying a marginally lower price for the privilege of more space and accommodation further from the city.

The state government are taking a two pronged approach. Firstly, by deciding to enforce a permanent urban boundary to prevent further ‘sprawl,’ whilst encouraging expansion of regional towns such as Bacchus Marsh, Warragul, Kilmore and Wonthaggi. And secondly, increasing the proportion of high-density accommodation by way of recent changes to residential zones.

So far, the main consensus of opinion on talk radio, television, and social media, has been virulently against all of the above – urban sprawl, increased density, and regional development, with neighbourhood voices speaking strongly against any change to their local landscape.

However, whilst heated emotions are understandable, ease of effective supply is an essential component when combating issues of affordability, and therefore, if this is what the state government intends – as spruiked in the various press releases, it must achieve the following.

1.) Drive down land values

2.) Ensure infrastructure is adequately financed

3.) Keep speculative activity in check to make sure supply is suitably priced and attractive to lower income homebuyers and renters.

In light of the above, a few cautionary points should be highlighted in regard to Melbourne’s new plan.

When you place a band of restriction around any neighbourhood – with a ‘permanent urban growth boundary,’ you effectively make assumptions about future increases in population, and in doing so restrict the amount of developable land, resulting in a decrease not increase of supply over the longer term.

In addition, larger developers have a tendency to land bank the available plots reducing competition against smaller players who don’t have the financial capital to compete so far in advance of demand.

This inevitably leads to higher, not lower land prices for the predominant demographic this type of accommodation attracts – lower wage dual income buyers.

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

Therefore, as much as idealists may not like ‘sprawl’ it’s not only important to make land readily available and free of restriction when population growth demands as such, it’s also important to implement a structured and timely plan to fund essential community infrastructure to attract consistent solid demand.

The specified areas closer to town set aside for intensive development of high-density apartment blocks will be immune from council or residential protest.

However, to date, the rush into apartment living has been anything but robust.  The elderly overwhelmingly downsize into medium density accommodation– and although younger generations in their 20s and 30s have a better propensity towards high density dwellings; figures still only peak at around 14% at the age of 27 (as of 2011.)

At the root of the problem lay a few issues. The relatively small one and two bedroom units featured as “affordable” tend to fall into the investment sector of the market not just because of tight lending restrictions banks impose on first-home buyers for this type of accommodation – but also due to high owners’ corporation fees set aside to service the lifts and other security features.

The standard of accommodation is typically low grade and developers are pressured to pay vastly inflated commissions to achieve the pre-sale targets set out by the banking system in order to acquire funding. Hence why such projects are often aggressively marketed to off shore purchasers.

In this regard, the avenue Melbourne is heading toward, is similar to the building initiatives employed in Ireland in the run up to the GFC.

In this region, when supply responded to demand, it was generally too late. Urban growth restrictions ensured new homes were built in locations far from existing amenities, and therefore not appealing to the home buying demographic whilst brownfill sites were filled with high-density poor quality unit stock more suited to investors than the needs of owner occupiers.

Subsequently, in the two years leading up to 2007, almost half of all new home purchases stemmed from the investment sector rather than a first home buyer demographic, and as a result, many of these homes are still sitting vacant whilst the lingering lack of ‘quality’ accommodation is once again starting to disproportionately inflate as the economy shows slow signs of recovery.

If nothing else, the example proves aptly how supply shortages can still occur, even when building initiatives have been implemented.

Therefore, as admirable as the state government’s plans may seem on the surface, there’s every risk they won’t fulfil the objective intended.

In an excellent piece in The Australian a few days ago, Toby Hall, chief executive of Mission Australia made comment;

“Housing is part of our critical infrastructure and we should treat it as such. We (should) consider debt financing for major projects – bridges, roads, rail – and we should consider a housing bond backed by the commonwealth.”

Because of our current tax system the best-established property in our inner suburban market suited to the first home buying sector is currently a hotbed of investor demand.  Therefore, as vital as it is to consider finance initiatives to stimulate new projects, it is equally important to make sure the supply constructed is diverse enough to appeal and fulfil the needs of low income owner occupiers -including an increased provision of social housing – and therefore suitably targeted toward those who need it most.

Catherine Cashmore

Regulation and Speculation

Regulation and Speculation in Australia’s Housing Market

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

 

 

 

A housing bubble or the potential for one?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Catherine Cashmore

Australia is blinkered when it comes to property

Australia is blinkered when it comes to property

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It’s time we campaigned for change.

Catherine Cashmore

Is Australia’s housing market ‘unaffordable?’

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

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

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

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

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

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

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

So where do we stand on issues of affordability?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As Eslake comments

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

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

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

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

Catherine Cashmore