Australia’s housing markets are at a watershed moment
Several times in recent weeks the RBA has made statements about the price of Australia’s housing.
The first was that overseas buying is having little impact on price; the second was that owners shouldn’t expect prices to rise every year and the third, that if price growth slows, then many would be better off renting.
With only one real tool now left in the tool box – i.e. interest rates – there is little that The Guv can do but jawbone.
Nothing wrong with that – you, I and many others do it on a regular basis. The difference is we don’t get front page coverage (well, you do sometimes) or a mention on the nightly news.
Overseas buying
Well the RBA, in my view and according to our research, is wrong. Somewhere between 25% and 50% of new attached residential property is being sold directly overseas.
We are about to release a series of apartment sales and performance reports – which cover buyer profiles and origins, along with resale plus rental results – and the recently settled projects have all got very high overseas buyer origins.
Also, having given over 60 market outlook presentations over the past 12 months, I can tell you that many in the audience – especially in Sydney and Melbourne – are recent migrants and they tell me during our one-on-one discussions, after the formalities are over, that they are buying for not only themselves, but friends and relatives currently living overseas. Interestingly, many think that ownership gives their friends and relatives the right to occupy.
Despite the recent low interest rates, why is it this housing recovery has been quarantined (so far) largely to Sydney and Melbourne? Little has happened over the past 18 to 24 months, outside of these two capitals. Is it just coincidence that both Sydney and Melbourne attract the most overseas migration and direct overseas interest? Come on, let’s get real. and the RBA have no control over this.
Price growth to slow
Once interest rates normalise (rise) then the housing market will slow. But more importantly, ageing demographics, especially the contraction in the size of the upgrading market, will be a big drag on house spending. Ditto persistently high unemployment and fewer full-time jobs being created.
Annual price growth, say, post mid-2016 (when I think interest rates will rise, due to the Federal Reserve’s action rather than anything here), would at best be 5% per annum. So, well under 2.5% in real terms.
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Statistically yes, but only if households wisely invested the difference; the quality of the owner resident homes and rental properties in this country were the same and that pride, security and self-worth weren’t generated out of security of title and the ability to improve your lot.
It is amazing how a really boffin-ish academic study can get so much airplay. But it does reiterate that the RBA expects less residential growth in the future.
I think more will rent in the decades to come, as many will be priced out of the ownership marketand/or don’t want to commit to the mortgage. Ironically, we are likely to see fewer investors – well, first time investors mostly – as the past and easy property growth rate has gone. It will take real skill and focus to buy the right investment product and even if investors buy wisely, gone are the days of double digit annual price growth, once this current upturn is over.
What’s going on
Let me share some statistics with you:
- 16,000 new jobs were created across Australia in June, but just 3,800 were full-time. The unemployment rate is now at 6%. Less wage growth is the result and about half of that experienced just five years ago. Half of the new jobs created across Australia over the last year have been part-time. This is now a growing trend.
- Mining capex is in decline and has not (yet) been replaced by non-mining stuff – i.e. retail, tourism, gas projects, public transport and especially construction. Things look increasingly encouraging in this space, especially with housing commencements finally starting to move upwards, but many of these new jobs will not pay as well as resource-related ones and a lot will be part-time.
- 94.9 is the current reading of the Westpac/Melbourne Institute index of consumer confidence – a reading above 100 signals optimism. So, we are pessimistic. and it is more than just the federal budget or PUP and this Senate; we have been pessimistic for some time. I think many believe that Australia has been living ‘above its means’ for some time and that we need to do something about it,and now, rather than leaving it to our children/grandchildren to deal with. This means having less. Hard to do and such change usually zaps confidence.
- Investment housing loans are up over 20% on last year.
My reading is that the RBA is having a bet each way: rates to remain steady for some time, or if things continue to soften economically, then the cash rate will need to fall sometime over the next couple of months – down another 0.25% – to help boost employment and help boost the non-mining capex industries along.
If rates do fall, this will add strength to the housing cycle, increasing prices above a sustainable growth path and level (they have already passed this point in many centres – seriously so in Sydney, Melbourne and to some degree Perth).
This collateral damage is the price we will be paying for having only one tool now to work with (we have no money left in the bank) and it is why the RBA is megaphoning about such housing matters now.
And sometime in the future – let’s say for now, in 18 or so months, the USA will start increasing their cost of funds. Why? Because their economy will be improving and higher interest rates will be warranted. The world will have to follow suit, Australia included.
For mine, Australia’s housing markets are at a watershed – the future is much less generic price and even rental growth, real issues with affordability, acceptance of more compact and cheaper housing, plus the dire need for major changes to town-planning regulations and practice. Taxation on housing, new and established, will also need a major overhaul.
Fewer are likely to invest in property as a result; many will age in place; look to take in a tenant to help pay their way and where it is allowed, many owners will redevelop their homes – adding granny flats; creating duplexes; making extensions, but not for ‘pleasure’, rather for income generation and/or accommodating children at home for longer, or housing their ageing parents at home.
Sadly, the RBA isn’t megaphoning about this.
