The certainties and uncertainties of Australia's housing market: Catherine Cashmore
Balancing a real estate market is not an easy task. Too much supply and prices fall – too little and they rise and in this respect, years of rapid population growth has played an influence on the Australian real estate terrain.
Additionally, various incentives – negative gearing, grants for first-home buyers, reduced stamp duty rates for off-the-plan sales and new homes, relaxed FIRB requirements - to name but a few - have been introduced, changed, and intermittently withdrawn by government “movers and shakers.”
All have the effect of falsely influencing consumer demand one way or another - sometimes it’s done in favour of the investor, sometimes the home buyer, however in all circumstances any so called improvement in ‘affordability’ invariably results in price increases, of which I have no doubt was the intention in the first place.
The housing boom has fed Australia’s obsession with real estate – and I can fully understand the emotions that surround the debate. I attended a dinner over the weekend and enjoyed the company of a group of retirees who have all benefited nicely from rising property prices over our golden years of growth.
Most around the table owned a small portfolio of investments and once they discovered my current employment status, wasted no time recounting how investment in property – of which their parent’s generation had been unable or too cautious to explore – had paved the way into what was now, a relatively comfortable retirement.
When they purchased their first homes – Melbourne and Sydney were growing rapidly. Supply was good, low rise apartment blocks were popping up along local streets; there was massive investment in infrastructure – roads, schools hospitals, public transport etc. The then ‘outer suburbs’ were far more facilitated than our current comparable ‘fringe’ localities and the higher inflationary environment benefited their footsteps into property investment nicely.
However, the question all wanted answered was - ‘are we in a bubble’ and if yes, ‘will the housing market crash?’
It’s possibly the most common question I’ve been asked to date when talking about real estate – and understandably so. Prior to the GFC, following a global 'borrowing' shopping spree of cheap credit, Australia’s ‘too big to fail four’ were amongst the world’s most heavily exposed to the residential real estate market, with a grand total of 59% of loans offered to this sector alone.
Mortgage debt – the largest component of all debt in Australia, has ensured Australia’s banks are as ‘pinned’ in their reliance on the ever-expanding growth of our resident population’s desire to borrow and buy, as is everyone else who has a hand in the pie – aptly benefitting those who got in at the start of the ‘lending boom’ against those who now find themselves in a far more challenging environment.
As Canstar’s Steve Mickenbecker recently commented during a video interview on Yahoo Finance last week, Australian’s are “paying double what they were 10 years ago to get into the (property) market”, despite wages rising “by half that.”
Although property cycles are evident in all market economies, I’ve said previously that assessing the immediate future based on our long term past will not produce the desired result for those imagining that the property market can sustain an inflationary upward curve, in line with our previous ‘golden years of growth.’
Notwithstanding, RP Data have not been slow in suggesting a range of suburbs predicted to double in value over the next ten years. Under such a suggestion, buyers could find themselves faced with a bill for close to $1Mil for a basic inner city second hand unit. No wonder RP Data caution investors to view the ‘free’ report as a ‘starting point’ – general advice only in return for an email address.
Last week the RBA expressed concerns about growth expectation in an address to the Citibank Property Conference entitled “Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between.”
The speech was interesting, but perhaps should have just lead with the word ‘uncertainty’ because whilst they make it quite clear the future is not going to look like the past – for which they employ the term a ‘new normal’ – it’s also clear they have little concept of how this ‘new normal’ will look.
Understandably, they note a recent recovery in dwelling prices which they advocate ‘makes sense’ given the steady decline in interest rates. This is the one reason we’re being bombarded with ‘how affordable’ the market is at present.
However, it’s a funny old world where house prices can romp past the rate of inflation and wage growth ending at historic highs, and despite the recent ‘slump’ in transactions and values, which saw a fall of some 6 per cent nationally, be back on the road to recovery, with established metro prices romping on towards their 2010 peak. Yet, at the same time, first time buyers are consistently told – it’s ‘never been more affordable to buy’ because ‘cheap credit’ is currently in abundance.
Of course, there’s no mention of what will happen to those homebuyers when rates do eventually rise – which, if not in the foreseeable future, they inevitably will.
The RBA have voiced little concern regarding our high personal debt levels (household debt to income ratio remains stubbornly at some 150 per cent) noting thus far, serviceability is well maintained.
However, the risk is ever present. High levels of debt – when followed by downturn in house prices generally result in a greater reduction of economic growth and subsequently an increase in unemployment. In other words – the debt level is fine, as long as the party continues – but are there any rumblings on the horizon?
As referred earlier, one we approached any question of a ‘bubble’ the conversation I had round the table Saturday evening was an interesting one. When the subject of lending standards arose, the general consensus of opinion reiterated was the ‘new’ prudent environment which all imagined went hand in hand with the assumption banks no longer lend ‘more’ than an individual’s income can service. Or as the RBA termed it;
“Broadly speaking, mortgage lenders decide how much to lend to a household by working out the repayment they can reasonably make, given the household's income and other factors. For a given interest rate, this then backs out to a loan amount.”
I only wish I had evidence of this to hand. Whilst first-home buyers may find it challenging to gain finance for their initial purchase, and the environment is admittedly more ‘prudent’ - the last few conversations I’ve had with investors have revealed some concerning trends. Even in our post GFC environment, most were offered loans far in excess of what they could comfortably service, yet understandably, all chose to accept less. I readily admit this is only anecdotal evidence – however, clearly, for those who hold existing assets, lenders are unsurprisingly not averse to pushing the boundaries – with loan to value ratios still available at 95%.
But as for the future predictions, it’s somewhat ironic that Luci Ellis – who holds the title ‘Head of Financial Stability Department’, can give what is essentially a speech full of 'unknowns' and a few well publicized inaccuracies, which, if anything, it reads like a thesis of 'mights'..
“We don't have a strong view about whether the ratio of prices to income should be mildly rising, falling or constant from here”... “we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again”
“We don't know exactly what the saving ratio will do in the period ahead”
“We don't think it will necessarily return to the level in the 1960s and 1970s,”
“We think it is very unlikely to return to its 1970s levels, or to rise rapidly once again”
They make the point that they don’t want “banks to ease their lending standards to make more loans and bring back the boom times. Nor would we want them to cut costs in a way that impinges on their risk-management capabilities.” As if wishing for some kind of ‘goldilocks’ outcome in an environment in which they have marginal control.
However, for my friends around the dinner table on Saturday evening, hotly debating a potential property bubble, the following comment from Ms Ellis would have perhaps been worth a mention.
“we certainly can't rule out the possibility of a major housing downturn in the longer-term future. It is hard to know exactly what the outcome would be because it depends on how we got to that point. Institutions differ across countries, so we can't simply extrapolate from experience elsewhere. And there would need to be another boom first.”
In light of our personal debt levels, I don’t believe a drop in house prices need be pre-empted by another boom. Albeit, keeping property prices afloat is no hard task in a country awash with policies that encourage investment into our limited established housing market.
We can argue the case for and against such policies with passion, citing old concerns that many first time buyers have ‘inflated expectations’ or an un-willingness to move into cheaper markets, however what cannot be argued, is the widening gap between existing owners and initial buyers which has slipped to the lowest ‘seasonally adjusted’ level since March 2004.
Viewing housing as merely a tool to build wealth and drive the economy takes a fair amount of manipulation. It’s not hard to keep prices inflated – and if the worst happens, relaxing rules on foreign investment and providing a boost of cash grants as we did during 2008 would – based on recent history – be the accepted move.
Therefore, whilst there’s no doubt even in the collective mind of the RBA that property prices are sitting at a peak, there are plenty of variables to the questions of when, if, and how likely they are to drop.
Rather the question remains – how much higher can they possibly be pushed at the expense of a new generation of renters, who have long given up on the Australian dream?
Under the current system, we’re speedily widening the economic gap between the asset rich and asset poor. In this respect, the belief in giving the underdog a "fair go" as a key part of our collective culture – doesn’t quite extend across the socioeconomic boarders manipulated through high housing costs.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.
