House Prices

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<p><span>GUEST OBSERVER</span></p>
<p><span>The Westpac–Melbourne Institute Consumer Sentiment Index rose by 7.8% in August from 92.2 in July to 99.5 in August. </span></p>
<p><span>This is a very surprising result. Movements of the Index of this magnitude are unusual and generally associated with highly significant events such as interest rate moves or Commonwealth Budgets. There is no comparable event they may have triggered this response although the solution may lie with international issues and housing.</span></p>
<p><span>Last month we conjectured that the main reason behind the 3.3% fall in the Index related to concerns around global issues associated with Greece and the Chinese equity market. That fall had followed a fall in June of 7.1% (also influenced by concerns around Europe in particular) from the big increase in May<br> (8.0% jump) which was most likely associated with the Reserve Bank’s rate cut in early May and a positive response to the Commonwealth Budget.</span></p>
<p><span>It seems that with the tensions in Greece and the Chinese equity market no longer dominating the media consumers are feeling more relaxed. However, the Index remains below 100 and is therefore the 16th reading out of the last 18 where the Index has been below 100 indicating that pessimists have consistently outnumbered optimists.</span></p>
<p><span>Ongoing positive news around house prices may also have buoyed confidence. Certainly there was a much larger lift in the confidence levels of those respondents who wholly own a property (up 6.2%) or who hold a mortgage (up 11.0%) than those who are out of the housing market (up 4.3%).</span></p>
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<p><span>However confidence is not being boosted by the expectation of more interest rate relief. In our special question around the outlook for mortgage rates 55% of respondents expect mortgage rates to rise over the next 12 months; 35% expect rates to be steady; and 5% expect further rate cuts (5% with no opinion)</span></p>
<p><span>Over that 18 month period there have been two months (following the RBA’s rate cuts in February and May) when Confidence has rallied but this has not proved to be sustained.</span></p>
<p><span>I expect that this current “rally” will equally prove to be unsustainable particularly given a resurgence of concerns around China and the evidence last week that the unemployment rate lifted to 6.3%.</span></p>
<p><span>The rise in the overall Index was associated with a modest improvement in respondents’ confidence around the labour market. The Westpac Melbourne Institute Index of Unemployment Expectations fell by 2.1% following a 1.3% fall in July (a lower level indicates that respondents are more confident with the labour market outlook). However the Index is still above the level in May and 6% above the level in October 2011 immediately before the Reserve Bank began its easing cycle.</span></p>
<p><span>Not surprisingly, all components of the Index increased. Possibly reflecting the house price theme we saw a huge lift in “family finances compared to a year ago” of 15.5% while “family finances over the next 12 months” rose by 3.9%.</span></p>
<p><span>Prospects for the economy, possibly influenced by a more settled global outlook, also lifted. “Economic conditions over the next 12 months” rose by 13.4% and “economic conditions over the next five years” was up by 5.8%. However note that these two components are still down on a year ago: –8.7% and –2.1% respectively.</span></p>
<p><span>“Whether now is a good time to buy a major household item” rose by 3.7% but is also still down 1.6% on last year.</span></p>
<p><span>Sentiment towards housing improved. “Whether now is a good time to purchase a dwelling” increased by 8.2%. But that really only represents a recovery from the precipitous fall last month of 15.4%. The level in August is still 8.5% below the level in June and still represents the second lowest print for this Index since November 2010 – the aftermath of the Reserve Bank’s rate hike cycle. There was only one state, New South Wales, where the Index fell further (– 3.3%) from the July level. The Index for New South Wales is now 22% below its level two months ago. This sentiment is probably being driven by concerns around both affordability and prospects for prices.</span></p>
<p><span>Respondents were less confident about the outlook for house prices. The Westpac–Melbourne Institute Index of House Price Expectations fell by 5.6% (to 137.7) from its level in July (145.8) and is now down by 10.3% over the year. </span></p>
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<p><span><em>BILL EVANS</em></span><em> is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.</em></p>
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August consumer sentiment index rise surprising: Bill Evans

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<p>Rising household debt levels, the hot Sydney property market and continued low interest rates has made Australian Prudential Regulation Authority Wayne <span class="il">Byres</span> uneasy.</p>
<p>It seems he especially fears a market propped up by artificially low, interest-only borrowing rates.</p>
<p>Last month he decided the trend to over borrow, and then not to repay home loans in the conventional manner of interest and principal, was a likely recipe for a economic uncertainty.</p>
<p>To preserve financial stability, the prudential regulator decided in its latest macro-prudential measure that the interest-only loans fad need to be constrained.</p>
<p>The banks were told that less than 30 per cent of their new mortgages can be interest-only, <span>well below the 38 per cent of total loans currently taken.</span></p>
<p>With borrowers realising paying interest-only freed up cash-flow, they've dived into interest-only loans which haven't been below 30 per cent since around 2008.</p>
<p>Interest-only loans typically have a period of five years, and then the loan will revert to the normal P&amp;I repayments, with the recent accompanying price growth seeing the investor nicely placed to cope with the higher repayments.</p>
<p>The tax deduction of interest payments in the meantime on these investor loans will have been a big incentive for the investor.</p>
<p>Investors have accordingly snapped up the bulk of interest-only loans, but owner occupied borrowers have been a worrying large 40 per cent share.</p>
<p>As Sydney house prices have surged since 2012, house loan sizes have grown, and for most households who've have experienced limited wage growth, the upsizing to the bigger home has only really worked with getting an interest only loan.</p>
<p>On a $300,000 mortgage over 25 years at a 5% p.a. interest rate, the usual monthly repayment would be $1,754 a month. But if you were making interest-only payments, the monthly cost would be $1,250 a month.</p>
<p>For a $750,000 home loan the monthly repayment of $4,174 drops to $3,325 if only the interest is repaid – which for many Sydney families is the difference between owning a bigger home or not.</p>
<p>The push hasn't just come from borrowers as mortgage broker's commissions are calculated on the size of the loans so they are incentivised to write interest only loans.</p>
<p>ASIC advised this week while interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.　</p>
<p>The Reserve Bank of Australia has warned for two years that the rise in interest-only loans could amplify the housing price cycle, increase the risk of significant price falls, and may result in households overburdened in debt. </p>
<p>If house prices do drop, the borrower will likely end up owing more than the house is worth, paying much more interest than they would have otherwise paid, and then coping with the many ensuing dramatic problems.</p>
<p><em>This article first appeared in the Daily Telegraph.</em></p>
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Three housing market factors making APRA's Wayne Byres uneasy

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<p><img src="https://counter.theconversation.edu.au/content/75126/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1"></p>
<p class="caption">GUEST OBSERVER</p>
<p>Whether house prices have been inflated by limited supply, or because of transfers to investors and homeowners, government policy is now trapped in a vicious cycle.</p>
<p>The wealth accumulated in our houses has become a central part of the retirement system, and the government itself can’t afford for prices to fall.</p>
<p>Generous tax subsidies and asset test concessions on the family home have incentivised the accumulation of wealth in property and fuelled demand pressures in the housing market for decades.</p>
<p>Government assistance to home buyers and owners is provided in the form of the First Home Owners Grants, stamp duty concessions, and the family home’s exemption from capital gains tax, land tax, as well as the pension and other assets tests. These subsidies and concessions combine to make wealth accumulation in the family home more attractive than other assets.</p>
<p>In many real estate markets, land supply constraints and planning controls can limit urban sprawl while housing demand pressures continue to intensify. Hence, cities such as Sydney have become “pressure cookers” where the subsidies result in rising house prices in the face of land supply constraints.</p>
<h2><strong>The policy-price cycle</strong></h2>
<p>The family home has become a cornerstone of the Australian retirement system. Sustained house price increases have allowed government income support to be set at historically low levels in Australia compared to other countries with lower home ownership rates such as Sweden and the Netherlands. This is based on the assumption that the low-income elderly will be housing asset-rich, and can therefore can get by on smaller pensions.</p>
<p>Indeed, in an era of ageing populations, governments have been encouraging older Australians to tap into their store of housing wealth to fund their own retirement and ease intergenerational fiscal tensions. For instance, the Productivity Commission’s aged care equity release scheme recommends elderly home owners draw down against their housing equity to meet aged care costs.</p>
<p>Of course, this only works if house prices continue to rise.</p>
<p>If house prices fall, the cycle gets broken and the family home may no longer be an adequate base for supporting the retirement needs of the wider population. In the event of a long-term decline in house prices, individuals would require greater income support from governments as their personal asset base weakens. This would in turn perpetuate a rise in government social security expenditure.</p>
<h2><strong>Over the long term</strong></h2>
<p>But even if house prices weren’t to decline, there is a paradox at play in this system. In order to maintain a healthy housing asset base for retirees, house prices must remain high. So the policy-price cycle is aimed at sustaining home ownership as a key pillar of the welfare system. However, it has also resulted in housing wealth becoming increasingly concentrated in the hands of smaller subgroups. Notably, housing equity is getting concentrated in the hands of older generations.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/04/6/image-20170403-16550-3uf443.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/04/6/image-20170403-16550-3uf443.png" width="600" height="330"></p>
<p><em><span class="caption">Author’s own calculations from the Australian Bureau of Statistics Surveys of Income and Housing.</span> <span class="attribution"><span class="license">Author provided</span></span></em></p>
<p>As these charts show, the intergenerational housing wealth gap has widened in the last two decades. In 2011, the median housing equity of home owners aged 45-64 years was nearly double the value held by the 25-44 year olds. The share of the population’s housing equity held by those aged 45-64 years has widened between 1990 and 2011 at the expense of those aged 25-44 years.</p>
<p>This means the system could potentially unravel in the long term. If large numbers of young people continue to face price barriers to home ownership, the home ownership pillar within the welfare system will be weakened as the future population of home owners shrinks.</p>
<p>In the short-term a significant group of millennials will miss out on the benefits of home ownership. But in the long term, unless governments address some fundamental structural problems currently entrenched within our tax-transfer system, there is a significant weakness in our social welfare system built on housing.</p>
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<p><em>Rachel Ong is deputy director of the Bankwest Curtin Economics Centre, Curtin University and author for The Conversation. She can be contacted <a href="https://theconversation.com/profiles/rachel-ong-113482" target="_blank">here</a>.</em></p>
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Governments are trapped in a vicious cycle of housing policies and prices: Rachel Ong

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<p>GUEST OBSERVER</p>
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<p><span>The Westpac–Melbourne Institute Index of Consumer Sentiment fell by 3.5% in January from 100.8 in December to 97.3 in January.</span></p>
<p><span>The Index is at its lowest level since September 2015 but remains 4.3% above its level of a year ago.</span></p>
<p><span>With limited domestic news during the holiday season consumers appear to have been mainly impacted by the spate of negative news on the international front and the spill over effect on financial markets.</span></p>
<p><span>Over the two weeks to the end of the survey the oil price has fallen by 20%.</span></p>
<p><span>Furthermore, over the same period, the Australian share market has fallen by 7.6% and the US market by 8.0%.</span></p>
<p><span>News on China’s volatile share market may also be affecting households with the Chinese market down by around 15% since the beginning of the year.</span></p>
<p><span>Partly reflecting those forces, we have also seen a fall in the Australian dollar from USD 0.73 to USD 0.69.</span></p>
<p><span>Not surprisingly these concerns have weighed most heavily on how respondents assess their own financial position. The component of the Index tracking views on ‘family finances vs a year ago’ dropped by 9.4% to be at its lowest level since July last year. The component tracking expectations for ‘family finances over the next 12 months’ fell 2.3%.</span></p>
<p><span>Among the other components: ‘economic conditions over the next 12 months’ fell by 5.0%; ‘economic conditions over the next 5 years’ improved by a modest 0.3%; and ‘time to buy a major household item” fell by 1.7%.</span></p>
<p><span>Both the Index and its components are seasonally adjusted to take account of the regular positive impact on confidence of the holiday season.</span></p>
<p><span>Other Indexes in the survey are not seasonally adjusted so results for these Indexes in January need to be treated with some caution.</span></p>
<p><span>The Westpac Melbourne Institute Index of Unemployment Expectations increased by 0.7% from 141.7 to 142.7. This implies a slightly more concerned feeling amongst respondents about the outlook for the unemployment rate. However, the Index is 5.3% lower than in January 2015 indicating that there has been a material improvement in respondents’ attitudes to the labour market over the year. </span></p>
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<p><span>There was a sharp 13.9% increase in the ‘time to buy a dwelling’ index from 99.2 in December to 113.0 in January. That is the highest reading for this Index since May last year. </span></p>
<p><span>The Index is now only 1.4% below its level for January 2015. The sharp increase in the Index in January will reflect some seasonality but the move is so large that we can only conclude that this print may be signalling some improving optimism in the housing market. </span></p>
<p><span>Most of the improvement in the national Index was driven by </span><span style="line-height: 1.3em;">a sharp improvement in New South Wales which has regularly posted the weakest readings amongst the states in recent times. For this reason it is best to be cautious but nevertheless encouraged by this result.</span></p>
<p><span>This improvement in the outlook for housing was also indicated in the Westpac Melbourne Institute Index of House Price Expectations. The Index increased by 21.1% in January from 103.7 in December to 125.8 in January. The Index is still down by 10.2% over the year but this read represents the best result since September 2015. </span></p>
<p><span>The Reserve Bank Board next meets on February 2. Despite markets confidently expecting that the Reserve bank would cut rates by February Westpac has remained firmly of the view that the Bank will remain on hold throughout the second half of 2015 and the whole of 2016. We retain that view despite some concerns from this survey that consumers may slow their spending in response to this current global uncertainty. </span></p>
<p><span>The Australian dollar has adjusted further providing the important ongoing boost to Australia’s competitiveness which is now assisting the economy’s adjustment as the mining sector slows. Furthermore the survey has provided an early signal that the pessimism which has dominated the housing market in the second half of 2015 may be easing. </span></p>
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<p><span><em>Bill Evans </em></span><em>is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.</em></p>
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NSW cautious but encouraging spike in housing confidence: Westpac's Bill Evans

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<p><span style="line-height: 1.3em;">GUEST OBSERVER</span></p>
<p><span style="line-height: 1.3em;">For more than 100 years the average Australian family was able to buy its first home on one wage. The median house price was around three times the median income allowing young home buyers easy entry into the housing market.</span></p>
<p><span style="line-height: 1.3em;"> As can be seen from the graph below (ï¿½ Real Home Price Indexï¿½), the median house price has increased, in real terms, by more than 300% - from an average index of 100 between 1900 and 2000 to an index over 300 by the year 2008. Relative to incomes, house prices have increased from three times median income to more than nine times income. </span></p>
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<p><span style="line-height: 1.3em;">Thatï¿½s $600,000 they are not able to spend on other things - clothes, cars, furniture, appliances, travel, movies, restaurants, the theatre, childrenï¿½s education, charities and many other discretionary purchase options. </span></p>
<p><span style="line-height: 1.3em;">It is a similar story in the UK, US, Canada, New Zealand, Ireland and Japan. The economic consequences of this change have been devastating. The capital structure of these countriesï¿½ economies have been distorted to the tune of hundreds of billions of dollars and for those on middle and low incomes the prospect of ever becoming homeowners has now all but vanished. </span></p>
<p><span style="line-height: 1.3em;">Housing starts are below what they should be and so have all the jobs associated with them - civil construction, house construction, transport, appliances, soft furnishings, you name it. Not to mention billions of dollars in lost taxes and other housing-related revenue to the nation state. </span></p>
<p><span style="line-height: 1.3em;">The distortion in the housing market, this misallocation of resources resulting from the supplydemand imbalance is enormous by any measure and affects every other area of a countryï¿½s economy. New home owners pay a much higher percentage of their income on house payments than they should. Similarly, renters are paying increased rental costs reflective of the higher capital and financing costs in turn paid by landlords. </span></p>
<p><span style="line-height: 1.3em;">12th Annual Demographia International Housing Affordability Survey (2015: 3rd Quarter) The economic consequences of all that has happened over these past 15 years have been as profound as they have been damaging. </span></p>
<p><span style="line-height: 1.3em;">The housing industries of these countries have been decimated as have industries supplying that sector. Economies have been distorted and getting them back into alignment is going to take some time. But it is a realignment that is necessary. A terrible mistake was made and it needs to be corrected. Home ownership has long been a feature of western life. Levels of home ownership rose sharply in the postwar period. </span></p>
<p><span style="line-height: 1.3em;">Home ownership had become both a symbol of equality and a means through which average citizens could provide security and stability for themselves and their families while building wealth and claiming a tangible stake in their nation. For the vast majority, owner-occupation of the home in which they live was, and remains, a great ambition. So what happened? Why have ï¿½house pricesï¿½ skyrocketed?</span></p>
<p><span style="line-height: 1.3em;"> While influential bodies in Australia like the Productivity Commission and the Reserve Bank focused their attention on demand drivers like capital gains tax treatment, negative gearing, interest rates, readily accessible finance, first home buyers' grants and high immigration rates, few were looking at the real source of the affordability problem - land supply for new housing stock. </span></p>
<p><span style="line-height: 1.3em;">It is undeniable that demand factors played a role in stimulating the housing market and those factors were, for the most part, in the hands of national governments. However, the real culprit, the real source of the problem, was the refusal of local and state governments and their land management agencies to provide an adequate and affordable supply of land for new housing stock to meet demand. </span></p>
<p><span style="line-height: 1.3em;">The graph below (Capital Cities: Price of Land per sq/mï¿½) highlights the growth rate in the price of serviced allotments in Australiaï¿½s five mainland capital cities. This massive escalation in the price of land carries with it a multitude of detrimental impacts. Establishing affordable rental accommodation for those in greatest need becomes even more difficult for social and public housing authorities as they seek to purchase land and housing in a greatly inflated market. </span></p>
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<p><span style="line-height: 1.3em;">Road widening and major infrastructure projects experience cost blow-outs as land acquisition costs skyrocket, and establishing schools, community centres, health services and business facilities becomes difficult, and at times impossible. </span></p>
<p><span style="line-height: 1.3em;">The whole community suffers as a result of increased 12th Annual Demographia International Housing Affordability Survey (2015: 3rd Quarter) tax, transaction, finance and establishment costs. It is important to remember that the "scarcity" that drove up land prices is wholly contrived - it is a matter of political choice, not geographic reality. </span></p>
<p><span style="line-height: 1.3em;">It is the product of restrictions imposed through planning regulation and zoning. The problem is, it is young home buyers, hit with spiraling costs of home ownership who end up paying. They are mostly forced into overpriced units and will never be able to afford their primary ambition ï¿½ a free-standing family home of their own. Quite apart from the economic foolishness of it all, it is morally wrong for legislators to be enriching some (established home owners) while impoverishing others (first home buyers). </span></p>
<p><span style="line-height: 1.3em;">We cannot deny the rising generation a home of their own merely to satisfy the ideological fantasies of urban planners and the financial concerns of State and Territory Treasury officials. We cannot deny ourselves the joys of grandchildren because young women have to work to pay mortgages instead of raising a family. The joke that high mortgages are the new contraceptive is becoming no laughing matter. Young women used to be afraid of getting pregnant, now, as they approach 40, they are afraid of not getting pregnant. </span></p>
<p><span style="line-height: 1.3em;">We have to get back to the situation where a couple can pay off a mortgage on one income so they can start a family in their 20s, not in their late 30s or early 40s. In creating the conditions for home ownership to become the privilege of the few rather than the rightful expectation of the many, governments have produced intergenerational inequity and breached the moral contract between generations. </span></p>
<p><span style="line-height: 1.3em;">In human affairs this imprecise, and at times neglected, moral contract between generations dictates that we should leave things better than we find them. When it comes to home ownership this contract has been breached. In making home ownership much harder for the next generation we have denied them much more than a home. We have denied them the security and benefits that go with home ownership and the opportunity to build wealth that will provide them with options in later life. </span></p>
<p><span style="line-height: 1.3em;">Many are now choosing to defer having a family in the hope that they will be able to somehow put together the funds to buy a home later in life. If they can't afford to buy a house, they certainly can't afford to have children! 12th Annual Demographia International Housing Affordability Survey (2015: 3rd Quarter) When the time for retirement comes, those who own their homes have much more control over their lives than renters. </span></p>
<p><span style="line-height: 1.3em;">They can choose where they will live and how they will live. Given the vast social and economic benefits that flow from homeownership, restoring housing affordability should once again become one of a nationï¿½s most important priorities. </span></p>
<p><em><span style="line-height: 1.3em;">Senator Bob Day, a former National President of the Housing Industry Association, </span><a href="https://www.demographia.com/dhi.pdf" target="_blank" style="line-height: 1.3em;">wrote the forward for the 12th Demographia report</a><span style="line-height: 1.3em;">. He was elected as a Senator representing the State of South Australia at the 2013 Australian Federal election.</span></em></p>
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High mortgages are the new contraceptive: Senator Bob Day

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<p>GUEST OBSERVER</p>
<p>Building approvals are coming off record highs on a month by month basis, according to the latest ABS data, suggesting governments need to keep a close eye on the supply <span style="line-height: 1.3em;">pipeline for new housing.</span></p>
<p>While nationally approvals still had enough momentum to hit 230,298 year on year on a seasonal basis, one good year won’t make up for a decade of underbuilding.</p>
<p>We are only now starting to see new housing supply eat into demand in key markets like Sydney and take some of the heat out of house prices.</p>
<p>A strong, sustainable pipeline of new housing is imperative to ensure future housing affordability and must be a priority for government.</p>
<p>ABS figures for September recorded 18,900 building approvals across the country, down from the previous highs of 20,000 per month recorded for much of 2015.</p>
<p>Recent data shows significant variations month on month across the states and territories ranging from a 42% increase in Queensland to a 39% fall in the ACT. It also pointed to an emerging trend for greater apartment and multi-unit living.</p>
<p>The 1.9% drop in private house approvals nationwide for the month of September was offset by continued strength in apartment approvals which grew by 6.1% on the <span style="line-height: 1.3em;">previous month.</span></p>
<p>Apartment and multi-unit approvals are almost at parity with private sector houses, suggesting a changing demographic trend and increased growth in our major cities.</p>
<p>While a degree of moderation in record high residential construction activity is expected, governments needed to guard against any sudden drops.</p>
<p>Maintaining a steady supply of new housing is vital to keep up with population increases, household formation rates, and to avoid the price spikes that occur when demand outstrips supply. Residential construction also creates much-needed jobs.</p>
<p>Putting in place the right planning and taxation frameworks will help lock in a steady stream of residential development that benefits homebuyers and the broader economy.</p>
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<p><em>Nick Proud is residential executive director, Property Council of Australia and can be contacted<a href="https://www.propertyoz.com.au/" target="_blank"> here</a>.</em></p>
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Building approvals show need for close eye on supply: Property Council 

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<p>An increase in population and income are two demand influencers on high dwelling rents and prices, according to the directors of Real Estate Research and Teaching for the UNSW Business School.</p>
<p>According to Nigel Stapledon's<span style="line-height: 1.3em;"> submission to the House of Representatives Standing Committee on Economics inquiry into Home Ownership, the rise in house prices it is not only happening in Australia, but all over the world. This is due to low interest across the world.</span></p>
<p><span style="line-height: 1.3em;">"In the period 1993-2003, population grew at a 1.1% annual pace, in the period 2003-13, it averaged 1.6%. At the margin, that extra 0.5% per annum is a very significant difference. This surge in population also changed expectations about future population growth, which in turn influenced expectations about future rent growth. If buyers expect the future rate of rent growth to be higher, that justifies higher prices." </span></p>
<p><span style="line-height: 1.3em;">It is his belief that foreign buyers add to the pressure on prices, but the effect in the long term is not permanent.</span></p>
<p>"The broader point is that Australia is a major beneficiary of its open door to foreign capital. In the long term, Australia’s reputation as a secure, transparent place to invest is a positive. Apart from anything it lowers the cost of capital for governments, business and individuals. If we start imposing controls to help manage perceived short term problems, that will put that reputation at risk."</p>
<p>Taxation policy is not as important as the demand factors mentioned before. Nigel Stapledon says that a more efficient tax system is desirable but is not what affects housing.</p>
<p>"The real debate on the question of housing affordability is on the question of supply. There are a number of angles to this. </p>
<p><span>"</span>In economics, the margin is what matters. On the demand side, an increase in population growth rate from 1.1% to 1.6% per annum in the period 2003–13 caused rents to rise substantially. </p>
<p>"Allowing for age composition effects, potential household formation lifted from 1.4% to 1.8%. That small marginal change mattered a lot. Because supply lagged in its response, most of the initial action was in higher rents, which worked to subdue demand (more young adults - potential new households – for example stayed at their parents’ home). </p>
<p>"In period 2003-13, the stock of dwellings in Australia grew by an average 1.6% per annum – only slightly slower than potential household formation but the cumulative effect matters. With a lag, complicated by some big intervening events e.g. GFC (Global Financial Crisis), we are now seeing supply respond in a more substantial way. </p>
<p>"In 2014 new completions increased the dwelling stock by 1.8%, and in 2015 and 2016 the pipeline of starts tells us that rate of growth will be running at a 2.0% pace. Bearing in mind that population growth has now slowed to a 1.4% pace (household formation below 1.6%), then clearly the demand-supply equation is shifting towards buyers/renters. The evidence of that is the deceleration in rent growth evident in 2014. It is the indicator to watch in 2015. </p>
<p>"But imagine if the stock were to increase by more like 3% (double the normal) in 2015. That order of magnitude increase in supply would require lower rents/prices to encourage more households (those young adults staying at home) back into the market. Otherwise, there would be a lot of vacant new dwellings. </p>
<p>"As the city’s population grows, if the green zone is unchanged, what urban economic theory tells us is that when the constraint becomes binding that the increase in demand will cause the price of land to rise. In response, buyers will choose smaller amounts of land consistent with the policy-makers’ desire for increased density. </p>
<p>"While less land is used, which partially offsets the higher price per unit of land, it is only a partial offset and the price of housing rises. For the pre-existing stock of houses, the price rises and their owners (owner-occupiers and landlords) enjoy a capital gain. </p>
<p>"The binding constraint will lead to pressure for some relaxation. To the extent that policy-makers relent and rezone some of the greenbelt land, the owners of that land will achieve significant capital gains. This leads to significant resources going into lobbying and a propensity for corruption. </p>
<p>"The second policy option is to impose a development tax. This lifts the price of land and in response we again see smaller lots and increased density. If the tax is set at the right level, the same degree of increased density can be achieved as with quantitative controls. </p>
<p>"One advantage of the development tax is that the development tax captures the capital gain which would be earned by owners of greenbelt land which is rezoned. A second advantage is that it keeps the market for land competitive. </p>
<p>"I would note that constraints on higher density building in inner urban areas will also constrain supply and lead to higher rents/prices across the urban area. There are many such restrictions. For example the recent decision in NSW to impose a minimum size on apartments of 35 square metres will add to the cost of housing. </p>
<p>"The cost of commuting (both in dollars and in time) is the most significant influence on the cost of land within cities. The higher are commuting costs from the urban fringe, the more valuable is living in the inner urban areas where commuting costs are low. </p>
<p>"As a city grows, there is a need to add to the transport capacity (wider roads, more rail lines). If governments fail to expand the transport infrastructure, congestion rises and lifts commuter costs. </p>
<p>"There is strong advocacy for public/social housing, which represents less than 3% of the housing stock, to be a much bigger part of the market. At its peak in 1971, public housing represented closer to 6% of total housing stock. </p>
<p>"There is a place for public housing but do young Australians see it as the answer to their future housing needs. I suspect they all aspire to something better. It is seen as a safety net. </p>
<p>"Aspirations aside, public housing is heavily subsidised. And as the cost of housing rises in a city, so too does the cost of subsidising public housing. It follow that policies which make the cost of private housing lower also lowers the cost to the taxpayer of providing any given amount of public housing."</p>
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Aussies aspire to more than public housing

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<p><img src="/images/2015/11/NEW_RAMS_LOGO.jpg" alt=""></p>
<p><span>Owning a home is a key goal for many Australians. But rising property prices have led some people to question whether to give up on that dream and continue to rent.</span></p>
<p><span>In some areas it is cheaper to rent than to buy, but there are still suburbs where buying a home is affordable. If you have a reasonable deposit saved you may find your mortgage costs are comparable to rent, or even lower. </span><span> </span></p>
<p>There are also non-financial benefits to buying a home, although renting has its advantages as well and there are downsides to both. </p>
<p><span>WHY BUY?</span></p>
<p>If you buy, you could build equity in your property. Once you’ve fully repaid the mortgage, you’ll own it outright. </p>
<p>Buying allows you to put your personal stamp on the home, decorating or renovating to your taste and perhaps adding to the property’s value. As a result, you’ll typically feel a greater emotional connection to a property you’re buying than to one you rent. </p>
<p>You’ll also have greater security and stability if you buy. As long as you comply with your obligations under the loan, you can live in your home as long as you want – and leave it as an inheritance to your loved ones. <span> </span></p>
<p>The downsides to buying are that if you do wish to move, you’ll have to rent out the property or sell, which involves time and transaction costs.</p>
<p>Owners also have costs such as repairs and maintenance, strata fees, council rates and water levies which tenants do not have to cover.</p>
<p><span>WHY RENT?</span></p>
<p>Flexibility is a key benefit of renting. If you wish to move at the end of a lease, you can easily do so. </p>
<p>You may also find you can afford to rent in a location where buying would be out of your reach, particularly if you don’t have much savings. </p>
<p>The drawbacks are that you’ll never own the home you live in and you could be asked to move out if the landlord decides to sell or move into the property themselves.</p>
<p>Tenants must seek landlord approval for simple changes, such as hanging pictures on the walls so it’s hard to create a home that perfectly matches your style. </p>
<p><em>Quick tip: Buying offers stability, security and the chance to build an asset. Renting provides flexibility and freedom. </em></p>
<p> </p>
<p><span>TO FIND OUT HOW RAMS CAN HELP EASE YOU THROUGH THE PROCESS, GET IN TOUCH WITH YOUR LOCAL RAMS HOME LOAN EXPERT OR DROP IN FOR YOUR <a href="https://ad.doubleclick.net/ddm/clk/297185195;124281891;s" target="_blank">FREE FIRST HOME BUYERS’ GUIDE</a>.</span></p>
<p>For more great property advice and tips on buying your first home from RAMS subscribe to <a href="https://ad.doubleclick.net/ddm/clk/297187169;124281892;w" target="_blank">The Great Australian Dream property series</a>.</p>
<p><span>For your free </span><em>Property Observer</em><span> eBook from RAMS, <em>12 tips for first-time buyers</em>, </span><span>covering</span><span> </span><span>everything</span><span> you need to know when it comes to purchasing property, <a href="component/content/article?id=48727" target="_blank">click here</a>.</span></p>
<p><em>Disclaimer: Information in this material is general and does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. You should also obtain independent professional advice relevant to your financial circumstances.</em></p>
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To buy or to rent?

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<p>House prices are going nuts again, according to <em>Australian Financial Review</em> columnist Chris Joye.</p>
<p>He noted home values across the five capital cities have expanded 9.8 per cent over the last year with "staggering" 4 per cent capital gains in the past three months alone.</p>
<p>The correction called by so many in late 2015 has been superseded by an elongation of one of the biggest, and certainly most dangerous, house price cycles in history, Joye suggested.</p>
<p>Over the 12 months to mid-May, Sydney and Melbourne prices have leapt by a stunning 12.4 per cent and 12.7 per cent, respectively.</p>
<p>Dwelling values in Brisbane and Adelaide have increased 7.4 per cent and 5.6 per cent over the last year which, according to CoreLogic RP Data, which Joye noted while seemingly modest, is 3.5 and 2.7 times the pace of wages growth.</p>
<p>Joye advised the Reserve Bank of Australia's decision to further crush the cash rate to another record low of 1.75 per cent in May had compelled his upward revision to his 2016 forecasts.</p>
<p>In December his nominal appreciation forecast was of 2 per cent to 4 per cent which assumed an unchanged cash rate. </p>
<p>"Given current yield curve expectations for a second cut in 2016, my central case is house prices run at three to five times wages, which represents capital growth of between 6 per cent and 10 percent.</p>
<p>"We are, therefore, in completely unchartered territory that means the risk of policymaking errors apropos asset price bubbles is higher than it has been before.</p>
<p>"So if you are buying a house, you would be well-advised to embed a chunky margin of error in price terms to hedge against such hazards," said Christopher Joye who is a director and shareholder in Smarter Money Investments, which manages fixed-income investment portfolios.</p>
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Chris Joye says house prices are going nuts again - maybe up by 10 percent

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<div class="column">GUEST OBSERVER </div>
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<div class="column">If you just looked at the top level results, there wasn’t a lot of good news in the business investment report.</div>
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<div class="column">Spending recorded a sizable quarterly fall, expectations of future investment are down over 14 percent compared with a year ago and the weakness was across all the states and territories bar Victoria and Queensland.</div>
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<div class="column">But this is really backward looking, categorising an environment that included the lead up to the Federal Election and Brexit – hardly an environment that would see businesses lift investment plans.</div>
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<br>However the main good news or rather glimmer of hope was the lift in expected investment plans compared with last quarter. The fourth estimate for 2016/17 is $106.9 billion, up 1.7 per cent on the third estimate (June quarter). In addition investment plans have lifted substantially in the past six months, up by 17 percent.<br><p>Encouragingly the lift in investment plans over the last couple of quarters, may be a sign of a shift in momentum by the business sector, but it is too early to tell. Certainly the lift in business conditions in recent months may be supportive of a lift in investment plans – especially in light of the surge in commodity prices and improvement in the global economy. No doubt the rebalancing across the economy is also being supported by the slide in the Australian dollar – an outcome that should garner further traction in coming quarters. But as we have seen in the past, business may plan for future investment but then mothball projects if the economic landscape doesn’t improve.</p>
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<div class="column">Business spending looks like continuing to be a weight on Australia’s economic growth performance in the medium term. The Reserve Bank could cut rates again, but it is far from certain that this would have a measurable impact in further lifting business spending. The Reserve Bank is more forward- looking and is likely to maintain its neutral bias on a more upbeat medium term growth outlook.</div>
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<div class="column">It may be no surprise to see that home prices continue to lift across most capital cities. But what was clearly surprising was the slide in apartment prices across the nation, in particular the outsized 3.2 per cent fall in Melbourne apartment prices. Over the last year there has been a lot of discussion on the anticipated lift in housing supply, with particular concern on inner city Melbourne and Brisbane. And it may just be that this is the first sign of the lift in apartments coming on stream and curtailing price growth.</div>
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<div class="column">While the housing market is more mixed across the nation, it was encouraging to see some of the resource states seeing a decent lift in prices over November. And the lift in commodity prices may suggest that the mining towns may have come through the worst of the downturn.<br><p>  Overall policymakers will keep a close eye on the housing sector the early part of 2017, and will prefer to see more balanced house price growth across the nation. And in particular a lift in regional house prices would be a positive outcome. Annual growth in home prices across regional centres was just 1.4 per cent over the past 12 months. </p>
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<p>What do the figures show?</p>
<p>Private business investment</p>
<p>Overall: Business investment (spending on buildings and equipment) fell by 4 per cent in the September quarter after falling by 5.2 per cent in the June quarter. Spending on buildings fell by 5.7 per cent in the quarter while spending on equipment fell by 1.9 per cent. Investment is down 13.7 per cent over the year with buildings down by 24.3 per cent while equipment was up by 4.6 per cent.</p>
<p>Sectors: Mining investment fell by 7.2 per cent in the September quarter (ninth straight decline), while manufacturing spending fell by 4.9 per cent, spending by “other selected industries” fell by 1.9 per cent.</p>
<p>States: In seasonally adjusted terms investment fell in six of the eight states and territories in the September quarter. Investment fell the most in Western Australia (down 11.4 per cent), followed by Northern Territory (down 10 per cent), the ACT (down 8.1 per cent), South Australia (down 4.8 per cent), NSW (down 3.5 per cent), and Tasmania (down 0.1 per cent). The only rise was in Victoria (up 3.3 per cent) followed by Queensland (up 2.7 per cent).</p>
<p>Prices: The overall deflator for investment goods fell by 0.3 per cent in the September quarter after falling by 0.5 per cent in the June. The cost of buildings and structures rose by 0.2 per cent while the cost of equipment fell by 0.8 per cent. Over the year, the cost of investment goods fell by 0.5 per cent – the largest fall 41⁄2 years. The cost of buildings rose by 0.9 per cent while the cost of investment equipment fell by 3 per cent.</p>
<p>Forecasts: The fourth estimate for investment in 2015/16 is $106.9 billion, up 1.7 per cent on the third estimate but down 14.3 per cent over the year. Over the last six months, investment expectations have lifted by 17.1 percent.</p>
<p>Home prices</p>
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<p>The CoreLogic Home Value Index of capital city home prices rose by 0.2 per cent in November and was up 9.3 per cent over the year.</p>
In regional Australia, house prices fell by 0.2 per cent in October and were just 1.4 per cent higher than a year ago. (regional prices cover just houses and data is up to the end of October).</div>
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<br>In capital cities, house prices rose by 0.2 per cent in November while apartment prices fell by 0.1 per cent. House prices were up 9.6 per cent on a year ago and apartments were up by 7.2 per cent.</div>
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<br>The average Australian capital city house price (median price based on settled sales over quarter) was $645,000 and the average unit price was $540,000.</div>
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<div class="column">Dwelling prices rose in six of the eight capital cities in November: Darwin (up 3.7 per cent), followed by Adelaide (up 2.9 per cent), Hobart (up 0.9 per cent), Sydney (up 0.8 per cent), Perth (up 0.6 per cent), and Brisbane (up 0.4 per cent). Prices fell only in Melbourne (down 1.5 per cent). Dwelling prices in Canberra were unchanged.</div>
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<div class="column">Home prices were higher than a year ago in seven of the eight capital cities. Prices rose most in Sydney (up 13.1 per cent); followed by Melbourne (up 11.3 per cent), Hobart (up 8.5 per cent); Canberra (up 8.4 per cent); Adelaide (up 4.7 per cent), Brisbane (up 3.9 per cent) and Darwin (up 1.1 per cent). Prices fell in Perth (down by 3.4 per cent).<br><p>Total returns on capital city dwellings in the year to November rose by 13.1 per cent with houses up 13.3 per cent on a year earlier and units up 11.8 per cent.</p>
<p>Performance of Manufacturing</p>
The Performance of Manufacturing index rose by 3.3 points to 54.2 in November. A reading above 50.0 indicates that the sector is expanding. The index had been above 50 for 13 months up until August 2016 – the longest period of expansion since September 2006.<br><p>AIG notes “The expansionary conditions were broad-based, with six of the seven sub-indexes in the Australian PMI indicating expansion in November. The strong lift in new orders (59.5 points) together with solid growth in sales (53.5 points) is promising.”</p>
<p>What is the importance of the economic data?</p>
<p>“Private New Capital Expenditure and Expected Expenditure” is released quarterly by the Bureau of Statistics. The figures show both actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.</p>
<p>The CoreLogic Hedonic Australian Home Value Index is based on Australia’s biggest property database. Unlike the ABS Index, which excludes terraces, semi-detached homes and apartments, the CoreLogic Hedonic Index includes all properties. Home prices are an important driver of wealth and spending.</p>
<p>The Australian Industry Group compiles the Performance of Manufacturing Index (PMI) each month. The Australian PMI is the Australian equivalent of the US ISM manufacturing gauge. The PMI is one of the timeliest economic indicators released in Australia. The PMI is useful not just in showing how the manufacturing sector is performing but in providing some sense about where it is heading. The key ‘forward looking’ components are orders and employment.</p>
<p>What are the implications for interest rates and investors?</p>
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<div class="column">The great unwinding of mining investment continues although the lift in commodity prices may result in more of a soft landing in coming quarters.</div>
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<div class="column">The Chinese economic data remains encouraging, showing that the transition from the industrial sector to household sector remains on track. The manufacturing sector is expanding, while the services sector is clearly the driver taking up any slack.</div>
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<div class="column">The latest Australian manufacturing data is encouraging, suggesting that the current levels of interest rates and the Australian dollar are working in favour of domestic producers.</div>
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<div class="column">The Reserve Bank has regularly noted that housing supply will lift over coming years as work is completed on the bevy of new homes – especially apartments. The Reserve Bank looks to be comfortably on the interest rate sidelines over the coming year. </div>
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<div class="column"><em>Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a></em></div>
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