Just as the US after the housing crash, Australia is becoming a nation of renters

By Catherine Cashmore

Tuesday, 29 May 2012

It’s been a while since we heard about the “top 1%”.  The protests that spread the globe earlier in the year have fallen under the radar inAustralia – buried deep below the Thompson affair and global “wows”.  However, according to recent reports, if you live in the United States, the 1% are busy bulk buying thousands of real estate foreclosures and taking full advantage of what’s becoming – in some states – a very tight rental market.

The once “American dream” that fueled a nation with a similar owner-occupancy rate to that of Australia is slowly turning into a rental nation.  It’s no secret that US recovery from the financial crisis has been little more than a halfhearted limp.  If owner-occupiers have managed to hold onto their homes, it’s been at a substantial capital loss. Aside from the large number of foreclosures – which according to a recent report in theNew York Times has been in the order of some 4 million since 2007,   potential home owners now find it virtually impossible to access finance.  This, along with the pressures of record high unemployment, has begun to fuel an unparalleled rental boom.

For example, in San Francisco the vacancy rate has dropped to around 2% compared with 5% in 2009.  Property managers are charging fees simply for placing an application, and rents have increased some 13% since last year.  As one report puts it – trying to access rental accommodation has turned into a ‘competitive sport’, and it’s a similar story in other cities such as New York, Los Angeles and Boston.

Whether the US buying market has bottomed out or not is debatable and like Australia, it’s impossible to draw broad conclusions because each state suffers its own unique conditions. However, recently Gary Andersonreported in Business Insider that the number of bank-owned homes for sale in the most affected market of the US – Las Vegas – has fallen from 18,000 to just 1,600 in a remarkably short period of time.  The suggestion mooted by Anderson is that banks have been marketing these foreclosures for a period of 30 days at a “real” price, after which – if not sold – they are taken off the market and offered in bulk to investors, who enter a bidding war to purchase the homes at “wholesale” prices.  There is no evidence for this in the article and it’s also worth noting that Las Vegashas recently passed a bill requiring banks to use the more expensive “judicial foreclosure” process, which would add to the reduced figures.  However, there’s plenty of evidence that points towards a massive Wall Street buying spree of foreclosed homes which is creating a huge disparity in the market.

The US government is moving ahead with a trial project to sell big pools of foreclosed family homes owned by Fannie May, in some of the hardest-hit markets in America.  The initiative has created what Reuters report as a "Wall Street investing craze” and the L A Times suggests “Wall Street hedge funds and private equity firms" are " positioning themselves to snap up foreclosed homes and convert them into rental units”.

Of course, when you have a large number of investors purchasing affordable family homes that are the bread and butter of the owner-occupier market, you not only have speculation potentially inflating prices, you also have more distressed potential home buyers firmly stuck on the rental ladder.  It’s important to emphasise the US housing bubble resulted from a sub-prime lending crisis and not from large numbers of cash buyers looking for positive rental returns.  Therefore, it would be unwise to jump to any broad conclusions that this is the start of another potential boom-and-bust “bubble” cycle.  However, the market tipping in favour of investors over owner-occupiers has led to many wondering if theAmerica dream has become just that – a dream.   Such is the outcry, some 15,000 realtors recently gathered in Washington DC to protest against the investor-dominated market.  As one realtor on the video states – “we’re here to protect home ownership and the American dream!”

Back to Australia, and although we have been fortunate enough to avoid the level of housing stress seen in America, I often wonder if we shouldn’t take time to learn a few valuable lessons in our own defense of the right to home ownership. The right not to be kicked out after a six-month or 12-month tenancy, the right to own a “share” of tangible Australian land, the right not to suffer from rent increases – and the right to feel secure.  The number of first-home buyer commitments nationally fell by 19% in the first three months of this year and is currently sitting some 24% below the five-year moving average.   Outside the east-west divide of those prospering from the mining sector, potential first-home buyers are becoming long-term renters and under current policy decisions I can’t see it improving.

Like America pre GFC, Australia has grown used to its reliance on a booming housing market.  Generous tax incentives such as negative gearing, first-home owner grants, capital gains benefits, borrowing against equity, restrictions on residential development, low interest rates and an insistence on keeping growth and job centers predominantly locked in capital city locations has pushed the cost of metropolitan accommodation to unsustainable extremes.  Household debt to income ratios sit at around 150% and while all the above policies have supported debt fueled growth in the past, it’s time we took steps to discourage our housing market from becoming a long-term investor-dominated paradise.

The drop in interest rates may be welcomed in so much as it eases the burden on the average mortgage holder releasing much-needed disposable cash.  However, lower rates primarily encourage investors to borrow more, leveraging interest-only loans against increasing yields in a very tight established housing market. Other policies such as negative gearing and poor urban planning encourage investors to take advantage of the bread and butter of the first-home buyer market.  Investors aren’t typically buying million-dollar real estate, they’re purchasing inner-city apartments – the “affordable” options, leaving first-home buyers unable to compete.  Investors have the upper hand in our housing market, and it’s assumed the asset will provide above-inflation capital growth, which the above government policy decisions all but guarantee.

A recent OECD Better Life index of 34 member countries looking at “housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance” has voted Australiaas “the world’s happiest country”.  It shouldn’t come as a shock when you consider the economic climate in the USA and Europe.  It doesn’t take a “Better Life” index to work out, when comparing Australia with nations currently on their knees with double digit unemployment, we’re going to come out top of the pile. Of course, Wayne Swan is having a field day on the news, and who can blame him?  There’s hasn’t been an abundance of good news in the Labor camp of late.  However, neither Wayne Swan nor a “Better Life” survey can hide the fact that in Australia, there is a widening gap between the rich and poor.

Last year, the OECD bought out its Divided We Stand: Why Inequality Keeps Rising report.  It showed that since 2003, Australia has jumped some five or six places up the ladder in terms of inequality and currently sits in ninth pace.  Although we fare better than the US, since the year 2000 the rich/poor divide has been speedily increasing.  Studies conducted by the ABS have shown the top fifth of households hold some 62%of the country’s total wealth. We now boast the world’s richest woman (Gina Rinehart), whose fortune is estimated to be $29.17 billion.  Never is it more evident that the wealth of the mining boom simply does not trickle down than when you see reports such as "WA is moving away from the east" and read from the 60,000 jobs created in Australia over the last 12 months, some 50,000 of them were mining.  As the article clearly points out, the eastern and western states may be connected physically, but mentally our western state is fast becoming a closer partner to Asia than Canberra.

The rental market in Perth speaks volumes.  Vacancy rates are as low as 1.6% and over the past 12 months, the average rent has increased by 10.5%.  Yields are now coming in at 5.5% and expected to get higher. WA is taking a greater share of overseas migration than anywhere else inAustralia, and the consequential stress on house prices will place pressure on those most vulnerable.  We may have low default rates inAustralia; however, we can hardly hail it a healthy environment when over 50% of an average family’s income is spent on funding mortgage repayments.

A recent AHURI (Australian Housing and Urban Research Institute) study suggests 43% of mortgage holders are redrawing on their mortgage for “pressing financial needs”.  The report presents a compelling argument that Australia is moving into a “housing-based welfare system” with funds heavily invested in the “prospected” safety of bricks and mortar.  Falls in superannuation, a dramatic reduction in business investment, lower capital gains from investments and continual shocks of confidence as Europe threatens to do a Mount Vesuvius-style eruption have led to an over reliance on the mining boom and vain hope that China will continue to need us far into the future.  As long as China goes the course, we can prop up any prospected surplus and wave around figures that give the notion we’re all enjoying Western Australia’s increase in wealth.  The true picture is far more dangerous.

Most people don’t go through life looking for extreme riches; however most assume if they’ve worked hard, paid their taxes and invested wisely, they can at least rely on the government to set in place the potential to grow old in relative comfort.  Around 64% of the gross wealth of Australian home owners is locked in their housing.  The expense of housing ensures most of an average family’s income is given over to servicing high mortgage payments and hedging against prospected growth in overall household expenditure – investment elsewhere is therefore compromised.

Through various methods of manipulation, successive governments have done everything they can to inflate house prices and encourage over-investment in what should be viewed primarily as a commodity for shelter rather than a quick road to leveraged riches.  Housing is debt-fuelled and totally reliant on supply of credit and the ability of banks to prop up lending volumes. The mining boom may have protected the wealth of this country – however all “happiness” surveys aside, this wealth is not being distributed across the broader population – “haves and have-nots”.  As a consequence, many of today’s workers will enter retirement still paying off mortgages or servicing high rental fees.

Various studies have shown two thirds of residents under the age of 35 living in Sydney are locked out of home ownership altogether and considering Melbourne’s house prices are only baby steps behind Sydney’s, the stats are likely to be similarly mirrored.  The prospect of growing numbers reaching retirement locked out of home ownership is as frightening as an economy heavily leveraged against a debt-fuelled, rate-sensitive capital model. Our reliance on China’s continued need for Australian commodities is all but assumed, however various economists such as Satyajit Das have pointed out many times that China’s economic picture may not be as sunny as it seems.  Should Europe collapse, the resulting consequences and looming dark clouds could reduce that demand a lot sooner than expected.

As it stands at present, there is nothing to suggest an immediate or quick deflation in house prices – however we should all keep a close eye on Europe fully understanding the consequences any dramatic fallout could have on commodity demand from China.  We are short on adequate affordable housing supply around the major job centers where the population is rising and demand for accommodation (buying or renting) is consistent.  However, housing should be a provision first and foremost for owner occupiers and models that encourage broad based investment in the established market (as in the US) need to be scaled back and pushed into increasing supply and infrastructure in newer suburbs in order to boost the supply and feasibility of affordable accommodation.

Options for secure long-term tenancy need to be investigated to provide those unable to purchase adequate affordable and secure shelter into retirement. And we must increase the supply of good quality public and social housing. New South Wales and Victoria’s decisions to cut back their funding for public housing is remarkably short sighted. The powers that be have their heads in debt-fuelled sand. Our banking sector has directly or indirectly invested around 80 per cent in housing. We’ve already seen finance tighten and income stagnating, not to mention the risks of a rising unemployment as small business’s struggle.  The housing crash inAmerica – albeit caused by a landscape different to our own – is resulting in similar consequences, by ensuring increasing numbers will enter retirement firmly stuck on the rental ladder.  There will always be those who are unable to purchase, however can we call a system “just” if we’ve manipulated policies that advantage investors over owner-occupiers, potentially locking many out of home ownership all together?

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.