What kind of future are ‘home buyers’ facing?

On the one hand – increasing the ability of prospective home owners to get a foot hold in the market is admirable. After all, home ownership in Australia, is all but considered a ‘right’ of citizenship. However – to date, the only way governments have done so, is to encourage greater debt levels by way of incentives, lower LVR’s, negative gearing, low interest rates and so forth.  Consequently, even ‘overpriced’ homes have looked tempting to emotionally lead homebuyers who’ve heavily invested their future wealth and income into the principle place of residence. They – along with investors - were more than eager to take advantage of the pre GFC decade long ‘property boom’ stimulated principally by debt. According to Rate City, from a random selection of more than 2000 home loans in mid-2008, more than a quarter had a loan-to-value ratio of 100 per cent – LVR’s now rarely encountered.

However, the above policies that increased funding, without adequate investment in infrastructure to ease supply, have pushed property ownership (despite the health of the economy) out the reach for an increasing number of ‘would be’ homebuyers. We’re now facing a situation where the cost of living and subsequent debt levels against housing are an issue of growing concern.

For market watchers – reading the terrain ahead is somewhat clouded by the ‘emotional’ aspect to property, hence, why so many ‘mis’ forecast the measure of percentile change in their predictions.  The essential need for shelter, along with our creative capacity to make the home ‘a castle,’ pins a far greater emphasis on ‘consumer sentiment.’ Each sale is the result of a carefully negotiated contract between two parties with differing needs and priorities.  In most cases, it’s a long way from being just a simple ‘business’ arrangement and shouldn’t be classed as such.  Furthermore, because each property marketed has its own intrinsic qualities - which are valued differently from buyer to buyer - trying to lump residential housing alongside stocks and shares for example, leads to errors when reading and analysing statistics.

The latest data from Residex has indicated, Australia wide, there’s been a marginal return to growth in the ‘house and land market.’  The news is often jumped upon as a positive sign of ‘recovery.’  However, with overall turnover back at levels not seen since the 1990s, how can we herald it as such?  Residex recorded a marginal improvement in transaction figures, however, not significant enough to prove we’ve turned a corner.  Therefore, the figures feeding into the median are representative of a comparatively small composition of properties selling and most likely stimulated by ‘home buyer’ sentiment.  Broadly speaking, buyers are still taking a back seat, first time buyers are hamstrung by stricter lending conditions, and increased supply isn’t providing feasible or affordable options to ease the consequential stagnation.

As an outsider – looking at Australia’s current environment of low interest rates, broadly dormant house prices, coupled with the ‘on paper’ health of the economy - you’d be forgiven for wondering why overall transaction figures are so low?  As a home buyer however, the increasing cost of living, as well as a general unease about the future of the economy - despite Government and RBA insistence of a prospective ‘lucky country’ outlook - is starting to bite.

Consumer sentiment is further hampered when there’s more circulating disagreement regarding the “boom” or “not so boom” cycle in the resource industry, than there is surrounding residential property movements.  It’s not helping “reassure” Australian buyers or sellers of future market stability or job security.

As if we need further evidence of the above fact, the predominant headline from last week – picked up by every major news outlet – was the significant increase of Australian home owners seeking access to their super to fund outstanding home loans.  There’s been a 25 per cent rise in claims between 2011-2012 totalling $99.38 Million. It’s a worrying statistic.

Meanwhile, the ABS has recorded a 0.1% drop in ‘owner occupier housing finance’ for the month of June and Westpac’s “Consumer Sentiment Survey,” indicates a drop of 2.5 per cent in August.

There’s general disgruntlement with the current Government and as far as the property industry is concerned there remains a healthy standoff between ‘un-erring’ vendor expectation, along with few cashed up buyers with which to negotiate. Consequently, those wanting to upgrade or downsize are finding themselves unable to make a move through lack of buyer activity and as our population increases, this is causing a mismatch of ownership as downsizers hold onto property too big for their needs, and families struggle with an inability to find suitable accommodation in which to upgrade.

The recent census proved the continued downward trend of home ownership figures, which – should it continue – could see 50 per cent of the population renting within a generation. Along with this, the current strain on both available and affordable rental accommodation is locking a significant proportion out of the property market for the foreseeable future, with renters struggling to service increasing yields - up 50 per cent on the last census figures.

Home owners are also under pressure - median mortgage payments as a percentage of median household income are also on the rise.  ABS data indicates a 4.5 per cent increase since 2006 currently sitting 3.7 per cent above the broadly accepted stress level of 30 per cent. To cut to the chase – residential property is too expensive for a growing majority – with the cost of shelter depicting more of a ball and chain than a ‘dream.’

Pundits in the financial and property sphere tend to pump the proposal that ‘all’ we need to spike a return to growth, is a lift in consumer sentiment to enable Australia to get back to its ‘pre’ GFC trajectory. However, when you consider the data above, there are some worrying ‘rumblings’ under the surface which are not going to disappear when the clouds clear.

Whether you see the cup as half full or half empty, will no doubt depend on personal circumstance.  We’re not currently looking at market collapse of 40 per cent or so, as witnessed the USA or parts of Europe, due to relatively stable employment.  According to Finch Ratings, default rates are still low by world standards despite a marginal increase Queensland – up 18 basis points to 1.60 per cent. However, the low numbers transacting on property are a concern and producing figures not dissimilar to countries in more dire straits – countries that have witnessed a 40 per cent drop in values.

Whilst a loss on the balance sheet of property prices would cause pain to the economy, the catch 22 is that high property prices are equally unfavourable - increasing the cost of living and leaving less in the pocket for wealth creating projects to stimulate greater economic recovery.

Australia currently has the world’s highest household debt to annual disposable income at around 150 per cent and despite the movers and shakers in Government telling us its ‘OK” based on our ‘lucky country’ outlook and debatable ‘responsible’ lending practices – you have to wonder what will happen when Australia can no longer shelter itself behind a mining boom?

The RBA are not ignorant of the risks outlined above, the fact that they have chosen to address the subject in detail in this year’s annual conference - ‘Property Markets and Financial Stability’ outlines that lessons reaped from booms and bust cycles in other countries, are bringing the risks associated with our highly leveraged housing market to the forefront.

One of the areas addressed in detail is the housing shortage.  It was noted that cities producing an adequate supply of affordable accommodation in the USA had experienced lower long term inflation in house prices.  The example offered in the study was Atlanta – however you could equally cite Dallas Fort-Worth.

In 1981 both cities were of a similar size and a similar population growth trajectory as Sydney and Melbourne, yet both Dallas and Atlanta provided cheap land on the outskirts of their city boundaries and unlike Australia, developed adequate infrastructure at the same time (train lines, schools, hospitals etc) to entice their growing population.

In Australia, the limited affordable options open to first time buyers have been by way of poor planning policies coupled with a lack of adequate investment in infrastructure. Often, the only way home buyers and investors can be incited to soak up the oversupply of ‘leggo land’ houses or high rise rabbit hutches, is when they’re lured with generous ‘off the plan’ or ‘new home’ incentives. Incentives that a significant number regret taking advantage of, when a few years later they find themselves stuck in ‘nowhere’ land with little capital growth and 3 hour commutes into their place of work.

The debate is both endless and tiring and yet we never seem to move past first post. As always the most venerable to be hit are ‘would be’ buyers and those who reach retirement either renting, or still servicing hefty mortgage repayments.  If we continue on our current path we face some undeniable certainties – certainties an adjustment in interest rates, or ‘talking up’ the economy will not change.

Whilst some maybe satisfied with a life living in rental accommodation rather than opting for ownership, Australia doesn’t have any “long term” rental strategies to provide this security and protect against rising yields. Albeit, undeniably, most would prefer to be outright owners of their own principle place of residence by retirement age.

You can’t solve the dilemma by building new homes first home buyers can’t afford to purchase or which are located in areas not suitably supplied with enough essential amenities to inspire relative demand. Furthermore, according to the Australian Taxation Office, self-managed super funds are now the “largest and fastest-growing segment of the super industry” and corresponding data proves a large proportion of this wealth is invested in established residential property – totalling over $14 Billion.  In light of this, investment policies affecting the housing sector need to come under greater scrutiny, especially as they predominantly encourage activity in the established market rather than promoting regional growth and investment.

Like it or not, a core part of any housing affordability strategy needs to focus on driving down costs in areas prone to inflation due to heated demand via stimulation in the investment or home buyer sector. There’s inevitably going to be a growing need for social housing and therefore this needs to be integrated within the frame work as well as tacking inevitable problems of social residualisation.

Australia once had a dream – a dream for the “right of all Australian people to have access to (land) at fair prices.” However, unless we seriously address the issues above and make serious moves to lower the cost of living and price of housing - that once held dream will become an “un-obtainable nightmare”  - effectively placing a huge burden on government assisted housing and our future ability to prosper and grow.

Catherine Cashmore