Home buyers should be the core focus of any real estate market:
I read an interesting column this week penned by Madeleine Morris – a Melbourne based journalist and writer for the BBC.
The focus of her piece was our ‘lucky country' status and the inevitable costs that accompany that title’s privilege.
After starting her piece lamenting the inflated cost of limes – pointing out with an outlandish splutter that limes cost $2.25 each (in the UK they’re roughly $0.49c each) and consequently "storming out of the shop limeless" – I had to have some sympathy.
For every dollar of wealth we’ve gained as a nation, it’s been speedily called upon to pay for the rising costs of essentials such as food, water, electricity, and housing – all of which are stretching the limits of any supposed wage growth which for certain sectors of the community has been woefully inadequate.
Madeleine has been living in the UK for the past 12 years, so the recent price rises were more than a nasty shock. When commenting on the insanity of paying over $2 for a single lime, the response from her father was as follows:
"Darling, look around. People here are rolling in money. We live in an unbelievably wealthy nation."
In case that statement caused you to splutter over your cup of coffee – wondering where your slice of the pie has disappeared to, it should have perhaps been framed a little better. The money we’re rolling in isn’t falling out of back pockets. In fact, an overwhelmingly large proportion of our national wealth – roughly 70% of it – is locked up in housing.
It’s certainly not a desirable situation. I’ve read more than enough property articles cutting and pasting ABS ‘wage growth’ graphs along with international comparisons – using them alongside housing inflation charts, with an abstract wave of the han, to brush away any concept that our residential real estate is overpriced.
Worse still are those which reference ‘property cycles’ without any qualifying data to show the ‘whys’ behind their research and the reason a future Australian profile may not be quite so sunny.
All stress the ‘underlying fundamentals’ of our market – supply, demand, population growth, so called ‘responsible’ lending practices, lower rates of interest, dual-income families – in an attempt to waylay any fears which may be induced by the oft-quoted property bears who commonly stress their case underneath lofty headlines of a ‘housing crash’.
However, it would be hard to protest that such large excesses of wealth, sitting in one comparably ‘illiquid’ asset class is favourable to a more balanced portfolio. Especially as the purchase of prime residential property in part of a self-managed super fund has outstripped growth of other SMSF investments by 50% over the previous four years and looks set to continue along this path.
Put simply, a larger proportion of Australians are relying on the increasing value of residential real estate to fund their retirement – hanging their hats on the old mantra that ‘property always goes up’ with little to qualify the data or paint the broader picture in real terms.
Furthermore, recent insecurities over prospected changes to current superannuation rules have encouraged a greater proportion to look towards an improving housing market as a relatively safe environment to park funds.
It’s all well and good whilst values are increasing, however thus far in Australia, those increases have been primarily inflated through careful – some would say intentional – market manipulation.
Decades of poor planning for population growth has ensured land values and the slowly reducing pool of established dwellings – favoured by most negatively geared and SMSF property investors as well as the vast majority of home buyers – inflate disproportionately under growing demand from the larger proportion of people who want to park themselves – and their investments – in our established capital city residential market.
A very real victim to come out of this is the construction industry. The overwhelming consensus amongst investors and home buyers – buoyed on through the heady experience of a decade’s worth of capital growth which has been arguably and “unsustainably” forged through periods during which it has outpaced the rate of inflation – is that 'established' is better than 'new.'
We're not effectively developing, planning or building infrastructure to lure demand away from this sector and it’s resulting in a construction industry that is dying on its foundations. Even with the recent ABS release of New Home Sales data, which saw a modest rise of 4% for houses and 4.9% for units over the month of January – it follows a long declining spiral in which the industry suffered its biggest job losses throughout the course of last year.
Outside of the carrot-and-stick approach of FHO grants or artificially low interest rates, new property remains a hard sell and, consequently, we have an increasing number of buyers fighting for a decreasing pool of ‘established’ second-hand property.
We’re effectively sentencing large swathes of home buyers to the relative 'Aussie' equivalent prices of London and New York, principally because we’re not producing a large enough recourse of ‘new’ alternative options which have the essential elements to attract the attention of home buyers and consequently ease demand.
When land is released in fringe locations, prices are artificially inflated with needless taxes and development overlays. Furthermore, a woeful lack of infrastructure to facilitate the new estates – which every ‘Joe’ on the street recognises is needed at the start of a project, not 20-plus years down the line if we’re to lure buyers outwards - leaves many developers struggling to offload stock to a dwindling market which 'booms and busts' on the back of cash grants and ‘would you like an extra bedroom with that’ special offers.
The other 'alternative' is 'tower blocks' which, as I point out here, are hardly suitable.
It should concern us all that construction lives in a state of relative stagnation – hobbling along despite the low-interest-rate environment – especially if we’re not going to start unravelling demand from established real estate sector and ease supply.
Building a portfolio of real estate investments and locking up wealth in property is all well and good for one generation – but not so good for the one following – unless we’re providing feasible alternatives.
Furthermore, a reducing pool of first home buyers entering the real estate market also isn’t so good for the mortgage-free 60-plus individuals looking to tap into their pool of equity and downsize.
Pyramids need the beavers at the bottom to keep the top pumped, and at the moment in our capital city established terrain, the beavers are coming from an increasing pool of investors which jolly along on the back of that unpredictable thing called consumer sentiment. I’d argue that it’s not the best foundation for a healthy real estate environment, which should ideally be built around the needs of its community.
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 – if the worst happens, relaxing rules on foreign investment and providing a boost of cash grants as we did during 2008 – is effective enough.
Needless to say, the best investment any economy can manipulate is to look after the newer generations who will face their own fight to build enough wealth for retirement. The last thing we should aim to do is burden them with an increasing cost of residential housing. In this scenario, what one generation gains is a shot in the foot for a large proportion of those not inheriting the ‘goodies.’
As it is, there is a limit to the tax deduction you can claim against super, however there is no limit to the tax deduction you can claim against negative gearing. It has been the best policy imaginable for property investment – that is investment into the established real estate market – but a largely dysfunctional policy to buoy up the new home market or assist the needs of younger residential home buyers.
Ideally, home buyers should be the core focus of any real estate market as it’s home buyers who bring true investment into a country – buy a piece of land and the propensity to 'settle’ and contribute to the local community, environment, and neighbourhood culture, provide the foundation blocks often only ownership can inspire.
However, for the inner-city areas where most want to live, the biggest furphy going is that it’s not possible to cope with a population squeeze without building a host of ‘rising oracles’ in the order of 100 metres or more.
A movement entitled Create Streets in the UK is one such report that has forged inroads into the case for low-rise accommodation – rightly claiming the exact same number of residents currently situated in the aging tower blocks can be accommodated in low-rise dwellings taking up no extra space.
Another such figure to take note of is Robert Dalziel, the London-based architect for Rational House. He has visited nine cities around the world, including Mexico City, Shanghai and Berlin, to examine how to make high-density living agreeable for a broad demographic of home buyers – with author Sheila Quershi, he’s detailed his findings in a book – commissioned and published the Royal Institute of British Architects: entitled A House in the City — Home Truths in Urban Architecture.
I’d suggest the construction industry would improve two-fold if we placed the same level of intelligence and innovation in Australia’s future design. However, at present, there’s little hope because it’s far more 'profitable' to build apartment blocks or multi-story dwellings, aimed at investors and housed by student renters, than it is to increase the supply of new accommodation for our home-buying demographic.