Why we need a sensible conversation on the future of Australia's housing market.

Language is an important tool in the real estate sector and skewing data to either the positive or negative is a well honed skill which, as I explained last week, more often than not masks the underlying trends actually taking place.

However, when it comes to property, there are no words more inflammatory, and drama inducing than ‘Bubble’ or ‘Bust.’ Flag a headline which suggests either, and it will evoke a barrage of abuse from market speculators. Hint we have a pending housing crisis in Australia citing affordability concerns which are voiced loudly and clearly across a number of sectors, and you’re promptly labelled a ‘doomsayer’ ‘laughably’ predicting an instant 40 per cent market crash.

Try and have a sensible discussion on the matter and it’s marred with vested interests – in the case of politicians, it’s the need to lobby for votes from the majority, above and beyond the need to improve the ‘home’ buying environment for a small, but increasing ‘non owning’ minority.

As I suggested a few weeks ago – “woe” unto any politician who suggests capital values may fall, thereby reducing the entry level of ‘borrowing’ a new home buyer needs to fund.

And for anyone who has even a basic grasp of how the world’s debt based monetary system works, which provokes a continuous consumer driven need for spending and growth, you’ll understand precisely why there is little concentration on policies to reduce debt, and instead a greater concentration on how to make higher capital prices ‘more affordable,’ with low interest rates, tax incentives, grants, and arguably failed attempts to boost supply.

However, Australia is heading into prevailing headwinds which will have an inevitable impact on our younger generations as we navigate our way into what’s undeniably an environment of weaker economic growth.

All the conditions that were at play during the golden years of capital gains in which household incomes were rising strongly, and the commodity boom was impacting the overall size of the Australian economy are slowing.

We have a growing in-balance of the proportion of working age individuals relative to retirees which will bear heavily on the percentage of Government funding (the tax payers back-pocket) over the next 40 years or so.

In 2009-2010 financial year 26 per cent of the government’s budget was directed towards age related services (health, age related pensions, and aged care) – however, according to treasury projections, this figure’s expected to increase substantially over the next 40 years “pushing the share of spending to almost half.”

In response, a range of tax concessions currently enjoyed by Australian’s will need re-addressed, and judging by the reaction to the abolition of the ‘statutory formula’ for valuing fringe benefits on employer provided cars – it will be far from palatable, albeit, an unavoidable necessity.

In addition, I would expect at some future/future point, the current claims on negative gearing will also inevitably fall into question – not an opinion that meets wide agreement, however time will tell.

Income growth is slowing – as chief economist of Macro Business, Leith Van Onselen recently pointed out in relation to the latest ABS “Biannual Household Income and Income Distribution report“ covering the 2011-12 financial year;

“An examination of biannual income growth since 1996 shows that average real inflation-adjusted household income (pre-tax) has essentially flat-lined since 2008 when measured on a equivalised basis (i.e. adjusted for household size and composition)”

Full time job growth is weak, with both hours worked and levels of underutilisation deteriorating.  Even NAB have come onboard with a recent research release highlighting Australia’s ‘ongoing sources of weak domestic demand’ and in relation to the overall outlook for Australia’s economy make the rather startling, albeit sobering comment ‘We are not optimistic.’

Significantly, they picked up on comments offered by RBA Governor Glen Stevens in suggesting that Australia cannot rely on housing and consumption to plug the ‘growth hole’ – bringing into line an almost certain August interest rate drop – further eroding savings.

However, whilst this may assist lowering the Aussie dollar, which will have a positive impact in the longer term, GDP growth is slowing and as we’ve seen over the past 12 months, as a tool, interest rates are limited in their effectiveness to stimulate those sectors of the economy most in need.

For example, in relation to housing, the marginal upward trend in building approvals evident since the low of 2011, has been moderated with the latest ABS figures showing new houses and apartments falling -6.9 per cent over June (seasonally adjusted) – posting their third large fall in the past four months.

Even allowing for the usual volatility of short term data, this is low by historical standards and falls short of RBA forecasts.   In contrast the established market is enjoying an investor lead rally as funds are increasingly shifted from cash into residential real estate with 36 per cent of loans going to this sector alone.

In May of this year, 18.4 billion worth of housing finance for investment purposes was committed to – the highest level since January 2008.  Prices in Sydney, Perth and Canberra are now reportedly back to their previous peaks – and with the cash rate set for a further fall to 2.5 per cent, it could be argued, that we haven’t even started to touch the surface.  As reported a couple of weeks ago from the new “SMSF Professional’s Association of Australia and Macquarie Bank” according to the ATO, between 2006 and 2013, SMSF property assets grew in value by 230 per cent – ‘a higher growth rate than any other asset class.’

Ahead of the hugely popular auction episode of ‘The Block,’ the REIV commented that the result could not be taken as a reflection of the current market.  However, I attended the auctions on the day, and the buoyant competition that was clearly evident from those bidding, was not at all at odds with what we’re currently seeing ‘on the ground’ in inner and middle ring Melbourne localities.

If you have a sensible head on your shoulders, and think it somewhat bazaar that a buyer would pay around 1.5 Million for a three bedroom apartment that has four bathrooms, five toilets - with some hefty owners corporation fees thrown in for good measure, along with fixtures and fittings which are ‘arguably’ dramatically overcapitalized for the property type - when the same dollars could purchase a renovated period terrace in one of the better streets of Albert Park, Middle Park or South Melbourne then you get a small sense of some of some of the  crazy activity I’ve witnessed of late.

Most recently, the price of a 2 bedroom apartment in Melbourne’s bay-side suburb of Elwood, which achieved $830,000, yet an exact – or at least a very comparable - replica in the same block sold just two months prior for $715,000.

Or another from a local Woodard’s agency, who sold a three bedroom period home in Prahran with a reserve of $950,000, yet with approximately 200 in the crowd and six bidders, delivered a result of $1,325,000 with no recent comparable to suggest a price even moderately close to this level.

There is nothing particularly outstanding or unusual about these properties - neither in each circumstance - are the results driven by ‘home’ buyers looking for their ‘dream’ dwelling and therefore, to some extent, a justifiable balance between price and desire for ‘the one.’ I could sight off the top of my head at least a dozen similar examples of investors overpaying for real estate, despite figures being somewhat inflated by lowering levels of stock.

Conversations with colleagues in Sydney, Perth and certain areas of Brisbane are full of similar tales of sheer amazement. Yet, as anyone who has an active interest in property or shares will tell you, markets run on fear and greed.

Or as Schiller said in his book ‘irrational exuberance;’

A “speculative bubble,” is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.”

And although they were written with the USA housing market in mind, they’re words which aren’t wholly irrelevant when it comes to Australia’s current buying terrain.

As for first home buyers; the news is less joyous. The latest ABS housing finance commitments note that first home buyers continue to play a long term decreasing role in the purchase of property accounting for only 14.6 per cent of Australia’s buying market – which year on year is down -10.6 per cent, with movements in percentages only fluctuating on the back of various grants an incentives.

Compare this with the 31.4 per cent share during the 2009 ‘boom’ – invoked by the first home buyer boost - and you’ll get the idea.

And whilst it can be argued that this figure is manipulated by the proportion of buyers who bought forward plans to buy under the Rudd stimulus, the longer term trend is particularly noticeable when looking at census data, with a sharp decrease in ownership between 1975 and 2010 for the age groups between 25-34 and 35-44 which has fallen from a peak of 61 per cent to ‘around and about’ 45 per cent currently.

Whilst demographic and lifestyle changes will inevitably result in a proportion delaying a purchase until later in life, it’s prospected a significant and growing percentage will remain – like it or not - trapped in the rental or social housing sector.

Rental rates have inflated strongly since 2007 – RPData estimate a cumulative rise of 32.1 per cent. Any non-home owner locked in a ‘Catch 22’ of being employed in one of the capital city ‘job hubs’ of Australia, will be hamstrung as they try to make headway against the escalating cost of accommodation.

So, when does affordability become an issue?

It’s wonderfully easy to create well worded speeches about halving the rate of homelessness with emotive ‘sound bites’ filtered in for effect.

However, wishing a better life for the disadvantaged, who perhaps haven’t had the good fortune of inheriting the rewards of our golden years of growth, remains a charitable gesture without hard hitting policies which would inevitably impact the level of ‘growth’ existing home owners could expect to ‘achieve.’

Albeit - unless we do so, Australia’s political powers are merely searching for answers with their right hand to problems they created with their left.

Instead, we need a sensible conversation on how we want the housing market to look in ten to twenty year’s time, which isn’t dependant on pointless ‘pot shots’ between bulls and bears.

If you listen to some market commentators, it will be an environment in which median prices in capital city localities will sit over a million in ten year’s time (a misguided prediction that has been lingering for some years – here’s another example written in 2003) - so how about listening to the voices of those who have a degree of concern about their children’s future in an environment as I explained above, is not prospected to be quite such an easy ride.

Catherine Cashmore