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I was fortunate enough to attend the SQM seminar last week as Louis Christopher – one of the most well respected voices in the real estate industry for his balanced assessment of market data – presented a state by state rundown of projected activity over 2014.
<a target="_blank" href="#https://www.sqmresearch.com.au/capitalcitiesreports.php">Louis predicts</a> Sydney’s established housing market will see a 15-20% ‘rapid rise’ over the course of 2014, highlighting the middle suburbs in particular to capture the overflow of demand, as inner city development constraints force consumers outwards.  
There’s been plenty of talk regarding housing affordability and the very real risk associated with an unsustainable boom in values, with some claiming – based in part on our low interest rate environment – that any mention of a concern is a mere myth.  
When asked from an audience member at the seminar if first home buyers were being crowded out of Sydney, Louis concluded they were – and indeed it would be hard to deny.  
Investor activity has dominated the Australian property market over the last 12 months or so.  Banks are bidding for buyers in a highly competitive environment, and the lion’s share of mortgage demand is being eaten up between investors and upgraders.  
A third of all new loans are with loan to value ratios of more than 80%, and 40% are on interest only terms.  Clearly investors are speculating on a continued pattern of price gains from an already high plateau – an ambitious projection.  
Under the existing financial system, inevitably, it’s none other than rising debt that fuels accelerated growth.  However, <a target="_blank" href="#https://www.macrobusiness.com.au/2013/09/charting-the-australian-first-home-buyer-retreat/">since March 2009</a>, whilst the average first homebuyer mortgage has increased by only 1.4%, the mortgage for the market as a whole has grown by 7.9%.  
Meanwhile, first home buyers have seen their savings eroded, and as the latest ABS housing finance data outlines, wishful thinking that rising yields are pushing greater numbers into the market, has had scant effect.  
According to research by <a target="_blank" href="https://www.ratecity.com.au/">Rate City</a>, “first home buyers now account for just 11% of home loan commitments. This is below the 20 year average of 15% and has not been this low since 2004.” And whilst interest rates on their own can have little impact on price rises or falls in the near term – a long period of low rates and the dependency it invokes, can be dangerous in inelastic areas of limited supply.  
Current competition coupled with pent up demand, has done little more than push values further out of reach of a genuine entry buyer demographic.  And as complex as it may be to slowly unpick the current distortions that tie up the established market and hamper construction, the implications of not doing so, are potentially worst over the longer term.  
No one should be fooled by the rhetoric from various industry commentators concluding current inflationary gains are of no concern. Hence why we are seeing a conundrum in central banks across the globe employing "precautionary policy activism” in an attempt to cool asset inflation without hampering the broader economy by raising rates.  
<a target="_blank" href="https://www.propertyobserver.com.au/news/new-zealand-rba-announces-restrictions-on-mortgage-lending-for-borrowers-with-less-than-a-20-deposit/2013082064388">In New Zealand in particular it’s a point of concern</a> and not just a localised issue. House prices currently sit at record highs, with the government property valuer ‘QV’ residential index showing gains of 8.5% in the 12-month period ending August 30.  
As reporter for real estate news on Sky Business 602, Iggy Damiani pointed out to me last week that Australian banks' ownership of New Zealand’s 'big four', place them in a precarious position - currently having the highest exposure to residential mortgages in the world. Therefore asset gains, which outpace both wage growth and inflation, must be addressed.  
Even assuming low rates are assisting first home buyers, saving a deposit and sourcing a suitably affordable property is no easy task for a demographic who are often burdened with a hangover of student debt, and, in many cases, can’t conceivably buy in until they partner with a second income earner.  
With this in mind, it must be pondered what the effect will be when rates do inevitably rise, considering our household debt to income ratio remains stubbornly high, at around 148%.  
Property to some extent connects together like a flowchart. Supply is fed in from the bottom to allow those upgrading (and then downsizing) a ready market to sell into in order to make the move.  
However, when investors predominantly negatively gear into the asset class most favoured by first home buyers – inevitably resulting in inflated established property values – and the state government fails to come to the party with feasible affordable alternatives, our property wheel of upgrading and downsizing risks stagnation.  
In the near term, heated investor activity may keep everyone dancing, however over the longer term we’re losing a valuable demographic of property buyer, which will no doubt have a flow-on effect across the property chain as a whole.  
As these changes push through the generation gap, it’s fair to assess, increasing numbers will retire whist still factoring as short-term renters.  
Investors tend to hold property for extended periods of time in order to build equity – many choose to invest as part of their self-managed super funds and subsequently do not sell until retirement. Therefore the ready supply, which usually comes from initial homebuyers selling and upgrading, will start to slow.  
 
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Additionally, we have the first world problem of an aging population creating future headwinds across the economy, with <a target="_blank" href="https://archive.treasury.gov.au/igr/igr2010/report/pdf/IGR_2010.pdf">government intergenerational reports</a> forecasting the already reducing workforce participation rate, to drop to around 60% by 2050.  
Considering the predominant home buying activity takes place within the ages of 22-44, it seems reasonable to assume that there’ll eventually be proportionally greater demand from those downsizing as we progress through these buyer type changes.  
However, if the flow-on home buyer effect doesn’t follow through, the mismatch of household size comparable to property type will continue to stagnate our property buying and selling terrain, further tying down supply in the areas most want and need to reside – areas within easy commutable distance to city suburbs, jobs and essential amenities such as schools, hospitals, doctors, public transport systems and so forth.  
Therefore, the last thing we should be doing, is advocating the spruik that rising property prices are somehow good for the economy having a supposed flow on effect into retail spending, which in itself is currently not producing the desired result.  First home buyers may head out to purchase white goods and furniture for their new abode, but our investment sector certainly won’t.  
Additionally, choices are limited in a market that has been turned into a speculative terrain.  
If we were building homes that were viable for first home buyers to gain a foothold which would not only maintain consistent market demand in order to upgrade, but also provide feasible accommodation for this demographic to settle for an adequate period of time, then having an investor-dominated inner-city terrain could perhaps be balanced somewhat so as not to affect the stagnated flow of the home buyer chain.  
However, the new home options are either limited to outer-suburban estates lacking in infrastructure, which is an essential component needed at the start of each project if we’re to lure home buyers outwards, or alternatively, inner-city high-density low grade developments.  
Our census data already demonstrates that most lone person households are tottering around in accommodation that’s far too big for their requirements. Building an abundance of one-bedroom apartments therefore won’t suffice; only 14% of the total single person households of all ages opt for one-bedroom units.  We instead need a wider diversity of options, in particular, accommodation suited to families - with the decrease of ownership for this demographic showing a fall from 79.5% in 2006 to 77.2% in 2011.  
<a target="_blank" href="https://www.propertyobserver.com.au/residential/why-investor-activity-is-causing-our-property-markets-to-stagnate-catherine-cashmore/2013021759370">As I’ve mentioned previously</a>, the percentage of investor-owned apartments in both Darwin and Brisbane falls close to 70% – and in the other capitals, it comes in between 60 and 70%.  
And whilst this generation of existing investors may continue to enjoy short-term speculative gains of the oft quoted property cycle, since when did the future of the first home buyer market become ours to erode?  
I’ve assisted numerous first home buyers and renters over the past few years, and it’s no exaggeration many perceive the capital price of property and the risks associated with taking on a greater proportion of debt a potential liability. For those who argue based on textbook analysis that property is not over priced, I suggest they change their frame of reference. There may be historical logic behind the long-term growth in values, but this doesn’t change the consequence; it is both over priced and under supplied.  
Therefore, pressure on the rental market is unlikely to ease in the near to far future, with ABS data showing almost two-thirds of new residents from overseas are long-term property renters along with half new residents from within Australia who also class themselves within the same bracket.  
Furthermore, economic conditions such as wage growth, unemployment, consumer confidence and frequent changes of work placements all reduce the likelihood of a strengthening owner-occupier market over the next decade.  
Current policy is built around the general assumption that renting is a step on the road to ownership. However, unless the trend takes an about turn, tomorrow’s generation will hold a growing percentage of residents for which renting is for life, and as such, we also need to consider their welfare.  
Policy should be steered towards the creation of a fairer partnership between owner and renter.  This would include longer terms of tenancy, protection from exorbitant rent rises coupled with enforcement of basic standards of accommodation in both the private and public sector.  
As it stands, in the rental market, and the property buying/selling market short termism dominates.  No surprise, as we’re governed by those who derive personal and political benefit from the existing system, polling for the popular vote from home owners and investors; pinned to our flawed debt based financial system that relies on an ever inflating future to under-pin existing gains.  
 
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 Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.
 
     
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The future of the first home buyer should not be ours to erode: Catherine Cashmore

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"The home, built in 1857, had been unoccupied for years," said the report of a dilapidated Victorian-era mansion in Sydney's Balmain East.
Situated in an exclusive residential pocket next door to the Balmain East ferry wharf, and sporting bayside views of Sydney's Harbour Bridge, the 457 square metre block of land attracted 200 people to the auction, 18 registrations to bid, and sold $830,000 above the reserve to a local home buyer <a href="https://www.rebonline.com.au/breaking-news/8169-decrepit-house-fetches-millions-at-auction" target="_blank">for $2.68 million</a>.
According to <a href="/expert-insights/buying/35928-uninhabitable-crumbling-1857-balmain-east-cottage-secures-2-68-million-sale" target="_blank">Property Observer,</a> the site had been acquired in 1973 for $33,500 by the notable gay rights activist and historian, Alexander 'Lex' Watson. Watson was the president of The Pride History Group and a lecturer in Australian Politics at Sydney University who sadly passed away earlier this year after a long battle with cancer.
$33,500 in 1973 dollars would be $289,724 in real terms today – just over 10% of today's $2.68 million selling price.
The location was the key of course, with planned upgrades to the Balmain East ferry wharf, which will now receive services from the Parramatta River along with extra ferries to McMahons and Milsons Point, further enhancing its value.
Had the home been only a few kilometres away, a few hundred thousand could have been wiped off the price tag and the media sensation may not have been so great. Even so, it is not the only dilapidated property to make the press of late.
Opportunistic buyers caught up in Sydney and Melbourne's property boom have snapped up a string of empty homes, selling under stiff competition while exceeding all expectations of price.
An empty hat factory on Wilson Street, Newtown, also vacant for years, sold earlier this month for $1.725 million.
A dilapidated home on 360 square metres of land in Thornley St, Leichhardt, vacant for more than 30 years, sold a few weeks ago for $1.4 million at auction.
A home in total disrepair at 19 Durham St, Stanmore, situated on 172 square metres of land, vacant for years and sold for $923,000.
And not to leave Melbourne out, an unliveable Richmond property on 726 square metres of land, also vacant for years, <a href="/expert-insights/buying/35608-derelict-richmond-cottage-development-site-sold-at-2-544-million" target="_blank">sold for $2.544 million</a> – $900,000 above the price it achieved only two years ago (pictured above).
The <a href="https://www.news.com.au/finance/real-estate/leichhardt-property-pulls-in-14-million-at-auction-and-tops-big-money-dump-list/story-fnd91nhy-1227006222322" target="_blank">list goes on</a>.
Barring the last example, that came with plans and permits for two town houses, these properties transacted for nothing more than their land value. However, while the buyers purchased a location, they did not pay for the services that rendered that location valuable or, in the case of the first example, compensate the local residents for suppressing access to some of the best views in town.
Instead, reinforced by inelastic zoning constraints, generous tax treatment, and unrestrained speculative growth in dwelling finance commitments, they unwittingly rewarded the sellers with a substantial unearned gain for withholding valuable land from use and depleting the nation's housing supply.
This means of 'creating wealth' common in most western nations sits at the root of many of our economic and social problems today. It has both a debilitating and destabilising effect on the economy, evidenced clearly in a painful and rising trend income and housing inequality that burdens the capacity of the 'welfare state' to compensate.
This article continues on the next page. Please click below.
 
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Interestingly, Lex Watson, the prior owner of the Balmain East property cited above, was purportedly greatly influenced by the writings of John Stewart Mill whose work was said to be "the touchstone of his life and later activism".
Born in London in 1806, John Stewart Mill is remembered as "the most influential English-speaking philosopher of the nineteenth century".
Inspired by his father James Mill, who tutored his nine children with daily lessons in Latin, Greek, French, history, philosophy, and politics, John Stewart Mill was a leading economist. He was a prolific logician, who dedicated his life to championing the causes of liberty and equality, while advocating 'radical' ideas, such as the abolishment of slavery and equal rights for women.
In 1848 he published the most prominent textbook on economics in the 19th century, Principles of Political Economy, critiquing systems such as communism and socialism and cementing Mill's reputation as a leading public intellectual.
Extending on the ideas set out by Adam Smith and David Ricardo, Mill employed concepts that that have been written out of today's economic narrative, that conflate land and capital – virtual opposites – while failing to distinguish between income that is 'earned' and the economic surplus that disproportionately flows to those that "love to reap where they never sowed" (a process best set out in Mason Gaffney's book The Corruption of Economics).
Writing on the moralities of taxation in Book V, Chapter II of Principles of a Political Economy Mill commented:
"The ordinary progress of a society, which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing."
From this Mill concluded that the government should collect society's economic rents in lieu of taxes that impede productive labour and industry, including taxes on the improvement and the transfer of property, (stamp duty) which he said, should rather be: "distributed over the land generally, in the form of a land-tax."
He was not the first or last to do so.
He followed a long line of influential activists, from Thomas Paine, who in his 1797 publication Agrarian Justice stressed:
"Men did not make the earth... It is the value of the improvement only, and not the earth itself, that is individual property... Every proprietor owes to the community a ground rent for the land, which he holds."
Most recently, Dr Ken Henry, who chaired Australia's Future Tax System Review, noted: "... economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases."
The classical economists recognised that unless profits from the 'enclosure of the commons' – land, water rights, minerals, and so forth - were effectively collected and shared for the benefit of the community, all productive gains, every improvement in society and the economy, would be capitalised into rising locational land values, enriching those that owned the assets but more so, those who created the credit and traded on the debt.
This is equally applicable to reductions in the cost of construction.
For example, news that high-density apartment towers close to public transport in Sydney, will no longer require parking facilities, delivering an estimated saving of $50,000 - $70,000 in development costs, will do little to ease affordability.
Rather, it will simply leave more funds available to bid up the price of land. This is precisely what we are seeing in Australia – sky rocketing land prices requiring 'super tall' structures to provide a viable return on investment.
This article continues on the next page. Please click below.
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While the small one and two bedroom units may be spruiked as affordable, when calculated by cost or rental value per square metre of floor space, they are remarkably expensive.
Mason Gaffney expanded on the theory, coining the acronym ATCOR – "All Taxes Come Out of Rent." Showing that whether renting or buying, total tax liabilities from whatever area carried by the consumer, deduct from the cost of a site to the extent they limit the amount a buyer is both prepared and able to pay.
It follows that the removal of all taxes would naturally wash up into higher prices for real estate, which in theory leaves the resulting rise in the economic rent of land 'just' enough to replace the forgone revenue. (For more, see Fitzgerald's Resource Rents Of Australia).
When that liability falls on productive industry, deadweight losses occur. For example, 90% of our taxes are distortionary, adding 23% to prices of goods and services.
However, when the burden falls on land and monopoly rents – minerals, fuels, the broadcasting and communications spectrum, patents et cetera, the reverse is the case.
In respect of land, a higher tax rate levied on the unimproved value would discourage leaving dilapidated homes vacant for years while we struggle with an assumed housing shortage - suppressing the speculative element that adds to the volatility of the market cycle.
Furthermore, when the gain is collected and used to fund the expansion of infrastructure in order to service a growing population, the tax base is expanded without a subsequent lift in rates.
In the 19th century, nature's 'free lunch' was largely limited to the aristocracy of the great landed estates. Today, monopoly profits are absorbed by the financial sector, which wields significant political leverage from lending 'endogenously' created credit against real estate collateral, with the compounding interest disproportionately increasing levels of household debt.
As I pointed out previously - Australia will increasingly feel the effect of this as we move into 2019.
Our current tax system is crooked. It allows large companies to jump through loop holes in legislation and 'cook the books,' shipping profits offshore, leading to an estimated $1.6 billion in tax revenue forgone, while land on the other hand, is used by investors as an effective tax haven.
This article continues on the next page. Please click below.
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In a recent post by Dr Gavin R. Putland of the Land Values Research Group, he notes:
"No matter how high your gross income may be, you can make your taxable income as low as you like, simply by buying enough negatively-geared properties. Such artificially reduced taxable incomes are used in ATO statistics on negative gearing, which are then trotted out by the property lobby as "proof" that most negative gearers aren't rich — as exposed, for example, in Michael Janda's article <a href="The%20myth%20of%20'mum%20and%20dad'%20property%20investors" target="_blank">The myth of 'mum and dad' property investors</a> (The Drum, 24 September 2014)."
Australia's economic narrative is more concerned with suppressing wages than high land values.
Joe Hockey has unashamedly stated that any rise to the minimum wage "will cost jobs" and "reduce competition," while remaining notably silent on the average CEO pay, which sits at an estimated 63 times average earnings (as at 2013), and showing scant regard for rising land values which increase the associated costs of running a business, while discouraging growth in productive industry.
It uncovers a damaging neo-liberal agenda, which will do nothing to raise the living standards for Australians struggling to make ends meet.
Meanwhile, in Germany, the house price-to-income ratio has fallen by almost a third nationally since the early 1990s, yet residents enjoy low unemployment and some of the highest wages per capita in the world – including the highest minimum wage in the world. Germany weathered the 2008 depression better than any other country in Europe by maintaining its focus on value adding growth.
The public needs to recapture the debate and push for a better set of democratic tools, that let the people decide directly on the benefits that can aid their communities, rather than the current state of affairs which is coloured with vested interest, polarising voters with false promises and flawed economic thinking.
The rise of citizen's juries, where a diverse and representative group of people are randomly selected and given the information and training needed to deliberate together on matters of policy – for the benefit of all, not just a few - limiting the power of corrupt government officials, may take us one step closer to achieving this.
Top of the agenda should be every citizen's right to affordable access to land and shelter.
 
 
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Australia's empty homes

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The latest affordability index by the Adelaide Bank and Real Estate Institute of Australia has once again flooded the real estate headlines with the jolly news that housing is growing ever more affordable.  
This pre Christmas gift of optimism from the newly updated affordability studies commissioned by the financial and real estate sectors, comes with a host of commentary – usually from those with a vested interest – who happily advise aspiring home owners that ‘they’ve never had it so good’ – in other words, to paraphrase Terry Ryder’s thoughts, first home buyers should <a href="/property-observer" target="_blank">‘put up, or shut up.’</a>  
Of course, it wouldn’t be half as palatable if it didn’t come accompanied with the seeming contradiction that not only is it more affordable than it’s been in the last decade (according to the HIA-Commonwealth Bank affordability index), it’s also substantially more expensive than its ever been. Yes, housing is only item than can be both affordable and unaffordable at the same time.  Work that one out Einstein.  
In fact, according to <a href="#more-3603" target="_blank">Residex</a>, median prices in both Sydney and Melbourne have already exceeded their historical highs, ‘nudging’ $750,000 in Sydney and $600,000 in Melbourne - additionally, Perth has also reached its previous peak of 2008, with a median price of $521,000.  
<a href="https://www.rpdata.com/" target="_blank">RP Data’s</a> dwelling price index shows a year to date increase of 14.3% in Sydney, 6.4% in Melbourne and 9.7% in Perth.  For home buyers, the benefit derived from lower lending rates has been all but offset by the inflationary pressure placed on prices.  
Rarely is it mentioned that housing affordability and the cost of servicing a mortgage are two separate entities.  
Mortgage rates are set up with different structures dependant on circumstance, and subject to interest rate changes influenced by the macro environment.  
To take out a 25 year mortgage requires the expectation of secure employment in a terrain where frequent job changes or part time work are becoming a norm.  
They may influence house prices through a cycle, but they do not take away the fact that home prices now – even with lower lending rates – require longer terms to pay down, with the interest over the duration of that period adding considerably to the capital cost.  
In fact I couldn’t put it any better than current governor of the Bank of England - <a href="https://www.theguardian.com/business/2013/nov/29/mark-carney-bank-of-england-home-buyer-warning" target="_blank">Mark Carney</a>, when he warns;  
“Think about the mortgage you are taking on, the debts you are taking on…You are taking at least a 25-year mortgage, maybe a 30-year mortgage.  Are you going to be able to service that mortgage five years from now, 10 years from now, if interest rates are higher? Or are you counting, even subconsciously, on the price of your house keeping going up and if something happens an ability to sell it quickly and not facing the consequences of not being able to pay?"
Carney’s cautionary words pre-empt the Bank of England’s decision to scale back its inflationary Funding for Lending Scheme amidst fears of a rapid escalation of house prices in the south-eastern regions of the country.  
From next year funding for lending will only be available for business loans -not mortgages – and if the banking sector’s concerned about signs of frothiness in an industry in which it’s heavily invested, so should we also be.  
The Bank of England governor is not alone. Central banks in Sweden, Hong Kong, Norway, New Zealand, Canada and Switzerland (to name but a few) have all adopted macro prudential measures to buffer against the associated risks of a boom/bust investor lead recovery in a post GFC environment - highlighting the importance of keeping lending standards robust – all, that is,  except Australia.  
Having weathered the impact of the GFC a little more effectively than others – the RBA seem to think we live in some magic faraway tree, effectively doing little more than wagging a cautionary finger to a sector which for the duration of the year, have outstripped owner-occupier lending with well over a third of all new loans on interest only terms and roughly the same proportion with LVRs of over 8%.  
In other words, there are still over a third of all loans in which the principle is not being reduced – with 37.3% lent on these terms for the September quarter alone.  
In NSW, investment lending is at record highs, making up over 50% of the market and although many use the well worn argument that the unwanted boom is predominant ‘only in Sydney’ – let’s not forget, Sydney is not some nether land off the coast of Tasmania. What happens in our biggest capital, with the largest and most diverse economy in Australia, inevitably impacts us all.  
Historically, this sector is more sensitive to interest rate changes with a tendency to wax and wain pro cyclically with market movements, exaggerating both gains and falls.  A housing recovery built on the back of small mum and dad investors pouring their money predominantly into negatively geared established dwellings – especially considering our current levels of private debt to income ratios - is not ideal for the long term the stability of our housing market, or house prices.  
The common Aussie term ‘spruiking’ - which APRA warns against in the self-managed super sector, is not only a contributing aspect of what inspires our culture to see property as the undiversified road map for building wealth for retirement – it is also part and parcel of what has kept our property prices high by both local and international standards.  Yet the risks associated with spruiking in SMSFs is simply the tip of a much larger iceberg.  
Having worked in many aspects of the housing industry, I have seen first hand the type of material that’s presented at seminars not just from those who receive under the table commissions from developers, but also from advocates working as independent advisors for either the seller or buyer.  
It really isn’t unusual to see slides presented at seminars with straight lines charting the difference between investing in properties that supposedly “grow” at steady 5% per annum, compared to those that grow at 10%, using historical median data as ‘evidence’ that future returns can replicate those achieved in the past, without any distinction of how such data is correlated or the difference between individual “house prices” and “median values.”  
This information borders on financial advice and comes with no mention of risk or the type of rigorous analysis, which you would reasonably expect when choosing to invest in a single asset.  
Another widely used industry favourite is the statement;  
“FACT: fewer than 5% of properties are investment grade”  
A myth if ever there was one.  Perhaps the well-known companies that use this as an advertising tool, would like to point to the person who researched every property in Australia to correlate such a statistic? Maybe we could also ask for a comprehensive definition of what ‘investment grade’ really is – because I guarantee there would be no shortage of differing opinions from industry ‘experts.’  
This endless promotion of residential property, with rows of investment magazines lining newsagency shelves, promoting subjective ‘hotspots,’ or as I <a href="https://catherinecashmore.wordpress.com/2013/11/18/do-we-have-a-changing-landscape-concerning-australian-real-estate-and-property-prices/" target="_blank">pointed out</a> a few weeks ago, agencies cold calling households, and sending ‘advisors’ round to ‘educate’ and encourage inexperienced investors to negatively gear against their principle place of residence, is toxic.  
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Meanwhile, the RBA continue to sit on their hands, not wanting to pull a regulatory lever, instead <a href="https://www.afr.com/rw/2009-2014/AFR/2013/09/25/Photos/160229d4-2585-11e3-bbca-a7ec88bfff7c_FSR.pdf" target="_blank">warning</a> investors to employ caution, hoping they will fall into line like a bunch of good school kids. However, whilst macro prudential tools may assist in ensuring banking lending standards remain robust – can they have any long-term sustainable or lasting impact on property prices?  
In a recent research paper by BIS (Bank for International Settlements), entitled <a href="https://www.bis.org/publ/work433.pdf" target="_blank">“Can non-interest rate policies stabilise housing markets?”</a>, evidence was gathered from 57 countries spanning more than three decades, investigating the effectiveness of nine non-interest rate policy and macro prudential tools on restraining credit growth and house prices.  
The analysis used a new dataset going as far back as 1980, making it the most comprehensive study to date in terms of both scope and time span.  
The paper concluded that whilst reductions in the maximum LTV (loan to value) ratio can restrain demand, its effects can be partially or wholly offset by a rising market enabling the investor to borrow more, therefore, changes in the maximum DSTI (debt service to income) ratio were assessed to be more substantial.  
But importantly;  
“Only tax changes affecting the cost of buying a house, which bear directly on the user cost, have any measurable effect on prices” and,  
“None of the policies designed to affect either the supply of or the demand for credit has a discernible impact on house prices.”
The study puts this down to the ‘can buys’ still outnumbering the growing pool of credit constrained ‘can’t buys’ – stressing that the importance of housing supply was not explicitly considered. Therefore if we want to lower house prices or put in place policies to aid affordability, we need to look outside the limited powers of the RBA alone.  
As has been proven <a href="https://www.businessspectator.com.au/article/2013/1/21/national-affairs/built-backs-first-home-buyers" target="_blank">time and time again</a>, intermittently stoking at the bottom end of the market with FHB grants and incentives does little more than provide a short term happy pill for vendors, as the price multiplier effect ripples across the rest of the housing terrain, stimulating both an inflationary and volatile environment.  
Instead, we need to focus on the real problem in Australia – and it’s not property prices, it’s land prices - as economist <a href="https://www.macrobusiness.com.au/2013/11/residential-land-values-reflate-across-australia/" target="_blank">Leith Van Onselen effectively points out</a> when he analyses the difference between commercial and rural land compared to residential land values, and building costs.  
“Whilst commercial and rural prices have remained relatively stable over the last 24 years relative to GDP, residential prices have skyrocketed.”  
In other words, the cost of residential fringe land, which without constraint, should be close to its ‘raw’ value, is not cheap at all – and it’s all down to ineffective urban planning policy.  
As I (<a href="https://www.macrobusiness.com.au/2012/12/englobo-the-shady-world-of-land-banking/" target="_blank">and others</a>) have pointed out previously, even within a wide expansive boundary as mooted in Melbourne’s new urban growth strategy, the government limits land use until they have gone through a lengthy process of mapping out areas for infrastructure known as a ‘<a href="https://www.gaa.vic.gov.au/precinct-structure-plans/" target="_blank">Precinct Structure Plan’</a> (PSP) – it is a slow laborious process and as soon as you restrict the supply of anything, scarcity inevitably inflates values.  
Larger developers are not slow to purchase swathes of acreage prior to rezoning, and then once PSPs have been finalised, drip feed it onto the market. Not only do government bodies have little understanding of how released plots respond to consumer demand, they have no policy in place to deter the practice. It’s therefore a failure.  
Furthermore, facilitation of infrastructure is currently financed via hefty development overlays, which are passed onto the buyer rather than initiatives such as bond financing, where residents pay back proportionally over a lengthy period of time, as was the case historically.  
We must remove these barriers with effective policy and let land prices revert back to normal levels to reflect a real price closer to commercial values.  
Without doing so, we can’t gain a true indicator of the trade-off buyers are prepared to make between price and distance. Currently, the average price of a newly built house and land package is around $400,000, this is not serviceable on the single median wage, and therefore can hardly be deemed affordable.  
Get the land supply, price, and infrastructure equation right and I suspect there would be no lack of demand from genuine aspiring home buyers.  Only when this is done, can we have a truly transparent debate on first home buyers’ willingness to spread over the land.  
 
<hr>
 Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.
 
 
 
 
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Can housing really be affordable and unaffordable at the same time?

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As a property investor you face a mine field of advice from financial advisors, sales agents, property planners, developers, not to mention numerous magazines and books all promising the road to riches  - and never more so than in a downward phase of the property cycle. 
Not unlike politics they offer a sea of differing opinions of what constitutes a good property investment, and it’s often hard to sort the wheat from the chaff.  Learning from past mistakes isn’t preferable when you’re investing large amounts of money, so it’s best not to make one in the first place.
Ironically, buyers often feel more confident purchasing into what’s traditionally known as a seller’s market rather than a buyer’s market.  Purchasing property that’s rising in value is understandably more assuring than reading weekly headlines that instigate fear we’re on the brink of a property crash. However, for those wise enough to step in whilst we’re still experiencing flat conditions, it’s important to identify a good buy from those that are simply substandard.
There’s currently a lack of quality real estate on the market – and to achieve maximum capital growth over the long term, it’s important your acquisition is attractive to owner occupiers (who fuel price growth) as well as holding appeal for long term tenancy in both downward and upward phases of the property cycle. Even in the current climate of market uncertainty, if you want to purchase a property that’s going to perform well over the long term, nine times out of 10the property you’re attracted to will also attract healthy competition from other buyers. 
With sound negotiation skills there’s always opportunity to purchase good property at a great price. However if you find yourself being lured into a deal that looks too good to be true - with little competition surrounding the home - it’s time to start asking why. Vendors have usually done their homework on market value prior to listing their property for sale.  Australians don’t give up their houses easily – it’s one of the reasons house prices in Australia are more likely to stagnate for periods of time than drop.  Most vendors will hold rather than sell in a downward market, and the value Australians place on their property is heavy with romantic aspiration.
Therefore, if it looks like they’re giving the home away it will be for one of two reasons – they’ve hit a financial dilemma and need a quick deal, or they want out of a non-performing asset or money pit. It’s important to make sure you walk in with your eyes open. 
It’s not unusual to hear about distressed sales, or quiet off-market listings, and in such circumstances a reduction in buyer competition is always advantageous.  However, this doesn’t mean the vendor is desperate to sell or the price is below market value, it usually means they will sell ‘if’ they can get the price they’re looking for.  So, before you whip out your wallet, make sure you’re not assuming otherwise. 
One of the most concerning acquisitions widely touted to investors are off-plan developments or house-and-landpackages.  Some sellers often disguise themselves as ‘free’ buyer agents picking up their fee directly from the developer.  When you purchase off plan you’re taking a punt the property will continue to appreciate in value.  With established dwellings it’s possible to trace the sales history for reassurance of capital growth; however off the plan dwellings don’t offer the same luxury. They come with a promise of high rental yields and depreciation benefits; however you have no guarantee that the look, feel and design will fulfil expectation.  You’ll usually be charged a premium on price (much the same as you would with a new car) – and like a new car, the price is unlikely to hold value without risk of initial depreciation once the word "new" has disappeared from the title.
Remember, as an investor, you’re not purchasing the home for yourself; you’re purchasing it to attract a long term tenant and – if you decide to sell – hopefully an owner occupier who’ll be prepared to dig deep.  Therefore identify the demographic you’re targeting. Who’s going to live in the property? Are you buying an apartment in an area which mostly attracts families who won’t be interested in your ‘shoe box’? Is the location desirable or are you purchasing on a main road, close to an industrial zone, or in a far off field away from local amenities? Is a flash renovation covering poor bones, or are there strict heritage overlays which will make future renovation or development problematic? 
Finally – if the word accommodation is preceded by ‘student’, ‘defence’, ‘serviced’, or listed with ‘huge stamp duty savings’ probably best to steer clear. It may look attractive on paper, but without considerable due diligence, there’s a good chance capital growth will be limited, on-going corporation fees invariably high, and you’ll find yourself walking into a greatly increased ‘risk v reward’ scenario. 
In most circumstances, a good property will sell well in all markets.  Therefore, cheap properties are cheap for a reason, so before you purchase, find out why.
Catherine Cashmore is senior buyer advocate for JPP Buyer Advocates – the largest dedicated buyer advocacy service in Victoria. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiates more than $100 million worth of property each year. <a href="https://www.jpp.com.au/">www.jpp.com.au</a>
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Cheap investments might be more trouble than you bargained for

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Are we starting to see more distressed vendors than may have been reported? Australia-wide, the delinquency rate has climbed from about 1.4% to 1.79%. It might be low in comparison to Europe and America, but it’s a figure the Reserve Bank should be paying close heed to because it seems there are other distressed vendors flying under the radar and trying to bail out before they get to the delinquency stage.
The average time Australians stay in their homes is 7.5 years (according to RPData) – although in the established suburbs of Melbourne close to the water and city it’s 9.1 years. However, there seem to be increasing numbers of vendors selling prime real estate after only one or two years of residence – something I’m seeing more and more often when I research the sales history of homes. In many cases these homes are struggling to sell, with days on market stretching into months as vendors try to achieve their “wish price” (a return on investment) in a flat conditions. These are often people who purchased when interest rates were low, and now rates have climbed, find themselves labouring to make the repayments.
Investment in real estate is long-term game plan, so trying to get a return on price one or two years down the line is a gamble no one should take, or be forced to take. Therefore in a flat market, with the possibility of interest rate rises brimming on the horizon, paying the right price and ensuring that decision by purchasing the right property is not only important, it’s crucial. Pay too much in the first place and you’ll get no short-term capital growth. Choose a “lemon” and if you need to sell in a soft market, reducing the price will be the only way to do so.
So how do you know you’re paying the right price? Just because the papers are screaming “buyer’s market” and the agent is giving you a “discount” on the asking price, that doesn’t mean a “bargain”. Drawing comparables against the weekend results in the paper won’t always help, as they only list exact addresses for auction sales, and many of those are now “undisclosed”. In fact, sales results won’t help you much at all unless you’ve been monitoring the market closely and assessing the individual properties listed – and furthermore, how do you know someone else didn’t over-pay on the property you’re comparing against? I was recently asked to help with a report into vendor discounting. This is the amount the vendor discounts throughout the sales campaign in order to sell. It wasn’t hard to find examples, however it was much easier to find examples of advertised prices (private sale) that had been exceeded.
There are three numbers in real estate – what the vendors want, what the market is willing to pay, and what a property’s reasonable market value is against comparable sales. Unless you’ve got a handle on all three you can’t negotiate effectively. If you’re a current buyer who has little experience negotiating and find yourself judging a property’s value based on the quoted range, or “reserve” price, rather than a solid base of knowledge, beware! Selling agents know all the tricks to con a buyer into paying more, from touting they have other offers on the table to convincing them the “distressed” vendor has “a very reasonable” reserve.
And what about choosing the right property? Well, even in flat markets with well-publicised drops over any one year, there are those properties that buck the trend - the roses amongst the thorns – in locations with unique aspects that drive owner-occupiers to stretch budgets. And these are the very properties investors need to target if they’re going to prosper during boom-and-bust cycles.
A suburb-by-suburb look through Melbourne highlights a few of these areas that are withstanding current conditions. Take, for example, Kew, located south east of Melbourne’s CBD. Made up of roughly 70% owner-occupiers, it’s already had a 29% jump during the first quarter in median value and a steady 74% year-to-date clearance rate, according to the REIV. Although this doesn’t guarantee every home in Kew will buck the downturn, you can be pretty sure that if you own a good well-positioned property that suits the buyer demographic of the area, it’s going to attract attention.
I would never advise someone to purchase a property unless they are fully committed to a long-term game plan, however I would strongly advise the essential need to get experienced advice before you risk becoming a distressed vendor.
Catherine Cashmore is a senior property adviser and buyer advocate for <a target="_blank" title="JPP" href="https://www.jpp.com.au">JPP Buyer Advocates</a> – the largest dedicated buyer advocacy in Melbourne. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiate more than $100 million worth of property each year for clients.
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Distressed vendors flying under the radar

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The financial fallout in America is not going to do anything positive for investor confidence, however the agents this weekend were taking full advantage of the news to spruik the safety of investing in “bricks and mortar”.   Without exception, in each auction preamble, there were comments to the effect that “the share market is crashing, and therefore there’s no better time to turn to real estate”. 
Of course it’s in the best interests of real estate agents to spruik this message – but then, why not? Amidst all the conflicting headlines, the property market is happily singing its own tune. The clearance rate has been firmly in the 50s (the new “norm”) for some months now. We’ve had a flat market all year with minimal movement – interest rates are on hold, our economy looks secure – and if anyone was perturbed following the downgrade of America’s AAA rating, it wasn’t evident in property land this weekend. Numbers walking through opens and standing outside auctions gave the impression we’re in anything but doom and gloom. Of course, the crux is when will the window shoppers turn into buyers? 
While investors have flexibility to step in and out of the market as confidence dictates, there are increasing numbers of homes buyers who – having sold earlier this year during which stock levels were at a peak – are now looking to purchase. Data released this week shows evidence of this, with a marked increase in approvals for owner occupiers (and slightly less so for investors). Rate City reports the biggest increase in June, rising by 0.93 % or $9.60 billion since May. 
However, the physical evidence is also clear – during the torrential rain at Saturday’s auctions in Melbourne, there were large crowds of brolly-less buyers (not neighbours) standing outside home sales monitoring results –and getting very wet in the process! It’s inevitable those with pre-approvals will take action sooner or later, and when they do this will result in upward pressure over some sectors of our market. 
The amount of stock on market is another contentious issue. Good properties with motivated vendors priced to sell in the current market are not in abundance, however agents are reporting large numbers of off-market – (and on-market) – stock where vendor expectation is set firmly at prices that far exceed even the best times of 2010. These are the discretionary vendors who don’t need to sell, however, they will do so only if a buyer can be found who’ll pay their “wish” price! This is dictating where our market stands at the moment – it’s not going down – but neither is it going up at any great pace. 
How much prices move over the remainder of the year is debateable and will no doubt be moderated by affordability. However while we still have a supply/demand imbalance of both useable and available housing along with increasing GDP, labour shortages, a strong mining sector, low unemployment and an economy that is faring better than most other developing countries, we will continue to suffer the inflationary consequences. 
There may be a good proportion of our population who are financially feeling the strain, and this has certainly been evident in some sectors of the housing market. However an equally large proportion of our population is reaping the rewards of investment in a booming economy. As the old saying goes: the rich get richer while the poor get poorer. 
Of course, not a week goes by without numerous reports hitting the headlines suggesting we’re heading for a housing market crash. Despite plain facts, a minority always seem to find a public platform to beat the drum of impending disaster. It seems pointless to reiterate the arguments for and against; they have been repeated many times from all corners of the spectrum, and like politics - sides have already been staked out. 
The truth is no market or investment is risk-free and ultimately the future prospect of any one market is largely out of our control. As individuals we have little say over the weightier matters dictating the economy, but we do have the ability to minimise risk through a carefully strategised plan before making any financial decisions. Short of putting money under the mattress or taking an oath to live the remainder of our lives on the rental ladder for fear of the next looming financial disaster, risk minimisation is something we can control when deciding to purchase property. With this in mind, it’s important buyers take care to buffer any rollercoaster effects by minimising their risk profile and employing strong negotiation skills whilst purchasing well within their borrowing capacity. 
It’s just as possible to lose money through unwise investment in the real estate market as it is with any other financial acquisition. However the difference with property is it’s essential to our daily needs. Next in line to air, food, and water comes shelter. Unlike America and the UK, most people in Australia live in capital city locations – in Melbourne alone we have between 1500 - 1800 people entering the city each week. For each person that enters the country our total GDP increases – as our population grows, so does our GDP. The majority of immigrants actually bring wealth and income into the country – they are not all coming in poverty stricken on boats even if it is the popular perception. 
All of these people (including our growing generic population) need a place to call home. Whether they purchase or rent is immaterial, because we have a shortage of quality residential real estate, in the places where they need and ‘want’ to live (the city!). With increasing demand it’s inevitable – over a period of time - property prices will increase, and with this in mind, it seems fair to suggest the ‘right’ property presents a relatively low risk investment. 
So what are the boxes you need to tick to minimise risk? Well if before you step in; get some good independent advice,
<ul>
<li> Don’t exceed the budget.</li>
<li>Buy in an established residential location close to transport, shops, and jobs.</li>
<li>Buy a property that accommodates essential living needs with good space, light, secure off street parking, and at least the potential for quality of ‘lifestyle’. </li>
<li>And finally, buy a property that has long term ‘owner occupier’ appeal. Remember - it’s home buyers that essentially fuel the market, so to ensure the house or apartment will rent and hold value during any potential market downturn, purchase a ‘home’ – not just roof space!</li>
</ul>
Catherine Cashmore is senior buyer advocate for JPP Buyer Advocates – the largest dedicated buyer advocacy service in Victoria. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiates more than $100 million worth of property each year. <a style="outline-style: none; outline-width: initial; outline-color: initial; text-decoration: underline; color: #6888b1;" href="https://www.jpp.com.au/">www.jpp.com.au</a>
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Tips to minimising your risk in a turbulent market

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If you’re waiting for someone to fly a flag when we hit the bottom of the market, think again: life doesn’t afford such luxuries. By the time people realise the market has bottomed out, it’s because it’s started on the upward curve and opportunity has passed! A bit like the gold rush; as soon as word gets out, the herd mentality kicks in, and it’s a difficult force of nature to resist.
So what is happening with our market? Some would suggest this is a typical market cycle. However, look a little deeper and a rather different picture is painted.  Market downturns are usually accompanied by various factors such as interest starting to flatten out, job insecurity, high unemployment, poor wage growth, population decline, large supplies of stock, and all manner of other triggers in different areas of the property market.
However, Australia isn’t suffering any of these. In fact, on the face of it, the picture looks enviably rosy.
 
<ul>
<li>Turnover in Melbourne is not markedly down. It’s trailing a little from this time last year, however, compared to 2008 and 2009 we’re ahead, indicating a steady stream of buyers and sellers. </li>
<li>Unemployment has been below 5% since last year, and although some areas are suffering more than others, the general outlook is excellent. </li>
<li>Our interest rates, although not low, are not high either – and no one would argue our population is falling.</li>
<li>The RBA has happily announced we’re saving more, and paying down our debts, and despite continuous complaints against the cost of metropolitan real estate, the debt servicing ratio is just 21%. Indeed, more than half of us are apparently paying down our loans faster than we need to.</li>
<li>Furthermore, wage growth is relatively firm, and household income was growth strong in the March quarter, according to the RBA</li>
</ul>
 
Nevertheless, the face is often very good at contradicting what’s emotionally within, and if truth be known, confidence is anything but robust.  We don’t need an interest rate hike – the RBA is doing a good job of making us err on the conservative side with a mere hint at it.
We all know bills are going to increase, but by how much is annoyingly uncertain.  And furthermore, anyone with investments in the stock market will be looking closely at the current international tremors and not liking the aftershocks.
We’ve all heard the news surrounding the Greek economy and its effect on Europe; America on the point of further demise; and possible warnings of a ‘hard landing’ in major players our side of the Pacific which could, some suggest, contribute to a ‘commodity crash’. However, if you think we’ve started on a downward-sloping curve, be warned: you may miss the boat.
We have a largely discretionary market. The evidence above suggests most vendors don’t ‘need’ to sell – especially if they don’t get their price.  They’re happy to sit it out and wait for better times.
Mortgage brokers have reported a large increase in the number of pre-approvals, hinting that there are plenty of buyers hovering in the starting blocks. The supply-demand argument continues to be a testy debate, but however many houses are built in the outer suburbs of our best performing cities, in far off lands away from the convenience of public transport and amenities, or high-rise, small one and two bedroom apartment blocks which are hardly an attraction for home buyers (nor fit into the typical first home buyer price range, or meet lending requirements). Stock located in areas where people want to live is certainly not in abundance.
Therefore, it’s unreasonable to suggest that real estate will keep dropping in price in the top third of suburbs of those areas driven fundamentally by supply/demand. However, outer-suburban locations, and poor high-rise accommodation heading into oversupply, may sing a different tune altogether and continue to suffer low demand.
With this in mind it’s important to note how dangerous it is to paint the whole real estate market with sweeping statements of downturns – or upturns. Every area must be assessed on its merit – hence many suburbs have shown a rise in median value over the first quarter, while other areas have dropped back to 2008 levels.
In short, the only thing we’re waiting for before the market swings upwards once again is the spark that’s going to inject confidence and an element of security into buyer psychology. However, waiting for that spark is not a wise thing for any investor to do if they want to purchase at the bottom! Have we hit the bottom yet? No one can make that call quite so soon – but if we haven’t, it’s not far away.
 
Catherine Cashmore is senior buyer advocate for JPP Buyer Advocates – the largest dedicated buyer advocacy service in Victoria. With extensive experience in all matters regarding real estate, JPP successfully purchases and negotiates more than $100 million worth of property each year. <a href="https://www.jpp.com.au/">www.jpp.com.au</a>
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Catherine Cashmore

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