Empty apartments and demographic headwinds need constant investor surveillance: Catherine Cashmore
When discussing issues of housing affordability, the conversation is often weighted toward our first-home buyer demographic – principally those locked on the ladder of rising rents.
However, last week ABC Radio National’s ‘Background Briefing’ report focused on the new face of homelessness – with a quarter of a million older Australians approaching retirement with little super, and no house to call their own – importantly – many only a couple of rent payments away from homelessness.
I’ve commented previously on our ageing headwind of retirees, who hold roughly half of Australia’s housing stock as their principal retirement fund, and the potential consequences resulting from any downturn in home values or dwindling activity from a first-home buyer demographic, who are currently outbid by demand from a higher percentage of investors focused on the established sector.
However, as highlighted in the program - a growing demographic of older working Australians, are facing dire financial straits as they reach retirement.
Some of the most venerable victims are women, who having worked hard, and raised children, due to divorce or circumstance, are now finishing employment with less super than their male counterparts, (some with no more than $40,000 in a fund) and finding themselves once again as tenants, paying more than 50% of their income in rent.
Within the report, Ludo McFerran – from the University of New South Wales and national director of the Safe at Home, Safe at Work project stressed the urgency of the problem;
‘This problem of ageing and gender and homelessness is so big the reality is it will swamp all previous expectations or discussions or plans.’
Her comments are insightful, because as I’ve pointed out on many an occasion, the accommodation we’re currently building (which many argue is in undersupply) is neither affordable nor suitable for average single workers or elderly downsizers – being predominantly McMansions on the sparsely facilitated fringe locations, far away from our inner and middle suburban job hubs or low grade over-priced apartments with high owners corporation fees, which offer little more than a roof and four walls.
It’s a sobering reality, because if you think the numbers are significant now – without immediate action, the story’s set to get worst.
The traditional model of an ageing population who have in the past, purchased a house, enjoyed tax free capital gains and when the children have left home, sold it onto the next generation, not only starts to break down as the dependency ratio (the proportion of workers to non workers) falls from peak – but with more demands on the tax payer dollar, coupled with a lower growth environment as we face the challenges of a tighter macro economy than previously experienced, the trend indicates a reducing number of first-home buyers who purchase later in life, marry later in life, start their family later in life and significantly, tap into their housing equity to fund the rising cost of living, earlier in life.The bias is a significant one, because parents often find themselves digging into their own retirement equity stream to assist their children onto what’s too often termed ‘the property ladder’ – as if it’s something to be conquered.
Importantly, for those who don’t partner and cannot harness the power of a duel income or do not have funds to draw upon from relatives - retiring whilst still renting, is a very real possibility.
The issues were also highlighted in last week’s AFR in which Simon Kelly – author of a CPA Australia study entitled ‘Household Savings and Retirement – where has all my super gone?’ makes comment;
“People approaching the age of 65 have considerably higher debt than in the past. Mortgage averages and other property loans have more than doubled since 2002 and credit card debt has increased 70%. Superannuation is clearly being used to reduce debt.”
The report goes on to highlight how:
“People approaching retirement age are using the equity in the family home as a source of funds to assist their children into homeownership.”
Considering we’re in the second half run up to the federal election, it’s hard not to take further opportunity to highlight such concerns which have to date been ignored by our two major contenders - hence Peter Chittendon’s comments in Property Observer last week that the “elephant in the room” is “housing policy.”
Whilst our two major political contenders are busy focusing on a stronger Australia – promoting economic growth a return to surplus all coupled with reduced cost of living - which as highlighted by St Vincent de Paul in their recent campaign for a relative price index, bears little relation to official CPI measures. By far and away the biggest financial cost most Australian’s face is that of accommodation.As Australians for Affordable Housing correctly point out, – between 2003-04 and 2009-10 the amount households spent on housing has outpaced other expenses - increasing by 55%. Therefore any policy debate with cost of living on the agenda should have this top of list.
Needless to say, the first question on ABC’s Q&A debate between Joe Hockey and Chris Bowen last week, was precisely this, as a young professional living in Western Sydney expressed her dismay at the now near impossible dream of becoming a home owner.
As I’ve written previously – it’s an unfortunate reality that neither political party can see past burdening buyers with cheap credit by way of grants, low interest rates and incentives, in a vain effort to mask the rising cost of accommodation under the false premise that they’re doing something.
As Chris Bowen commented that “there (are) two big things that we can do to help with housing affordability. That's keep unemployment as low as possible. Because you have got a job, that's the best thing you can do to get into the housing market. And also to keep interest rates low and interest rates are as low as they’ve ever been in Australia”
However, in answer to his first point - Australia faces challenges ahead - with a falling participation rate due in part to an aging population, fewer full time positions coupled with a rise in part time work inflating the underemployment figures – it’s clear job creation is not keeping pace with increases in our working age population. Whilst moves are underway to improve the situation, the role of private debt is overlooked in favour of paying down government debt; hence consumers are weighted toward saving rather than spending money into the economy.
As for low interest rates, they have done little more than inflate established property prices and speculation on financial markets which is scant benefit to those facing rising yields, or paying an inflated cost to secure a property at the offset.
Joe Hockey’s comments took a similar stance – except he did touch on the issue of supply;
“The fact is you've got to increase the supply. I mean it’s a market. There is plenty of demand and increasing demand but what are we going to do for supply? I have some plans on that which we’ll be talking about before the end of the election.”
However, releasing more land and building more supply is not the answer when the land is neither affordable, or the supply desirable enough to attract the surplus of buyers forced to live within commutable distance from essential facilities.
In this respect, any plans for new supply need to be specifically targeted to combat both issues – let’s hope this is the case.
It also doesn’t touch upon the difficulties developers have gaining funding without a large proportion of pre-sales - generally only possible to the foreign market – and I mentioned last week, due to cultural tendencies, a significant proportion of these apartments often remain empty once sold - which once again has an impact on measuring the true effectiveness of any increase in underlying supply.
With the rise of the internet and the ability of those searching for answers to delve a little deeper than they perhaps would have done before the world became a mirror of reflections - it can only be hoped, that a majority, not minority, are taking opportunity to look past the frivolity of what I think most would agree, (whether by design or purpose) have been fairly meaningless debates – particularly if their searching for answers on housing policy.
Indeed, the home ownership dream - which resulted in prices trebling between 1997 – 2007 in the UK - and performing a similar feat in Australia, was not built on the fundamentals so often advocated - that of a rising population’s demands for a home – although of course, supply/demand constraints do a good job of exaggerating the figures when inelastic policies hamstring development.
Rather a great inflation in property prices was the direct result of the dramatic increase of mortgage debt built on the back of a housing market which had fast progressed into what Faisal Islam comments in his new book ‘The Default Line’ “a multi faceted investment vehicle financed through an unrestrained system of credit and deposit creation.”
As I said last week – in this respect, it’s not the health of the housing market that needs to be tacked, it’s the disease, hence why a growing number of influential economists are pushing for monetary reform – importantly, regaining control of the money supply and the dictates of where that supply is allocated, as a basic prerequisite for coming to grips with the banking and financial system.
What cannot be argued is the conditions that took values to their 2010 peak following our golden decades of growth, will not be replicated as we enter a very different and challenging decade than previously experienced – therefore all LNP comments that start with under the Howard era as evidence for their management of employment figures and surpluses, bear little relevance to our new reality.
As it stands, the environment in various capital city pockets has gone into overdrive and among others, AMP have now weighed into the debate commenting “Australian houses are 7% overvalued based on long- term trends” referencing how “home prices rose last quarter at the fastest pace in more than three years, and sales of dwellings reached the highest since 2011 in June, government and industry data show.”
Whilst the current rally seems set to last into 2014, the prospect of higher rates coupled with higher unemployment, should temper the gains and therefore, I expect we’ll see shorter durations to the traditional boom and bust market cycle.
As Christopher Joye aptly commented in a recent AFR column “ride the housing and equities wave for as long as you can. But remember... You are not surfing a swell in Bali.”
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.