The Australian dream of home ownership becoming unobtainable

The Australian dream of home ownership becoming unobtainable
The Australian dream of home ownership becoming unobtainable

On the one hand, increasing the ability of prospective home owners to get a foot hold in the market is admirable. After all, home ownership in Australia is all but considered a right of citizenship. However, to date, the only way governments have done so is to encourage greater debt levels by way of incentives, lower loan-to-value ratios, negative gearing, low interest rates and so forth.

Consequently, even overpriced homes have looked tempting to emotionally led home buyers who’ve heavily invested their future wealth and income into the principal place of residence. They – along with investors – were more than eager to take advantage of the pre-GFC decade-long property boom stimulated principally by debt. According to RateCity, from a random selection of more than 2,000 home loans in mid-2008, more than a quarter had a loan-to-value ratio of 100% – LVR’s now rarely encountered.

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

For market watchers, reading the terrain ahead is somewhat clouded by the emotional aspect to property, hence why so many mis-forecast the measure of percentile change in their predictions.  The essential need for shelter, along with our creative capacity to make the home “a castle”, pins a far greater emphasis on consumer sentiment.

Each sale is the result of a carefully negotiated contract between two parties with differing needs and priorities.  In most cases, it’s a long way from being just a simple business arrangement and shouldn’t be classed as such.  Furthermore, because each property marketed has its own intrinsic qualities – which are valued differently from buyer to buyer – trying to lump residential housing alongside stocks and shares, for example, leads to errors when reading and analysing statistics.

The latest data from Residex has indicated that Australia-wide, there’s been a marginal return to growth in the house-and-land market. The news is often jumped upon as a positive sign of recovery.  However, with overall turnover back at levels not seen since the 1990s, how can we herald it as such?

Residex recorded a marginal improvement in transaction figures, however, not significant enough to prove we’ve turned a corner.  Therefore, the figures feeding into the median are representative of a comparatively small composition of properties selling and most likely stimulated by home buyer sentiment.  Broadly speaking, buyers are still taking a back seat, first-time buyers are hamstrung by stricter lending conditions, and increased supply isn’t providing feasible or affordable options to ease the consequential stagnation.

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

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

As if we need further evidence of the above fact, the predominant headline from last week – picked up by every major news outlet – was the significant increase of Australian home owners seeking access to their super to fund outstanding home loans.  There’s been a 25% rise in claims between 2011-12 totalling $99.38 million. It’s a worrying statistic.

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

 


 

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

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

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

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

Whether you see the cup as half full or half empty will no doubt depend on personal circumstance.  We’re not currently looking at market collapse of 40% or so, as witnessed the USA or parts of Europe, due to relatively stable employment.  According to Finch Ratings, default rates are still low by world standards despite a marginal increase Queensland – up 18 basis points to 1.6%. However, the low numbers transacting on property are a concern and producing figures not dissimilar to countries in more dire straits – countries that have witnessed a 40% drop in values.

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

Australia currently has the world’s highest household debt-to-annual disposable income at around 150%, and despite the movers and shakers in government telling us it’s OK based on debatable “responsible” lending practices, you have to wonder: what will happen when Australia can no longer shelter itself behind a mining boom?

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

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

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

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

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

While some may be satisfied with a life living in rental accommodation rather than opting for ownership, Australia doesn’t have any “long-term” rental strategies to provide this security and protect against rising yields.

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

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

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

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

Catherine Cashmore

Catherine Cashmore

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

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