There will be no housing recovery until there is a construction recovery: Catherine Cashmore
Last week Michael Yardney re-published his rundown of Australia’s market cycles from the 1980s onwards. The premise was to calm any ‘would-be’ property investors into recognising the various historical trends that traditionally affect the ‘ebb and flow’ of Australia’s real estate market.
If you’re a regular reader of Property Observer, you will have no doubt had your fill of where each individual state sits on the ‘property clock.’ It’s an arguably overused term to provide a fairly limited theory for our frequent ‘boom and bust’ cycles.
Question why property prices are so high and you’ll receive a basic lesson in real estate agent property economics – the top of which will be supply vs demand. 'We have a growing population and not enough homes'... and on and on it goes.
Indeed, various commentators have already extrapolated out two months worth of housing data to ‘conclude’ a rise of '10%-plus' over the course of 2013.
Certainly, if you want to ignite an emotional debate, housing is right up there with politics and religion. Since history began, it has remained an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for: land.
Whether it be a means to make a living through effective cultivation, a form of wielding control over a resident population, a place to build the modern-day castle, or simply a speculative investment, it’s the most valuable commodity mankind owns – a valuable and finite commodity that becomes ever more so as the population expands.
Indeed, property rights are a foundational component of a capitalist economy, and under our current system of ownership, governments profit nicely from the advantage. In Australia, state government revenues from property-related taxes alone equate to around 23% of the total balance sheet – hence why ‘stamp duty addiction’ and the consequential need to incentivise buyers to keep transaction figures high has such a strong hold.
However, no-one should be under the impression that property prices are high due to demand factors from home buyers. Prior to the GFC, following a global 'borrowing' shopping spree of cheap credit, Australia’s ‘too big to fail four’ were amongst the world’s most heavily exposed to the residential real estate market, with a grand total of 59% of loans offered to this sector alone.
Australia’s banks are as ‘pinned’ in their reliance on the ever-expanding growth of our resident population’s desire to borrow and buy, as is everyone else who has a hand in the pie.
In this ‘boom and bust’ merry-go-round culture, we’ve simply borrowed more to pay more, the vast majority of which has gone into residential housing – inflating prices disproportionately.
It’s a somewhat inevitable conclusion – made all the worse due to restrictive planning laws which have failed to accommodate for substantial capital city population growth – that the ease of credit has advantaged those at the beginning of its issuance, to the expense of those at the end.
Baby boomers who got in at the start of the ‘lending boom’ have certainly profited over those who are now at the ‘sticky’ peak, where prices have already had their ‘golden years’ of growth and the big profits have been made.
Mortgage debt – the largest component of all debt in Australia – is aptly living up to its original French meaning for the first-time buyers paying inflated prices, that being a “death contract.” However, as long as those purchasing are able to meet their repayments, the banks can continue to create money ‘selling’ their loans - backed up by overly generous wholesale funding guarantees – and there’s little incentive to improve the situation for a growing minority sitting at the bottom of the pile.
Albeit, there’s no doubt the property market has once again started to simmer – most agencies are reporting a spike of active enquiry – some declaring levels equal to those seen back in 2009 during which the federal first-home-owner boost was fuelling a post-GFC boom.
RBA governor Glenn Stevens also conceded as such, stating that residential investment seems to be “slowly increasing (Australia wide), with higher dwelling prices and rental yields.”
Share markets have trended higher, and there’s been a marginal uplift in retail spending, all of which filters through to the property market. Confidence that we’re on the ‘up and up’ again, combined with ‘cheap credit’ simply adds fuel to the fire.
AFG is once again reporting a ‘record’ month of borrowing with their February figures up 5.3% on this time last year (albeit with ‘subdued’ first-home buyer activity). Australia’s largest mortgage broker was reporting increasing activity as far back as February 2012, fuelled by a strong investment sector (which currently makes up roughly 42% of the residential market).
As Michael Matusik pointed out a few days ago, "Australian’s borrowed $200 billion to buy residential property last year – 7% less than the market peak in 07/08."
In Melbourne, clearance rates are up, the auction market is bubbling – and if ever there was an ‘out on the street’ example of the ‘boom and bust’ physiology in motion, it can be viewed in the inner suburban streets of Melbourne on any bumper ‘super Saturday.’
By their very nature, auction sales have played a significant part in igniting golden periods of rapid inflation in the established residential sector. Bidders evidently have their confidence underpinned when they see others competing for the same property – budgets tend to be pushed, and the under-bidder who walks away with that gut-wrenching feeling of empty disappointment is the one who’ll stretch their finances for the next auction they attend.
As buyers see prices go past expectation in an open and arguably transparent atmosphere, there is a feeling of ‘act now or miss out’ – it’s a feature of any rising market, whether stocks or property, and the build in intensity is rapid.
As an example, if two buyers are going head to head during an auction – and the winning bidder exceeds by just $1,000 – there is another buyer - the under-bidder - who has a similar budget and, with a determination not to lose twice, needs little persuasion to bid to the same level (or higher) on another property.
If you want a really good demonstration of this scenario, congregate around ‘investment-grade’ properties in the popular markets of Elwood and St Kilda (as an example). Whilst the general consensus remains that emotional home buyers push the market, they don’t shine a light to a couple of investors going ‘head-to-head’ for a negatively-geared asset, which will produce a fairly robust rental income and decent depreciation schedule to boot.
Albeit – do not mistake this for a market recovery – once again, it’s all confined to the established sector. Everyone is effectively fighting over the same pool of existing dwellings in a never ending game of 'musical chairs.' We’re simply paying higher prices for an ageing stock of second hand homes.
Indeed, there’ll be no housing recovery until we have a construction recovery. As the first ABS building approvals update for 2013 indicated, approvals in January fell for a second consecutive month, lingering back below the 13,000 mark.
Spokesperson for the HIA, Harley Dale, commented that even with a rise of 3.3% in detached house approval, overall approvals for this sector are still down by 1% over the three months to January 2013.
Fletcher Building LTD is also flagging the weight of the issue, stressing that the ongoing weakness in Australia's new housing sector is likely to last until the end of the year. Along with the others, they are crying for lower rates and a return of incentives for first-home buyers.
Last week, the federal government’s housing supply council revealed the nation faces an "an impending very substantial fall in home ownership". The report goes onto state that “baby boomers will be the last generation to live the home-ownership dream”, with the so called ‘trend’ towards renting a “natural response to higher house prices.”
A younger generation are now being told the only way they can get into the market is by either tapping into mum and dad’s equity, or living in the family home longer and perhaps getting a foot through the door as an investor, rather than an owner-occupier.
All in all, so long as the profits keep rolling in, there is no incentive whatsoever to address these concerns. The powers that be can keep their ears covered, whilst singing loudly to any forthcoming pain which may be experienced by a future generation that 'no longer can'.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.