The future of the first home buyer should not be ours to erode: Catherine Cashmore
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.
Louis predicts 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, since March 2009, 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 Rate City, “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.
In New Zealand in particular it’s a point of concern 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.
Additionally, we have the first world problem of an aging population creating future headwinds across the economy, with government intergenerational reports 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.
As I’ve mentioned previously, 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.
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.