Residential Property

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<p>A recent survey by Finder.com.au has revealed that some buyers indicated they would offer <span style="line-height: 1.3em;">up to 25 percent less than the asking price for a property that had presented badly, further </span><span style="line-height: 1.3em;">solidifying the importance of property presentation.</span></p>
<p>These results are really <span style="line-height: 1.3em;">no surprise to us. Over the years we have seen unstyled or poorly presented properties have </span><span style="line-height: 1.3em;">very little interest, only to sell over reserve following a spruce up by a professional stylist.</span></p>
<p>In a tough market place, property presentation can really make or break a sale.</p>
<p>Top tips for preparing your home or investment for sale include:</p>
<p>1. Improve your street appeal by tidying the gardens, repairing any fences or guttering, <span style="line-height: 1.3em;">adding a fresh coat of paint and making sure to have a definitive pathway to the front </span><span style="line-height: 1.3em;">door.</span></p>
<p>2. Declutter by removing excess furniture and personal items – too many items such as <span style="line-height: 1.3em;">photo frames and figurines can make a property feel small and cramped and will </span><span style="line-height: 1.3em;">distract buyers from focusing on the property itself.</span></p>
<p>3. Conceal day-to-day items such as laundry, piles of paperwork, dishes, keys and <span style="line-height: 1.3em;">garbage or remove completely from the property for open for inspections.</span></p>
<p>4. Set up the property well in advance by opening all curtains and blinds, turning on <span style="line-height: 1.3em;">heating or air conditioning, opening balcony doors and windows, and turning on lights </span><span style="line-height: 1.3em;">and lamps – this will make the property feel light and airy.</span></p>
<p>5. Finishing touches create good first impressions – adding a bunch of flowers, bright <span style="line-height: 1.3em;">scatter cushions and colourful throws along with burning a scented candle will make </span><span style="line-height: 1.3em;">buyers feel welcome.</span></p>
<p><span style="line-height: 1.3em;"> </span></p>
<p><em>Justine Stedman is director and principal stylist of Vault Interiors and can be contacted <a href="https://www.vaultinteriors.com.au" target="_blank">here</a>.</em></p>
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Poor presentation costs Aussies up to 25 percent on auction day

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<p class="p1"><span class="s1">GUEST OBSERVER</span></p>
<p class="p1"><span class="s1">A number of recently released statistics suggest that the Perth residential property market is primed for investment in 2017.</span></p>
<p class="p1"><span class="s1">Key indicators offer reason to believe that Perth is moving through the bottom of its current residential property cycle, and investors may be able to capture the full benefits of the next upswing by acting in the coming months.</span></p>
<p class="p1"><span class="s1">Some positive signs in the market are contributing to an overall shift in sentiment amongst buyers, with many feeling optimistic about 2017.</span></p>
<p class="p1"><span class="s1">Smart investors know that now is a great time to buy in Perth, but as we’ve always said, selecting the right property type in the right area is also very important, and at the moment there are some very attractive opportunities out there for savvy investors.</span></p>
<p class="p1"><span class="s1"><strong>Stronger numbers</strong></span></p>
<p class="p1"><span class="s1">The latest data released by the Real Estate Institute of Western Australia (REIWA) shows that Perth’s preliminary median house price for the December 2016 quarter did not change at $520,000, which is a positive sign as historically once all sales have settled, this preliminary median generally increases, so Perth could in fact record an increase in price over the quarter.</span></p>
<p class="p1"><span class="s1">Sales activity is increasing with the preliminary dwelling sales for the December quarter 2016 five per cent higher than the same time in 2015. For the week ending 31</span><span class="s2"><sup>st</sup></span><span class="s1"> of January 2017, property listings were down about 2 percent year on year, indicating that some of the excess supply in the market is starting to be absorbed.</span></p>
<p class="p1"><span class="s1">Furthermore, CoreLogic’s recently released RP Data report revealed that Perth dwelling prices improved by .2 percent in January contributing to a 2.1 percent rise over the past three months, adding to conjecture about the beginning of a recovery after a long period of negative growth.</span></p>
<p class="p1"><span class="s1"><strong>Great time to buy right</strong></span></p>
<p class="p1"><span class="s1">Buying strategy is just as important as timing in order to maximise the benefits of any approaching upswing. Investors who examine potential demographic, social, infrastructure and planning changes will have the best chance in purchasing a property that will outperform the market.</span></p>
<p class="p1"><span class="s1">For example, in 2007, our research team identified the City of Belmont as an investment grade suburb with strong short and long term growth drivers exposing many of our clients to the rapid price growth that occurred in this area.</span></p>
<p class="p1"><span class="s1">The report explores some of the research and resulting strategies the company employed to capitalise on investments in Belmont.</span></p>
<p class="p1"><span class="s1">With stock of listings still comparatively high, interest rates at record lows and affordability amongst the best in the nation, the current market presents excellent buying conditions in 2017:</span></p>
<p class="p1"><span class="s1">Investors who can identify a good long term growth property and negotiate a favourable deal should purchase now to realise significant price growth in the future.</span></p>
<p class="p1"><span class="s1"><em>Damian Collins is the founder and managing director of Momentum Wealth and can be contacted </em><a href="https://www.momentumwealth.com.au/damian-collins/" target="_blank"><span class="s2"><em>here</em></span></a><em>.</em></span></p>
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Perth primed for smart investors: Damian Collins

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<p>GUEST OBSERVER</p>
<p>Respondents to the ANZ-Property Council Survey report a more optimistic outlook for the property sector in 2017.</p>
<p>Confidence rose to a two-year high, supported by stronger expectations of economic growth, capital values, and forward work schedules.</p>
<p>Sentiment is still strongest in New South Wales, while the outlook for Queensland’s property market looks to have bottomed, and is embarking on a tentative recovery.</p>
<p>Firms nationwide now expect interest rates to rise over the next 12 months. This likely reflects a combination of the RBA cutting cycle reaching an end, and recent increases in bond yields and retail interest rates – especially in the housing market.</p>
<p>Confidence in residential property rose significantly, in line with other positive data flow on the housing market in recent months, including price growth, auction results, and investor finance.</p>
<p>Commercial property sentiment remains elevated, especially in the tourism sector. The improvement in the outlook for commercial offices is also encouraging.</p>
<p>ANZ chief economist Richard Yetsenga said the first quarter ANZ-Property Council Survey shows a further increase in sentiment in the property sector, despite the sharp slowdown in economic growth prior to the survey.</p>
<p>"Nonetheless, we believe growth will continue to pick up through 2017, with most of the Q3 weakness proving to be only temporary," he said.</p>
<p>"Our solid outlook for the Australian economy in 2017 is broadly consistent with the strong tone to this quarter’s survey. Sentiment in New South Wales’, Victoria’s, and the ACT’s property markets sits around record levels, in line with the transition away from mining-led growth. A stronger non-mining economy means that we believe the RBA’s easing cycle is over, and we expect rates will remain on hold this year.</p>
<p>A noteworthy feature of this quarter’s survey is that businesses nationwide now expect interest rates to increase over the coming year. This reflects both the RBA being at the end of their easing cycle, as well as tighter funding conditions. But as of yet, there is little sign that the likelihood of higher funding costs is having an adverse impact on the property sector.” </p>
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<p>The March quarter survey showed that firms are considerably more optimistic around the outlook for the property sector. Confidence reached a 2-year high, with 31 percent of respondents expecting conditions in the property market to improve over the next 12 months.</p>
<p>The outlook remains quite mixed across the states, with New South Wales still leading the way (Figure 1), while Western Australia continues to feel the negative effects of declining mining investment. Encouragingly, sentiment in Queensland appears to be showing some signs of a base.</p>
<p>Queensland tends to get lumped with Western Australia as a ‘mining state’, but the transition to growth outside the mining sector appears much more advanced in the eastern state. Recent GDP data show that Queensland’s business investment has increased for the past two quarters, and in annual terms is much less of a drag on the state economy compared to 12 months ago.</p>
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<p> <img src="https://www.urban.com.au/images/2017/01/12/Screen%20Shot%202017-01-12%20at%209.35.46%20AM.png" alt=""></p>
<p>Consistent with this result, ANZ-Property Council respondents in Queensland are reporting a more positive state economic outlook and generally rising capital values over the next year.</p>
<p>One trend that is consistent across the states is the expectation that interest rates will rise over the next 12 months. This is a significant turnaround from just 6 months ago, when respondents in all states expected rates to move lower (Figure 2).</p>
<p>We believe this changed outlook reflects two influences. First, it is increasingly likely that the RBA is now at the end of its easing cycle, after having cut rates again in August. Second, bond yields have been rising for the past few months, and even more recently housing investors have seen their interest rates increase. All in all, it appears highly unlikely that today’s record low interest rates will continue to fall.</p>
<p>Much of the improved outlook for the property market came from the residential segment, supported by improved expectations of capital price growth, forward work schedules, and construction activity (Figure 3). The stronger price growth expectations are largely in line with recent results in the housing market. House prices have returned to double-digit annual growth rates across Sydney and Melbourne, while auction clearance rates have steadily increased and now sit only a fraction lower than last year’s peak (Figure 4). Coupled with the returning presence of investors, it appears that demand for housing is reasonably steady at an elevated level.</p>
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<p><img src="https://www.urban.com.au/images/2017/01/12/Screen%20Shot%202017-01-12%20at%209.37.05%20AM.png" alt=""></p>
<p>The recent improvement in work schedules and construction activity expectations is also a positive. While we expect dwelling investment to fall slightly through the second half of 2017 given the recent decline in building approvals, a significant backlog of work is likely to see construction remain around historically high levels. </p>
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<p><span>Sentiment in the commercial property segment is still stronger than in residential property </span><span>(Figure 5). The March quarter survey saw the outlook for commercial property rise to the </span><span>second-highest level on record</span><span>, driven by an ongoing improvement in commercial office sentiment, and still-elevated levels of confidence in the tourism industry. </span></p>
<p><a href="https://www.propertyobserver.com.au/images/2017/01/12/Screen%20Shot%202017-01-12%20at%209.38.05%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/01/12/Screen%20Shot%202017-01-12%20at%209.38.05%20AM.png" alt=""></p>
<p>Net confidence in the commercial offices segment has been steadily rising for nearly two years, reflecting an improving outlook for price growth and construction activity. This result is in line with ongoing absorption of office space as white-collar employment continues to rise across the major capital cities.</p>
<p><span>The </span><span>outlook for the tourism industry remains very strong </span><span>despite a small decline in the March quarter. A net 64% of respondents expect tourism-related construction activity will </span><span>rise over the next 12 months, 52 percent believe their company’s forward work schedule will rise, </span><span>and 39% forecast capital values to rise. This positive outlook is </span><span>consistent with data showing the ongoing stre</span><span>ngth in Australia’s services exports, which includes </span><span>tourism </span><span>(Figure 6). </span></p>
<p><span>Importantly, the resilience of the AUD over the past year does not appear to have had a dampening effect on tourist inflows and expenditure. This suggests the strength of the tourism sector is not solely dependent on the currency, and is supported by other factors such as the rapid wealth expansion of the Chinese middle class. </span><span>This broadening of demand bodes well for the growth prospects of an increasingly key </span><span>component of Australia’s </span><span>economy. </span></p>
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<p><em>Daniel Gradwell is economist, ANZ and Richard Yetsenga is chief economist They can be contacted <a href="https://www.anz.com/corporate/research/" target="_blank">here</a>.</em></p>
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Property sentiment strengthens, despite higher rate expectations: ANZ Research 

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<p><span>GUEST OBSERVER</span></p>
<p><span>The departure of Britain from the Eurozone took most pundits by surprise. </span></p>
<p><span>Reviewing past events, we know that markets do not like surprises. The bookmakers expected the occurrence of this event to be rare and global markets are now feeling the immediate aftermath of the result. </span></p>
<p><span>The local property market will not be immune to this. BREXIT has been resisted by the wealthy and educated as these graphs from The Guardian show.</span></p>
<p><a href="/images/2016/07/08/Screen%20Shot%202016-07-08%20at%204.24.59%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>Secret Agent feels that BREXIT could create a bigger hit to the high end property market in Australia than other sections of the market in the short term. </span></p>
<p><span>While auction results after BREXIT were generally robust, we are likely to witness:<br></span></p>
<p><span>Subdued auction results at the higher end of the property market as participants sit on their hands to see what happens. * The commercial market tighten as sophisticated investors try to interpret how this might impact their investments. </span></p>
<p><span>Tighter credit conditions (lending) could result if major banks see an increase in offshore funding costs. The major banks each experienced a 3 - 5% decline on the day of BREXIT.<br></span></p>
<p><span>A further rate cut by the RTBA will become more likely. The yield curve, which is perhaps the best predictor of interest rates indicates further cuts in the short term (see Figure 1). </span></p>
<p><span>One counterintuitive aspect could be an increase in foreign capital to Australia's property market as Australia retains its safe haven status. This could be a medium term by-product, especially if our federal election delivers a clear outcome. </span></p>
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<p><span><em><span>PAUL OSBORNE</span> is managing director of buyers' advocate <a href="https://secretagent.com.au/" target="_blank">Secret Agent</a>.</em></span></p>
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Brexit impact on Australian property: Paul Osborne

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<p><img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>When politicians talk about tax and fairness, it’s easy for them to point out undeserved loopholes benefiting the wealthy, or multinational companies. But the elephant in the room is the difference between those who own and those who rent (or have recently bought and have huge mortgages) the house they live in.</p>
<p>The tax advantages of housing offend against justice on every count: they place financial stresses on the poor, they are unequal, and the increase in price is not deserved.</p>
<p>Owner-occupied houses are exempt from income and capital gains tax, and from social welfare means tests. Negative gearing gives investment properties a tax advantage, which is exacerbated by discounts on rates of capital gains tax. Rent assistance given to those on social security (currently a maximum of A$130 per week) is not sufficient to compensate for the difference.</p>
<p>The high price of housing is created by tax inequalities and by supply and demand imbalances created by government failure. At the same time, the government has encouraged banks to borrow hundreds of billions offshore to fund greater mortgage debt – pushing prices higher. Foreign depositors are faced with a low 10% withholding tax (reduced from 15%), and have not been subject to adequate money laundering controls.</p>
<p>And there is not much social benefit in higher house prices to counteract the costs to non-homeowners. Higher prices have not led to a significant increase in supply over time; people do not spend the increase, nor use it much to fund their retirement.</p>
<h2>Defining ‘justice’</h2>
<p>The word justice is used so widely, it needs some definition. While “fairness” is applied more widely, justice can be used to incorporate four sometimes conflicting objectives. Justice seeks, as much as possible to:</p>
<ul>
<li>Contribute to economic equality</li>
<li>Give each person their just deserts</li>
<li>Meet people’s essential needs</li>
<li>Allow for personal liberty by not interfering in people’s lives.</li>
</ul>
<p>Such a model of justice can be used to evaluate tax systems.</p>
<p>For those concerned that justice comes at a cost to efficiency and economic growth – there is considerable evidence to show that the relationship, where it exists, is positive. Giving people their just deserts provides the material incentives so beloved of economists. Evidence from a broad group of countries shows little overall relationship between income inequality and rates of growth and investment. Fairer taxes lead to greater compliance with tax laws. Research has found a significant increase in Australian tax morale between 1981 and 1995, which was explained by reforms that people saw as making the system more just.</p>
<h2>Clouded by politics</h2>
<p>Amid the ongoing debate about tax reform during the last year, many had hoped for some meaningful changes in the coming federal budget.</p>
<p>Instead, the current debate on the tax system, and more recently negative gearing, is concerned with perceptions of political acceptability.</p>
<p>This was also typified by the dismissal of any change to the taxation of housing in the Re:think tax discussion paper:</p>
<p><span style="line-height: 1.3em;">“Given the central importance of the home for Australian families, there is a strong consensus that it would not be appropriate to tax either the imputed rent on owner-occupied housing or capital gains derived from it.”</span></p>
<p>“Strong consensus”, whatever that means, is not a good reason if it involves injustice. The argument works the other way: given the central importance of the home, and its place in income and assets, it is essential for housing to be included in our tax and welfare systems. Let’s be the land of the fair go, even if we have to give up some personal advantages.</p>
<h2>Reform options</h2>
<p>Addressing the issue is complicated politically in that around 70% of voters own their houses, and a significant minority have borrowed heavily to get into the market in recent times. If prices drop, they will suffer through no fault of their own, as would the banking industry. With more than two million shareholders, banks are also strong politically.</p>
<p>The Henry tax review did, however, recommend a transition from stamp duties to a land tax, a significant increase in rental assistance and the removal (albeit with a high threshold) of the exemption of owner occupied homes from the means test for pensions.</p>
<p>The greater efficiency, and justice, of land taxes means that they have fairly widespread support from informed commentators. Taxes on property currently raise A$29 billion annually for the states and another A$14 billion for local governments in Australia. If land accounts for 50% of the value of residential housing, the additional revenue would be of the order of A$75 billion. Another A$40 billion might be possible if commercial land was also be included.</p>
<p>Removing capital gains discounts and taxing imputed rents should also be considered. <a href="https://www.tandfonline.com/doi/abs/10.1080/10511482.1994.9521152?journalCode=rhpd20#.VyAWCmR96X0">Research released in 1994</a> found the latter would be both efficient and more equitable in Australia. The advantage of this is that such a system allows for the tax deductibility of mortgage repayments, so would provide compensation for the minority that had recently bought into the housing market. A higher withholding tax on international deposits would also reduce the availability of funds to push up assets, and encourage local businesses by removing some of the artificial support for the currency.</p>
<p>Housing accounts for more than 60% of the value of total assets held by Australians. Translated into imputed rent it amounts to about A$150 billion annually, or 20% of the gross personal income of those who own their homes. If taxed at marginal rates of tax, imputed rents would add about a third to current personal tax of A$190 billion annually.</p>
<p><em><span class="fn author-name">Anthony Asher is a</span><span style="line-height: 1.3em;">ssociate professor, UNSW Australia, and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/anthony-asher-247115" target="_blank">here</a>.</span></em></p>
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The way Australia taxes housing is manifestly unfair

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<p><img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>The Queensland government recently launched a call for ideas to shape a revised plan for the future of Southeast Queensland.</p>
<p>The deputy premier and minister for infrastructure, local government and planning, Jackie Trad spoke recently of the opportunities for Southeast Queenslanders to grow communities sustainably and protect the region’s amenity – its environs, facilities, services and values.</p>
<p>This plan will consider consequences for the next 50 years. A 20-year plan will underpin the 50-year vision.</p>
<p>However, a long-term plan can’t properly underpin a vision without engaging many of Southeast Queensland’s stakeholders and visitors. It must also use appropriate futures methods to help look ahead 50 years.</p>
<p>What role for futures thinking?</p>
<p>Professional futures studies tools help to map, anticipate and deepen understanding of complex local and global trends and challenges. Kelvin Spiller’s experience as CEO at Maroochy Shire Council, on the Sunshine Coast, includes a process of “visioning” to establish long-term priorities across the whole city.</p>
<p>Now CEO of Geelong City Council, Spiller believes such visioning is vital for successful local government:</p>
<p>"particularly when there are service implications worth tens of millions of dollars or infrastructure replacement is necessary."</p>
<p>He employs the following steps to bring about change in cities:</p>
<ul>
<li>visioning with stakeholders;</li>
<li>service planning;</li>
<li>asset strategy planning;</li>
<li>encouraging leaders and managers via upskilling and guidance contained in legislation;</li>
<li>gaining a clear understanding of the council, government and community financial opportunities and constraints in relation to the vision as identified by the wider community. Link the infrastructure and social requirements of the vision to the finances available;</li>
<li>managing carefully the expectations, what can be achieved and timelines with the community, key stakeholders and governments; and</li>
<li>regularly refreshing the vision and strategic direction process with key stakeholders.</li>
</ul>
<p>What the plan needs</p>
<p>The plan must consider the pressing and engaging futures that affect the region’s residents. These include the softer social and harder economic and environmental issues and solutions that must cascade throughout cities if we want to achieve sustainability.</p>
<p>Southeast Queensland’s population will grow to 5.3 million people in the next 25 years, according to Trad. This growth has implications for how Queenslanders settle and then relocate in the region given the demographics of age groups and lifestyle changes – for example, work opportunities, career changes and family developments.</p>
<p>One implication of accelerated change is how quickly preferences of Generations X and Y change from wanting co-location options, specialised services and village communities. Each generation is seeking services that match their particular needs.</p>
<p>Futures opportunities up for grabs</p>
<p>In visioning initiatives in the region’s cities, communities have created city visions. These called for the priorities to be areas of community and cultural connection, engagement, openness and environmental sustainability.</p>
<p>A priority is pride in cities, and how we sustain a socially just and connected society across all demographics. Taking care of youth through to the elderly, multiple cultures, the disabled and disempowered requires designing and innovating to meet future health, security, cultural, education and social needs.</p>
<p>Uniting people around behaviours that help maintain and enhance the quality of our ecosystems, pristine air, water, food and energy requirements will remain of vital importance.</p>
<p>Our economic interests include prospects for jobs and prosperity – not simply in creating wealth, but also in creating opportunities. Transport and technology challenges, the new digital economy and our knowledge economy factor highly.</p>
<p>Our capacity to connect regionally to globally is also critical. Economic hotspots around the globe are shifting, as are the cities, mega-cities and cultures we network with.</p>
<p>Questions remain</p>
<p>The plan’s strengths are in thinking about issues dealing with infrastructure and land use. Yet, in proposing the plan’s revision, some questions about “softer” issues remain unanswered:</p>
<p>1  In considering long-term consequences, will the plan help the creation of innovative futures networks that empower hard-to-reach communities alongside policymakers, businesses, NGOs, consultants and universities? And will it legislate for more and better community engagement standards by cities in the region?</p>
<p>2  Given the projected population growth and accelerating pace of technological and climate change, will the plan encourage cities to develop city-wide visions and community plans to help them consider the opportunities and challenges ahead?</p>
<p>What issues will the plan translate into strategy and actions to tackle regional challenges? Will these include health, education, policing and encouragement of jobs that create sustainable futures?</p>
<p>Answers to these questions will depend largely on how stakeholders, community members and interested persons respond to the <a href="https://www.shapingseq.com.au/about-shaping-seq" target="_blank">call for feedback</a>.</p>
<p><em><span class="fn author-name">Colin Russo is f</span>uturist, University of the Sunshine Coast and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/colin-russo-267108" target="_blank">here</a>.</em></p>
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Queensland’s 50-year vision for its southeast must take heed of all region’s future needs

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<p>GUEST OBSERVER</p>
<p>Australia’s household debt has been rising and is high by international standards.</p>
<p>The household debt-to-income ratio has risen from 167 percent in 2011 to 190 percent in Q4 2016. Assessing how much to worry about this is not straightforward.</p>
<p>On the one hand, high levels of debt make the economy more vulnerable to a negative economic shock. On the other hand, appropriately allocated debt is an engine of economic growth, as it better allocates resources between savers and investors.</p>
<p>Our long held view is that high household debt is not, in itself, a problem, as long as it is held by households that can continue to service it. The problem faced by many economies during the global financial crisis, such as the US and Spain, was that household debt was misallocated to households that could not service it. In Australia, the latest available statistics suggest that the distribution is fairly favourable.</p>
<p>As at 2014, most of the debt was held by high income earners and there were few low income households with large debt servicing burdens. In addition, Australia does not have sub-prime borrowers and all of the mortgages are full recourse.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.14.17%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.14.17%20AM.png" alt=""></p>
<p>However, household debt has risen since 2014 and there has been an investor-led house price boom in Sydney and Melbourne. As a result, it is hard to be certain about how much risk has built up recently. The longer it goes on, the more difficult it is to judge. It is for this reason that prudential settings have been tightened and that RBA Governor, Mr. Phil Lowe, has repeated that it would not be in the ‘public interest’ to cut interest rates further if it provided another boost to housing prices and debt.</p>
<p>In its recent financial stability review, the RBA deemed that, given lending standards have been tightening, the key risk from rising household debt is to the macroeconomic cycle rather than financial stability.</p>
<p>The central bank’s own granular assessment is that any build-up of risks that could see rising defaults in a downturn is not large enough to be a financial-system-wide risk. Rather, they suggest the key risk is that the higher household leverage could amplify the economic cycle. We expect that concerns about high and rising household debt will be a key factor that keeps the RBA from cutting its cash rate further. We expect prudential settings to remain tight. </p>
<p>Household debt is high, but mostly for fundamental reasons</p>
<p>Australia has high household debt and it has been climbing further in recent years. Indeed, across the range of economies regularly tracked by the Bank of International Settlements, Australia has the second highest level of household debt, relative to nominal GDP (Chart 1). In contrast, corporate debt is about average and public debt is low by international standards.</p>
<p>At the outset, a key question is: why is household debt high? In Australia, high household debt reflects that: firstly, the bulk of the housing stock, including the rental properties, is owned directly by the household sector using leverage, which is not the case across many nations; and, secondly, that housing prices are fairly high when compared with household incomes.</p>
<p>On the first point, this is because the owner-occupation rate is high, at around 68%, and because the bulk of the rental properties are also owned by the household sector directly. In Australia, investment properties, which are then rented, are a tax-favoured investment. So, unlike most other economies, including the US, for example, the stock of rental properties involves debt on the household balance sheet, rather than the corporate balance sheet. As a result, around one-quarter of Australia’s household debt is held by investors, which is a key reason that household debt levels are higher in Australia than elsewhere (Chart 2).</p>
<p>On the second point, Australia’s housing prices are fairly high relative to household incomes, although they are not exceptionally so (Chart 3). Australia’s housing-price to income ratio is around 5 times, which is a similar level to the UK, Ireland, Denmark, Spain, and the Netherlands. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.17.13%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.17.13%20AM.png" alt=""></p>
<p>For Australia, housing prices are high for a range of reasons, including relative economic success in the form of continued growth, low interest rates, strong population growth, and high foreign demand, in the face of limited supply.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.18.25%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.18.25%20AM.png" alt=""></p>
<p>Some of these factor are cyclical, such as low interest rates, while others are structural. A key structural factor is limited housing supply. The supply of well-located housing has been limited by planning regulations and poor urban infrastructure. As a result, Australia has very low rates of urban density despite being a largely empty continent (Chart 4). Although there has been a ramp up in residential construction in recent years, in the largest city, Sydney, there is still not enough being built to meet demand (see Downunder Digest: Apartment building boom is nearing its end, 10 January 2017).</p>
<p>It’s the distribution of debt that matters the most</p>
<p>If the overall high level of household debt is driven by fundamentals, then what’s the worry? Part of the concern is that debt has been climbing recently, and that the rise has been driven by investors, rather than owner-occupiers (Chart 5). Again, even this is not worrisome, as long as the new borrowers are expected to be able to continue to service the debt. Thus it is the distribution of debt that matters the most, a point we have made before (see Downunder Digest: Australia’s rising household debt: should we worry?, 22 April 2016). The challenge is that there is considerable uncertainty about the distribution of debt and that this uncertainty rises when growth in debt is driven by new borrowers.</p>
<p>In Australia’s case, the key cross-sectional survey from 2014 shows quite favourable trends. </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.19.28%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.19.28%20AM.png" alt=""></p>
<p>The survey shows that the bulk of the household debt is held by high-income earners, with 74% of the debt held by the top 40% of income earners. The survey also shows that most of Australia’s highly-indebted households (those with debt-to-income ratios in the top 10th percentile of debt holders) are also high-income earners (Chart 6).</p>
<p>Australia’s financial regulatory environment is also strong. All mortgages are full recourse and there is no sub-prime lending. Australians also have an incentive to pay down their mortgages ahead of schedule, as they cannot deduct the expenses associated with their owner-occupied housing, such as mortgage interest, against their other taxable income. As a result, the average mortgage holder is around 21⁄2 years ahead on their mortgage payments (when offset accounts and redraw facilities are included). This means that the average borrower has a significant buffer on which to draw in the event of job loss or some other negative income shock.</p>
<p>So what is the concern? First, the information on the distribution of debt is from 2014 and we know that household debt has risen since then. We do not know much about the distribution of the new debt, although we do know that the bulk of it has been for property investors. On the positive side, historically, investors have been less likely to default on mortgages than first home buyers as investors tend to have equity in an owner-occupied property, and tend to be older and higher-income households with a loan repayment history. On the negative side, we do not know much about the new investors in recent years, although we know that the prudential regulator has been tightening its settings since late 2014 to prevent an excessive build-up of risk.</p>
<p>Second, although the average mortgage holder has a significant buffer, it is not the average borrower that typically defaults. At the riskier end of the spectrum of borrowers there is evidence of mortgage holders with only slim buffers against a negative income shock. For example, in a recent speech (4 May 2017), the RBA Governor, Mr. Phil Lowe, referred to data on securitised loans which showed that about one-third of borrowers only have a one-month buffer.</p>
<p>However, in that same speech Governor Lowe relayed that the RBA’s own assessment, with full access to all of the granular lending numbers, was that the risk of rising household debt levels was not to financial stability but to the macroeconomic cycle. Given that lending standards have been tightened and that risky loans are still only a small share of financial system liabilities, a large enough rise in loan defaults to shake the overall financial system is unlikely.</p>
<p>What happens when housing price growth slows?</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.20.23%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.20.23%20AM.png" alt=""></p>
<p>The RBA’s concern is that, when housing price and household credit growth slow down, this could exacerbate the economic cycle. Sydney and Melbourne have had significant housing prices booms in recent years, although it has been quite concentrated to these cities (Chart 8). </p>
<p><a href="https://www.propertyobserver.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.21.27%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/05/16/Screen%20Shot%202017-05-17%20at%208.21.27%20AM.png" alt=""></p>
<p>Sydney and Melbourne housing prices have risen 77 percent and 58 percent over the past five years, while housing prices are only 14 percent higher in the rest of the nation.</p>
<p>The RBA’s argument is that the eventual slowdown, or fall, in housing prices and easing in the pace of household credit growth could weaken overall economic growth, particularly growth in household consumption.</p>
<p>While a slowdown in housing activity would, no doubt, have some effect, it may not be as large as in the past. Indeed, there is clear evidence that the recent ramp up in housing prices and household debt has had little impact on households’ willingness to borrow to consume goods and services. Unlike the early 2000s housing boom, households have not been withdrawing equity from their properties, but rather have been injecting it in recent years (Chart 9). If there has not been a significant positive wealth effect from rising housing prices and household debt, any slowdown in these factors may also have a more muted effect than in the past.</p>
<p>A key counter-argument is that the household saving rate has been falling in recent years, which provides some evidence of a positive wealth effect (Chart 10). That is, households may have been more willing to lower their saving out of income because their wealth has been rising.</p>
<p>However, the state-level numbers suggest that this story is a bit more nuanced. The biggest fall in the saving rate has occurred in Western Australia, following a sharp rise earlier. This reflects the impact of the mining boom, which boosted incomes significantly in that state prior to 2011/12 and where incomes have fallen since. Western Australian households saved when income growth was strong and have been saving less recently, in line with what a permanent income model might suggest.</p>
<p>However, the saving rate has not moved much in New South Wales and Victoria, where the housing markets have been booming recently. This suggests that the wealth effect has, in fact, been quite small in these states, consistent with the housing equity withdrawal numbers.</p>
<p>In our view, when the housing markets in Sydney and Melbourne cool, which we expect to be the case this year and next, we do not expect a large negative wealth effect.</p>
<p>For the RBA, the idea of the overall economic cycle being exacerbated by the housing cycle is clearly a concern. In our view this concern would suggest an earlier tightening, rather than a later one, though. If the concern is not allowing the housing boom to continue too long, because the end of the boom could cause problems, the risk-averse approach is likely to be higher rates, not lower ones. </p>
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<p><span><em><a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. </em></span></p>
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How worrisome is Australia’s high household debt? Paul Bloxham

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<p>The prime residential forecasts for the 30 cities in Savills World Cities Prime Residential Index highlight the strength of prime residential property.</p>

<p>Average growth for the cities in the index is forecast at 1.6% for 2021. Sentiment is improving as the rollout of the Covid-19 vaccine begins in many countries and, despite the uncertainties which still linger, prime residential property is expected to remain an active market.</p>

<p>The resilience of prime residential markets was highlighted during the second half of 2020. Savills World Cities Prime Residential Index recorded an average increase of 0.8% for the cities in the index at a time when global GDP is recovering from the impact of Covid-19 and subsequent lockdowns.</p>

<p>Many of the factors which helped drive the prime residential market in the second half of 2020 are expected to continue into 2021, including low stock levels in some locations and the desire for more space.</p>

<p>Historically low interest rates, which are expected to remain low for some time, also make the sector attractive for wealth preservation. These factors, and the sector’s strong fundamentals, mean positive price growth is expected in 19 cities, compared with nine that are expected to see small price falls.</p>

<p><img alt="" height="636" src="https://s3-ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/pictures/article-images/savills_world_performance_2021.jpg" width="1200"></p>

<p>Source: Savills Research</p>

<h2>The high fliers: +6%</h2>

<p>Of the cities in the Savills World Cities Prime Residential Index, Seoul saw the strongest growth during 2020 with prices increasing 8.6%. This strong performance is expected to continue over the coming year. The market remains on an upward trend, driven by high demand from historically low interest rates, strong economic performance and short supply.</p>

<p>Berlin and Sydney are the next strongest performers. The German capital has been on an upward trend with high levels of demand that exceed supply. Sydney has seen comparatively weaker performance in recent years but is expected to improve in 2021 as economic activity picks up.</p>

<h2>The strong contenders: +4-6%</h2>

<p>Guangzhou is expected to see the highest growth out of the Chinese cities in the index over the coming year. The city is benefitting from urban regeneration projects as well as its proximity to comparatively higher-valued Shenzhen.</p>

<p>In the USA, as with many Western markets, the search for more space was a pandemic-driven trend during 2020. This is expected to continue over the coming year, benefiting cities that offer space, such as Miami.</p>

<p>Miami also has particularly attractive tax advantages. Should the rise in remote working continue, those who no longer need to stay in one location for work may find Miami appealing.</p>

<p>Mumbai has seen stamp duty changes over the past year. The forecast growth in Mumbai, driven by the stamp duty reduction and low mortgage rates, follows price falls due to an oversupply.</p>

<h2>The steady cities: &gt;0-4%</h2>

<p>Despite the headwinds of 2020, supply remains a significant influencer of price movements. Many cities that expected to see positive growth of up to 4% in 2021 are markets characterised by low supply levels, e.g. San Francisco, Amsterdam and Tokyo.</p>

<p>London’s prime market is expected to see a turnaround, with forecast growth underpinned by the value on offer compared with its peak in 2014.</p>

<p>The Chinese cities of Shanghai, Shenzhen, Hangzhou and Beijing are expected to see growth of between 0% and 4%. These markets have performed well in 2020 as economic activity returned. Residential is seen as a safe investment, which is expected to continue in 2021. Beijing has a slightly weaker forecast than the other cities in China due to heavy local regulation.</p>

<h2>A softening of prices: -2-0%</h2>

<p>Some prime residential markets are more reliant on international demand than others. For these markets, travel restrictions have hindered performance during the past year. While vaccine news does bolster optimism for the return of travel, a number of markets that are driven by international demand, including Dubai, Kuala Lumpur and Lisbon, are expected to see a slight softening of prices over the coming year. Lower international demand is also expected to impact the prime market in Paris.</p>

<p>A weaker economic environment is expected to impede growth in a number of cities in Southern Europe, including Milan, Rome, Barcelona and Madrid, while oversupply also continues to play a role for a few cities in this price growth tier, namely Bangkok and Dubai.</p>

<h2>Down, but not out: &lt;-2%</h2>

<p>In Hong Kong, the highest valued city in our index, prices have been impacted by political uncertainty. Prime values are expected to continue their downward trend over the coming year.</p>

<p>New York’s prime market has been on a downward trend in recent years due to oversupply. The pandemic has also caused a temporary move away from densely populated urban living – whether this becomes a long-term trend, however, still remains to be seen.</p>

<p>Sean Hyett is an analyst for Savills World Research</p>
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Joel Robinson

Sydney forecast to sit among the 2021 residential high fliers: Savills

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<p>EXPERT INSIGHT</p>

<p>This year has been a rollercoaster for residential values, from January onward the market began to rally off the back of some political and financial certainty in Q3/Q4 2019.</p>

<p>This ended abruptly at the beginning of lockdowns as we saw prices decline seemingly 10-15% overnight.</p>

<p>Once restrictions were lifted, buyer sentiment and demand returned to near pre-lockdown levels while the number of properties on the market remained considerably less than comparable months in previous years.</p>

<p>Low stock levels meant that there was a shift in the supply/demand dynamic which is now weighted toward larger dwellings as buyers' value usable space more than ever.</p>

<p>With stronger demand per property some local markets saw houses sell for record highs towards the end of 2020, surpassing previous peaks set in 2017. The apartment market has not been as lucky due to other external factors that appear to have stagnated prices however for the most part, this segment of the market has remained stable since restrictions were eased.  </p>

<p>Over the year we also saw a sharp decline in rents which has meant less investors were actively looking at residential property due to lower yields. What we are now seeing is a steady return of investors to the market due to the poor performance of cash so while yields may have declined, the net position of many investors remains relative due to lower borrowing costs.  </p>

<p>Next year the following changes are proposed to take place which will have significant impact on the local residential property market:</p>

<p>Changes to the National Consumer Credit Protection Act - 1 March 2021<br>
While it won't quite be like the old days when you would walk into a bank and walk out with a loan approval, one of the legislative frameworks that banks work within and are held to account will be eased. This is proposed to shift the balance of responsible lending from lender back to consumer which will have interesting effects, one of which we will likely see is an increase in borrowing in affordable markets where access to credit has previously not been possible or too expensive. Is a bubble coming, maybe, all we know for sure is that there will be more money in the market which will likely lead to price growth. </p>

<p>COVID-19 Vaccine - First half 2021<br>
Many industries and local businesses seem to be almost back to normal (apart from distancing measures) so while we are able to live and operate locally without a vaccine, the news is welcomed and will give certainty to businesses and consumers who will be able to forward plan and travel internationally. To give you an understanding of one of the biggest impacts a vaccine will have, International tourism in Australia is a ~50 Billion dollar industry that is currently non-operational. </p>

<p>Changes to stamp duty in NSW - Second half 2021<br>
The formula of how the new duty will be accrued is yet to be determined and this will impact the feasibility of a more transactional property market, however the reform in principle has been welcomed by both potential buyers and sellers. As always, time will tell, however we expect to see this enable the business of real estate manage cashflow better (developers, investors etc.) which will create additional activity and subsequently increase prices with competition.</p>

<p>Overall, in 2021 it will be a good year to own residential property, I expect the detached dwelling market to continue to outperform others in inner suburbs while we will likely see a renaissance in off-the-plan sales as investors and first home buyers begin competing for the same stock, leaving a hole in the market and pushing up prices making currently held development sites more feasible.</p>

<p>Chris Orr is the director of residential at Savills Australia</p>
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This year has been a rollercoaster for residential values, from January onward the market began to rally off the back of some political and financial certainty in Q3/Q4 2019.

2021 will be a good year to own residential property: Savills director of residential Chris Orr

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<p>Four times per year we get the unbridled pleasure of the official residential property price indexes.</p>
<div>Here, then, is a 60-second overview of the June 2017 quarter figures. </div>
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<div>The total value of Australia's dwelling stock rose by +$631 billion or +10.4 per cent to $6.72 trillion in the 2017 financial year. </div>
<div> </div>
<div>That now represents a +53 per cent increase in dwelling stock value from the $4.4 trillion recorded at the end of 2011. </div>
<div> </div>
<div>I'd take the data series back further, but since it only begins in Q3 of that calendar year, I can't.</div>
<p><a href="https://www.propertyobserver.com.au/images/2017/09/21/A1.jpg" target="_blank">Click to enlarge</a></p>
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<div>The annual stock value gains were mainly driven by the two most populous states. New South Wales (+$336 billion) and Victoria (+$215 billion) accounted for some 87 per cent of the total increase. </div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/09/21/Aus%20Dwelling%20Stock.jpg" target="_blank">Click to enlarge</a></div>
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<div>Detached houses have outperformed attached dwellings on average since 2003, reflecting rising land values and a relative scarcity of this dwelling type in the thriving, landlocked suburbs of Sydney and Melbourne.</div>
<p><a href="https://www.propertyobserver.com.au/images/2017/09/21/A3.jpg" target="_blank">Click to enlarge</a></p>
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<div>Over the June 2017 quarter the attached dwellings index performed strongly, however, helped along by the +11.7 per cent year-on-year gain for attached dwellings in Sydney (with the harbour city retaining a healthy weighting for that dwelling type). </div>
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<div><strong><span style="text-decoration: underline;">City by city</span></strong></div>
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<div>There were strong quarterly residential price index gains in June 2017 for Sydney (+2.3 per cent) and Melbourne (+3 per cent), with those two capital cities recording a twin +13.8 per cent annual increase. </div>
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<div>The Reserve Bank of Australia noted in its September Board Minutes released today that Sydney market conditions had eased in recent months, as reflected in softer auction clearance results and various other timelier measures. </div>
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<div>Annual price growth in Hobart notched up a pacy +12.4 per cent - with more to come later in the year - while there was steadier price growth in Canberra, Adelaide, and Brisbane. </div>
<div> </div>
<div>Perth and Darwin recorded further declines, but the pace of decline has slowed, and more timely measures suggest that conditions appear to be levelling out somewhat in these resources capitals. </div>
<p><a href="https://www.propertyobserver.com.au/images/2017/09/21/Resi%20Price.jpg" target="_blank">Click to enlarge</a></p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/09/21/Resi%20Price.jpg" alt=""></p>
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<div>The mean dwelling price in Australia increased by $51,700 or +8.2 per cent in FY2017, to hit a record high of $679,100.</div>
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<div>In New South Wales, the mean dwelling price rose to $903,700, possibly helped along by the sale of Sydney's most expensive house in the second quarter of the calendar year (the 'Elaine' estate in Point Piper, which transacted for a lazy $75 million or so - punchy). </div>
<p><a href="https://www.propertyobserver.com.au/images/2017/09/21/A4.jpg" target="_blank">Click to enlarge</a></p>
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<div>Finally, the number of dwellings increased by +2 per cent or +190,500 over the financial year to 9,906,100.<br><br>That's now well ahead of the rate of the official population growth, as the supply response hits its straps. </div>
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<div>There was a substantial increase of +2.35 per cent in Queensland's dwelling stock in FY2017, or +45,500 additional dwellings, reflecting the high volume of apartment completions in inner city Brisbane and elsewhere. The state population probably gr<span>ew by <span>~</span>75,000 over th</span>e same period. </div>
<p><a href="https://www.propertyobserver.com.au/images/2017/09/21/A5.jpg" target="_blank">Click to enlarge</a></p>
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<div>In absolute terms there was a robust uplift in the total dwelling stock of New South Wales (+50,900) and Victoria (+53,500), although in Victoria's case even this record rate of new dwelling construction is not keeping up with rollicking population growth.</div>
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<div><strong><span style="text-decoration: underline;">The wrap</span></strong></div>
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<div>As always, the interesting stuff is in the detail, but the overview shows that Melbourne's housing market was still powering along in the second quarter of 2017, while Hobart will glide into top gear in the latter half of the calendar year. </div>
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<p class="p1"><span class="s1">PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank"><span class="s2">AllenWargent</span></a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank"><span class="s2">blogger</span></a>.</span></p>
<p class="p2"><span class="s3"><em>His latest book is </em><a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank"><span class="s2"><em>Four Green Houses and a Red Hotel</em></span></a><em>.</em></span></p>
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