Category: Home Prices

Home values fall in Sydney and Melbourne as housing market moves through peak of cycle – CoreLogic RP Data

The CoreLogic November Home Value Index out today confirmed dwelling values fell across five of the eight capital cities in Australia over the month, taking the combined capitals index 1.5% lower.

According to CoreLogic RP Data head of research Tim Lawless, slower housing market conditions for Sydney and Melbourne became evident earlier in the year and continued throughout November. Over the month, Melbourne values fell by 3.5 per cent, while Sydney values were down 1.4 per cent.  Hobart dwelling values dropped by 2.4 per cent, Darwin values were down 1.3 per cent and dwelling values moved 0.5 per cent lower in Canberra.   Overall the combined capitals housing index has seen dwelling values drop by 1.5 per cent over November, taking the rolling quarterly rate of change to -0.5 per cent.

Values rose in the remaining three capital cities, with Adelaide showing the highest month-on-month growth rate (0.7 per cent), followed by Brisbane (0.6 per cent) and Perth (0.3 per cent).

Mr Lawless said, “The latest results are now placing downwards pressure on the annual change in dwelling values. The annual rate of growth across the combined capitals index peaked at 11.5 per cent back in April 2014, and has since reduced to 8.7 per cent.”

Sydney maintained the highest annual growth rate at 12.8 per cent, which is down from a peak rate of annual growth of 18.4 per cent in July earlier this year, while Melbourne’s annual growth rate has reduced from a recent peak of 14.2 per cent to 11.8 per cent over the 12 months ending November this year.

The only capital cities where values have declined over the past year are Darwin (-4.2 per cent) and Perth (-4.1 per cent), where weaker economic conditions and a slowdown in population growth contributed to an early peak in housing market conditions in December last year.  The equivalent peak in the cycle for Darwin was May 2014.   Since that time, Perth values are down a cumulative 5.9 per cent and Darwin values have fallen by a larger 6.8 per cent.

Index results as at November 30, 2015

2015-12--indices

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood,  become a contributor to the slowdown in housing market conditions, as well as tighter lending practices evidenced by a recent reduction in  lender risk appetite for investment loans and high loan to valuation ratio mortgages. Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.”  Mr Lawless said.

As a consequence of the tighter lending environment for investors, as well as gross rental yields being at near record lows, participation in the housing market from investors has reduced from 54.1 per cent of all new mortgages in May 2015 to 45.4 per cent at the end of September, which is the lowest level since July 2013.   Data released by APRA at the end of last month showed the pace of investment related housing credit growth fell below the APRA 10 per cent speed limit for the first time since September last year, with the monthly change in investment credit growth the lowest since October 2011.

According to today’s results, the slowdown comes after auction clearance rates have moderated back to the low 60 per cent range since the last week of October, whilst average selling time and vendor discounting rates also continue to rise from their record lows.

The 1.5 per cent decline in capital city dwelling values over the month, coupled with a 0.3 per cent rise in weekly rents, has seen the average gross yield record a subtle improvement over the month.  This follows a trend towards lower rental yields which commenced in May 2013.  Gross yields remain close to record lows for houses in Melbourne at an average of 3.0 per cent, while Sydney has overtaken Melbourne to show the lowest yield profile across the capital city unit markets, with an average gross rental yield of 4.1 per cent.

Mr Lawless said, “Slower housing market conditions will likely be a topic of conversation when the Reserve Bank board meets today to deliberate on the cash rate setting.  A less buoyant housing market is likely to provide the Reserve Bank with a greater degree of flexibility in adjusting interest rates without as much risk of overstimulating the housing market.”

“While the Reserve Bank is likely to welcome a slowdown in the rate of home value appreciation, the overriding objective would be to avoid a significant downturn in the housing market, which would act as a weight on economic growth and potentially impact financial system stability.”

“With the housing market moving through the peak of the cycle at a time when there is a large number of new dwellings commencing construction, there is likely to be a heightened level of settlement risk for off the plan purchases.”

“Those purchasers who have recently purchased off-the-plan may face challenges at the time of settlement if the valuation of the property is lower than the contracted price, or if mortgage finance is less freely available, or on more expensive terms.  This would imply that some buyers may have a higher loan to valuation ratio than anticipated, which could require additional funds to bring the LVR down to a level the lender is comfortable with.”

“As a result of slowing housing market conditions, an additional risk for policymakers is where a large number of dwellings approved for construction are postponed or withdrawn as developers face fewer presales or lose confidence in their ability to deliver a profitable project to market,” Mr Lawless said.

A land value tax could fix Australasia’s housing crisis

From The Conversation.

The major cities of Australia and New Zealand are experiencing an extraordinary wave of speculation in their respective real estate markets. Over the past three years, the median house price to median income ratio has increased by 21.2% in Australia and 18.1% in New Zealand, a rate reminiscent of Ireland’s 20.5% before its housing crash at the time of the global financial crisis.

The rapid increase in property unaffordability on both sides of the Tasman has enriched a number of homeowners and speculators and made countless more eager to join the game. But it has had dramatic effects for businesses and landless families who find it exceedingly difficult to afford a place to live, work or operate.

Unsurprisingly, a lot of column space and political deliberation have been dedicated to finding a solution to the problem. Much of the analysis points to a lack of housing supply at a time of increasing demand as being the main driver of rising prices, resulting in a simple policy prescription: increase the supply of housing.

The main problem with this argument is it ignores the fact that it is land, not physical structures, that appreciates in value, making it an obvious area for speculation. Unlike houses or genuine capital, land does not depreciate or require maintenance. Instead, the value of land reflects its economic potential due to public expenditures on infrastructure (such as roads, schools or railway stations) in its vicinity and the effort and entrepreneurship of local workers and entrepreneurs.

When land prices soar, residential real estate becomes a more attractive investment opportunity than productive businesses. Land bubbles tend to produce two seemingly contradictory effects. Firstly, it produces urban sprawl as businesses and families are forced to seek cheaper land outside of the urban centres. Secondly, as owners are more interested in expected capital gains than any productive activities, much valuable land become idle.

Eventually, the burden of debt, lack of affordable land and investments based on wrong signals (e.g. luxurious condominiums promising high-profit margins) start affecting the real economy. As workers lose their jobs, they become unable to repay their debts and are forced to sell. Land prices finally stagnate and then fall, taking leveraged banks, speculators and people’s life savings with them. It is, therefore, clear that to escape this never-ending cycle, we need to focus on land.

Over a century ago, American economist Henry George suggested instead of taxing workers and entrepreneurs, governments should raise their revenue from land via a land value tax (LVT).

Indeed, both Australia (land taxes at the state level) and New Zealand (property rates at the council level) already have some taxation of land in place. But over the last century these taxes have become significantly debased due to the influence of various interest groups that secured exemptions or low rates. It is time to reconsider shifting the fiscal balance back onto land.

Unlike the land taxes already in place or the often suggested capital gains tax, LVT does not punish anyone for constructing houses or factories in the way that our current taxes do. As the supply of land is fixed, LVT becomes a cost of owning it. Consequently, it can bring in a decrease in prices as the owners of inefficiently used sites might feel compelled to sell or lease them to those willing to use them productively. Increasing the cost of owning land would drastically reduce the incentives for speculation.

Imagine central Auckland or Melbourne without vacant sites or dilapidated buildings. What is more, encouraging more efficient use of land is not only beneficial to economic growth and housing affordability, but also has a potential to substantially lower the costs of public infrastructure and encourage more efficient use of space and natural resources.

LVT would be a transparent and efficient alternative to our current taxes which are not only burdensome on businesses and families but also difficult and expensive to administer and enforce. It is impossible to hide land in a tax haven or a trust (trusts are not exempt from the current land taxes). Taxing it can be done cheaply and on the basis of publicly available information.

While LVT might persuade some modest-income earners to sell their valuable properties, most workers and homeowners would get net benefits from a reduction in taxes falling on their income (income taxes) and consumption (GST). Furthermore, a citizen’s dividend could be introduced in which part of the revenue raised from LVT is directly paid out to all citizens on a per-capita basis.

Given the multiple problems stemming from the rapidly expanding housing bubbles in Australia and New Zealand, introducing a tax on unimproved land values makes sense. Not only would it undoubtedly address house price inflation, it could also result in a more efficient use of land, mitigate urban sprawl, lower the burden on the natural environment and reduce the risk of real estate bubbles; all this without undermining the foundations of economic growth.

 

Author: Nicholas Ross Smith, Professional Teaching Fellow, University of Auckland;  Zbigniew Dumieńsk, Lecturer, University of Auckland.

 

A Deeper Look at Recent Auckland Housing Market Trends: RBNZ

The Reserve Bank of New Zealand has published an analytic note “A Deeper Look at At Recent Housing Market Trends; Insights from Unit Record Data. It highlights the influence of investors and their impact on the overall market and the impact of LVR controls.

In October 2013 the Reserve Bank placed a temporary ‘speed limit’ on high loan-to-value ratio (LVR) residential mortgage lending, restricting banks’ new lending at LVRs over 80 percent to no more than 10 percent of total residential mortgage lending. This policy was implemented to reduce financial stability risks associated with the housing market, against the backdrop of elevated household debt, high and rapidly rising house prices, and a large share of new lending going to borrowers with low deposits. The policy had an immediate dampening effect on housing market activity and house price inflation, and facilitated a strengthening in bank balance sheets. However, since late 2014, upward pressure on the housing market has re-emerged, predominantly in Auckland, posing renewed risks to financial stability.

With the housing market showing renewed signs of strength, this paper provides a detailed overview of market conditions and examines developments following the imposition of the speed limit on high-LVR lending. We find that increased housing market activity in recent months has been driven by strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit. Much of the increase in investor purchase shares has coincided with a fall in the share of movers, with the first home buyer share increasing slightly following its decline after the introduction of LVR speed limits.

We also investigate whether the LVR policy has led to an increase in cash buying activity or borrowing from institutions outside of the regulatory. We do not find evidence of the former with cash buyer shares falling in Auckland and remaining broadly flat in the rest of the country. There is some evidence of a modest increase in the share of transactions involving non-banks since October 2013, although non-bank activity remains low.

We then undertake a more detailed analysis of investor activity given their heightened prevalence in the market. The primary driver of their increased market share has been a rising incidence of small investors (that are heavily reliant on credit) in the market, as opposed to greater activity among larger investors. This suggests that the incoming changes to the LVR restrictions could have a significant dampening effect on Auckland housing market activity and house price inflation. We also find that investors are disproportionately represented at both ends of the price spectrum, contrary to popular opinion that investors predominantly buy relatively cheap properties for use as rentals.

Finally, we offer some additional insights into cash buyers, with the evidence pointing towards increased investor leverage relative to other market participants, consistent with the strong growth in investor-related mortgage commitments in recent months.

Will Cameron’s 200,000 starter homes really help solve the housing crisis?

From The Conversation.

British prime minister, David Cameron, has pledged to turn “Generation Rent” into “Generation Buy”, by building 200,000 affordable starter homes for under-40s by 2020. The price of the starter homes will be capped at £250,000 (£450,000 within London), and buyers will not be able to sell the properties on for five years. While the prime minister’s announcement will help address the UK’s chronic housing shortage, it is also likely to have unintended consequences.

We really ought to be building 240,000 new homes each year in England alone, if we are to meet need. Currently, we are only building about half of that amount. In fact, it was as far back as 1978 when we were last building the numbers of new houses we need today.

Challenge accepted

Minister for Housing and Planning Brandon Lewis recently said that building 1m new homes in the life of this parliament would be a good achievement. But, welcome as those homes would be, they are still fewer than we need.

The real challenge is to rebuild the construction capacity that we lost after the credit crunch, when many small and medium sized builders went out of business and many skilled construction workers left the industry as house prices fell and small builders found it hard to raise finance. So building more homes will involve boosting the number of small- and medium-sized construction firms, as well as skilled labour – all of which will take time and money.

As though the challenge of building a million homes wasn’t enough, we also need to ensure these homes are spread across all tenures: we need homes for private and shared ownership, newly built and professionally managed private rental homes and affordable rental homes. The prime minister’s announcement of additional starter homes is a useful contribution to meeting the gap between what we need and what we are currently building.

But these homes are to be secured by relaxing planning obligations for developers. Herein lies the potential for unintended consequences.

Over the last two decades, planning obligations have proved to be a very useful way of securing funds for infrastructure – such as open public spaces, schools, roads and public transport – and new affordable homes, including shared ownership and affordable rental homes.

Local authorities can use planning laws to negotiate with developers to incorporate affordable homes into their projects, and contribute toward the local infrastructure needed to support the new residents they attract. Over the years, large sums have been secured for infrastructure and affordable homes. Developers obviously incur costs when making these provisions. They ensure they can afford these extra costs by paying less for the land they buy than they would have done, if they did not have to comply with these obligations.

Prices for land tend to rocket when planning consent is granted, and it has long been regarded as reasonable for some of this potential increase to be diverted to fund infrastructure and affordable homes. Crucially, planning obligations have enabled private funding to replace publicly funded grants to housing associations, while maintaining the output of new affordable rented homes.

What’s the catch?

Now, developers will be required to provide starter homes at a discount, instead of contributing to infrastructure and affordable rental homes. This trade-off could mean that new starter homes are built, but the supporting infrastructure isn’t. It could also prevent communities from securing the new affordable rental and shared ownership homes they need. This will be a critical loss, especially since the latter have proved an effective way of helping low-income earners to get a foot on the “housing ladder”.

And while financial institutions are keen to invest in newly built privately rented housing, the scale of this activity is still modest and will not be adequate to meet the gaps in rented housing provision in the immediate future.

Perhaps the government has yet to unveil plans to increase public funding for infrastructure and to provide additional grants to build new affordable rental homes. But this seems unlikely, given the cuts to public spending we’re expecting, as we await the outcomes of the public spending review.

What we need, in addition to the government’s aspiration to build 1m new homes by 2020, is clarity about all the resources to be provided. This will allow the house-building and construction industry to gear up with confidence, and aim to reach that target across all tenures. Starter homes will help – but they shouldn’t come at the cost of schools and affordable rental homes.

Author: Tony Crook CBE, Emeritus Professor of Town and Regional Planning, University of Sheffield

Are Australian House Prices Overvalued?

Within the 65 pages of the IMF report there is a comprehensive section on Australian house prices.  Housing market risks they say remain heightened. They conclude that house prices are moderately overvalued, probably around 10 percent. The problem is concentrated in Sydney and is fuelled by investor credit and interest only loans. Current rates of house price inflation imply rising overvaluation. Current efforts to rein in riskier property lending might not be sufficiently effective.

International comparisons persistently signal warnings. The level of real house prices and the house price to income ratio is high relative to the OECD average (though similar to other buoyant markets). House price inflation picked up to 7-10 percent in 2014-15—driven by rapid increases in Sydney and to a lesser extent Melbourne (prices in the resource states have fallen back in recent months). While foreign investment in real estate has increased, the main driver has been local investor lending and interest-only loans. Sydney house price to income ratios are much higher than for other cities at around 7—similar to Auckland, London, Stockholm and Vancouver.

Can the increase in house prices be explained?

  1. The housing market and financial system have changed significantly over the past two decades with a shift to low inflation, low nominal interest rates and financial liberalization which loosened credit constraints. Households’ borrowing capacity increased and they moved to a higher steady state level of indebtedness and higher house prices relative to incomes.
  2. Supply side constraints may also keep prices high. Although Australia is big, much of the country is remote and the population is concentrated in a few cities where there are geographical or other barriers to expansion. Population growth has also been much more rapid than for other OECD countries, whereas housing investment as a share of GDP is only at OECD average levels. Supply bottlenecks also reflect planning issues and transport restrictions.

IMF-Aust-1IMF-Aust-2Are high and rising prices a problem? There has been no generalized credit boom and lending standards are generally high (and being tightened), so financial stability risks seem contained. The run-up in house prices has also not been accompanied by a construction boom (unlike Ireland and Spain). But with already high debt and house prices, rapid house price inflation raises the risk of a sharp reversal, which would damage the macroeconomy.

Do models point to overvaluation? Estimating overvaluation is inherently difficult. Rather than relying on one model, staff used four different approaches.

  1. Statistical filter. Deviations from an HP filter suggest overvaluation of about 5 percent.
  2. Fundamentals. The standard model used in the Fund, estimated since the early 2000s, with fundamental explanatory variables—affordability, incomes, interest rates, and demographics―estimates overvaluation of around 15 percent and equilibrium growth rates around 3-4 percent.
  3. Including supply factors. A model using similar longrun fundamentals, but adding credit and the housing stock to take into account supply constraints, points to an overvaluation of around 8-10 percent.
  4. User costs. Estimates of user costs (whether it is more expensive to own than to rent) suggests that renting is about as costly as buying a house based on average real appreciation since 1955 (Fox and Tulip, 2014). However, this estimate is highly sensitive to interest rates and expectations of future house price appreciation. Using a plausibly lower expected appreciation term results in an overvaluation of 10-19 percent.

IMF-Aust-3Bottom line: House prices are moderately overvalued, probably around 10 percent. The problem is concentrated in Sydney and is fuelled by investor credit and interest only loans. Current rates of house price inflation imply rising overvaluation.

In their house price modelling, they assume a  baseline projection is for a soft landing, with house price inflation slowing to a sustainable 3-4 percent, based on medium-term fundamentals. This implies no change in the estimated overvaluation and housing market risks thus remain heightened.

Current efforts to rein in riskier property lending might not be sufficiently effective. Against a backdrop of already high house prices and household debt, this could give rise to price overshooting and excessive risk taking. A sharp correction in house prices, possibly driven by Sydney, could be triggered by external conditions (e.g., a sharper slowdown in China or a rise in global risk premia), or a domestic shock to employment.

This might have wider ramifications if it affects confidence. The house price cycle could be amplified by leveraged investors looking to exit the market and a turning commercial property cycle. Though currently small, investors in self managed superannuation funds that have added geared property to their fund portfolios would also be adversely affected in a downturn. In a tail scenario, APRA’s stress tests suggest banks would probably face ratings downgrades/higher offshore funding costs and would likely resist capital ratios falling into capital conservation territory by sharply tightening credit conditions, thus transmitting and amplifying the shock to the rest of the economy.

Five reasons the Turnbull government shouldn’t let us spend super on a home

From The Conversation.

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Like the nine-headed Hydra, which replaced each severed head with two more, each time the idea is cut down it seems to return even stronger.

Both sides of federal politics took proposals to the 1993 election to let Australians draw down their super. After re-election, then Prime Minister Paul Keating scrapped it amid widespread criticism. Former Treasurer Joe Hockey raised the idea again in March and was roundly criticised by academics and the media. This month the Committee for Economic Development of Australia (CEDA) has again resurrected the idea.

House prices have skyrocketed again over the past two years, particularly in Sydney. So politicians are attracted to any policy that appears to help first homebuyers to build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But the change would worsen housing affordability, leave many people with less to retire on, and cost taxpayers in the long run.

It is a bad idea for five reasons.

First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.

Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.

While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.

Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund

Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.

Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.

Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.

Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.

Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.

What, then, should the federal government do to make housing more affordable?

Prime Minister Malcolm Turnbull has tasked Jamie Briggs with rethinking policy for Australia’s cities. Mick Tsikas/AAP

Helping fix our cities

Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.

Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.

There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.

 

Authors: Brendan Coates, Senior Associate, Grattan Institute;  John Dale, John Daley is a Friend of The Conversation, Chief Executive Officer , Grattan Institute.

 

90% of Property was Sold at a Profit – CoreLogic RP Data

CoreLogic RP Data’s Pain and Gain Report for the June 2015 quarter shows that 9.1% of all homes resold recorded a gross loss when compared to their previous purchase price. However, vast majority (90.9%) of properties resold over the quarter did so at a profit. In fact, 30.8% of homes resold for more than double their previous purchase price.

The vast majority (90.9%) of properties resold over the quarter did so at a profit. In fact, 30.8% of homes resold for more than double their previous purchase price. Across those homes which resold at a profit, the total value of this profit was recorded at $16.1 billion with the average gross profit recorded at $259,174.

Those recording a loss over the March 2015 quarter was (8.9%) and slightly higher than the 8.6% recorded over the June 2014 quarter. Although the proportion of loss-making resales rose, the figure has been fairly steady over the past 12 months. Across those dwellings which resold at a loss over the quarter, the total value of loss was $411.3 million with an average loss of $65,585.

The data also highlights the fact that ownership of property, whether for investment or owner occupier purposes, should be seen as a long-term investment. Across the country, those homes that resold at a loss had an average length of ownership of 5.3 years. Across all sales recording a gross profit the average length of ownership was recorded at 9.9 years, while homes which sold for more than double their previous purchase price were owned for an average of 16.4 years.

Sydney remains the only capital city housing market in which units had a lower proportion of resales at a loss (1.8%) than houses (2.2%) over the quarter. The differential in loss-making resales between houses and units was quite substantial across most capital cities and reflects the fact that house values tend to increase at a more rapid pace than units.

Trends across some of the major regions of the country which are intrinsically linked with the resources sector have been analysed and in most instances a heightened level of loss-making sales is evident as the mining investment boom slows. Over the June 2015 quarter, 47.6% of resold properties in Mackay sold at a loss. Across the other regions analysed the figures were recorded at: 35.6% in Fitzroy, 10.9% in the Hunter Valley (excluding Newcastle), 19.3% in Outback SA and 32.6% in Outback WA.

 

Residential Real Estate Now Worth $5.76 trillion

The ABS released their data on capital city house prices today, to June 2015.  Total property is now worth $5.76 trillion, reflecting recent significant price rises in Sydney and Melbourne. The number of dwelling rose to 9.53 million, and the average price was $604,700.

The capital city residential property price indexes rose in Sydney (+8.9%), Melbourne (+4.2%), Brisbane (+0.9%), Adelaide

The price index for residential properties for the weighted average of the eight capital cities rose 4.7% in the June quarter 2015. The index rose 9.8% through the year to the June quarter 2015.

(+0.5%) and Canberra (+0.8%), was flat in Hobart (0.0%) and fell in Perth (-0.9%) and Darwin (-0.8%).

Annually, residential property prices rose in Sydney (+18.9%), Melbourne (+7.8%), Brisbane (+2.9%), Canberra (+2.8%), Adelaide (+2.7%) and Hobart (+1.5%) and fell in Darwin (-1.8%) and Perth (-1.2%).

The total value of residential dwellings in Australia was $5,761,607.2m at the end of June quarter 2015, rising $271,939.1m over the quarter.

The mean price of residential dwellings rose $26,200 to $604,700 and the number of residential dwellings rose by 38,400 to 9,528,300 in the June quarter 2015.

Long-run Trends in Housing Price Growth

The RBA in their latest edition of The Bulletin has included an article examining the factors driving long-run trends in Australian housing price growth over the past three decades. They look at factors like supply, inflation and population growth.

However the glaring omission in our view is the direct impact easier credit and capital ratios have had on bank lending. Without the credit boom we could not have had a house price boom. Whilst they do point out that price to income ratios are high (but more static), we think this is a function of income growth, and is directly connected with the current level at which banks are willing to lend.

During the 1980s, housing prices grew broadly in line with general price inflation in the economy. The period from the 1990s until the mid 2000s saw relatively strong housing price growth associated with a significant increase in the debt-to-income ratio of Australian households. Since the mid 2000s, strong population growth has played an increasing role in explaining housing price growth.

Over the past 30 years, Australian housing prices have increased on average by 7¼ per cent per year, and over the inflation-targeting period by around 7 per cent per year However, these averages mask three distinct phases:

  1. During the 1980s, annual housing price inflation was high, at nearly 10 per cent on average, but so too was general price inflation. In real terms, housing price inflation during the 1980s was relatively low, at 1.4 per cent per annum compared with 4.5 per cent during the period from 1990 to the mid 2000s, and 2.5 per cent over the past decade.
  2. The 1990s until the mid 2000s were marked by quite high housing price inflation, of 7.2 per cent per annum, on average, in nominal terms.
  3. Annual nominal housing price inflation over the past decade was lower than either of these periods, at a little over 5 per cent on average.

They note that housing price growth, has outstripped the rate of inflation in other prices in the economy including inflation in the cost of new dwellings. They posit a range of drivers, for example population growth….

House-Prices-RBA-1Price to income and household debt to income ratios have never been higher than they are now. Part of this is explained by freeing up the financial system, so finance was easier to get.  The increased access to credit by Australian households over this period can be seen in the steady increase of the ratio of household debt to income. A similar trend is observed in the dwelling price-to-income ratio. While deregulation and disinflation were largely complete by the mid 1990s, the adjustment of the economy to the new steady state took well over a decade. These adjustments appear to have largely run their course, with the household debt-to-income ratio fluctuating around 150 per cent over the past decade.

House-Prices-RBA-2Finally supply did not keep up with demand. When compared with the range of underlying demand estimates, completions suggest that, over much of the past decade, the supply side has been slow, or unable, to respond to the significant increases in underlying demand (based on estimates of underlying average household size, rather than actual household size). More recently, the gap between underlying demand for and supply of new dwellings in Australia looks to have become smaller. Much of the aggregate gap was accounted for by developments in New South Wales. Underlying demand-supply gaps in Queensland and Western Australia also look to have contributed to the aggregate gap, although the estimates of underlying demand on a state level are subject to even larger uncertainty than those at the national level.

House-Prices-RBA-3They conclude that during the 1980s, housing price inflation broadly followed general price inflation in the economy, which was relatively high and
volatile. Following the financial deregulation of the mid 1980s and disinflation of the early 1990s, cheaper and easier access to finance underpinned a secular increase in households’ debt-to-income ratio that was closely associated with high housing price inflation from the early 1990s until the mid 2000s. The past decade saw a stabilisation of debt-to-income levels, but also a prolonged period of strong population growth – underpinned by high immigration – and smaller household sizes that led to increases in underlying demand exceeding the supply of new dwellings.

Looking ahead, they say it seems unlikely that there will be a return to the rather extreme conditions of the earlier episode when significant increases in household debt supported high housing price growth. Nonetheless, protracted periods of changes in population growth that are not met by adjustments in dwelling supply could lead to periods of sizeable changes in housing price growth. One important factor for housing price growth is the ability of the supply of new dwellings to respond to changes in demand. The significance of this is made clear by the recent increases in
higher-density housing and lower growth of those prices relative to prices of detached houses, whose supply has been less responsive.

We think the generous capital adequacy ratios and the banks fixation to lend on property however is the root cause. We think they should have looked harder at credit supply, and capital ratios in the context of bank profitability.

Tapping super not the answer to home ownership decline

From The Conversation.

“All Australians should be able to retire with dignity and decent living standards.”

So states the recently released superannuation report of the Committee for Economic Development of Australia (CEDA).

CEDA’s report is commendable. And although I agree with most of its recommendations, including what the purpose of super should be, how retirement income products dealing with longevity risk should be developed and how super tax laws should be made more equitable, I have one serious misgiving: I do not believe active employees should be able to use their super funds to invest in owner-occupied housing.

The American 401(k) system (also a defined contribution model like Australian super) provides a cautionary tale on the damage caused by what’s known as pre-retirement leakage. Unlike Australia, it is fairly easy for US workers to access their 401(k) retirement accounts during active employment. Even prior to preservation age, which is 59½ in the US, individuals are able to use their workplace retirement accounts for a number of purposes, both with and without tax consequences.

For instance, the US tax code allows individuals under specified circumstances to take loans against the value of their retirement funds without tax penalty. Although such funds are required to be secured and paid back like any other commercial loan, studies show many employees are never able to restore the money to their 401(k) accounts. Not only does this lead to diminished pension pots, it also means there will be less money upon which interest or investment returns can build on in the long-term.

The US 401(k) system also permits employees to take hardship distributions for a number of reasons, including purchasing of a first home, university education and medical expenses. In these circumstances, not only does the individual not face any tax penalties for the withdrawal (except for having to pay ordinary income tax), they are also not required to pay back the money to their account.

Finally, employees can take money out of their 401(k) accounts if they “really” want. What I mean is, absent even an authorised loan or hardship distribution, employees before preservation age can withdraw funds from their retirement accounts. We call this “expensive money” because both a 10% excise tax and 20% employer withholding of funds apply. In the end, these employees receive 70 cents in the dollar for withdrawing money prematurely from their retirement account.

Such leakage in the US causes a significant erosion of assets in retirement – approximately 1.5% of retirement plan assets “leak” out every year. This can potentially lead to a reduction in total retirement assets of 20% to 25% over an employee’s working years, according to experts.

Remember the role of super

I do not disagree with the CEDA report that housing makes a critical contribution to sustaining living standards and helping to address elderly poverty. Needless to say, there should be a multipronged federal government response to the spectre of increasing poverty in old age because of the lack of home ownership. Many useful suggestions are made in the CEDA report in this regard.

But using super, even if only for first-time home buyers, should not be the answer. Indeed, CEDA agrees with much of the recent Financial System Inquiry report (the Murray report), which concludes that super legislation should state explicitly and clearly that its purpose is to provide retirement income.

While increasing home ownership for younger workers is an admirable policy prescription, it is not consistent with the retirement income focus of super. Allowing workers to use their super funds to buy homes means there will be much less money in the pension pot to grow over time to provide the necessary retirement income.

And the harm is ongoing. Making such a change would lead to a further constrained supply of housing, meaning more money chasing the increasingly limited stock of property, tending to drive home prices up even further.

Of course, when, not if, the housing market crashes, much of the super savings tied into such property will also be lost. This problem stems from a lack of diversification in one’s retirement portfolio through an over-investment in the family home. The consequent lack of investment diversification among asset classes means super is less likely to be able to survive future shocks to the Australian economic system.

The lesson from the United States is clear: pre-retirement leakage from super should be permitted only under the most exceptional of circumstances. Even for the very best of reasons, like first-time home ownership, Canberra should prevent super fund leakage during active employment to ensure the primary objective of super: retirement income adequacy.

Author: Paul Secunda, Senior Fulbright Scholar in Law (Labour and Super) at University of Melbourne