Home Prices – Page 82 – Digital Finance Analytics (DFA) Blog

The housing market is looking worryingly like a pyramid sales scam

Are you on the property ladder? You might want to look again. That comforting metaphor of an aspirational route to economic security has come to dominate our thinking, but what if it wrongly describes the phenomenon? There has been a steady decrease in the number of first-time house buyers since 1980, with the biggest drop of 47% occurring from 2007 to 2008. It may be that the British housing market now resembles the classic pyramid scheme scam that rewards those at the top and punishes the fools who dive in too late or can’t dive in at all.

I’m certainly not the first to think of the housing market in this way. As journalist Gabby Hinsliff observed:

Rather like pyramid-selling scams, housing markets need a constant stream of fresh-faced hopefuls coming in at the bottom in order to keep delivering big returns at the top.

So is this really true, and if it is, should we continue to tolerate such a mainstream social practice which seems to be so ethically dubious?

A losing game

The classic pyramid scheme is essentially a sales scam. Someone is recruited and pays a fee to join a team ostensibly flogging something – health supplements, perhaps, or even providing no product or service at all. This recruit then gets a cut from the fees paid by the salespeople he or she newly recruits. They then do the same. Very quickly, the scheme reaches saturation point.
Two more generations of suckers? EPA/HANNAH MCKAY
So how does this relate to the housing market? Let us begin with an essential feature of pyramid schemes: most people lose. This involves the membership factor in which new recruits pay a progressively higher fee to get onto the pyramid. In other words, the pyramid is driven by a top-down dynamic. Those at the lowest level try to recoup what they paid to become members by making a profit off those wishing to gain access to the scheme. Chronologically, those who come later have a greater risk of losing.

Under the current economic system, those pensioners sitting on six-bedroom townhouses in chic parts of London, bought for pennies in the post-war period, are our equivalent of pyramid scheme bosses – through no fault of their own, of course.What makes the housing market more restrictive than a classic sales scam is that its sale item is finite in supply. There may be an almost unlimited supply of health supplements in the example above, but with housing there is only so much land available. This makes entry into the scheme more competitive, and by virtue of that, it has the effect of increasing demand.

In short, most people lose in the housing market because most people who do not own property can never really afford to do so. Despite government efforts to help, first-time buying has continued to struggle, and the odds of finding an affordable price are stacked against non-owners. They may even find that those most willing to buy property already own some. Indeed, such speculators know that the more they buy up land, the more it will tend to be in higher demand.

Saturation

There is a second essential feature of pyramids: most people lose because there is no one left to pay the higher fee. In effect the market reaches saturation point. In housing, this happens because non-owners, who usually constitute the majority of the population, cannot find the means to make the high fee payments – in other words, a mortgage deposit and monthly payments. And this is where the ethically dubious nature of the scheme emerges.

In classic pyramids, the good or service being sold is not really important. With the housing market, the good in question is essential. One can easily live without health supplements, for example. Yet, show me one person who can live and work without access to land or shelter. In other words, at the sake of making a profit for the few, the majority of people are denied access to land, which is access to the opportunity to flourish.

It will have damaging effects more broadly, too. In a build-up of the housing market, the allure of property investment is so high that money is diverted to buying property rather than to production. Without investment in production, non-owners do not see an increase in their wages. If we go back to the pyramid scheme set-up, investment in production is like telling a salesperson to concentrate on selling the vitamin supplements, rather than on recruiting more salespeople into the scheme, which is where the easy money lies.
No knockdown prices here. stockcreations/Shutterstock
Why fund a new business and wonder about whether it is going to succeed when you can buy the land on which either the business relies or on which its employees rely in order to live? If investing in property means diverting money from production and wages, then the economic system is bound to break. In other words, we are all bound up in this giant pyramid scheme whether we like it or not; whether we own property or not; whether we are suckers are not.

The obsession with maintaining the everlasting growth in the housing market places the economy in a stranglehold and engenders something that looks very much like a pre-crash phase. It’s not just the non-owners who lose, but because production itself takes a hit, property owners also lose in terms of property investments which do not make a return.

So why hasn’t the housing market caused the economy to break once and for all? Well it certainly came close in 2008, but our economic system seems flexible enough to make adjustments that keep us afloat. However, these adjustments are makeshift reactions to a system’s fundamental problems rather than a remedy. Why not fix the problems? Why not raze the pyramid that is the housing market? To do that would require a philosophical change: an appeal to understanding how land (and thus housing) constitutes a unique kind of primary good that cannot be subject to the same kinds of conventions as capital.

Author: Todd Mei, Lecturer in Philosophy, University of Kent

So Just How Much Are Home Prices Rising?

The statistical “fog of war” appears to have descended on Australian home prices, partly fueled by the RBA’s recent statements, and the latest chart pack data. Because of perceived issues with the CoreLogic data series, we see plots from a number of data providers, including the ABS (whose June 2016 data should be out later on – they are disgracefully slow on releasing their quarterly price data).

Now, we see there are some significant variations between the series, and of course in turn mask the significant differences between locations. CoreLogic has been tweaking their series, and the RBA specifically mentioned this in their recent report. These differences are driven by different methodologies, as well as some series breaks.

So, what is the truth about home price momentum? Of course the RBA wants to show prices growing more slowly despite the cut in the cash rate, thanks to their careful management; whilst others want to talk up the positive movements, to encourage more transactions. Our surveys suggest demand is still quite strong.

As best we can tell, price momentum did moderate in recent months, but now is on the rise again, thanks to low rates, and ongoing interest from investors. Somewhere between 2.5% and 7.5%! The high auction clearance rates appear to confirm this.

But, the real amount of the movement is uncertain. Yet another example of the problems we have getting meaningful, prompt and reliable statistics in Australia.

More Strong Auction Results Today

According to the latest APM PriceFinder provisional auction results, there was another strong result today. This confirms the strong demand for property, especially in the south-eastern states and points to continued momentum into the spring.

Nationally, there were 1,646 properties listed, with 77.5% clearance, compared with 73.1% last week, and 73.3% this time last year, albeit off a higher number of listings.

In Sydney, 80.7% were cleared from the 574 listings, compared with 78% last week and 72.5% last year. Melbourne achieved 77.9% clearance from the 877 listings, compared with 73.2% last week and 76.9% last year, again from a higher number of listings. Of the 53 listings in Canberra, 79% cleared; of the 86 in Brisbane 49% cleared; and in Adelaide of the 56 listed, 61% cleared.

Property Market to Cool in 2017?

NAB’s latest Housing Market Report, Winter 2016 edition, suggests indicators painting a mixed picture of market conditions. Any near term strength likely to be temporary, with a more subdued market expected for 2017.

Property prices have continued to prove more resilient than expected in 2016 (to date) which are likely supported by better than expected population growth and the recent RBA cut to interest rates, although different price measures are providing
conflicting signals. An example of this can be seen in the Sydney market where quality adjusted house prices have increased significantly in the past 6 months. There are also a number of other (non-price) indicators that point to more mixed conditions in the housing market, including turnover, time on market and vendor discounts. Consequently, we still expect that overall market fundamentals will become less favourable going forward.

Indeed, the NAB Residential Property Survey has softened with moderation seen in each of the major eastern markets. Consistent with the more difficult environment facing property investors, the Survey showed a fall in the share of foreign buyers of new property as well, although observations on this vary considerably by State – Victoria and NSW saw a surprise lift in demand despite a further deterioration in rental yields and relatively poor affordability. Investor housing credit growth has remained relatively subdued in Q2, with annual growth dipping well below APRA’s imposed ‘speed limit’ of 10% (currently 6%) – although this could suggest some upside potential going forward. In contrast, growth in owner-occupied credit has remained fairly robust.

Our (quality adjusted) price forecasts have been revised higher this month in recognition of the strength seen in prices to date. Nevertheless, we are not convinced that the fundamentals have changed significantly since last quarter, although the near-term risks may have shifted more to the upside. Rather, we expect that once the recent resurgence in prices runs out of steam, we are likely to be left with a market that remains soft for a little longer than previously expected.

Our average national house price forecast in 2016 has been increased significantly to 5.1%, from 1.5%, although this is still a slower pace of growth than in 2015 (7.8%). Our unit price forecasts are also higher, at 3.6%, up from -1% previously – but less than half the rate of growth seen in 2015. The weakness previously expected for 2016 has now been shifted to 2017, with house prices forecast growth to be relatively subdued at 0.5%, while large additions to supply are expected to contribute to a decline in unit prices of 1.9%. The NAB Residential Property Survey showed that respondents actually upgraded their price expectations for the next 2 years – especially in NSW – despite deterioration in market sentiment.

Auction Clearances Up Again Today

The latest data from APM’s PriceFinder shows Sydney auction clearances reach 82.8%, up from 72.4% last week, on listings of 464, compared with 728 this time last year. Melbourne reached 79.5%, compared with 73.7% last week, on 522 listings compared with 612 last week and 773 last year. So while the number of properties listed are down, the clearances are astonishingly high.

Looking nationally, clearances were 77.4%, on 1,153 listings compared with 71.2% last week, though a year ago, 1,696 properties were listed. Adelaide listed 45 and cleared 62% whilst Brisbane listed 77 and achieved 46% clearance.

Another Set of Good Auction Results

It may be a moot point whether home prices are rising or not, but the latest results from the APM PriceFinder team shows that nationally 76.3% of property for auction sold, compared with 68.6% last week, and 75.1% last year. However, the total number for sale was lower at 1,177, compared with 1,288 last week, and 1,989 last year.

Sydney led the way with 79.4% clearance from 393 listings, but there was more activity in Melbourne, with 676 listed, though 77.9% cleared. Both are higher that a year ago, when 74% cleared in Sydney and 71.7% in Melbourne.

Global Home Prices, On Average Back to 2007 Levels

The latest data from the IMF Global Housing Watch says shows that, on average, prices are almost back up to where they were at the start of 2007. That said Australia and a number of other countries have had much stronger growth over this period.

There is a fair bit of cross-country variation, however. While house prices have increased over the past year in most countries in the sample, the pace of increase varies quite a bit. And there are still a dozen or so countries where house prices have fallen over the past year, including Brazil, China and Russia.

Both real house prices and real GDP growth in the 2007-2015 period were well below the boom experienced during 2000-2006. In the earlier period, global real GDP grew by over 4% per year while real house prices surged by about 9% on average. In the more recent period, these grew by just 2% and 1% per year, respectively. The simple correlation between real growth in house prices and GDP growth was very similar in the two periods at about 0.6.

The pace of credit creation also fell sharply between the pre- and post-crisis periods from 17% to 6%. The correlation between growth in house prices and credit expansion fell substantially from 0.8 to 0.3. Given that many countries sharply eased monetary policy during the post-crisis period, it seems reasonable to posit that slow credit growth was a result of diminished investment opportunities, reduced risk appetites on the part of lenders, and the adoption of macroprudential policies designed to reduce the probability of boom/bust cycles in the future. Moreover, the decline in the correlation between house prices and credit expansion suggests that other country-specific factors may have played a role in determining house prices.

One such factor is fiscal policy. We use as our indicator the change in the cyclically-adjusted primary fiscal balance as a percentage of GDP during each sub-period. The correlation between the change in the policy stance and home prices went from nearly zero to almost -0.5, suggesting that country-specific policy developments have played a role in determining the development of real estate prices.

Over the last quarter, there have been discussions of housing sector developments in IMF staff reports in over a dozen cases. One feature of the discussions has been a growing emphasis on the role of supply constraints in driving house price increases—this was flagged for instance in the case of Denmark and Germany. Another is the continued active use of macroprudential policies in several countries, among them Canada and the United Arab Emirates. Concerns about the extent of house price growth were flagged in the cases of the Czech Republic (“a strong housing market is becoming a potential source of risk”), Denmark (“rapid house price increases call for early policy action”) and Norway (“high and rising house prices and household debt in Norway pose important macro-financial stability risks”).

Home Values Up, Rental Yields Down in July

The latest Corelogic data shows that their hedonic eight capital city aggregate index rising 0.8 per cent over the month to reach a new record high. But the movements varied considerably across the capital cities and rental yields fell again.

The annual rate of growth, which hit a recent peak at 11.1 per cent across the combined capitals index in October last year, is now tracking at 6.1 per cent; the slowest annual rate of appreciation since September 2013.

Sydney and Melbourne have also seen the annual rate of growth slip back to below 10 per cent, with the July indices showing a respective 9.1 per cent and 7.5 per cent capital gain over the past twelve months. Darwin and Perth remain as the only two capital cities to record a negative movement in dwelling values over the past twelve months, with values in Darwin down 7.6 per cent and Perth values falling by 5.6 per cent.

Capital city rental yields have fallen to a new low of 3.3 per cent, with Melbourne down to 2.6% and Sydney 3.9 per cent.

Today’s Auction Results

APM PriceFinder’s residential auction summary for Saturday 30 July 2015 continues to underscore momentum in the property market, especially in Sydney and Melbourne.

Nationally, clearance rates were 73.1% on 1,285 properties, compared with 66.9% on 989 listing last week. A year ago, there were 1,488 listing and 74.9% cleared.

In Sydney, clearance was 75.7%, compared with 70.3% last week, and 76.1% a year ago, though on lower volumes. Melbourne cleared 75.7% of 675 listed, compared with 67% last week, and 76.9% on 651 properties a year ago. Adelaide achieved a 60% clearance on 83 listings. Brisbane listed 101 properties and cleared 50%.

First Time Buyers Still Determined But Under The Gun

Continuing our series on the latest Digital Finance Analytics household survey results, today we turn to those wishing to enter the property market for the first time.

Looking briefly at those wanting to buy, but are not able to at the moment (about 1.1 million households, down from 1.3 million last year), whilst fear of unemployment and interest rate rises continue to dissipate, home prices are just too high relative to their income, to consider market entry. This is also influenced by their costs of living, and an inability to get finance. We also note a rise in “other factors”, which include needing to get finance help from family or friends.

Turning to those actively seeking to enter the market in the next year for the first time (about 312,000 households), we see that more are motivated by potential future capital growth than needing a place to live. In addition, tax advantage was cited by around 15 per cent of first time buyers as a key driver, whilst access to the first home owner grant has become ever less important.

Looking at the barriers to purchase, first time buyers say that high home prices remains the most significant barrier, and as a result just finding a place to purchase is a challenge. Whilst fear of unemployment and the impact of rising interest rates have reduced, more are saying that availability of finance is an issue now as lending criteria are tightened.

Well over 20 per cent of first time buyers are not sure what, or where they will buy. More are likely to buy a unit than a year ago, and less likely to buy a house.

We also continue to see a proportion considering buying an investment property, perhaps a cheaper property in an area they do not want to live in, as a way to enter the market, and participate in potential capital growth. This may be the key to an owner occupied purchase later.

We publish monthly data on the number of first time buyers who go direct to the investment sector from our surveys and overlay this on the ABS data. Around 4,000 are buying each month. The ABS data also shows the number of first time buyers is rising, to May 2016, though still well below the peak.

Next time we will do a deep dive on the investment property sector.