The preliminary data from Domain shows that nationally auction clearances were 79.3% with 1,812 listed. Sydney cleared at 83.1% on 675 listed whilst Melbourne cleared 79% on 719 listed. All higher than last week and total volumes higher than a year ago – so no signs of slowing momentum so far.
Brisbane cleared 52% on 94 listed, Adelaide 71% on 70 listed and Canberra 79% on 65 listed.
He argues that whilst macroprudential policy regimes are the child of the financial crisis and is now part of the framework of economic policy in the UK, if you ask ten economists what precisely macroprudential policy is, you’re likely to get ten different answers. He presents five guiding principles.
There are some highly relevant points here, which I believe the RBA and APRA must take on board. I summarise the main points in his speech, but I recommend reading the whole thing: This is genuinely important! In particular, note the limitation on relying on lifting bank capital alone.
First, macroprudential policy may seem to be about regulating finance and the financial system but its ultimate objective the real economy. In a crisis, the financial system may be impacted by events in the economy – for example credit dries up, lenders are not matched with borrowers. Risks can no longer be shared. Companies and households must protect themselves. And in the limit, payments and transactions can’t take place. Economic activity grinds to a halt. These are the amplifiers that turn downturns into disasters; disasters that in the past have cost around 75% of GDP: £21,000 for every person in this country. So the job of macroprudential policy is to protect the real economy from the financial system, by protecting the financial system from the real economy. It is to ensure the system has the capacity to absorb bad economic news, so it doesn’t unduly amplify it.
Second, the calibration of macroprudential should address scenarios, not try to predict the future but look at “well, what if they do; how bad could it be?” In 2007, he says it was a failure to apply economics to the right question. There was too much reliance on recent historical precedent; on this time being different. And, even more dangerously, they relied on market measures of risk; indicators that often point to risks being at their lowest when risks are actually at their highest.
The re-focussing of economic research since the crisis has supported us in that. It has established, for example, how far: Recessions that follow credit booms are typically deeper and longer-lasting than others; Over-indebted borrowers contract aggregate demand as they deleverage; While they have high levels of debt, households are vulnerable to the unexpected. They cut back spending more sharply as incomes and house prices fall, amplifying any downturn; Distressed sales of homes drive house prices down; Reliance on foreign capital inflows can expose the economy to global risks; And credit booms overseas can translate to crises at home.
When all appears bright – as real estate prices rise, credit flows, foreign capital inflows increase, and the last thing on people’s minds is a downturn – our stress scenarios get tougher.
Third, feedback loops within the system mean that the entities in the system can be individually resilient, but still collectively overwhelmed by the stress scenario.
These are the feedback loops that helped to turn around $300 bn of subprime mortgage-related losses into well over $2.5 trillion of potential write-downs in the global banking sector within a year. Loops created by firesales of assets into illiquid markets, driving down market prices, forcing others to mark down the value of their holdings. This type of loop will be most aggressive when the fire-seller is funded through short-term debt. As asset prices fall, there is the threat of needing to repay that debt. But even financial companies that are completely safe in their own right, with little leverage, and making no promise that investors will get their money back, can contribute to these loops.
The rapid growth of open-ended investment funds, offering the opportunity to invest in less liquid securities but still to redeem the investment at short notice, has been a sea change in the financial system since the crisis. Assets under management in these funds now account for about 13% of global financial assets. It raises a question about whether end investors, under an ‘illusion of liquidity’ created by the offer of short-notice redemption, are holding more relatively illiquid assets. That matters. This investor behaviour en masse has the potential to create a feedback loop, with falling prices prompting redemptions, driving asset sales and further falls in prices.
And in a few cases, that loop can be reinforced by advantages to redeeming your investment first. Macroprudential policy must move – and is moving – beyond the core banking system.
Fourth, prevention is better than cure.
Having calibrated the economic stress and applied it to the system, it’s a question of building the necessary resilience into it. The results have been transformative. A system that could absorb losses of only 4% of (risk weighted) assets before the crisis now has equity of 13.5% and is on track to have overall loss absorbing capacity of around 28%. Our stress tests show that it could absorb a synchronised recession as deep as the financial crisis.
And if signals emerge that what could happen to the economy is getting worse, or the feedback loops in the system that would be set in motion are strengthening, we will go further.
But bank capital is not always the best tool to use to strengthen the system and is almost certainly not best used in isolation.
We have applied that principle in the mortgage market. Alongside capitalising banks to withstand a deep downturn in the housing market, we have put guards in place against looser lending standards: A limit on mortgage lending at high loan-to-income ratios; And a requirement to test that borrowers can still afford their loan repayments if interest rates rise.
These measures guard against lending standards that make the economy more risky; that make what could happen even worse. Debt overhangs – induced by looser lending standards – drag the economy down when corrected. And before they are, high levels of debt make consumer spending more susceptible to the unexpected. So they guard against lenders being exposed to both the direct risk of riskier individual loans, and the indirect risk of a more fragile economy. This multiplicity of effects means there is uncertainty about precisely how much bank capital would be needed to truly ensure bank resilience as underwriting standards loosen.
A diversified policy is also more comprehensive. It guards against regulatory arbitrage; of lending moving to foreign banks or non-bank parts of the financial system. And by reducing the risk of debt overhangs and high levels of debt, it makes the economy more stable too.
Fifth, It is that fortune favours the bold.
The Financial Policy Committee needs to match its judgements that what could happen has got worse with action to make the system more resilient. Why will that take boldness? Our actions will stop the financial system doing something it might otherwise have chosen to do in its own private interest – there will be opposition. The need to build resilience will often arise when private agents believe the risks are at their lowest. And if we are successful in ensuring the system is resilient, there will be no way of showing the benefits of our actions. We will appear to have been tilting at windmills.
As the memory of the financial crisis fades in the public conscience, making the case for our actions will get harder. Fortunately, we are bolstered by a statutory duty to act and powers to act with. And whether on building bank capital or establishing guards against looser lending standards, we have been willing to act. Just as building resilience takes guts, so too does allowing the strength we’ve put into the system to be drawn on when ‘what could happen’ threatens to become reality. Macroprudential policy must be fully countercyclical; not only tightening as risks build, but also loosening as downturn threatens. Without the confidence that we will do that, expectations of economic downturn will prompt the financial system to become risk averse; to hoard capital; to de-risk; to rein in. To create the very amplifying effects on the real economy we are trying to avoid.
A truly countercyclical approach means banks, for example, know their capital buffers can be depleted as they take impairments; Households can be confident that our rules won’t choke off the refinancing of their mortgage. And insurance companies know their solvency won’t be judged at prices in highly illiquid markets. We must be just as bold in loosening requirements when the economy turns down as we are in tightening them in the upswings. Boldness in the upswing to strengthen the system creates the space to be bold in the downturn and allow that strength to be tested and drawn on. Macroprudential fortune favours the bold.
Each week we receive updated data from our household surveys. One element in the survey looks at investor appetite – specifically whether households are intending to transact within the next 12 months. It is a leading indicator of future investment loan volumes.
However, in the past three weeks we have seen a change in intention. It has started to fall quite significantly (and actually represents the biggest move in the 10 years of the survey).
The chart plots the average intentions each week against the volume of new investor loans written each month. We see a significant downward movement in intention. This is being driven by a range of factors including concerns about future property values, falling rental returns, rising investment interest rates and most recently concerns about potential changes to the generous tax breaks which currently are enjoyed by property investors.
It is early days but it does appear investor property purchase intentions are on the turn. If this is the case, then auction clearances, investor lending momentum and property price rises may be be impacted. We will watch the next few weeks’ data with interest.
Though the big four banks have clamped down on lending to foreign nationals, other lenders have moved to fill the gap, and the share of properties bought by foreign nationals in the Australian market ticked higher at the end of 2016
Other lenders have moved to fill the gap, including developers themselves, but lending hurdles are higher across the board. Foreign nationals looking to obtain finance in Australia are often left disappointed in the current environment.
While the big four are not writing new loans for non-residents, some do still consider loans for temporary visa holders.
Lending criteria for foreign nationals varies across the big four.
Westpac is not writing new loans for non-residents.
The Commonwealth Bank doesn’t provide loans to non-residents. CBA has a maximum LVR of 70 per cent for selected temporary visa holders earning Australian income.
ANZ no longer lends to foreign nationals. Applicants must be permanent residents of Australia, NZ citizens, or 457 visa holders. Applicants are allowed to have a maximum of 30 per cent foreign income, with specific documentation required to verify it.
For National Australia Bank, a maximum LVR of 60 per cent applies for temporary visa holders living in Australia, and 70 per cent for Australia and New Zealand citizens and permanent residents living overseas. All foreign income is ‘shaded’ by 40 per cent when assessing serviceability.
HSBC and Citigroup are said to be filling the gap when finance isn’t available from the big four, according to some reports, but both banks did not reply to requests for information.
John Kolenda, Managing Director of 1300HomeLoan, told SCHWARTZWILLIAMS it is more challenging for foreigners to obtain housing finance in Australia than in the past, but it’s not impossible.
He said, “Some, mainly second-tier lenders, are still lending to foreign nationals. However, these applicants must meet strict credit criteria and maximum LVRs have been significantly reduced over the last 18 months, making obtaining a non-resident loan quite challenging.”
Kolenda said demand from foreign nationals for Aussie loans is as “strong as ever”, but doesn’t always get the borrower over the line.
“The problem is some applicants are simply unable to meet the lender’s credit criteria leaving many foreign nationals without the ability to obtain funds in Australia to purchase a property,” he said.
Though tighter lending restrictions at the big four banks has, to a certain degree, simply shifted demand to other lenders, Kolenda says those “other lenders” are also constrained in their lending.
“These lenders in many cases have increased interest rates, tightened credit criteria and reduced maximum LVRs on non-resident loans,” he said, adding, “many non-resident borrowers may find difficulty obtaining a loan from all lenders at the moment.”
According to NAB’s Residential Property Survey, foreign buyers increased their share of both new and established property markets in the final quarter of 2016, the first increase since late 2015.
The share of new property sales made by foreign nationals increased to 10.9 per cent during the December 2016 quarter. The rise follows four quarters of declining rates – no doubt an impact of the tighter lending rules. The recovery at the end of the year could indicate foreign nationals are finding finance elsewhere as alternatives to the major banks spring up.
In new property markets, foreign buyers were noticeably more prevalent in Victoria, where their market share of sales rose to 19.3 per cent, up from 15.0 per cent in the previous quarter.
The same trend was observed in the share of foreign buyers purchasing existing dwellings, which rose to 7.6 per cent in the fourth quarter of 2016, up from 6.4 per cent the previous quarter, and the highest result since the final quarter of 2015.
The AFR has reported the Turnbull government is planning a crackdown on capital gains tax concessions for property investors to seize the mantle on housing affordability and provide revenue to help replace soon-to-be dumped budget cuts.
Given most property investors are benefiting more from rising capital gains than offsetting costs from negative gearing, this is a significant change of tune.
The policy backflip, to be unveiled in the May budget, comes after more than a year of savaging Labor’s proposal to halve the capital gains discount as an assault on badly needed investment.
It is understood the policy being worked on within government would be confined to property investment, and not apply to all investments such as shares, as Labor’s plan would. Neither would the Coalition policy target negative gearing, as Labor is doing.
Options being worked on include following Labor in halving the 50 per cent discount on capital gains tax to 25 per cent, or reducing it by another amount. The other is adopting a phased model in which the discount would increase the longer the property was held. A property would have to be held for several years before the investor was eligible for the full 50 per cent discount.
This morning Malcolm Turnbull and finance minister Mathias Cormann dismissed the reports.
“We do not support the Labor Party’s plans to increase capital gains tax,” the Prime Minister said in a press conference.
Turnbull also said the government was not considering to “outlaw negative gearing.”
The Property Council of Australia urged caution amid the conflicting reports.
“Increasing capital gains tax runs the risk of reducing the incentive to invest at a time when Australia needs to build new housing to cater for our growing population,” said Ken Morrison, Chief Executive of the Property Council of Australia.
“While there are conflicting media reports this morning, we urge the government to be extremely cautious if it is considering changing the CGT discount,” he said.
Morrison pointed out that the capital gains tax discount is intended to compensate for natural growth in asset prices due to inflation.
“The CGT discount is recognition that you should not tax people for inflation – inflation-driven capital growth is not real growth and investors should not be taxed for it,” he said.
Morrison said the construction cycle is already past the peak, and any disincentive to build should be considered carefully.
“The industry has passed the top of the construction cycle,” he said.
“The risk for the government is that if it moves too far, it runs the risk of tightening housing supply and adding further pressures to housing prices.”
The inequalities and inequities that housing markets generate have become a cross-national issue in the last decade or so. In Australia, the UK and the US, discussions of “Generation Rent” have taken centre stage.
In the generational debate, older, asset-wealthy owner-occupiers advantaged by previously more stable lending conditions and historic house price trends have been pitted against younger cohorts. The latter have been priced out of the home buyers’ market and pushed into rental housing in ostensible perpetuity.
Evidence of just what “Generation Rent” is and, more importantly, why it matters have, however, been somewhat fuzzier.
Economies and security built on housing
One reason declining access to home ownership for younger people is of such concern is that housing is much more than housing. The wealth accumulated in our homes over our lifetimes has come to represent economic security and a means to live more comfortably in old age. It’s seen as a buffer in times of hardship – buying a home is an implicit part of the welfare system in many contexts.
Declining home ownership is contributing to inequality.
Governments have largely nurtured this. They often support or even fund the growth of home ownership and protect property value increases. It has become increasingly evident, however, that this approach to housing markets as a kind of welfare policy has fundamental limitations.
For one thing, the global financial crisis of almost a decade ago demonstrated how deeply rooted and transnational housing finance has become. A welfare system that relies on home ownership in a globalised era is thus critically vulnerable.
Although property markets work at a local level, global capital has become increasingly intrusive. Investment purchases are financed from around the world. While our homes function as our family savings accounts, housing now also serves as safety deposit boxes for transnational middle classes and wealthy elites.
The global financial crisis also illustrated that the very conditions that may require home owners to draw on their property assets as an economic buffer are likely to undermine their value and make them difficult to access when needed.
Since the crisis, housing has again become an overwhelming focus of investment, sustained by quantitative easing, weaker financial markets, and low interest rates. This is driving renewed inflation in house prices, especially in global cities, with overflows downwards and outwards.
Divide grows between owners and renters
Buying a home is now well beyond the capacity of many among the increasingly vulnerable cohorts of younger people. They have also faced reduced job security, subdued wage rises, and diminishing access to credit.
As a result, home ownership rates across English-speaking societies, but also elsewhere, have fallen significantly, driven by the collapse in home buying among millennials.
While it is easy to blame globalisation (especially foreign investors) and dwell on the historic advantages baby boomers enjoyed, much of the problem lies with our housing systems and especially with our approaches to fixing them. Critically, by relying on home ownership and making homes default savings accounts essential to our long-term welfare security (in the context of austerity or welfare state retrenchment), we have come to depend on them for much more than housing.
This is why Generation Rent represents so much of a challenge. It requires more than dealing with the supply and distribution of home ownership. It may require a complete rethinking of home ownership as a basis of our housing systems.
The term “Generation Rent” is not particularly useful as it implies direct conflict between cohorts. In fact, the opposite is true. In recent years different generations within families have increasingly mobilised around their collective property wealth in the face of diminishing economic security.
In the UK, around one in ten first-time home-buyers were getting help from parents in the mid-1990s. By 2005 this was up to 25%. And since the GFC the figure has soared to as high as 75%.
The family assets invested in housing are undergoing profound shifts.
At the same time, has been a remarkable shift in family deployment of assets. Numbers of private landlords increased from just over half a million in the early 1990s to around 2.2 million by 2015 (equivalent to almost one in ten households). This represents a remarkable boom in new landlords, owning just one or two extra properties, since the beginning of the century.
Various studies suggest that house hoarding and “landlording” have become an extension of the home-ownership welfare strategy. Buying and then renting out an extra home represents an effective means of ensuring long-term security. It’s also something that can be drawn upon to help out, or even pass onto the kids.
Generations, then, are not necessarily at odds with each other. There is little evidence that younger people directly blame their elders for their housing situation. In fact, it is older people that are most likely to help them out.
Problem is deeper than Generation Rent
Underlying Generation Rent is essentially a wider problem derived from the maturation of home-ownership systems in a diverse numbers of contexts, from Ireland to Japan.
In the past, home-ownership rates and property prices boomed, supporting asset accumulation for particular cohorts. However, this created conditions for tighter access, which has undermined the tenure and reinvigorated low-level rent-seeking in the longer term.
The outcome is not so much a polarisation between generations, but between younger people based on the housing market position, or strategy, of their parents, or even grandparents. The children of secure home owners are likely to eventually be helped out or inherit. The children of renters, over-leveraged mortgage-holders or ageing households who rely on their unmortgaged property to meet their own needs are likely to remain locked out unless they have a considerable income.
In the context of continued flows of global capital and the normalisation of property investment as family welfare strategy, we cannot realistically expect that socioeconomic inequalities derived from housing or problems of access among younger people are going to be reversed.
Governments have largely responded to declining home ownership by sponsoring access to credit or providing extra cash for potential home buyers. This has done little other than revive house price inflation and thus aggravate the affordability issue.
Rental housing careers are likely then to become more common and last for longer. We therefore need better means to reconcile tenants’ needs with both housing and welfare practices. This will involve policymakers and politicians imaging other ways of “doing” housing that consider different types of households and life courses, tenures and housing ladders.
Younger people themselves seem to be adapting to a post-homeownership landscape. While owner-occupation remains deeply normalised, household situations have become increasingly diverse. Sharing with friends or strangers has become much more common.
In cities, this shift has started to stimulate private-sector responses, including large-scale purpose-built developments expressly tailored to the needs of Generation Rent.
Author: Richard Ronald, Associate Professor, Centre for Urban Studies, University of Amsterdam
The most popular government policy at the moment for solving housing affordability continues to be increasing housing supply. After a visit to the UK to look at this very problem, Treasurer Scott Morrison said:
The issue here fundamentally is about supply.
And it’s little wonder the government dwells so much on this argument. Rising house prices are very popular amongst Australian households, the majority of which are owners. And stamp duties on housing transactions are key sources of income for state governments. Our research found the default position for politicians is to sound concerned about housing affordability, but do nothing.
The supply refrain has all the hallmarks of a good policy for a politician. Increasing housing supply – rather than reducing the tax breaks that stimulate excessive demand – is a popular policy with peak property groups. The Property Council has been saying the same thing for years, so the supply solution has come to sound like fact.
If the supply doesn’t flow or, as is occurring now, doesn’t cool prices, the federal government can blame the states for sluggish planning and land supply without having to put their money where their mouth is. States in turn can blame recalcitrant local governments for blocking housing development and “gold-plating” infrastructure requirements. Since the private sector almost wholly funds and delivers new housing, calling for more of it has been a pretty cheap strategy for government.
It’s true that increasing the supply of new homes in line with population and economic growth is a fundamental part of maintaining a healthy housing system. But to tout new housing production as the only policy lever without examining the question of demand is clearly an ineffective policy position.
The supply argument sounds believable – increasing supply will actually reduce prices in markets for most types of goods, like bananas, cars or televisions. Unfortunately, the housing market is different.
Why are housing markets different?
So why is it that despite record supply levels in Australia in recent years, prices have continued to rise in Sydney and Melbourne? We think there are a number of reasons.
New supply is a small fraction of the total stock of dwellings (about 2% in Australia). Prices are set by the total housing market – most of which already exists in the form of established homes.
Also housing is an unusual good in that as prices increase, demand in the short term actually increases (it’s an asset market). This makes it much more difficult for supply increases to reduce prices.
Increasing prices feeds demand
In most other markets increasing prices both encourage extra supply and reduce demand, so these two key forces are working together – prices in these markets come down sharply when supply increases. In housing markets these two forces are working against each other – the growth of investor demand is simply swamping new supply.
The very low interest rates on offer at the moment are exacerbating this trend.
Developers manage supply
Developers, and the banks that fund development, simply won’t allow supply to get ahead of demand in a way that would put significant downward pressure on prices. Dwelling approvals in Sydney and Melbourne are running way ahead of building starts, but housing projects are released in stages to avoid swamping the market. Since our major banks have the majority of their loan books in retail mortgages, it’s no wonder they avoid funding enough supply to increase their own risk levels.
How much new supply would improve affordability anyway?
Even if Australia’s developers and financiers were less cautious, it’s probably not feasible to produce enough supply to really knock prices around when demand is very strong.
For example, prior to the global financial crisis, Ireland – which is about the same size as Sydney, increased supply to 90,000 dwellings per year (Sydney does about 30,000 dwellings per year) and prices still kept rising. It wasn’t the over-supply of homes that caused Irish house prices to fall dramatically but rather the sudden contraction of demand when the global financial crisis hit.
Under more stable conditions, the problem of generating additional housing supply remains. Australia’s prime minister has encouraged the states to fix their planning laws to make it easier get housing approvals and building to flow.
But there has been a continuous wave of planning reform over the last 10 years in Australia, and Sydney and Melbourne dwelling approvals are at long-term highs. For example, in 2015-16, Sydney recorded over 56,000 new dwelling approvals and Melbourne over 57,000.
Much new supply is in apartments. In the rush to create new supply, some local councils and state governments have provided bonuses to developers by allowing, at no charge, more apartments on a site. Land owners have seen this behaviour and are likely to increase land prices on the assumption that this will always happen. So, in this case, more supply (through additional apartments) may have actually increased prices not reduced them.
The global ‘financialisation’ of housing
Demand has increased because the focus for many housing investors is now not the cash flow generated by rents but the value of a house as a financial product. For example, at the moment there is continued strong demand for housing by investors despite the fact that apartment rents have started to decrease in Sydney and are flat in Melbourne.
The internet, and the global real estate market it helps support, enables national and international investors to be an increasingly important part of the market. They increase demand pressures in the best-performing (in terms of price growth) cities of Sydney and Melbourne by “soaking” up the new supply.
If politicians were serious about the affordability crisis, they would be trying to support the important but underfunded affordable housing sector. Better targeting tax breaks towards new and affordable rental housing, rather than fuelling demand for existing homes, would also help. But until our politicians can see past supply slogans we can expect very little policy change.
Authors: Peter Phibb, Chair of Urban Planning and Policy, University of Sydney; Nicole Gurra, Professor – Urban and Regional Planning, University of Sydney
How to fix the UK’s housing crisis has been the subject of national debate for decades. Universal home ownership is a popular goal, which successive governments have failed to achieve. This is largely because they have been faced with the paradox of increasing the supply of affordable housing while not encouraging house prices to fall, as this is widely regarded as political suicide.
One solution has been to promote policies that make it easier to get a mortgage or boost disposable income so that it rises faster than house prices. In fact, nearly ten years after a global financial crisis caused by the ready availability of mortgages to households with no ability to repay them, the UK government maintains its “Help to Buy” initiatives. These focus on helping people to borrow the large sums necessary to pay for unaffordable homes.
What has been missing from the debate is the role that renting can play in solving the UK’s housing problems. The government’s latest white paper is significant in that it features policies to help renters. But ownership remains the ultimate goal.
In the UK there is social and political pressure for people to “get a foot on the housing ladder” – even when, in many cases, it is financially preferable for households to rent. Although the benefits of home ownership are many, one should ask whether it is wise for governments to encourage – and subsidise – people to take on debt that they would otherwise not be able to afford, in order for them to place all of their financial resources into an asset that may be overvalued or unsuitable.
Must you get on the ladder?shutterstock.com
Eggs in one basket
One of the most basic rules of investment is “don’t put all your eggs in one basket”. Yet most households do just that when they buy a home and then they leverage this investment by borrowing money.
This is much riskier than placing all of your money in a fund that tracks the global stock market. Not only is it difficult to sell a house when you urgently need the money, if house prices fall – even by a not unusual 10% – your losses will be multiplied by the gearing effect of the mortgage. For example, if all of your savings amount to £20,000 and you use this as a 10% deposit to buy a £200,000 home, then you borrow the remaining £180,000, a 10% price fall will leave you with no savings and owing money to the bank if you then try to sell.
For previous generations, from the late 1970s onwards, the risk of homeownership has paid a commensurately high return because inflation has been generally positive but benign. And, at the same time, interest rates have trended down from double digits towards zero.
For those contemplating buying their first home today, however, the outlook for both interest rates and inflation is more uncertain. For example, Japan and more recently some eurozone countries have experienced prolonged periods of deflation. In the UK, despite efforts to keep inflation positive, actual realised inflation has been consistently below the Bank of England’s forecasts from the second quarter of 2013 until January.
Don’t bet on inexorable rises.shutterstock.com
House prices vary substantially over time relative to both GDP and household income – confirming that housing is a risky investment. Furthermore, in markets where building land is in short supply (such as Japan and many parts of the UK), this variability is greater than in markets such as the US where it is more readily available to meet demand.
When renting is better
In a recent paper I demonstrate that renting can be a better financial option than buying in a number of circumstances. These include: if you do not plan to live in the same house for at least five to ten years; or if inflation is negative (deflation); or if the net rent saved by owning is less than your mortgage interest or the return you could have achieved by putting your money in other investments with a similar level of risk.
This is because rent typically includes substantial ownership costs such as building insurance, property maintenance and furnishing. So the money saved by owning a house is considerably less than the rent not paid. Another reason is that buying and selling houses incurs substantial transaction costs in the form of legal fees, transaction tax (stamp duty) and selling agents’ fees. These are much higher than rental transaction costs. So unless you plan to stay in the new home for a considerable time, the chances are that these higher costs will not be recouped by savings from rent or price appreciation.
Plus, although prices have tended to drift up in the long term, prices can and do fluctuate substantially in the medium term (five to ten years). So if you plan to relocate within a few years there is a greater risk of being unlucky in your timing and suffering a price loss.
Finally, purchasing a home fixes your housing costs and often incurs a substantial mortgage liability. This is good if prices and wages are generally rising – because the mortgage payments become more affordable as incomes rise. But, in a world of low inflation or deflation, mortgage liabilities remain fixed, but incomes, prices and rents tend to decline making it harder to sustain mortgage payments and harder to recoup the capital invested in buying.
There are many ways that governments can influence the affordability of housing besides helping financially constrained households to concentrate all of their savings into risky assets that they would not otherwise be able to afford. Allowing house prices to drop will always be politically difficult – homeowners tend to make up the bulk of the electorate that turns out to vote. But they could do much more to encourage renting, even if it does require a radical rethink in the British mindset when it comes to home ownership.
Author: Isaac Tabner, Senior Lecturer in Finance, Director of the MSc in Finance, University of Stirling
There was a subsequent flurry on Twitter discussing the DFA research approach.
To be clear, our household modelling is based on a rolling 26,000 statistically robust omnibus survey, to which each month we add 2,000 new households and drop off the oldest set. We have data from more than 10 years of research and it feeds our programme of activity and is reflected in the DFA blog.
From a mortgage stress perspective, we run our modelling, based on our household profiles and segments, which looks at net cash flow (before tax) and we also sensitive the modelling based on potential future rate movements. We take account of their total financial position, including other debt demands, and costs of living.
P.S. Our research is separate and distinct from other research in the housing affordability arena, including the international Demographia survey. Whilst some of the findings may align, the research is based on different underlying research sources.
It has been strong week for auction activity across the capital cities, with the number of auctions more than doubling compared with last week in Sydney and Melbourne. Despite the surge in the number of auctions held, the combined capitals region recorded a preliminary auction clearance rate of 76.6 per cent, up from last week, when the final clearance rate dipped to 68.7 per cent. Auction volumes saw a significant increase over the week, with volumes rising week-on-week across all of the capital cities, with the exception of Adelaide which saw a decrease over the week. There were 1,564 properties taken to auction across the combined capital cities this week, compared to last week’s 881. At the same time last year, auction volumes were lower, with 1,400 capital city auctions held with a lower rate of clearance (71.8 per cent). The two largest auctions markets, Sydney and Melbourne, recorded a preliminary clearance rate of 84.8 per cent and 75.4 per cent respectively, suggesting that vendors are still very much in the driver’s seat across these markets.
Brisbane cleared 52% on 94 listed, Adelaide 71% on 70 listed and Canberra 79% on 65 listed.
There are some highly relevant points here, which I believe the RBA and APRA must take on board. I summarise the main points in his speech, but I recommend reading the whole thing: This is genuinely important! In particular, note the limitation on relying on lifting bank capital alone.
The chart plots the average intentions each week against the volume of new investor loans written each month. We see a significant downward movement in intention. This is being driven by a range of factors including concerns about future property values, falling rental returns, rising investment interest rates and most recently concerns about potential changes to the generous tax breaks which currently are enjoyed by property investors.
The supply refrain has all the hallmarks of a good policy for a politician. Increasing housing supply – rather than reducing the tax breaks that stimulate excessive demand – is a popular policy with peak property groups. The Property Council has been saying the same thing for years, so the supply solution has come to sound like fact.Must you get on the ladder? shutterstock.com
Don’t bet on inexorable rises. shutterstock.com
