The New Daily – Page 6 – Digital Finance Analytics (DFA) Blog

Super saver accounts fail to impress

The government’s plans to allow first home buyers to salary sacrifice up to $30,000 into superannuation accounts looks set to do little to make houses more affordable.

“Under this plan, most first home savers will be able to accelerate their savings by at least 30 per cent,” Treasurer Scott Morrison said in his budget speech.

From July 1, 2017, people can contribute up to $15,000 a year, taxed at 15 per cent, into their superannuation accounts for a home deposit.

Withdrawals will be allowed from July 1, 2018, and will be taxed at marginal tax rates minus 30 percentage points.

Dr Sam Tsiaplias, economist at Melbourne University, said the measure would not improve housing affordability “in any substantive way” because it favoured the well-off.

“Most of the people who might take this up will be able to afford a deposit anyway,” he told The New Daily.

“If the objective is to help a relatively small number of households save faster it probably can do that.”

Because the money will be deposited in Australians’ super funds, it has been suggested the funds would need to adjust their programs. But Dr Tsiaplias said the accounts would probably be so unpopular that they wouldn’t affect the super funds “in any way”.

Superfund Partners director Mark Beveridge said the government’s “30 per cent” sales pitch would simply leave super funds offside trying to accommodate the new funding arrangements.

The new schemes do not rely on Australians to open new bank accounts. Instead, the government will allow deposit savers to salary sacrifice into their superannuation accounts.

Bill Watson, CEO of First Super, said people who use the new scheme need to be wary of the risks that come with investments.

“There’s a risk that what you think is a saving is exposed to losses in the market. What a person would need to do is put it into a cash investment, but you get pretty much the same return as a bank deposit.”

Saving schemes like this have been tried in the past. The first Rudd government introduced First Home Saver Accounts in 2007. Savers were taxed at 15 per cent on the first $5000 they deposited each year, while interest was taxed at 15 per cent. The government also kicked in a 17 per cent contribution a year on the first $6000.

However, Labor’s scheme saw little uptake. Only 48,000 accounts were opened, compared to the projected 730,000. It was abolished in 2015 under the Abbott government.

Wayne Swan, treasurer during the first Rudd government, speaking on CNBC on Wednesday, said his scheme would have shown its impact if it had not been abolished.

“It was a far more generous proposal than the one they announced last night,” Mr Swan said.

“[This is] just window dressing because they’re ideologically opposed and won’t touch the negative gearing provision which is the key to solving this problem.”

First Home Buyers Australia co-founder Daniel Cohen said he supported the scheme, but wanted more to be done to address affordability.

“It doesn’t single handily solve the property crisis,” he said.

“We also wanted to see measures that decreased the amount of investor activity in the market, we were also disappointed that there weren’t more cuts to tax incentives given to investors.”

Negative gearing came in for only minor changes in the budget, with some tightening around travel expenses and depreciation deductions.

The government expects its home buyers grant to cost $250 million and its changes to negative gearing to save $540 million over the next four years.

Banks prepare for war, customers in the crosshairs

From The New Daily.

The big banks are arming themselves for a propaganda war against the Treasurer’s $6.2 billion bank levy, with bankers warning that customers and shareholders will be the ones who pay the new levy.

To help pay for Tuesday’s cash-splash budget, Treasurer Scott Morrison announced a roughly $1.5 billion a year tax on the ‘Big Five’: CBA, ANZ, Westpac, NAB and Macquarie, to be paid over the next four years.

The banks are fuming, according to the industry’s peak lobbyist, and have been left no option but to extract more money from shareholders, savers, borrowers – or all three.

In a blistering press conference, Australian Bankers Association CEO Anna Bligh accused the Treasurer of a “grab for cash to fill a budget black hole” and of setting a “very dangerous” policy precedent.

Minutes earlier, there were reports that Commonwealth Bank CEO Ian Narev had sent an email to staff warning the costs could hit customers and shareholders.

The rhetoric is only hours old, but is already mirroring the fightback of big mining companies against Kevin Rudd’s Minerals Resource Rent Tax in 2009, which the industry branded a “super profits tax”. The Abbott government later repealed the tax.

Ms Bligh said the government had put the economy at risk by “singling out” its most profitable sector, simply because the banks were “easy targets”.

“Right now the major banks of Australia are very angry,” she said.

“There are only three options for the banks. It will be either be paid by shareholders, by savers, by borrowers or a combination of all three.

“I don’t think the Treasurer has thought through the full implications of this tax.”

Because bank share prices fell quickly and heavily on budget day, there has been speculation of a leak. Mr Morrison told the press gallery he had seen “no evidence” of this.

National Australia Bank CEO Andrew Thorburn echoed the lobbyists’ threats, saying the “tax” would impact “millions” of Australians, including every one of his bank’s 10 million deposits and borrowers and its 570,000 direct shareholders

“It is not just a tax on a bank. It is a tax on every Australian who benefits from, and is part of, our industry.”

But Mr Morrison cautioned the big banks, which make a combined profit of more than $30 billion, to simply accept the levy.

“Families absorb costs, small businesses absorb costs,” Mr Morrison told the National Press Club on Wednesday.

He said companies’ value lay in the way they treated their customers and the services they provided.

“They already don’t like you very much,” he said to the banks.

“But prove them wrong on this occasion. Don’t confirm their worst impressions. Tell them another story. Tell them you will pony up and help fix the budget.”

There are already suggestions the banks would soon raise mortgage rates by up to 0.15 per cent to recoup some of the costs of the levy.

Prime Minister Malcolm Turnbull also warned the banks that if they pass the cost on to customers, “the ACCC will be watching them very, very carefully”.

Between the levy’s introduction on July 1, 2017, and June 30, 2018, the consumer watchdog will be asking the banks to “explain” any increases to residential mortgage rates, fees and charges.

The levy is expected to reap the budget $6.2 billion in extra revenue over the next four years.

It will apply to banks with liabilities of more than $100 billion (indexed with nominal GDP), and will charge them a yearly sum equal to 0.06 per cent of the total value of those liabilities (which don’t include customer deposits).

The crash the RBA fears: it’s not housing and banks, it’s you

From The New Daily.

In a landmark speech, Reserve Bank of Australia governor Philip Lowe has outlined his nightmare scenario of a property market crash, as well as his favourite solution to the affordability crisis.

The RBA is not overly concerned that a “severe correction in property prices” would trigger a banking collapse, as happened in the US in 2008-09, Dr Lowe said on Thursday.

No, he said he was far more worried that Australians would bring the economy to a grinding halt by curbing their spending.

“The Australian banks are resilient and they are soundly capitalised. A significant correction in the property market would, no doubt, affect their profitability. But the stress tests that have been done under APRA’s eye confirm that the banks are resilient to large movements in the price of residential property,” Dr Lowe told the Economic Society of Australia.

“Instead, the issue we have focused on is the possibility of future sharp cuts in household spending because of stretched balance sheets.”

Household debt is “high” relative to incomes, making it likely that many Australians would respond to a market correction with a “sharp correction in their spending”, in an attempt to pay down debt.

“An otherwise manageable downturn could be turned into something more serious.”

The golden solution

Dr Lowe’s speech contained a comprehensive answer to what has caused house prices to skyrocket, at least in Sydney and Melbourne, and what should be done to fix it.

The answer was unlikely to be comforting for either the Liberals or Labor, as it touched on both supply and demand-side fixes.

He dismissed allowing young Australians to use their superannuation for a deposit. “You don’t address affordability by adding to demand.”

But he also downplayed the importance of tax policies. “The best housing policy is really a transport policy,” he said during a question-and-answer session at the end.

In the speech itself, the Governor blamed the house price explosion on an encyclopaedic list of factors, including an increased ability to borrow via financial liberalisation and lower interest rates; supply constrained by zoning issues, geography and, crucially, inadequate roads and trains to link outer suburbs to the inner city.

He also pointed to Australians’ preference for big houses in the big cities; slow income growth; stronger-than-expected population growth; and the rise of investors.

While much has been made of the crackdown of APRA and ASIC on bank lending to investors — indeed, constraining investor demand is the centrepiece of Labor’s solution — Dr Lowe placed far more emphasis on supply issues.

“This borrowing [by investors] is not the underlying cause of the higher housing prices. But the borrowing has added to the upward pressure on prices caused by the underlying supply-demand dynamics. It has acted as a financial amplifier in some cities, adding to the already upward pressure on prices.”

The Governor noted in passing that tax policies (presumably negative gearing and the 50 per cent capital gains tax discount) would “have an effect”, but he was more optimistic about faster rates of home-building, better transport infrastructure, and an eventual rise in the RBA’s cash rate.

“Increased supply and better transport could be expected to help address the ongoing rises in housing prices relative to incomes. These changes and some normalisation of interest rates over time might also reduce the incentive to borrow to invest in an asset whose price is rising strongly.”

Talk of a property slowdown is just ‘propaganda’

From The New Daily.

A senior property data expert has warned Australians not to fall for “propaganda” claiming the Sydney and Melbourne housing markets have already cooled.

Louis Christopher, head of SQM Research, said all available data contradicted rival firm CoreLogic, whose numbers last week sparked dire headlines and talk of a market crash.

Even Treasurer Scott Morrison cited CoreLogic’s numbers on Friday to argue the housing market needed a “scalpel, not Labor’s chainsaw”.

“The concern here is that we’ve actually had the Treasurer refer to the index, basically to imply that he doesn’t really need to do that much more on affordability,” Mr Christopher told The New Daily.

“It couldn’t be further from the truth. Our opinion is that the market continues to boom and APRA [Australian Prudential Regulation Authority] will likely have to step into the market later this year.

“This is being used as propaganda, as an excuse for people to hold back from taking real action in the market.”

Unlike CoreLogic, SQM Research calculated that asking prices for houses rose over the last month by 1.1 per cent in Melbourne and 2.2 per cent in Sydney, coupled with steadily falling property listings and strong auction clearance rates around 80 per cent.

Falling listings were probably a sign that vendors were “holding back” because they expected prices to rise even higher, Mr Christopher said.

This is in stark contrast to CoreLogic, which estimated that Sydney’s dwelling values fell 0.04 per cent last month, while Melbourne grew by just 0.5 per cent. According to its index, combined price growth in the capital cities was the slowest month-on-month since December 2015.

CoreLogic is the most widely cited property pricer, at least among journalists, because it reports dwelling values daily and weekly. Its data formed the basis of most headlines reporting a ‘slowdown’ or ‘peak’.

However, CoreLogic’s own research director, Tim Lawless, urged “caution” last week about over-interpreting the company’s April numbers. He told The New Daily “potentially there is some seasonality creeping into these numbers”, as the index is generally moderated in April and May.

The Reserve Bank dumped CoreLogic as a data source last year over concerns about its methodology.

Mr Christopher said while the data continued to paint a picture of a booming market, he did not rule out a “slowdown” later in 2017, especially if regulator APRA cracks down further on bank lending.

By “real action” on affordability, he meant a temporary cut to immigration; incentives for migrants to move to regional areas; and the replacement of state-imposed stamp duties with a federal land tax.

Dr Stephen Koukoulas, an economist, warned that calling the end of the boom now would be “extremely premature and arguably a bit hazardous”.

He admitted he had been caught out “badly” in years past by making too much of month-to-month CoreLogic fluctuations, and urged others not to repeat the mistake.

“If we get another month of zero, well, the story builds. But so far I don’t think we’ve seen enough concrete evidence to say definitively this is the end of the boom,” Dr Koukoulas told The New Daily.

He also warned that vested interests could use CoreLogic’s numbers for their own ends.

However, the economist agreed the markets would eventually cool, perhaps as early as the second half of 2017.

“Look, it is going to cool, it is going to slow down, because it can’t keep going at that pace. There’s the APRA changes, many rate hikes by the banks, an oversupply in Brisbane apartments and Perth’s still looking dreadful,” Dr Koukoulas said.

“But to say there will be minus signs and a genuine ‘bust’, ‘correction’ or ‘slump’, that’s not going to happen. Or at least, I’d want to be see more evidence.”

An ideal scenario would be for price growth to stagnate at zero per cent in Sydney and Melbourne for the next five years while wages grow by 2 or 3 per cent (up from the current 1.2 per cent), he said.

“There is a problem in house prices in Sydney and Melbourne – there’s no question, I don’t think. Saving a deposit is difficult, even though once you’ve got the deposit you’re okay.”

Aid for home buyers could be a back-to-the-future flop

From The New Daily.

The federal government may be poised to unveil a special savings account and tax breaks for first home buyers in next week’s budget, despite government ministers refusing to confirm leaked reports in the media at the weekend.

With the housing affordability crisis close to the top of voter concerns, the federal Treasurer last week appeared to change focus from the housing sector to infrastructure, but those hoping to get into the housing market will be encouraged to hear the issue may be tackled, if in limited form only.

Reports suggested that Treasurer Scott Morrison’s upcoming budget would feature a provision allowing aspiring first home buyers to salary sacrifice in order to raise their needed deposits.

If that is true, it will be a case of back to the future, as a similar measure was introduced during Kevin Rudd’s first turn as prime minister before being scrapped by the Abbott government.

While Resources Minister Matt Canavan would not deal in specifics during a Sky News interview on Sunday, he stressed that home ownership would be a key theme of the upcoming budget.

“We are focused on making sure Australians can afford a home,” he said. “It is a fundamental principal.”

Under the Labor scheme, First Home Saver Accounts saw the government make co-contributions of up to $1020 (or 17 per cent) on the first $6000 that account holders deposited each year.

While there were tax concessions associated with the accounts, there were also restrictions around access to the funds, including that they were only to be used towards payment for first homes.

That scheme proved to be something of a disappointment. While Labor treasurer Wayne Swan predicted as many as 750,000 accounts would be established, only 46,000 had been opened when his successor, Abbott-era treasurer Joe Hockey, wound it up six years later in 2014.

And there was no shortage of critics, including the consumer group CHOICE, which complained in a submission to Treasury that it provided disproportionate assistance to high-income earners while doing little to help those who genuinely needed it.

“We are unaware of any evidence to suggest that sufficient savings are more difficult to achieve for higher-income earners,” CHOICE noted sarcastically.

Another criticism came from Treasury itself, which warned that the scheme as initially conceived would be complex to administer while not benefitting those on low incomes.

If the Turnbull government is indeed planning to revive home-saver accounts or something similar, the one near-certainty is that government contributions and associated tax breaks will need to be far more substantial if they are to have a positive impact than under Labor, when house prices were substantially less.

According to the Australian Bureau of Statistics, the national average home price rose a staggering 4.1 per cent in the last quarter of 2016 alone, and 7.1 per cent for the year.

Despite First Home Saver Accounts being in effect for six years, Labor frontbencher Mark Butler insisted on Sunday that they had not had time to work – and, if something similar were to be re-introduced, it wouldn’t do much good anyway.

“The critical message is this,” he told the ABC’s Insiders, “you cannot deal with housing affordability in Australia without dealing with negative gearing.”

Greens senator Sarah Hanson-Young also rejected the notion that salary sacrificing would have a major effect.

“We have to bring the pressure down, not just give people more money to go straight into the hands of property investors.”

Don’t bet the house on a property market correction

From The New Daily.

Experts have warned against predicting that property prices have peaked just yet.

A flurry of headlines this week generated by UBS analysts, Australian Financial Review columnists and others all warned that Sydney and possible Melbourne prices had peaked and we should brace for a correction.

Most were based on slower price growth in Sydney dwelling values and slight reductions in auction clearance rates compiled by CoreLogic, a property data firm.

However, CoreLogic director of research Tim Lawless cautioned against reading into the results (especially dwelling values, which are yet to be officially released for April) because April and May are generally weaker periods.

“Potentially there is some seasonality creeping into these numbers and that’s one of the reasons why I would probably suggest caution calling the peak right now before we see a few more months and see if the trend actually develops,” Mr Lawless told The New Daily.

“When we look at, say, a year ago or any sort of seasonality in the marketplace, yeah, we do generally see some easing in our reading around April and May.”

A further complication is that CoreLogic adjusted how it calculated dwelling values in May 2016 to account for seasonality. The result, according to Mr Lawless, is that “technically speaking, there are some challenges and complexities making a year-to-year comparison”, although he said the adjustments were “quite minor” and values could still be compared.

The change sparked a scandal last year, with the Reserve Bank ditching the company as its preferred data source after claiming it had overstated dwelling values in April and May.

Despite this, CoreLogic remains the most widely cited property data source because it reports dwelling values daily. But the most authoritative is the Australian Bureau Statistics, which has measured similar quarter-on-quarter falls in the past, especially between the December and June quarters. And yet, the trend has been ever upwards.

IFM chief economist Dr Alex Joiner agreed we shouldn’t jump to conclusions based on the latest statistics.

“I wouldn’t suggest that anyone looks at any month-to-month data in Australia and makes firm conclusions from it,” Dr Joiner told The New Daily.

“People might want to rush to call the top, but the trends are for gradually decelerating growth, and I think that’s about right.”

But if this is not the peak, the market is “very much approaching it” because the Reserve Bank and the banks are likely to lift interest rates even as wage growth stays low, Dr Joiner said.

“When that actually decelerates price growth, whether it’s this month or later in the year, I don’t know. But we’re certainly eeking out the very last stages of price growth in the property market.”

Morrison’s budget switch points at infrastructure boom

From The New Daily.

The government has bent to calls from experts and Labor by clearing away the accounting impediments to a big spend on infrastructure.

In a speech on Thursday, his last before he hands down the May 9 budget, Treasurer Scott Morrison promised to change how the budget reports the deficit.

Instead of reporting the ‘underlying cash balance’ (which counts “good and bad debt”) prominently and burying the ‘net operating balance’ (which only counts “bad debt”), Mr Morrison said he will put them side by side from now on.

“While the net operating balance has been a longstanding feature of our budget papers … it has not been in clear focus. This change will bring us into line with the states and territories, who report on versions of the net operating balance, as well as key international counterparts including New Zealand and Canada.”

In this context, “good debt” is borrowings for economy-boosting capital expenditure, such as roads and trains that reduce the time it takes to get to work, while “bad debt” is borrowing to cover the cost of defence and welfare.

As an example, in the latest MYEFO budget update, the projected underlying cash deficit for 2017-18 was $28.7 billion but the net operating deficit was only $19.2 billion.

Mr Morrison’s pledge was a marked reversal on his comments late last year when he said the government would only take on “so-called good debt” for infrastructure spending once it had brought “bad debt” under control.

The Coalition will soon, perhaps in the next six months, be forced to administratively lift the $500 billion gross debt ceiling to allow the government to keep borrowing. Nevertheless, the government will heed the calls of experts for debt-fuelled stimulus.

Various expert bodies, including the Reserve Bank, have been prodding the government to take advantage of record-low borrowing costs to renew Australia’s public infrastructure.

In his farewell address, former RBA governor Glenn Stevens said the economy would only be pulled out if its malaise if “someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend”.

“Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending,” Mr Stevens said.

“The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.”

Credit ratings agencies, the International Monetary Fund and the OECD have also encouraged infrastructure spending.

And in a discussion paper last year, Labor’s shadow finance minister Jim Chalmers called for consultation on the “optimal budget presentation for intelligent investment in productivity enhancing infrastructure assets” and the idea of splitting out “spending on productive economic assets such as infrastructure from recurrent expenditure”.

Labor took a very different line on Thursday, with Shadow Treasurer Chris Bowen accusing the government of employing accounting “smoke and mirrors” to hide its economic mismanagement.

Anthony Albanese, the opposition’s infrastructure spokesman, welcomed the change but accused the government of wasting the last four years coming to the decision.

“Treasurer Scott Morrison’s declaration today that at a time of record low interest rates it makes sense to borrow for projects that boost economic productivity is precisely what Labor, the Reserve Bank and economists have been saying for years,” Mr Albanese said.

He warned the government’s “ill-advised” decision to create an infrastructure unit within the Department of Prime Minister and Cabinet, rather than relying on the independent Infrastructure Australia, risked pork barrelling.

“Creating another bureaucracy to sideline the independent adviser makes no sense. The government should have already learned that lesson from its creation of the Northern Australia Investment Facility, which was announced two years ago but has not invested in a single project.”

Bank shares lurk as an unseen danger in a property shakeout

From The New Daily.

With property prices at dramatic highs, regulators are getting very nervous about the danger of a shakeout, so they’re trying to chase away investors by making loans harder to get and more expensive.

While the dangers of over-exposure to a property slump through unaffordable mortgages and aggressive negative gearing strategies are clearly understood, there’s another property-related danger lurking in the wings: bank shares.

The banks have been massive winners from the property boom. The lure of easy money from jumping prices has seen them dramatically lift exposures to residential housing, from 47 per cent of their loan portfolios in 1997 to 66 per cent today.

And, as The New Daily recently reported, housing lending has left business lending for dead since capital gains discounts were introduced in 1999. So profitable have banks been they now make up 32 per cent of the value of the Australian share market and, as the following chart shows, they are outgrowing the rest of the market.

But that all leaves them, and investors, highly exposed to property fortunes, according to a new report from investment consultants Rice Warner.

“Australians have been heavily invested in the domestic banking sector due to its high visibility, perceived strong track record (despite the GFC) and size relative to the rest of the Australian market. However, institutions in this sector are, by nature, highly interlinked … on mortgage lending,” the report said.

The interrelationship between bank profits and the property boom has worked in tandem. “But when one starts to fall I won’t be surprised if the other goes down with it,” Michael Berg, a senior consultant with Rice Warner, said.

And private investors, many of them retirees, would be heavily hit by falling bank shares. “Whenever we see a breakdown it shows portfolios are heavily weighted to bank shares,” Mr Berg said.

“It’s fair to draw attention to the very high weightings in portfolios to bank shares,” said independent economist Saul Eslake. “The main reason they’re so attractive is they deliver very high after-tax yields through dividend imputation.”

However if the property market were to fall “the banks may well cut their dividends”, Mr Eslake said. That, in turn, would hit their prices.

A fall in bank share prices and dividends would hit not only the 26 per cent of Australians who have direct share investments it would also hit retirees exposed to shares through super funds.

Self-managed super funds and retail, in particular, are heavily exposed to shares which deliver high dividends. Their members would see incomes cut if prices and more particularly dividends, were cut.

Industry funds also have shares but they tend to have lower exposures than retail funds because they often invest collectively in other asset types.

Another share popular with retirees for its dividends is Telstra, which has fallen 25 per cent since January because of concerns about competition in its markets reducing future profits. “The scary part (with the banks) is when you look what’s happened to Telstra,” said David Simon, principal of advisory group Integral Private Wealth.

“The banks could be facing similar risks.”

Given the fact that many portfolios are made up of at least 20 per cent bank shares, a property-induced banking shakeout would be felt widely, hitting peoples’ retirements and the economy generally as incomes and spending falls.

Why an apartment bust could prove calamitous

From The New Daily.

Go into the city at night and turn your eyes upward. The dark eyes of city apartment towers stare back. Night after night, it’s the same – some windows never brighten. Nobody is there to flick the light switch because the apartments are empty. Water usage statistics confirm it – 7 per cent of apartments in certain high-density city areas lie vacant according to one estimate.

It is not clear exactly how many vacant properties are the possession of overseas investors keen to park money in a safe place, but anecdotal evidence suggests they are a big contributor to the phenomenon. Vacant apartments are a danger to us all. They are like little pockets of combustible material that could turn a bit of smouldering at the edges of the apartment market into a consuming fire that damages the whole housing market and the whole economy.

Empty vessels make the most sound

An apartment left vacant is a particular kind of investment. One where the investor doesn’t need cash flow, but wants to grow – or at least maintain – their capital investment. It is selected because it seems safe. So far, that assumption has been a good one. Apartment prices have risen alongside Australia’s house prices.

But if apartment prices fall, people who invested in vacant apartments will have reason to second-guess. Why, they may ask, am I keeping my money in a losing bet? Vacant apartments are easy to put on the market – you don’t need to move, or even evict tenants. You just call your real estate agent. If the apartment market were ever to fall, vacant apartments could accelerate that movement.

But why would they even?

There is a good argument Australia needs apartments. We are quarter-acre obsessed even as our cities grow too large to adequately function. For a long time we were building too few. Hence the steady price rises that have only been exacerbated by interest rates at very low levels. But the rise in prices has inspired developers to go crazy. These next charts shows approvals in Sydney and Brisbane. The change in the preferred type is obvious and severe.
Is it possible we might not just catch up with demand for apartments, but exceed it? One might want to hope the discipline of a free market would ensure the apartment market doesn’t wobble. Bad news – even the head of the RBA Financial Stability Department, Lucy Ellis, thinks otherwise.

“Just as there’s a Greater Fool Theory of investment that helps perpetuate booms in prices of financial assets, it sometimes seems that there is a Slower Builder Theory of property development, where everyone knows that not all the projects underway will make money but yours will if you can just complete it before the other guys complete theirs.”

Many builders rushing their buildings to completion would only exacerbate any price fall. In bad news for developers still in the hard-hat stage, there are hints apartments may already be more numerous than the market can stomach. According to reports in the financial press, some apartments bought off the plan in Melbourne are selling for hundreds of thousands of dollars less than they were bought for, while owners are raising sales commissions to help clear excess stock in other towers.

RBA Governor Glenn Stevens made explicit mention of apartments last time the central bank cut rates, suggesting the bank doubted overall dwelling prices would rise much longer because “considerable supply of apartments is scheduled to come on stream over the next couple of years”.

The number of units under construction is startling.
Safe as houses …

Don’t think house owners can just watch apartment prices fall and not get singed. The two markets are linked and an apartment glut can lead to a house price fall. This might be what the OECD was talking about when it said: “The unwinding of housing-market tensions to date may presage dramatic and destabilising developments.” But if a destabilising house price wreck happens we shouldn’t look up at those unoccupied apartments and blame their owners. We should blame ourselves for letting it happen.

Jason Murphy is an economist and journalist who has worked at Federal Treasury and the Australian Financial Review. His Twitter handle is @jasemurphy and he blogs about economics at Thomas The Think Engine.