A housing bubble or the potential for one?
A housing bubble or the potential for one? Why not call it as it is Australia.....
I wrote a few weeks ago about housing bubbles and the misconceptions commonly related to the term. A bubble is typically an illusion of economic strength which draws buyers in, whilst masking underlying fragilities - and in some areas of Australia, the recent investor lead rally in property prices from an already inflated base is concerning.
However, unlike other economic bubbles, housing markets have plenty of complexities which can delay a severe correction – not least the stimulus of easy monetary policy, incentives, and speculation buoyed on by tax policies that encourage heated investor activity in the established housing terrain around our most desirable capital city locations.
Even in markets where housing has suffered dearly from the 2008 financial crisis, such as the UK, and USA – there is a fragmented nature to the falls dependent on location and the openness to attract foreign speculation.
In the south eastern regions of England for example, where foreign money has propped up London’s prime central market, creating a ripple across the outer lying suburban towns, the falls in capital have been far less severe than the northern districts, where the market has dipped some 20%, and in regional areas, even more.
Not that this has in anyway helped Briton’s younger population who are now commonly termed ‘generation rent,’ with the numbers of unemployed living in the family home almost doubling between 2008 to 2012, and the productive areas of economy failing to pick up fast enough to drive innovation and generate new sources of growth.
Although house prices in the UK have started to rise again with the help of various schemes such as ‘funding for lending,’– other areas of productivity aren’t fairing so well. As UK regulator Lord Adair Turner pointed out in a recent speech to London’s central bankers and economists, only 15% of total financial flows in the UK have gone toward investment projects, the rest have instead been used to support unsecured personal finance or existing assets - significantly real estate.
However, do we really fair much better in Australia? Our low interest rate environment, coupled with a honeymoon period of ‘post election’ confidence, is predictably forcing investors to seek out any area of imagined opportunity that can provide a better return on their dollar.
This runs the risk of stimulating higher levels of household debt (currently at around 150%) directly tied to speculative behaviour. And in the Australian culture which veers towards the perceived safety of bricks and mortar, based on the somewhat fool hardy view promoted widely in the industry, that limited supply and rising population growth can forever prevent a sharp correction, you don’t need a second guess as to where a large proportion of undiversified debt is currently being allocated.
Some interesting research was released last week by Jonathan Mott of financial services firm UBS, highlighting the above point aptly;
“If we compare Australia, New Zealand and the UK, all three countries have similar cultures, demographics and home ownership. However, investment property contributes 32% of Australian mortgages, 20% of NZ mortgages and 12% of UK mortgages. ….57% of Australian landlords are leveraged (ATO data suggests this is closer to 81%) compared to 28% in NZ and just 13% in the UK”
This would be less of a concern if effective supply was keeping pace to soak up the overflow of demand, and thereby reduce volatility in values. However, in areas of limited supply, the bubbly nature of the price gains disproportionally advantages those with existing assets, at the expense of those struggling to get a foothold.
When viewed against a less than desirable economic backdrop of rising unemployment, an unwinding mining boom, and weak wage growth, with a rise in the cash rate at some future point inevitable, you’d be foolish to think the current trend can continue without some correction.
Notwithstanding, our politicians continue to miss the point, as Tony Abbot said on 3AW last week;
“Don’t forget … if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset,”
What a sad world it is, when the most essential item young and old aspire to alike, for both their health and continued well being, gradually becomes less affordable over time, requiring a greater level of debt to be serviced despite the somewhat falsely perceived advantage, that low interest rates somehow make the buying environment and purchase of property easier.
And yet as a direct consequence, we have falling rates of ownership – particularly in the younger generations, an increase in overcrowding of accommodation, rising waiting lists for social housing, and the average age of ownership for those not benefitting from a gifted deposit, pushing closer to 40 years.
The housing market no longer revolves around promoting home ownership for the sake of personal well being, it’s Australia’s largest domestic asset class with an aggregated value of over $4 trillion, and understandably it’s now suggested that ASIC should recognise it as such.
Countless hours can be spent arguing what the term ‘bubble’ actually means – definitions are numerous. Equations are done regularly comparing price to rent, debt to GDP, price to wages (a somewhat skewed calculation due to the inclusion of compulsory super,) however do we really need a meteorologist to tell us what the weather’s like outside?
Whether you call it a bubble matters not, Australian house prices have been pumped up with many ingredients over the decades to get to such elevated levels. As a result, we have a market that is both over priced and under supplied, with the first-home buyers' share of new home loans sitting at its lowest point in a decade.
Monetary policy alone is a blunt instrument, and whilst Governments can allocate at their discretion where to spend our tax dollars, they have limited influence on where cheap credit is spent, or for which asset it is lent into the economy.
Nor do they currently have the ability to direct it into areas where it’s needed most – which in terms of housing would principally be construction. Hence why the sector continues to call out desperately for another rate cut.
Instead buyers are punting a lot of unproductive dollars on second hand houses, and the proportion of cheap money finding its way into a limited pool of dwellings, should not be brushed aside as merely part of a typical ‘property cycle,’ when we have a number of economic and social factors combining, which left unregulated, have the potential to create the ‘perfect storm.’
Much commentary has been written on this matter of late, and it’s not isolated to Australia. The Bank of England this week voiced how it was watching the UK market “closely” as price rises in London reached 10% in the year to July, warning “that if risks to the stability of the financial system were to emerge from the housing market, both it and the microprudential regulators had a range of tools available to address those risks."
However, the RBA continue to sit on their hands, not wanting to pull a regulatory lever, instead taking on a stern expression and wagging a finger at investors whilst pleading with them to employ caution, as if they will all fall into line like a bunch of secondary school kids in a playground.
This idea that investors will employ a sense of rationality is ambitious in a market that has corporate regulator ASIC, once again warning against the propensity of spruikers.
But even without these ‘spruikers’ buyers face difficulties - fed ‘daily’ with house price statistics from RP Data, which could be somewhat relevant if we were monitoring petrol prices. Closely comparable sales data is not readily available – computer generated “estimates” are a guess and more often than not, hopelessly inaccurate.
Furthermore, there are plenty of other variables that need to be assessed prior to investing in any residential listing. Prospected development projects which may spike the stock being taken to market, thereby diminishing the level of capital growth being ‘assumed’ based on a cursorily look at historical data.
Local vacancy rates, the time on market you can expect your rental property to reasonably sit before finding a tenant, the predominant area demographic any said property will appeal to in order to attract and maintain consistent buyer demand - the list continues.
I mention this, because the broader implication of a large proportion of inexperienced buyers making unwise acquisitions without educated due diligence, is a worry unto itself. However, the number of real estate investors is set to rise. Although presently, only a relatively small proportion of total investment in the property market stems from SMSFs, it’s going to rapidly increase.
As mentioned in the AFR this week, the most mobile pot of cash is in the self-managed super system. About 1/3 of the $500 billion in SMSFs is held in cash, or about $150 billion.
On the back of this, there is a theory that self-managed super will have a mean reversion to normal cash weightings of about 10%. If that proves accurate, about $100 billion in cash will move – leading to the question –‘where will it move?’
As it stands, only 23% of investment into residential property comes from SMSFs, against 77% invested in commercial. Albeit, when the direction of that percentage is into established areas suffering an elastic band of restricted supply, the recent boom in Sydney for example, against the backdrop of slow credit growth - will have no doubt been exaggerated by SMSF demand.
However, banking regulation aside, our politicians should be moving to restrict policies that encourage disproportionate speculation, such as the tax treatment of negative gearing (which should be phased out) and capital gains, or implementing a transition toward a broad based land tax system which is long over due.
My only comment to those with short-term spectacles on who think the recent ‘boom’ is good news, - enjoy it whilst it lasts, because I suspect it won’t end without unpleasant consequences.