The Property Imperative 8 Now Available

The latest and updated edition of our flagship report “The Property Imperative” is now available with data to end February 2017. This eighth edition updates the current state of the market by looking at the activities of different household groups using our recent primary research, and other available data. It features recent work from the DFA Blog and also contains new original research.

In this edition, we look at mortgage stress and defaults across both owner occupied and investment loans, housing affordability and the updated impact of “The Bank of Mum and Dad” on first time buyers.

We also examine the latest dynamics in the property investment sector including a review of portfolio investors, and discuss recent leading indicators which may suggest a future downturn.

The overall level of household debt continues to rise and investment loans are back in favour at the moment, though this may change. Here is the table of contents.

1       Introduction. 
2       The Property Imperative – Winners and Losers. 
2.1         An Overview of the Australian Residential Property Market.
2.2         Home Price Trends. 
2.3         The Lending Environment. 
2.4         Bank Portfolio Analysis. 
2.5         Broker Shares And Commissions. 
2.6         Market Aggregate Demand.
3       Segmentation Analysis. 
3.1         Want-to-Buys. 
3.2         First Timers.
3.3         Refinancers.
3.4         Holders. 
3.5         Up-Traders.
3.6         Down-Traders. 
3.7         Solo Investors. 
3.8         Portfolio Investors.
3.9         Super Investment Property. 
4       Mortgage Stress and Default.
4.1         State And Regional Analysis. 
4.2         Stress By Household Profile. 
4.3         Stress By Property Segments.
4.4         Stress By Household Segments. 
4.5         Post Code Level Analysis.
4.6         Top 100 Post Codes And Geo-mapping. 
5       Interest Rate Sensitivity. 
5.1         Owner Occupied Borrowers. 
5.1.1          Sensitivity by Loan Value. 
5.2         Cumulative Sensitivity. 
5.2.1          Owner Occupied Borrowers. 
5.2.2          Investment Loan Borrowers. 
5.2.3          Owner Occupied AND Investment Loan Borrowers. 
6       Housing Affordability And Hot Air.

Request the free report [61 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

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Auction Volumes Surge Past 2,000 This Week

From CoreLogic.

The combined capital city preliminary clearance rate remained in the high 70 per cent range over the week, despite auction volumes reaching the highest level so far this year.  There were 2,280 dwellings taken to auction this week, significantly increasing from 1,591 over the previous week, with 77.0 per cent of auctions reported as successful.  The larger number of auctions was driven by a substantial rise across the Sydney and Melbourne markets, while the number of auctions held actually saw a decrease across the smaller capital cities over the week.  The strongest clearance rates, based on preliminary data, were in Sydney and Canberra, where 83.5 per cent and 81.5 per cent of auctions returned a successful result.  Melbourne also recorded a strong preliminary clearance rate, with 76.7 per cent of auctions clearing.  The preliminary combined capital city clearance rate was higher this week than what was seen over the same period last year, however, the number of auctions held was lower, with 2,347 auctions held over the same week last year, returning a 71.8 per cent clearance rate.

Time For Some Straight Talk On Credit Card Rates

The ANZ move to cut rates on some of its cards will stimulate more discussion on the economics of the credit card business. It may appear a bold move, but we are not so sure.

Actually all the the various bank and ABA initiatives are not necessarily going to help to rebuild trust in the banks. Like a running sore, the ongoing exposure may well reinforce current negative consumer perceptions. A point event like a specific review might actually draw the poison more effectively!  And yes, there are major issues to address.

But, today we look at credit card economics. To do this we use the data provided by the RBA.  They show the number of card accounts (not the same as card numbers because some accounts will have multiple cards on them) has been growing, to approach 16.7 million accounts. The number of transactions on these accounts are also growing, with 241m transactions to December 2016.

The average value of a transaction has remained relatively static, with the average purchase around $120 and the average cash withdrawal around $380. But significantly the proportion of account balances which are accruing interest is reducing, with around 40% of accounts being cleared off each month. Households who can clear their cards should do so to avoid interest costs.

We see the monthly flows of new transactions and repayment match quite closely.

The 60% of balances which are revolving incur interest costs. The data shows despite cuts to the RBA cash rate, rates on both low rate and standard rate cards remain high, and indeed, some low rate cards have moved up recently. As a result the average interest margin between the cash rate and the charged rate is higher than it has ever been, on average close to 20%.  This puts the ANZ 2% cut on some cards into perspective!

So, now we know the proportion of cards which are revolving, and the margin, we can estimate the real net cost to the average revolving card holder. We estimate the typical account will incur a monthly interest charge of $57 each month they revolve, compared with $10 in 2003. In fact we see a stable cost until 2008, since when it has climbed substantially.  This is worth about $80m a month to the banks at the current margins.

To broaden the analysis, banks have also been slugging households with higher credit card fees. Again the RBA says, fees rose 6.6% in 2015 (last year of available data) and they took $1.5 billion in card fees in that year. In the past four years, card fees have risen significantly faster than inflation.

Finally, overall personal credit growth has fallen in recent times, as mortgage borrowing roar ahead. This is consistent with our observation that more households are repaying their cards each month.

Later we will look at the broader economics of cards, taking account of loyalty schemes and merchant fees.  Meantime you can read our earlier analysis of credit card economics by segment. But from a margin view, 2% is hardly a generous concession.

Australia needs to reboot affordable housing funding, not scrap it

From The Conversation.

Federal government ministers have cast a cloud over funding for social housing and homelessness services, leading to speculation that the National Affordable Housing Agreement (NAHA) may not survive the 2017 budget.

Treasurer Scott Morrison and Assistant Treasurer Michael Sukkar point to the recent Report on Government Services, which shows the number of public housing properties has fallen, as evidence of the NAHA’s “abject failure”. Sukkar said:

We believe it’s crucial that every dollar of spending on affordable housing programs increases the number and availability of public and social housing stock. Clearly, this objective has not been met.

It should be no surprise that Australia’s social housing has been largely static for 20 years. Everything we know about the system tells us it is not funded to even cover the costs of its ongoing operation, let alone growth to meet the needs of an expanding population. Aside from a one-off boost under the 2009 federal economic stimulus plan, social housing has been on a starvation ration for decades.

The whole system system is effectively being run at a loss. So, from the perspective of state governments, building a new public housing dwelling is just one more way of losing money.

The federal government has also long lamented the lack of transparency about how states and territories spend their NAHA funds – about AS$1.5 billion a year. And there are glaring gaps in the evidence about the operations and performance of public housing authorities.

In failing to act on a 2009 commitment to modernise and enhance the Report on Government Services metrics, the states and territories have placed themselves in a weak position to rebut claims of ineffective financial management.

That said, everyone who has any contact with the public housing system knows it to be grossly underfunded. One-off studies occasionally illuminate the scale of the issue. For example, a 2013 New South Wales Audit Office report found a $600 million annual operating deficit for that state’s public housing. But no-one can easily quantify the extent of the problem using routinely published data.

A snapshot of social housing in Australia

Around 320,000 of Australia’s approximately 428,000 social housing dwellings remain under public housing authority control. This stock was amassed through a long series of funding agreements between federal and state and territory governments. These were known as the Commonwealth-State Housing Agreements until their 2009 NAHA rebranding.

Australia has had federal-state housing agreements since the Labor government of Ben Chifley initiated the first one in 1945. AAP

From the first Commonwealth-State Housing Agreement in 1945, the basic arrangement was that the federal government would lend funds to state housing authorities to build houses. The states would cover the ongoing costs from the rents paid by working-class tenants.

And, at least to begin with, the housing authorities did build. They made a significant contribution to housing supply, amounting to roughly one in six houses built between 1945 and 1965.

From the early 1970s, the housing authorities were directed, justifiably, to provide more housing to low-income households unable to pay full “market” rents. However, their capital funding also went into a long decline. With the exception of a brief period in the mid-1980s, housing authorities never again built at their earlier rate.

A number of interlocking problems set in. Social housing’s declining share of the housing stock became more tightly rationed to the lowest-income households. This eroded the system’s rent base. At the same time, its ageing buildings and households with greater support needs increased its costs.

Two landmark studies by Jon Hall and Mike Berry charted the implications of these developments for the finances. At the end of the 1980s, all but one of the housing authorities ran an operating surplus. By 2004, all but one ran an operating deficit.

Various attempts to improve the situation have been made. The 1989 Commonwealth-State Housing Agreement switched federal funding from loans to grants; the 1996 agreement allowed federal funds to be spent on recurrent expenses. In the early 2000s, rebates on social housing rents were reduced, slightly increasing revenue.

Modest amounts of public housing have also been transferred into the hands of not-for-profit community housing providers. Partly, this is to take advantage of the eligibility of community housing tenants for Commonwealth Rent Assistance. But although this often enables these providers to run a small operational surplus, it isn’t enough to fund stock replacement or any significant expansion.

Meanwhile, the overall stock has been eaten away, through market sales of public housing, and run down, through skimping on repairs and maintenance. Both are unsustainable strategies.

Running a system without good data

If the broad outlines of the problem are clear, there are major deficiencies in the data as to the details. The Hall and Berry analysis is now dated. There is no current evidence base that shows transparently and consistently what the social housing system in each state and territory costs, and how these costs are met.

For example, the Report on Government Services purports to show the “net recurrent cost per dwelling” for each state and territory. But this does not differentiate between distinct expenditure components such as management and maintenance.

Our 2015 research found that this metric was a “black box”, subject to implausibly large variations across jurisdictions. These reflected the vagaries of departmental restructures, rather than a sound accounting of social housing operations.

There is little doubt that all public housing authorities are now in deficit. However, the Report on Government Services provides no data on the relative scale of these funding shortfalls. Nor do governments routinely reveal the scale of system costs still met by tenants’ rents, nor through stock sales.

What should a rebooted NAHA do?

Although the NAHA does it inadequately, an enduring program of federal funding for operational expenses is essential to sustain the social housing system. Such funding cannot be “replaced”, as Morrison has suggested, by a government-backed aggregated bond financing model.

The bond aggregator model depends on social housing providers having a durable subsidy from government that pays the difference between their ongoing costs and the revenue from rent that low-income tenants can afford.

Instead, NAHA should be rebooted to deliver three things:

  • capital funding for new social housing stock, distributed according to an assessment of current and projected needs in each state and territory;
  • recurrent funding, distributed according to the number of social housing dwellings in each state and territory and an assessment of reasonable net recurrent costs; and
  • clear accounting by social housing providers for costs of provision and the contributions of tenants, government funding and other sources of income towards meeting these costs.

Many in the social housing world would agree the NAHA framework is far from transparent and that there is no certainty that NAHA money is optimally spent. But a ministerial focus on these issues while ignoring the system’s chronic underfunding smacks of re-arranging deckchairs.

Rather than scrapping the NAHA, the system should be rebooted, to properly fund both the growth and ongoing operations of social housing. This must be done on the basis of clear targets for the level of need to be met and the reasonable costs of providing the service.

Authors: Research Fellow, Housing Policy and Practice, UNSW;Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW

 

Baby Boomers digging into retirement savings to help their kids buy houses

From StartsAt60.

We’ve all heard stories about some Baby Boomer parents helping their kids out to buy their first home.

But as a new report, released by Digital Finance Analytics, has revealed, it’s becoming a growing trend across the country.

The report shows a growing number of Baby Boomer parents are giving their adult children money a leg up to get into the property market.

In fact, 54% of first home buyers who entered the property market in the last quarter of 2016 had financial help from their parents.

According to the report, in the last quarter of last year, the average amount given by parents to help their children buy property was $85,000.

Digital Finance Analytics principal Martin North said many Baby Boomer parents were bringing forward their children’s inheritance, using rising equity in their property to fund their kids first home deposit.

“Some are making a loan, others a gift,” he told Starts at 60.

“This is clearly eroding savings and equity for retirement. It’s replacing guarantees.”

While many parents are more than happy to give their children the money, Mr North said it could create some issues for parents down the track – particularly at retirement age.

“If it’s a gift, then the capital is gone. If it’s a loan, this can lead to difficulty later, especially if the terms are not clear, or the kids decide not to repay,” he said.

“Given that many Baby Boomers will not have sufficient super to funder their longer than expected retirement, this could put more pressure on the pension budget and create hardship for some in the future.

“I’m not sure many really understand the potential implications, but they also want to help their kids.”

This chart shows the ages at which parents are giving money to their kids. Source: Digital Finance Analytics

This chart shows the ages at which parents are giving money to their kids. Source: Digital Finance Analytics

The report found that parents aged between 55 and 60 were most likely to give their kids money for a home deposit, followed by those aged between 60 and 65.

Interestingly, that number drops once parents retire after the age of 65.

The children receiving the money are aged mostly between 30 and 35 (41.2%) and 35 and 40 (33.6%).

So, what do the Baby Boomers think of the report’s finding?

Well, we put the age old question of “would you give money to your children to help them buy their first home?” to Starts at 60 readers and the response was varied.

Several SAS readers shared stories of how they gave money to their children.

Joanne Tonkin-Bride said she gave more than double the average of $85k to each of her children.

“My ex was a very good provider and therefore were fortunate enough to be able to do so,” she said.

“l would rather see my children happy now, than after l’m dead and gone.”

Fellow SAS reader Lorrain Lidston also provided for her daughters’ home deposits.

“When our parents passed, we sold their property and split it with our two girls, having 1/3 each,” she said.

“Better they enjoy it now than when we are gone.”

Some other readers loaned money to their children, while others acted as guarantors.

Unfortunately, as some readers pointed, many Baby Boomers can’t afford to give their kids help.

Many of you wish you could help them, but as you would know, a lot of Boomers are struggling.

“I wish we had been able to have that opportunity, we have been frugal all our lives but did not have the money to put into Super, gave them a private school education instead,” SAS reader Pamela Sanders said.

And then there are some Baby Boomers who pointed out that their parents didn’t help them out, and that their kids need to work hard and save for themselves.

“I had to work for my first house. No one helped me.” SAS reader Ruth Hourigan said.

“I personally believe that is a major problem with todays generation. They can’t be bothered doing it for themselves.”

You might be wondering what is driving the trend in Baby Boomers helping their kids buy their first home?

Well, it all comes down to the very topical issue of housing affordability.

Mr North said that housing affordability was “shot” for purchasers without parental help, and he’s pointing the finger at high house prices, banks demanding larger deposits and a reduction in first home buyer grants.

“With parental help they may be able to buy (either for OO or investment purposes), but this does not help affordability in the longer term as it will continue to push prices higher, alongside ongoing demand from investors,” he said.

“Regulators may be pressing the banks to curtail lending growth a bit, but demand, especially down the east coast is rabid.

“Savers of course get lower returns on deposits which makes savings for the house deposit more challenging without a circuit breaker like the ‘Bank of Mum and Dad’.”

Interestingly, another report released this week shows the majority of Australians across all ages believe the Great Australian Dream is becoming harder to achieve.

The Evolving Great Australian Dream report, released by Mortgage Choice, has found an increasing number of us don’t believe the Great Australian Dream of  “a free-standing house on a quarter-acre block in the suburbs” is achievable.

The report found 85% of Australians over the age of 50 don’t believe the Great Australian Dream is achievable, compared to 91.6% of Australians under the age of 30.

Mortgage Choice CEO John Flavell said Australians struggling to get a foot on the property ladder needed help to achieve their dream of home ownership.

To date, we have heard a myriad of suggestions from both sides of parliament in relation to what should be done to address the issue of housing affordability,” he said.

Home ownership should be achievable for all Australians, and as a nation, we should do what it takes to make that a reality.”

And the trend of housing affordability is only set to get worse, with more first home buyers set to rely on their parents to make home ownership a reality.

Mr North pointed to the UK, where more than 70% of first home buyers were getting help from the “Bank of Mum and Dad”.

“For as long as housing affordability is out of kilter with flat or falling incomes, many won’t be able to enter the market without help,” he said.

“My point is these intergeneration issues are not well understood. There are risks for both parties, and creates an additional divide – those wanting to buy with affluent parent can, those without this benefit are excluded.It is a symptom of a failed housing market. And failed Government policy to say nothing of poor RBA judgement.”

ANZ’s new credit card rate isn’t making the cut, say critics

From The NewDaily.

When you’re doing well, a little generosity is appreciated – except if it is too little, which is what consumer advocates and MPs are saying about ANZ’s surprise announcement that it will be trimming interest rates on its credit cards as of February 28.

And make no mistake, ANZ is doing very well indeed.

Last month it announced that profits for the most recent quarter had hit $2 billion, an increase of 31 per cent on the same period last year. More than that, ANZ Banking Group chief Shayne Elliott is upbeat about the burden of bad debts on his outfit’s books and recently scaled back estimates of that red-ink liability.

So given the ANZ’s strong profit result, they can afford to give users of its credit cards a break, right?

Absolutely, says CHOICE’s Tom Godfrey, who doesn’t see the reductions as anything but a very small bone indeed.

Those reductions should have been much larger, Mr Godfrey said, casting the cuts as a case of too little and too late.

“It’s an attempt by ANZ to try and take the heat off themselves and the other banks to show they’re responding to community concerns,” he said, adding that “the big four banks are just not competitive”.

Mr Godfrey noted that the best interest rates – those offered by the credit unions – are under 10 per cent, and he wondered where ANZ’s rival banks found the gall to charge “toxic interest rates” of “around 18 or 19 per cent or higher”. The best credit card rates available in Australia can be as low as 8.9 per cent.

More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates, with the bank estimating that a typical consumer stands to save about $150 a year.

MPs take the credit

The government has praised the bank for the move, with Liberal MP Scott Buchholz saying ANZ has shown “commercial courage” in lowering its rates.

Malcolm Turnbull also claimed credit. Despite his government’s reluctance to conduct a Royal Commission into the banking sector, he said the newly-formed economics committee, before which the bank CEOs appear, had now provided real results.

“I am bringing the banks regularly before the house economics committee and they are being held to account for their actions and you are seeing real results,” Mr Turnbull said on Sunday.

Neither Mr Godfrey’s criticism nor South Australian Senator Nick Xenophon’s faint praise for the move ruffled the head of ANZ’s retail and commercial unit, Fred Ohlsson, who crowed that the reductions mean customers will have “the best rate available from any of the major banks or any of the regional banks owned by the majors”.

ANZ estimates that a typical consumer stands to save about $150 a year under the new rates.

And that’s the whole point, according to Senator Xenophon, who scoffed that ANZ customers have good reason to be even more miserly with their gratitude than the bank has been with its rate cuts.

“The gap between the official cash rate and credit card rates has never been higher,” he said.

“We really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” said Senator Xenophon, who has been a strong backer of Labor leader Bill Shorten’s call for a royal commission into the banking industry.

Mr Buchholz cited the grilling late last year of bank executives who were dragged before a parliamentary inquiry as a prime factor motivating Sunday’s announcement.

“We will have the banks appearing in the next fortnight in Canberra, along with the Australian Banking Association, where I will continue to take a similar line of questioning with those banks that haven’t taken the commercial choice to shift their interest rates yet.”

ANZ To Cut Some Credit Card Rates

ANZ has today announced it will reduce purchase interest rates on two credit cards by up to 2.00%pa, which is the lowest these rates have been for customers since 2003.

Effective Thursday 23 February, ANZ will reduce the purchase rate on its Low Rate Platinum card by 2.00%pa to 11.49%pa, and its Low Rate Classic card by 1.00%pa to 12.49%pa.

More than 500,000 existing ANZ Low Rate accounts will benefit from the new rates with the majority of those customers who pay interest every month to save about $150 a year.

Announcing the changes, Group Executive Australia Fred Ohlsson said: “Our customers with Low Rate accounts are typically middle income Australians who predominantly use their credit card for everyday household purchases, such as groceries.

“We’ve listened to customer feedback about credit card rates and decided our Low Rate customers would benefit most from a rate reduction as they are more likely to have ongoing debt from month to month. These changes mean they will have the best rate available from any of the major banks or any of the regional banks owned by the majors,” Mr Ohlsson said.

ANZ’s Low Rate Classic card also offers the lowest annual fee of the major banks for similar cards at $58, and has a minimum credit limit of $1000 making it accessible to a wide range of customers.

The Low Rate Platinum card has an annual fee of $99 and a minimum credit limit of $6000. It also comes with a range of insurances, including overseas travel and medical, and up to nine additional card holders at no extra cost. Both cards feature up to 55 interest free days on purchases.

Key crossbench senator Nick Xenophon welcomed the announcement, but said the banks needed to do more to address the cost of credit cards.

“The gap between the official cash rate and credit card rates has never been higher and I think that we really need to look at some form of either greater market competition, or the banks need to really explain themselves in gouging consumers in this way,” he told ABC TV on Sunday.

Tackling housing unaffordability: a 10-point national plan

From The Conversation

The widening cracks in Australia’s housing system can no longer be concealed. The extraordinary recent debate has laid bare both the depth of public concern and the vacuum of coherent policy to promote housing affordability. The community is clamouring for leadership and change.

Especially as it affects our major cities, housing unaffordability is not just a problem for those priced out of a decent place to live. It also damages the efficiency of the entire urban economy as lower paid workers are forced further from jobs, adding to costly traffic congestion and pushing up unemployment.

There have recently been some positive developments at the state level, such as Western Australia’s ten year commitment to supply 20,000 affordable homes for low and moderate income earners. Meanwhile, following South Australia’s lead, Victoria plans to mandate affordable housing targets for developments on public land. And in March the NSW State Premier announced a fund to generate $1bn in affordable housing investment.

But although welcome, these initiatives will not turn the affordability problem around while tax settings continue to support existing homeowners and investors at the expense of first time buyers and renters. Moreover, apart from a brief interruption 2008-2012, the Commonwealth has been steadily winding back its explicit housing role for more than 20 years.

The post of housing minister was deleted in 2013, and just last month Government senators dismissed calls for renewed Commonwealth housing policy leadership recommended by the Senate’s extensive (2013-2015) Affordable Housing Inquiry. This complacency cannot go unchallenged.

Challenging the “best left to the market” mantra

The mantra adopted by Australian governments since the 1980s that housing provision is “best left to the market” will not wash. Government intervention already influences the housing market on a huge scale, especially through tax concessions to existing property owners, such as negative gearing. Unfortunately, these interventions largely contribute to the housing unaffordability problem rather than its solution.

But first we need to define what exactly constitutes the housing affordability challenge. In reality, it’s not a single problem, but several interrelated issues and any strategic housing plan must specifically address each of these.

Firstly, there is the problem faced by aspiring first home buyers contending with house prices escalating ahead of income growth in hot urban housing markets. The intensification of this issue is clear from the reduced home ownership rate among young adults from 53% in 1990 to just 34% in 2011 – a decline only minimally offset by the entry of well-off young households into the housing market as first-time investors.

Secondly, there is the problem of unaffordability in the private rental market affecting tenants able to keep arrears at bay only by going without basic essentials, or by tolerating unacceptable conditions such as overcrowding or disrepair. Newly published research shows that, by 2011, more than half of Australia’s low income tenants – nearly 400,000 households – were in this way being pushed into poverty by unaffordable rents.

Thirdly, there is the long-term decline in public housing and the public finance affordability challenge posed by the need to tackle this. In NSW, for example, 30-40% of all public housing is officially sub-standard.

“Why the “build more houses” approach won’t work

A factor underlying all these issues is the long-running tendency of housing construction numbers to lag behind household growth. But while action to maximise supply is unquestionably part of the required strategy, it is a lazy fallacy to claim that the solution is simply to ‘build more homes’.

Even if you could somehow double new construction in (say) 2016, this would expand overall supply of properties being put up for sale in that year only very slightly. More importantly, the growing inequality in the way housing is occupied (more and more second homes and underutilised homes) blunts any potential impact of extra supply in moderating house prices. Re-balancing demand and supply must surely therefore involve countering inefficient housing occupancy by re-tuning tax and social security settings.

Where maximising housing supply can directly ease housing unaffordability is through expanding the stock of affordable rental housing for lower income earners. Not-for-profit community housing providers – the entities best placed to help here – have expanded fast in recent years. But their potential remains constrained by the cost and terms of loan finance and by their ability to secure development sites.

Housing is different to other investment assets

Fundamentally, one of the reasons we’ve ended up in our current predicament is that the prime function of housing has transitioned from “usable facility” to “tradeable commodity and investment asset”. Policies designed to promote home ownership and rental housing provision have morphed into subsidies expanding property asset values.

Along with pro-speculative tax settings, this changed perception about the primary purpose of housing has inflated the entire urban property market. The OECD rates Australia as the fourth or fifth most “over-valued” housing market in the developed world. Property values have become detached from economic fundamentals; a longer term problem exaggerated by the boom of the past three years. As well as pushing prices beyond the reach of first home buyers, this also undermines possible market-based solutions by swelling land values which damage rental yields, undermining the scope for affordable housing. Moreover, this places Australia among those economies which, in OECD-speak, are “most vulnerable to a price correction”.

While moderated property prices could benefit national welfare, no one wants to trigger a price crash. Rather, governments need to face up to the challenge of managing a “soft landing” by phasing out the tax system’s economically and socially unjustifiable market distortions and re-directing housing subsidies to progressive effect.

A 10-point plan for improved housing affordability

Underpinned by a decade’s research on fixing Australia’s housing problems, we therefore propose the following priority actions for Commonwealth, State and Territory governments acting in concert:

  • Moderate speculative investment in housing by a phased reduction of existing tax incentives favouring rental investors (concessional treatment of negative gearing and capital gains tax liability)
  • Redirect the additional tax receipts accruing from reduced concessions to support provision of affordable rental housing at a range of price points and to offer appropriate incentives for prospective home buyers with limited means.
  • By developing structured financing arrangements (such as housing supply bonds backed by a government guarantee), actively engage with the super funds and other institutional players who have shown interest in investing in rental housing
  • Replace stamp duty (an inefficient tax on mobility) with a broad-based property value tax (a healthy incentive to fully utilise property assets)
  • Expand availability of more affordable hybrid ‘partial ownership’ tenures such as shared equity – to provide ‘another rung on the ladder’
  • Implement the Henry Tax Review recommendations on enhancing Rent Assistance to improve affordability for low income tenants especially in the capital city housing markets where rising rents have far outstripped the value of RA payments.
  • Reduce urban land price gradients (compounding housing inequity and economic segregation) by improving mass transit infrastructure and encouraging targeted regional development to redirect growth
  • Continue to simplify landuse planning processes to facilitate housing supply while retaining scope for community involvement and proper controls on inappropriate development
  • Require local authorities to develop local housing needs assessments and equip them with the means to secure mandated affordable housing targets within private housing development projects over a certain size
  • Develop a costed and funded plan for existing public housing to see it upgraded to a decent standard and placed on a firm financial footing within 10 years.

While not every interest group would endorse all of our proposals, most are widely supported by policymakers, academics and advocacy communities, as well as throughout the affordable housing industry. As the Senate Inquiry demonstrated beyond doubt, an increasingly dysfunctional housing system is exacting a growing toll on national welfare. This a policy area crying out for responsible bipartisan reform.

Auction Clearance High, Again

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.

Macroprudential – How To Do It Right

Brilliant speech from Alex Brazier UK MPC member on macroprudential “How to: MACROPRU. 5 principles for macroprudential policy“.

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.