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.

Note this will NOT automatically send you our ongoing research updates, for that register here.

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.

States drag feet on affordable housing, with Victoria the worst

From The Conversation.

Moral panic over recent increases in visibly homeless people in central Melbourne has brought to the fore the critical shortage of affordable housing across the metropolitan areas of Australia’s wealthiest cities. But living on the street is only the tip of the iceberg. Many more households are living in insecure and/or overpriced accommodation. Their plight is due to an undersupply of appropriately priced, sized and situated rental housing.

The Commonwealth government is reportedly planning to scrap the National Affordable Housing Agreement with the states. Without a clear alternative, the weakness of state policies, which lack clear targets and mechanisms for providing more and better affordable housing, adds to the problem. One state, Victoria, still doesn’t have an affordable housing strategy.

South Australia’s strategy has 15% inclusionary zoning as one of several mechanisms to achieve affordable housing targets. Western Australia provides regular progress updates on the regional targets of its Affordable Housing Strategy 2010-2020. Tasmania adopted a ten-year strategy in 2015.

New South Wales has had affordable housing policies in place since 2009. The NSW government has a new plan to build more social housing and improve existing stock. Queensland released a draft strategy in March 2016.

While these state policies vary in their success, Victoria does not even have a strategy to critique.

Victoria’s toxic planning legacy

No doubt Premier Daniel Andrews inherited several industrial-strength cans of toxic planning waste when Victorian Labor won office in November 2014. This legacy came not only from the Liberals, but from the earlier Bracks-Brumby Labor government.

Under the 2000s Labor government, the fourth new metropolitan strategy in four decades, Melbourne 2030, largely failed to stop sprawl. The main excuse for sprawl – that increased and largely unregulated housing supply would magically enable affordability – had become a sad joke.

As former Labor adviser Joel Deane’s book Catch and Kill shows, inability to respond to basic public concerns about planning and transport was perhaps the most significant factor in Labor’s 2010 election defeat.

If Labor had been ineffective in creating new affordable housing, the Liberals’ planning decisions between 2010 and 2014 were disastrous. Australia’s largest urban renewal site – Fishermans Bend – was drastically up-zoned from Industrial to Capital City (also known as “Anything Goes”). They did this without extracting a cent in added value from landowners towards affordable housing – or any other infrastructure.

Huge parts of the southeastern suburbs – Liberal strongholds – were essentially walled off from new housing, even though these had some of the best school and transport infrastructure to serve a rapidly growing population. Hundreds of job cuts meant the civil service lost experience and capacity to do better.

A long wait for action on affordable housing

The Victorian Labor 2014 election platform stated:

All Victorians have a right to safe, affordable and secure housing.

Yet in more than two years since its election, the Labor government has not completed any of the major reforms that would enable affordable housing.

Plan Melbourne’s “refresh” has not been published in its final form. The Residential Tenancies Act still has to be strengthened. The residential zone review hasn’t been completed.

Perhaps most disturbingly, we are still waiting for the results of the early announcement that the state treasurer was going to work with the planning and housing ministers to develop an integrated affordable housing strategy.

A new advisory body, Infrastructure Victoria, published a 30-Year Infrastructure Strategy in December 2016. “Social housing” (public and non-profit) was one of its top three priorities. However, compared with principles of “a good plan”, the affordable housing section of this strategy does not pass the test.

According to the literature on plan analysis, good plans should have seven elements: a clear vision; specific goals; a fact base informing alternatives; a spatialised sense of what goes where; a very specific implementation plan, with costs, timelines and responsible authorities; a monitoring and evaluation plan; and specific horizontal (across all parts of government, the private sector and civil society) and vertical (alignment between national, state and local government) integration.

Vancouver shows how to do it

The City of Vancouver’s Housing and Homelessness Strategy 2012-2021 is an example of an affordable housing plan that ticks the boxes. It has a clear vision embodied in the strategy’s subtitle:

A home for everyone.

The strategy sets specific numeric housing targets. These cover everything from supportive housing for homeless people with mental disabilities, to social housing, market rental and home-ownership options.

These targets are based on a robust and transparent analysis of housing trends across the city. While all subsequent neighbourhood plans are intended to achieve a mix of dwelling cost and size, there is a particular emphasis on locating supportive housing near areas with significant homeless populations.

Vancouver has shown what a comprehensive affordable housing strategy can achieve. Kenny Louie/flickr, CC BY

The partnerships with other levels of government, private developers and non-profit providers are comprehensive. A new Vancouver Affordable Housing Authority has been established to coordinate these efforts. Since the report’s adoption, further mechanisms such as a community land trust have been established. Annual reporting against the targets is available on the City of Vancouver’s website.

In contrast, Infrastructure Victoria is an advisory body to state government, not an implementation agency. Its vision of a “thriving, connected and sustainable Victoria where everyone can access good jobs, education and services” begs the question of how progress towards these attributes would be measured.

Infrastructure Victoria does estimate an extra 30,000 affordable homes are needed over the next ten years. But it admits this figure is not well justified, due to a lack of good information on affordable housing deficits.

It recommends further work on an affordable housing plan with specific funding streams. However, this cannot really be expected to be the plan that “tackles [the] affordable housing shortage”, as its own website boasted of the draft report.

At best, Infrastructure Victoria’s plan is a baby step. It does clearly state the importance of social housing as critical infrastructure. It also begins to justify mechanisms that could achieve some scaling up of affordable housing outcomes.

But the public housing waiting list now has more than 35,000 names. About 120,000 households receiving Commonwealth Rent Assistance are still unable to afford living where they do. That includes 50,000 households in the lowest income bracket. And another one million new households are expected to move into Victoria within the 30-year timeframe of the infrastructure strategy.

This all means that baby steps will not be enough to prevent rapidly increasing homelessness.

Author: Carolyn Whitzman , Professor of Urban Planning, University of Melbourne

UK Home Prices Rise Again

Latest data from the UK’s ONS shows that average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013. However, annual growth has been weaker in the second half of 2016 compared with the first half of the year. The average UK house price was £220,000 in December 2016. This is £15,000 higher than in December 2015 and £3,000 higher than last month.

The main contribution to the increase in UK house prices came from England, where house prices increased by 7.7% over the year to December 2016, with the average price in England now £236,000. Wales saw house prices increase by 4.7% over the last 12 months to stand at £148,000. In Scotland, the average price increased by 3.5% over the year to stand at £142,000. The average price in Northern Ireland currently stands at £125,000, an increase of 5.7% over the last 12 months.

On a regional basis, London continues to be the region with the highest average house price at £484,000, followed by the South East and the East of England, which stand at £316,000 and £282,000 respectively. The lowest average price continues to be in the North East at £129,000.

The East of England is the region which showed the highest annual growth, with prices increasing by 11.3% in the year to December 2016. Growth in the South East was second highest at 8.5%, followed by London at 7.5%. The lowest annual growth was in the North East, where prices increased by 4.1% over the year.

Why housing supply shouldn’t be the only policy tool politicians cling to

From The Conversation.

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.

In fact, approvals are running at about double the actual dwelling construction levels, so “fixing” the planning system is unlikely to have much impact on dwelling supply levels.

High-density supply fuels land speculation

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: Chair of Urban Planning and Policy, University of Sydney;Professor – Urban and Regional Planning, University of Sydney


A Blow To The Negative Gearing Bonanza

The AFR says Bankwest has changed its affordability calculators for investor loans, such that the tax benefits are now excluded from the assessment. This reduces the amount prospective investors can get in a loan, and it also may impact some existing customers.

The post-tax affordability assessment explains why on one hand some banks have been able to lend hard on investor loans yet on the other hand, on a pre-tax basis many investors have little wriggle room if rates raise, as we highlighted recently.

Note though that not all lenders were so generous in their handling of tax benefits, and Bankwest appears now to have revised their approach to meet APRA guidelines – see specifically APG 223 within the Residential Mortgage Lending prudential practice guide.

Another market change which will further rightly tighten investor lending.

The move was confirmed by The Real Estate Conversation.

Bankwest has confirmed it will remove the tax advantages of negative gearing when determining whether or not applicants are eligible for investor loans.

The changes will mean the amount investors can borrow will be lower, and could result in the bank, a subsidiary of the Commonwealth Bank, writing fewer investment loans.

The Commonwealth Bank is expected to announce similar moves.

The Australian Financial Review reports of speculation Bankwest and the Commonwealth Bank are close to breaching the Australian Prudential Regulation Authority’s 10 per cent growth cap for investor loans.

Mark Chapman, a director of tax accountants H&R Block, told The Australian Financial Review the change would be most dramatic for existing borrowers, who will have to deal with altered rules.

“The impact of Bankwest’s decision on new borrowers is not too bad – they can just borrow through another bank,” he said. But for existing BankWest borrowers, the change is retrospective he said.

“They borrowed in good faith from this bank under one set of rules, now they are having another set of rules imposed on them.”

Australian Broker said:

“For customers who operate their investment property at a loss, where the income of the investment property does not exceed the costs, the related tax benefit will no longer be included in Bankwest’s calculation for serviceability of the loan,” the spokesperson said.

The changes will impact all new applications involving an investment lending facility as well as any existing deals which may require a new serviceability calculation.


RBA Warns on Housing – Sort of…

Hidden away at the end of the 62 page Statement on Monetary Policy is a gem of a paragraph relating to housing. I think this is the first warning I can remember on the subject, as up to now the RBA has been remarkable bullish. Will this mean the regulators efforts to control the risks be accelerated?

Housing prices have picked up over the second half of 2016, most notably in Sydney and Melbourne. This could see more spending and renovation activity than is currently envisaged.

On the other hand, a widespread downturn in the housing market could mean that a more significant share of projects currently in the residential construction pipeline is not completed than is currently assumed. While this is a low-probability downside risk, it could be triggered by a range of different factors.

Low rental yields and slow growth in rents could refocus property investors’ attention on the possibility of oversupply in some regions.

Although investor activity is currently quite strong, at least in Sydney and Melbourne, history shows that sentiment can turn quickly, especially if prices start to fall. Softer underlying demand for housing, for example because of a slowing in population growth or heightened concerns about household indebtedness, could also possibly prompt such a reassessment.

Now, you can read this a couple of ways, first it is a low-probability – they say, so not to worry. Or could it be that this is a way of getting housing expectations reset.

We have been highlighting potential risks in housing thanks to low income growth, sky-high debt and rapid growth in the investment sector at a time when rental yields are under pressure.

At very least it seems the housing expectation sails are being trimmed, and should things go bad later, the RBA can point back to the “I told you so” paragraph.

Lets see if the regulators get their act together now, though it is late in the day!


‘Speeding’ housing investors are pushing families too far

From The NewDaily.

Market watchers are expecting a bombshell to be dropped on the property market next week, with Commonwealth Bank reportedly about to close its doors to refinancing housing investors wishing to migrate from other banks.

Fairfax Media suggested this could send “shockwaves” through the property market – though whether it will cause a price correction is far from certain.

At present, the consensus view is that CBA is simply taking a breather from lending to investors so as not to breach the mortgage growth speed limit imposed by the regulator.

The Australian Prudential Regulatory Authority introduced the speed limit in late 2014, requiring banks to limit growth in their investment mortgage books to 10 per cent per annum.

But even if CBA does slam on the brakes on Monday, it won’t be nearly enough.

A broker’s view

One independent mortgage broker told The New Daily that the speed limit is a fairly weak measure for controlling the housing credit bubble because so many smaller lenders exist to pick up the overflow of demand from the big banks.

So an ANZ customer chasing a better deal at CBA may now find their broker raking up names they’ve never heard of.

AFG, for instance, offers what the broker calls a “white label” home loan built on funding from a number of other banks.

A confident investor should have no problem signing up with such a provider, although less savvy investors may baulk at moving away from the psychological safety of the big banks.

A second flaw

The net result of the speed limit is to slow lending to a degree, but it has likely helped smaller lenders take additional market share.

The latter is not a stated goal of the policy, and even the real goal – to reduce investor activity – really doesn’t go far enough.

To understand why, two factors need to be considered. The first is population growth and the second is inflation. Consumer price index inflation is currently running at 1.5 per cent per annum, and population growth is around 1.4 per cent.

Combining those two figures, the amount of money lent against the housing market would have to grow just under 3 per cent to stay ‘steady’ in relation to the rest of the economy.

In fact, although the value of mortgage debt in Australia has grown by an average of 8 per cent since the onset of the GFC, the last calendar year saw banks’ mortgage books grow by almost exactly the ‘steady’ amount – 2.9 per cent.

That’s partly due to lower volumes of homes changing hands, and partly due to a slow-down in house price growth.

Why 10 per cent is too much

What’s alarming about the 10 per cent speed limit, which CBA is apparently hitting and other banks are getting close to, is that it’s more than three times the ‘steady’ rate of growth.

That means the mortgage market continues to be rebalanced away from owner-occupiers and towards investors.

It is investors driving extraordinary price growth in Sydney – up more than 60 per cent since 2012 – and Melbourne, and it is first home buyers and young families being priced out of the market.

This has to change. One suggestion, from economist Leith van Onselen, is to halve the speed limit to 5 per cent. That would still see investment loans growing faster than the population and inflation, but it would at least be a start.

Let’s get the language right

It would also be useful if media commentators could start focusing on the younger, more vulnerable portion of the housing market rather than celebrating the windfall capital gains made by the older and wealthier portions.

To illustrate what I mean, I’ve prepared two charts from the same set of ABS numbers for Sydney – one with a happy upward slant, the other with a depressing downward slide.

The first, which many readers will be familiar with, shows the huge capital gains investors have made in the past few years –expressed as the house price to income ratio.

The second looks at this period of financial exuberance from the first home buyer’s perspective where the question is not “how many incomes is my asset worth?” but rather “how much of the asset is my income worth?”

From that perspective, the appropriate headline is not ‘House prices boom in Sydney’ or ‘Investor returns at record levels’ – it is ‘Purchasing power of wages plummets’ or ‘Housing affordability tumbles’.

Rates on hold, but housing affordability remains ‘hotly debated’

From The Real Estate Conversation.

The Reserve Bank has left interest rates at historic lows as economic conditions improve, but the property industry says other measures are required to improve housing affordability.

The Reserve Bank of Australia left interest rates on hold at its first meeting of 2017, with rates held at a record low of 1.50 per cent.

Governor Philip Lowe noted in his statement that growth in China was stronger in the second half of 2016, that global business and consumer confidence is improving, and that global inflation is rising. He also said recent rises in commodity prices are increasing Australia’s national income.

Lowe said the RBA expects Australian economic growth in the final quarter of 2016 to firm, and re-affirmed the RBA is forecasting growth to pick up to “around 3% over the next couple years”. Lowe said Australian inflation is heading back towards the target range.

In his November 2016 statement, Lowe said cutting rates further may not be in the “public interest” if it further increased household debt.

Real Estate Institute of New South Wales President John Cunningham said the central bank’s decision was no surprise, but said he expects housing affordability to be “hotly debated” this year.

“An emphasis will again be placed on first homebuyers and there will be much debate this year on ways to improve their plight,” he said.

“A review of stamp duty is urgently required and should focus on first homebuyers and older Australians,” said Cunningham.

The RBA cut interest rates twice in 2016, first in May and then in August. However, banks are independently increasing interest rates for investors as increased global economic uncertainty raises their borrowing costs.

Laing+Simmons managing director and REINSW president-elect Leanne Pilkington echoed Cunningham’s sentiment, saying rate cuts are not the answer to improving housing affordability. Further rate cuts are not required in the current housing cycle, she said.

“Obtaining housing finance at attractive terms is already possible for those with the means,” said Pilkington.

“It’s those without the means – stuck in the rental cycle or unable to accumulate a suitable deposit – that face the greatest challenge in the market,” Pilkington said.

“Further rate cuts are not a solution to the problem. Between government and the industry, we need to table some alternative solutions to help people buy their first home,” she said.

“From a housing industry perspective,” said Pilkington, “rates are already low and have been for some time, so that piece of the affordability puzzle is in place.”

Like Cunningham, Pilkington believes changes to stamp duty are necessary to address housing affordability problems. “It’s through other avenues like stamp duty reform that improvements in affordability need to be addressed,” she said.

Pilkington also said making downsizing more viable for older Australians, introducing a Government-backed savings scheme to help people save for a deposit, and minimising the cost of mortgage insurance could all alleviate housing affordability problems in Australia.

The Property Council of Australia welcomed the statement by Lowe on interest rates, saying it was a sober assessment of housing markets.

The governor’s statement said “conditions in the housing market vary considerably around the country”.

Ken Morrison, chief executive of the Property Council of Australia, said the statement confirms the current situation of “prudent lending practices and the best environment for renters in a generation with consistent low rental growth.”

“The deterioration in housing affordability is a serious problem in a number of our major cities, but is not an Australia-wide problem,” said Morrison.

1300 HomeLoan managing director John Kolenda said the RBA will remain on the sidelines until uncertainty about the economic impact of US president Trump becomes clearer.

“The RBA will stay on the sidelines and assess the impact on the global economy although our domestic economy appears stable with no need to adjust interest rates,” said Kolenda.

Kolenda said while the RBA’s cash rate is unlikely to change in the short term, confusion could arise from varying mortgage rates, and reinforced his recommendation to use a mortgage broker.

The Deadly Embrace Of Housing

The latest RBA Chart pack, out today, with data to early February 2017 really highlights the critical role housing plays in household finances. If the home price growth music were to stop, things would get tricky.

Overall net wealth continues to lift, supported by rising dwelling prices, (and fully priced financial assets).

Everyone seems to benefit from high home prices.

Investment loan flow is now as large as owner occupied flow, as investors continue to bet on housing for future growth, in a low interest rate environment.

House prices continue to rise following slower growth earlier in the year.

Household debt continues to grow, whilst ultra-low interest rates make interest repayments manageable – though of course there are mortgage rate rises in the works.