ABS data released today confirms acceleration in the rate of growth in residential property prices in late 2016, said the Housing Industry Association.
In the year to the December 2016 quarter, dwelling price growth remained fastest in Melbourne (+10.8 per cent), followed by Sydney (+10.3 per cent). Dwelling prices also grew over the year to the December 2016 quarter in: Tasmania (+8.8 per cent); the Australian Capital Territory (+5.5 per cent); and Queensland (+3.8 per cent). Dwelling prices continued to decline in Western Australia (-4.1 per cent) and the Northern Territory (-7.0 per cent).
“This result for the December 2016 quarter shouldn’t surprise anybody. Nor should the large divergence in growth rates between Australia’s eight capital cities,” said HIA Chief Economist, Dr Harley Dale.
“The growth rate for attached dwelling prices is far slower than for existing houses, while Sydney and Melbourne price growth is way of ahead of other markets,” noted Harley Dale. “Sydney and Melbourne represent 40 percent of Australia’s population and some concern regarding the trajectory of house price growth in these two markets is warranted. Elsewhere, people still scratch their heads when it comes to a supposed housing price ‘boom’ because that simply hasn’t been their experience this cycle, even allowing for some recovery in prices in recent times.
“On the same day as we have received an update on dwelling prices there has also been speculation regarding some tension between members of Australia’s Council of Regulators, plus an (appropriate) questioning of banks’ out of cycle interest rate hikes.”
“People can make of that what they will, but let’s not lose sight of the main goal. Yes, there is some need to tighten lending conditions for some Australian housing markets in terms of geographical areas and dwelling types,” concluded Harley Dale. “However, a blanket tightening of lending conditions – as now seems to be emerging again – is the wrong policy and risks damaging Australia’s financial stability. That is the very opposite to the ideal outcome authorities want to achieve.”
Investors should expect house prices to fall between 5 and 10 per cent when the RBA begins tightening interest rates in 2018-19, but a 20 per cent ‘crash’ is unlikely, says AMP Capital.
In a note on Australian residential property, AMP Capital chief economist Shane Oliver said house prices are overvalued on most measures – but a disorderly crash is unlikely to eventuate.
The median multiple of house prices to household incomes in Australia is 6.6 times, Mr Oliver said.
By comparison, the same multiple 3.9 in the US and 4.5 in the UK. The Sydney multiple of price to income is 12.2 times, and in Melbourne it is 9.5 times, he said.
Looking at the ratio of house prices to rents adjusted for inflation, Australian houses are 39 per cent overvalued and units are 13 per cent overvalued, Mr Oliver said.
The rise in house prices has been accompanied by a surge in household debt prompted by low interest rates, he said.
But a general property crash in the vicinity of a 20 per cent fall would require one or more of three events to occur, Mr Oliver said: a recession, a sharp increase in interest rates and an oversupply of property.
Assessing each of the three criteria, Mr Oliver said a recession appears “unlikely”; interest rate hikes are not likely until 2018 and the RBA will take account of households’ greater sensitivity to higher rates; and a property oversupply would require the current construction boom to continue for “several years” (although he acknowledged the looming oversupply in some apartment markets).
As far as investors are concerned, residential property is “expensive on all metrics” and offers a very low net rental yield of 2 per cent or less, leaving investors “highly dependent on capital growth”, Mr Oliver said.
“But it is dangerous to generalise. Apartments in parts of Sydney and Melbourne are probably least attractive. [It is] best to focus on areas that have lagged behind.”
“Finally, investors need to allow for the fact that they likely already have a high exposure to Australian housing. As a share of household wealth it’s nearly 60 per cent,” Mr Oliver said.
The Federal Reserve’s widely anticipated rate rise is a reminder that while the US has learned from its housing market crash, our political leaders have created a record bubble of mortgage debt by shying away from reform.
When Fed chair Janet Yellen announced Thursday morning (Australian time) the fed-funds rate had risen to a new target range of 0.75 to 1 per cent, it caused barely a stir in markets. The New York Stock Exchange rose 0.8 per cent, as the Fed signalled future rate rises are likely to arrive sooner than previously expected.
These days the Fed telegraphs each move so effectively that markets no longer ask ‘will they move or not?’, but more ‘does that move reflect what’s really happening in the economy?’
Yes, with its years of super low rates, the Fed did set the scene for the 2009 housing collapse that hit global markets like a tsunami. But its three rate rises since the GFC have been spot on – late enough to avoid choking the recovery, but early enough to prevent inflation getting out of hand.
At a press conference Ms Yellen said the Fed is pushing rates back towards “normal” levels because the US economy has returned to reasonable health – growing at a “moderate pace”.
Meanwhile, Australia’s rates remain at historic lows. So what are we doing wrong?
The biggest reason we’re not seeing US-style growth is, gallingly, entirely self-imposed. Our political leaders have skewed the economy heavily towards real estate investing.
The vast sums of capital tied up in housing could be establishing new businesses, or backing the expansion of existing ones. Instead, we’re a nation hypnotised by capital gains that thinks buying and selling the same houses back and forth is a productive industry.
It all began in 1999, when treasurer Peter Costello cut capital gains tax to a rate well below the personal tax rates of middle- and upper-middle class Australians. It was one of the most economically harmful policies ever dreamt up in Canberra.
It did not take the nation’s accountants long to point out to clients that investing in a property, negatively gearing it for a few years, and then banking the capital gain at the new rate would slash the investor’s tax bills.
During the same period, the US was experiencing a credit bubble for different reasons – super low rates, plus the advent of sub-prime mortgages.
When the early ‘sub-prime’ phase of the GFC finally began to be felt, US house prices tumbled. And when the sub-prime crisis worked its way through the banking system, global stock markets crashed too.
Whereas the US learned from this and started rebuilding, we arrested our correction and did everything possible to keep the credit bubble growing.
As the share market tanked in 2009, Australian policy makers decided that the sacred cow of house prices must be protected at all costs. The 2009 first home buyer’s grant kickstarted that defence, and was topped up by most state governments too.
Even though the Rudd government’s own tax review – the Henry Tax Review – had recommended reining in negative gearing and the capital gains tax discount, all that was ignored.
The tax lurks stayed, gleefully maintained by the Abbott and Turnbull governments, and the RBA joined in by cutting interest rates that blew the credit bubble larger still.
The lack of action by politicians has pushed responsibility for reining in the bubble to the Australian Prudential Regulatory Authority, which imposed a fairly weak ‘speed limit’ on credit growth two years ago.
And now the RBA itself is threatening to put more “sand in the gears” of the credit machine.
It’s all too little, too late.
Australia, having ‘escaped’ the house price collapse that swept through so many nations in 2009, is now stuck in a self-imposed debt bubble.
The latest CoreLogic Market Indicator Summary, out today, highlights the divergent home price outcomes across the states. Results to 12 March show Sydney still moving strongly ahead, with Melbourne not far behind. Perth, on the other hand remains under pressure, with falling values.
We really need different economic settings across the states, lower interest rates in the West, but higher in the East. What IS a poor regulator to do? Of, course – “monitor the situation“.
Interesting note from the New Zealand Reserve Bank, “Evaluating alternative monthly house price measures for New Zealand” which highlights that whilst there are various methods which can be applied to measuring home prices, none is perfect. The data-intensive “Hedonic” approach as advocated by some in Australia, did not come out on top.
They also highlight the “quality-mix problem, which refers to the fact that the composition of houses sold will differ from period to period, making it difficult to discern whether observed price changes reflect genuine movements in underlying house prices or simply changes in the composition of houses sold. For example, prices may increase from one month to the next simply because of an increase in the average size of
houses sold. Larger homes tend to sell for higher prices, so it’s not clear whether the observed increases in prices represent genuine market movements or simply changes in sales composition. This quality-mix problem is of particular concern in the property market since
housing quality varies significantly along multiple dimensions.
This paper outlines the production of three monthly house price indices (HPIs) for New Zealand produced using data from the Real Estate Institute of New Zealand (REINZ) using three alternative methodologies. REINZ approached the Reserve Bank of New Zealand at the end of 2015 for technical guidance on possible improvements to their house price index methodology, in light of significant improvements to their dataset in recent years. The paper documents the guidance, providing an overview of the alternative methodologies and an empirical evaluation of the resulting indices.
The database provided by REINZ is a rich unit-record sales dataset with information on price, location, valuation, and property characteristics (such as the number of bedrooms and the floor area). We use the database to produce HPIs based on three well-established and widely adopted methodologies: 1) sales-price to appraisal ratio (SPAR); 2) hedonic regression; and 3) repeat sales. All three methods are found to produce credible-looking indices, which match the turning points and well-established cyclical properties of New Zealand’s existing house price statistics.
As a benchmarking exercise, the three candidate indices are evaluated alongside a simple median and a stratified median index (similar to the methodology currently used by REINZ). Applying a range of criteria to assess index performance, we find that all three alternative candidate methodologies out-perform the simple median and the stratified median methodologies.
The SPAR method is found to perform the best, due to lower month-to-month noise (especially for more disaggregated regional indices), greater stability as more data are added, robustness to sample changes, and higher accuracy in predicting sales prices.
Australia’s quarter-century run of uninterrupted economic growth has made its property market one of the world’s most expensive, but mortgage pain in towns hit by a commodities downturn is beginning to be felt in parts of the financial system.
While most Australians are able to pay their debts, alarm bells have sounded around pockets of distress in the mining-heavy states, raising warnings from policymakers, ratings agencies and the Organisation for Economic Co-operation and Development.
In the remote mining town of Karratha in Western Australia, 61-year-old Peter Lynch received a letter advising him that his bank was going to repossess his house at the end of the March.
“My property in 2010 was worth $905,000, today it’s worth $260,000,” Lynch said, estimating that seven out of 20 homes on his suburban street were for sale.
Two decades ago, Lynch borrowed money to buy a five-bedroom house in the town, thinking his job as a railway maintenance worker at Rio Tinto would last until he retired.
But the end of a one-in-a-century mining boom changed all that.
He now owes $222,000 and earns $42,000 a year as a cleaner, or roughly half his pay at the mine.
Western Australia is the hardest hit Australian state, with mortgage delinquencies topping 2.1 per cent, up by nearly half year-on-year, according to credit ratings house S&P Global.
S&P Global said 30-day arrears on mortgages packaged in issued securities were at multi-year highs.
Alena Chen, a senior analyst at Moody’s, expects rising underemployment and weak wage growth to drive delinquencies higher in mining-intensive states.
Signs of stress are now showing in the mortgage insurance market – shares in Australia’s largest mortgage insurer, Genworth Mortgage Insurance, are down 19 per cent since early February.
Borrowers typically pay for insurance when they have less than a 20 per cent deposit on their home purchase.
Genworth said in February that last year’s loss ratio of 35.1 per cent, up from 24 per cent in 2015, reflected higher average paid claims in resources-exposed regions, particularly Queensland and Western Australia.
Pockets of pain
Australia’s arrears rate of under 1 per cent, according to industry estimates, is still modest compared with the US peak of 27 per cent seen during the 2007-09 subprime mortgage crisis, and Australia has almost no subprime loans as such.
For now, rising arrears have not materially impacted the wider property market or financial system.
The major banks remain in good health and the mortgage-backed securities market, which finances the loan books of smaller banks and lenders, enjoys strong investor demand. And unlike the US, Australia has had no mortgage-backed bond defaults.
But investors and economists are worried stress could spread should there be a sudden loss of faith in the property market.
Concerns ‘already present’
Real estate is a national obsession in Australia, where two-thirds of households own a home. Since 2009, home values in the nation’s largest city of Sydney have more than doubled, while Melbourne has increased 88 per cent.
Australian households are among the world’s most indebted with a debt-to-disposable income ratio at an all-time peak around 180 per cent, compared with about 100 per cent in Germany and 150 per cent in the US.
Domestic mortgage debt stands at a whopping $1.7 trillion, equal to the country’s entire annual economic output.
The Economist updated their home price data series. Further evidence Australia’s home prices are look severely overpriced. Buyers, beware, and also consider the underlying reason why this is occurring. Limited supply, and negative gearing are a smart part but other deeper, more structural factors are also in play.
PROPERTY is as safe as houses, at least until the roof falls in. Our latest tally of global housing markets shows that American house prices have recovered to a new nominal high, and that in Spain and Ireland, prices are again rising at a decent clip. In the English-speaking Commonwealth countries of Britain, Canada, Australia and New Zealand, prices have risen largely unabated in recent years.
As our print article this week discusses, some of these rises can be attributed to the influence of foreign money. Since autumn 2014 $1.3trn of capital has flowed out of China. Some of that cash has found its way into residential property in some of the world’s most desirable cities.
In America, Chinese investors bought some 29,000 homes in the 12 months to March 2016 with a total value of $27bn, according to the National Association of Realtors. Much of this money is focused on a handful of cities: Seattle, San Francisco, New York and Miami. Foreign money has helped propel skyrocketing prices in other places, too. In Vancouver, home values have risen by 47% in four years; in London they have risen by 54%; and in Auckland the rise has been a whopping 75%. The influence of foreign capital flows on housing markets is being scrutinised, particularly as affordability becomes ever more stretched.
To gauge whether prices are fairly valued The Economist measures house prices against two metrics: rents and income. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable.
On this basis homes are fairly valued in America by an average of our two measures. But across Australia, Canada, New Zealand, and to a lesser extent, Britain, they look severely overpriced. Policymakers may well be left scratching their heads, however: increasing housing affordability for citizens and encouraging investment from foreigners are likely to be irreconcilable goals.
This interactive chart uses five different measures
House-price index: rebased to 100 at a selected date
Prices in real terms: rebased to 100 for the selected date and deflated by consumer prices
Prices against average income: compares house prices against average disposable income per person, where 100 is equal to the long-run average of the relationship
Prices against rents: compares house prices against housing rents, where 100 is equal to the long-run average of the relationship
Percentage change: the percentage change in real house prices between two selected dates
Notes The data presented are quarterly, often aggregated from monthly indices. When comparing data across countries, the interactive chart will only display the range of dates available for all the countries selected.
Politicians and the powerful property lobby continue to argue that building more houses is the solution to Australia’s chronic affordability problems.
But a “supply-side solution” – as propounded by NSW Premier Gladys Berejiklian as well as Prime Minister Malcolm Turnbull and Treasurer Scott Morrison – will only work if affordability is just a supply-side problem. Evidence suggests this is not the case. In fact, our analysis shows that Australia is almost a world leader in rates of new housing production.
How Australia compares
One way to assess Australia’s supply performance is to compare it with other developed countries. The graph below compares the number of dwelling completions per 1,000 persons across 13 countries, for the years 2010 and 2015. On this measure, Australia’s new housing production is second only to South Korea’s.
Australia delivers two-thirds more homes per 1,000 persons than the US and four times more than the UK. When we measure supply as a proportion of existing stock, Australia again ranks second with a rate double that of the US.
A slightly different approach takes into account population growth. This involves measuring dwelling completions per head of new population. Here Australia’s performance sits in the middle of the pack.
We are delivering just over 0.5 dwellings per head of new population compared to more than 2 in South Korea. This rate is, however, still ahead of the UK and comparable to the US. Again, that suggests inadequate supply is not the major cause of the affordability crisis.
State comparisons of supply
At a national level, supply seems pretty healthy. But there are significant state variations. This might, on the surface, be used to explain different patterns of price growth.
The table below shows that New South Wales has produced fewer new homes per 1,000 people than Australia overall over a 30-year period. The difference was particularly marked between 2005 and 2015.
However, higher supply output in the other states has certainly not created affordable markets. In NSW, the last two years have delivered significant supply growth yet prices have continued to rise just as fast. So why do prices rise with supply growth?
Demand drives supply
In a market-driven housing system, price stimulates new housing supply. In Australia new supply has responded relatively quickly to price rises (despite the continuous rhetoric from the property lobby about planning).
But there is always some lag due to the time it takes to secure necessary approvals and physically construct property. There is no such lag with demand meaning there is often a sustained mismatch between the two – positive or negative.
In a rising market, development becomes more profitable and land values rise, meaning greater returns for all concerned. Potential future capital gains stimulate investment activity. Price rises also allow owner-occupiers to trade up as the equity in their own dwelling increases.
In such circumstances, increased levels of housing supply do little to satiate demand created by population growth and the appetite of investors.
Western Australia has had an incredible level of housing completions over the last 30 years, as shown in the table, with 2014 and 2015 particularly strong. In the last 12 months, dwelling commencements have collapsed by more than 25%. Prices have been falling slowly for almost three years driven by the contraction in the resources sector and strong levels of new supply.
However, even under these conditions, WA housing affordability shows little sign of improving for those on low incomes. The market still cannot deliver housing for those at the bottom end of the market.
The housing market is simply unable to deliver housing that is affordable to those on lower (and, increasingly, moderate) incomes because there is a minimum cost of delivering housing that meets minimum community standards. This is made up of the land price, the physical construction costs of the dwelling, and the profit required for taking on the development risk.
This is why market intervention and subsidy are essential to deliver options for those on low incomes.
Targeted interventions are needed
Two strategies are needed to deliver affordable housing to the lower end of the market.
First, demand-side measures need to be better targeted to stimulate investment in new supply, particularly affordable rental housing, rather than simply fuelling demand.
Second, any government serious about improving affordability needs to put more resources into the community housing sector. This could be funded in two ways: partly by taxing the windfall gains from development and partly by reallocating existing demand-side subsidies.
The community housing sector can operate counter-cyclically. This means it can maintain housing supply even when house prices stagnate or fall – which is good for the economy.
Targeting supply to deliver housing for those on low incomes and reining in demand-side incentives that fuel prices will make some difference to affordability for those most affected.
There was some encouragement over the weekend. Scott Morrison discussed the rental market and social housing as part of the affordability solution. This was a welcome change from trotting out the tired old supply arguments and threatening to fuel demand through more home ownership incentives.
Let’s hope the treasurer follows through and delivers some much-needed “whole of housing market” thinking in the May budget.
Authors: Steven Rowley, Director, Australian Housing and Urban Research Institute, Curtin Research Centre, Curtin University; Nicole Gurran, Professor – Urban and Regional Planning, University of Sydney; Peter Phibbs, Chair of Urban Planning and Policy, University of Sydney
By some metrics, housing market conditions have cooled and credit growth to households has slowed, but risks related to house price and debt levels have not yet decreased.
Their specific assessment on Australia points out that house price gains have moderated [but this does not reflect more recent events]. However, the extent of cooling has varied considerably across cities. The strongest price increases continue to be recorded in Sydney and Melbourne, where underlying demand for housing remains strong. With house prices still rising ahead of income, standard valuation metrics suggest somewhat higher house price overvaluation relative to the previous IMF assessment.
The latest IMF assessment says that signs of commercial real estate overvaluation have emerged. Commercial real estate prices in Australia have increased rapidly since mid-2014. Rents have not followed at the same pace, and the price-to-rent ratio is now above average. Whether the latter is a good metric of fair value is difficult to assess. Risks to financial stability from any potential CRE overvaluation appear manageable. The share of commercial real estate lending in commercial banks’ total assets decreased in the past few years and has now stabilized at around 5 percent.
Overall the IMF’s Global House Price Index—an average of real house prices across 57 countries — continued to climb up in the third quarter of 2016. This is the sixteenth consecutive quarter of positive year-on-year growth in the index.
Brazil: Rio de Janeiro, China: Shanghai, Croatia: Zagreb, Cyprus: Nicosia, Finland: Helsinki, France: Paris, Greece: Athens, Macedonia: Skopje, Netherlands: Amsterdam, Russia: Moscow, Singapore: Singapore, Slovenia: Ljubljana, and Spain: Madrid.
Bust and Boom
Denmark: Copenhagen, Estonia: Tallinn, Hungary: Budapest, Iceland: Reykjavik, Indonesia: Jakarta, Ireland: Dublin, Japan: Tokyo, Latvia: Riga, New Zealand: Auckland, Portugal: Lisbon, South Africa: Johannesburg, United Kingdom: London, and United States: San Francisco.
Australia: Melbourne, Austria: Vienna, Belgium: Brussels, Canada: Toronto, Chile: Santiago, Colombia: Bogota, Hong Kong: Hong Kong, India: Delhi, Israel: Tel Aviv, Korea: Seoul, Malaysia: Kuala Lumpur, Mexico: Mexico City, Norway: Oslo, Slovakia: Bratislava, Sweden: Stockholm, Switzerland: Zurich, and Taiwan: Taipei City.
The position of Australia on the price growth is probably understated (based on more recent data).
Credit growth in Australia is towards the upper end of the countries listed.
The price to income ratio is Australia is relatively high.
The house price to rent ratio shows Australia above the average.
This suggests the housing issues are global in nature, and not exclusively the result of local policy settings! Many countries are are feeling the draft from low interest, and rising home prices.
According to various media reports, the Victorian Government has announced changes to stamp duty attached to buying property today. Currently, first time buyers in Victoria get a 50 per cent stamp duty discount, but from July, the duty will be removed for first-home buyers in the state where the property costs less than $600,000. In a band between $600,000 and $750,000 there will be stamp duty reductions regardless of whether the property is new or existing. It will assist owner occupied buyers.
Around 25,000 people a year are expected to benefit from the changes with average first-home buyer saving an extra $8,000. Those buying close to the tax limit of $650,000 would be $11,000 better off.
In the financial year 2013-14, the Victorian Government received $3.5 billion in duty, now it stands at $5.7 billion. The changes would cost about $800 million over four years.
Also, a $50 million “HomesVic” program will begin in January 2018 to give about 400 buyers an option to co-purchase a home with the government in an equity share. Buyers will need a 5 per cent deposit to be eligible, and equity up to 25 per cent for each property which the government will recover when the property is sold, The scheme will target couples earning up to $95,000 and singles earning up to $75,000.
Additional measures include a 1% land tax on vacant property and removal of some investment property stamp duty incentives.