The UK is sinking deeper into property inequality – here’s why

From The Conversation.

Outrage has been mounting over the untaxed incomes of the global elite, foreign ownership of urban land and soaring rents in the private rental sector. Much of this boils down to two key matters: who owns property, and how they are treated.

The UK, it seems, is a place that makes it very easy for individuals to generate a great deal of wealth from property, with little concern for social justice or the provision of affordable housing.

But this problem is not uniquely British. Across the world – and particularly in many developing countries experiencing fast economic growth – capital is flowing rapidly into real estate. And increasingly, governments are waking up to the need to effectively capture some value from these investments, for the public good. Yet, as my research shows, this can be extremely difficult to achieve due to complex historical legacies around land, as well as deeply entrenched vested interests.

Consultants from the UK and other rich countries are often the first on hand to provide advice and propose systems of property and land taxation, to enable governments in poorer countries to bring in revenues that reflect the real value of developments. Meanwhile, ironically, the UK’s primary property tax – a monthly “council tax” paid by residents to local authorities – remains scandalously out of line with modern property values.


House prices are rising – but council tax isn’t (London, 1995 to 2015). Alasdair Rae, University of Sheffield

Of course, property inequality looks very different in British cities than it does in cities in developing countries. In many African cities, a clear majority of people live in slum conditions, the like of which are (thankfully) consigned to the past in Britain. Yet the property markets are being transformed by very similar processes.

International capital flows are central in both cases: wealthier migrants from low-income countries now based in the US and Europe often channel their earnings into untaxed property back home, while the UK solicits property investments from footloose international elites Whatever the context, the outcome is largely the same: luxury properties abound, often unoccupied and almost always undertaxed, while governments fail to provide proper incentives for developers to invest in cheap housing.

These issues are particularly concerning in poorer countries, not only because of the scale of inequalities and gaping absences of affordable housing, but also because investments in luxury properties divert funds from other sectors, which urgently need capital to make the nations’ economies more productive.

What to tax?

It seems clear that governments of both poor and rich countries need to find ways to reduce the appeal of massive investments in high-end property, and to spend more on housing and services for low-income groups. The question is: how?

Stamp duty is obviously one mechanism for capturing some of the value of property, but as this is a one-off payment it deals with only part of the problem. Updating the council tax is an important step in the UK – though this will be very politically difficult.

More fundamentally, however, simply updating council tax bands sidesteps major questions about exactly what we should be taxing when we tax property. Given the state of the UK property market, a proper debate is needed on these issues. But as this is also a global issue, the UN’s biggest conference on urban development issues in 20 years should also provide a forum for discussing this at the global level.

One possibility that has aroused significant interest is a land value tax. The idea is that public investments in infrastructure – rather than private individuals’ effort – make land valuable. So, the government should “recapture” this value for further public investment, by taxing property owners a proportion of the annual rental value of their land.


Less vacant land. Sinkdd/Flickr, CC BY-NC-ND

Some argue that taxing land also encourages people to use land productively, and deters speculation; in other words, if you are paying a relatively large amount of tax on a plot of land, you will want to make the best possible use of that land (by building a tall tower, for example), in order to maximise your profit.

By contrast, taxing buildings discourages investment and development, so many proponents of land value taxation argue that structures should simply be ignored. There is a certain progressive logic to this: for the most part, growth in land value provides a windfall to the owner, so it seems like a fair revenue to tax.

Should buildings be off the hook?

But a land value tax could have some undesirable consequences: exempting buildings from taxation encourages developers to build for maximum profit – and this often means constructing expensive, luxury residences for wealthy investors. What’s more, large buildings impose on the surrounding residents and public spaces in a number of ways which can be seen to warrant taxation – for example by blocking light, generating traffic and adding to pollution and noise.

In countries where forms of land taxation are relatively high, but building taxes small or non-existent, there is a tendency to speculate on buildings for which there is no obvious demand. This can be particularly harmful when there isn’t sufficient public infrastructure or services to support these looming edifices.

If we consider property tax as a means of redistributing wealth from the rich to the less well-off, then it makes sense to tax buildings. After all, why should one person be able to own a large, immovable asset without paying tax on it, when others pay tax on so many goods, services and incomes? Is it really fair for the residents of high-rise developments to pay a small fraction of a land value tax, regardless of the actual value of the luxurious apartment which they occupy (or, more accurately, don’t occupy)?

No – taxing property wealth is not only about taxing the windfall of increased land values: it is about acknowledging that the playing field of society is not level, and that the rich should pay more because they can. And it’s not just a question of social justice – it’s also about the kinds of incentives we want to create for investment, and the kinds of lifestyles that this promotes. We should not be so keen to encourage intensive investment in land that we exempt buildings – no matter how extravagant and unnecessary – from any kind of tax.

In many developing countries, innovative approaches to valuing and taxing property are being proposed and piloted, and concerted efforts are being made to overcome political resistance. The UK would do well to follow suit and bring its system of property taxation into the 21st century.

Politicians fear these issues, and public discussions about property tax has fallen all but silent since the failure of the previous Labour government’s “mansion tax”. No solution is simple; but not talking about it won’t solve anything at all.

Author: Tom Goodfellow, Lecturer, University of Sheffield

Housing Affordability at ‘Crisis Levels’

From The Real Estate Conversation.

Shadow Treasurer Chris Bowen has spoken about the decline in Australia’s housing affordability, saying we are ‘a nation that can no longer house its own children.’

Shadow Treasurer Chris Bowen has delivered a passionate speech at left-leaning public-policy think tank, the McKell Institute, outlining the decline in the middle class in Australia, and listing worsening housing affordability as one of the main problems facing an increasingly pressured middle class.

Housing-Key

In the speech, Bowen said Australians’ aspirations for home ownership were perhaps stronger than anywhere else in the world, but that it was becoming “an aspiration which, for far too many, is becoming a pipe dream.”

“Overall home ownership in Australia is at a 60-year low,” said Bowen.

“In 1982, 62 per cent of people aged 25-34 owned their own home. By 2012, this had collapsed down to just 42 per cent,” he said, citing the recent HILDA report.

People today are paying 15 times their annual income to purchase a new home, said Bowen, compared with five times 25 years ago.

“Young people unable to crack into the housing market strips them of one of the most fundamental wealth drivers through their lifetime,” said Bowen, concluding that housing affordability is at “crisis levels”.

Bowen says Australian who can not afford to buy their own home are cut off from an important source of capital, as many fulfill their aspirations by borrowing against the family home.

“For many it (home ownership) is a means to a broader aspiration, of access to the capital which is built into the family home,” said Bowen.

Bowen believes the government should be playing a greater role in improving housing affordability.

“At the Federal level, our tax system continues to provide very generous tax concessions to property investors and zero assistance to first home buyers,” he said, explaining that Labor’s changes proposed during the recent election campaign were designed to deliver more balance to home owner and investor incentives.

“Our policy to limit negative gearing to new properties puts first home buyers on a more level playing field with investors, provides a stimulant to new construction to add to supply and, together with capital gains tax reform, adds $37 billion to the budget over the next ten years,” he said.

The Property Council has welcomed the Shadow Treasurer’s commitment to make housing affordability a primary policy issue for the Opposition.

“Mr Bowen’s speech recognises a central tenet of the Australian success story: high rates of home ownership across all parts of Australian life are critical to social cohesion and economic security”, said Ken Morrison, Chief Executive of the Property Council of Australia.

Morrison said he agrees it’s important that the next generation is not priced out of the housing market, but said he disagrees with the Shadow Treasurer about the means to achieve this.

“While we have differences with the Opposition about its tax policy for housing, we take this speech as an invitation to explore other areas where we can encourage high rates of home ownership and increased housing supply,” said Morrison.

“Our concern about the Opposition’s current negative gearing policy is that it is not an answer to the worsening state of housing affordability,” said Morrison.

“The McKell Institute and the Grattan Institute are the Opposition’s biggest supporters of its negative gearing policy, but even they concede that the impact on house prices will be minimal. McKell argues it will curtail prices by a modest 0.5 per cent a year and Grattan argues a 2 per cent fall in the price of housing,” Morrison said.

Morrison said he believes that changes to stamp duties would be a more effective tool in addressing housing affordability.

“Our challenge is supply and finding sensible ways to reduce costs in the market place. It is worth noting that the biggest beneficiaries of high house prices are state governments who are collecting enormous stamp duty and land tax receipts,” said Morrison.

 

How Best To Measure House Prices

Recently the RBA has been talking about house price metrics, and in their recent outings have been downplaying data from CoreLogic preferring metrics from other sources. Was this a case of selecting the data which best fits with your world view? As we said at the time:

The statistical “fog of war” appears to have descended on Australian home prices, partly fueled by the RBA’s recent statements, and the latest chart pack data. Because of perceived issues with the CoreLogic data series, we see plots from a number of data providers.

housing-pricesToday Tim Lawless from CoreLogic has discussed the issue of metrics in “A refresher on housing market measurements“.  Naturally he defends CoreLogic’s work, but it is also worth reading to see how complex the question actually is. We think the trend is the important perspective. But of course the picture is complicated when metrics are rebaselined without full disclosure.

Housing is Australia’s largest asset class, worth an estimated $6.7 trillion, so it’s important to measure the performance of this very important asset class in an accurate and timely manner. Recently there has been a lot more focus on the measurements of housing market performance, so it’s timely to provide a summary of the primary methods used for measuring housing market performance from a value/pricing perspective.

The complexities of property data

Before we go into the different measures, it’s worthwhile providing a brief refresher on property data which provides some background about why measuring housing market performance is a complex undertaking.

Firstly, compared with the equites markets, housing is an illiquid asset class. Individual properties are transacted, on average, every 8-10 years. The infrequency of transactions implies that the vast majority of residential properties are excluded from most housing market measurements which are reliant on transactional activity.

Secondly, housing is fundamentally nonhomogeneous; dwellings are unique in their characteristics based on their location and attributes, which makes the measurement of price and value shifts more challenging.

Additionally, the quality and timeliness of property data varies remarkably from state to state and between the private sector data providers. State governments collect a base level set of data which needs to be cleaned and augmented with more timely data and additional data sets such as attribute information to ensure a more complete and timely measure of housing markets is derived.

Regardless of the methodology used to measure dwelling price or value shifts, having housing data that is of the highest quality possible is the first and most important step in producing a reliable and accurate measure of the housing market.

CoreLogic collects and maintains the most comprehensive and current property and mortgage database, with more than 4.2 billion decision points across Australia and New Zealand that is growing in size every day. More than 60% of housing market transactions are collected directly from the industry, which provides a much more timely view of the housing market than relying solely on government provided transaction data.

What indicators are available to measure housing market conditions?

Housing market indices range in complexity from a simple median price indicators, which is subject to large amounts of bias and revision, through to a stratified median, repeat sales index and hedonic regression models. Each of these methods will provide different results for measuring price or value shifts across the housing markets.

Outside of these methodological differences, there will be further differences in results based on the data held by each of the private and public sector index providers as well as the way the data is cleaned, the sampling method, what geographic regions are being reported and what time frames the measures are reported across.

Simple median price

The median is simply the middle sales observation across a series of transactions. The median sale price is subject to a range of biases which can skew the middle observation up or down. Bias in median price can be caused by buyer types who are more active or less active in the market (for example, if first home buyers become more active there is likely to be a downwards bias in the median observation due to more transactions occurring at the affordable end of the pricing spectrum). Bias can also be found if there are changes in the types or quality of stock transacting and the median can be very volatile in markets with low turnover or where there are dramatic differences in the quality of housing. The advantage of median price is that it is very simple to compute and is easy to understand and interpret.

Simple median price measures are generally utilised by some of the real estate institutes and are still a common way of reporting price movements at the suburb or postcode level. Simple medians are useful for understanding what the middle observation for pricing is across a particular region over a specified point in time, however they aren’t all that useful for measuring capital gains over time due to the volatility and bias associated with this measure.

Stratified median

The stratified median measure, although still a measure of the middle observation, attempts to overcome the compositional bias of median price measures by dividing the market into separate strata’s, or segments, that are more alike. The Australian Bureau of Statistics, who use a stratified median measure, bases their stratification across dwelling types, the long term median price and socio economic indicators as specified here: . The ABS index is released quarterly after a significant lag and is non-revising.

Domain also use a stratified median approach, however no documentation appears to be publically available on their method or stratification approach. The Domain index is revisionary, however there is no transparency around the level of revision between quarters. Also, Domain do not appear to release their index results in a freely available format online.

The stratified median approach is a substantial improvement over the simple median for measuring price change across the housing market. As outlined in the simple median method, despite attempts to control for bias, the stratified median approach can be affected by changes in buyer activity or inactivity and by changes in the types or quality of dwellings that are transacting in the market.

It is important to note that non revising stratified median indices will not include off the plan sales data if the sale date has occurred more than three months prior to the reporting date. The reason for this is that such data tend to be quite lagged and reported by the Valuer General after settlement, which can occur several years after the sale date.

Repeat sales

A repeat sales index relies on identifying sales pairs and measuring the capital gain across these individual resales. The repeat sales method is very useful for measuring the demonstrated capital gain across individual properties that have resold, however the method excludes all transactions that don’t have a previous sale associated with the property. Inherently, the repeat sales method excludes new properties, which is a significant weakness at a time when a record amount of new housing stock is entering the market place. Additionally, the repeat sales index can be biased by property resales that have been affected by capital works (eg renovations and subdivisions) and can also be biased by properties that are transacted more frequently such as units and investment owned properties which generally have a higher turnover rate.

Residex (which is a CoreLogic owned company) publish a repeat sales index which is revisionary and released quarterly.

Off the plan sales are not accounted for in repeat sales indices as this methodology requires at least two sales for a property to make it eligible for inclusion.

Hedonic regression

The hedonic method of measuring housing market performance aims to track the true value shifts across the overall portfolio of housing, rather than price based movements based on observations of only those properties that have transacted. The hedonic imputation technique, which is used exclusively in Australia by CoreLogic, imputes the value of every Australian dwelling each day, taking into consideration every single data point we knew about the housing market at the point in time of calculation. Factors such as lot size, the number of bedrooms and bathrooms, car spaces and whether the home has a swimming pool or view are some of the hedonic attributes factored into the analysis. Based on a flow of around 1,400 new transactions received each day as well as a constant flow of new attribute data, our most accurate view of the imputed value of the property market is updated each day.

The benefits of a hedonic regression index include the sheer timeliness of the reading (virtually a real time indicator), the lack of any bias that can push the index higher or lower, as well as the fact that the index tracks true value shifts across the entire housing asset class rather than only across those properties that have recently transacted.

CoreLogic provides free public access to a full 12 month back series of the daily hedonic index, as well as a monthly summary of the end of month index results across each capital city by dwelling type. The index is published on the first working day of each month and has been independently peer reviewed and audited, the results of which are published on the CoreLogic web site, along with full documentation of the hedonic method used to build the index.

In summary, there are a variety of measures available to track dwelling prices and values across Australia. Each method presents its own pros and cons and there will always be differences in the results based on the different methods being uitlised, but also based on the differences in data quality, cleaning and sampling techniques, data timeliness, geographic context and time frames of the calculation. Other technical differences will also play out in the data based on specific ways each method treat the underlying data sets. For example, using a settlement date rather than a contact date in the analysis will show a difference in results, particularly at a time when a great deal of off the plan unit sales are flowing into the market where the difference between the contact date and settlement date could be several years.

While there will be divergence in these measurements of price and value changes from period to period, over a longer period, each of the methods used will tend to show broadly similar results. One notable exception is the presence of off the plan transactions, which will cause the hedonic index to diverge from repeat sales and non-revising median indices from time to time. Repeat sales indices and non-revising median indices (in particular based on sales data over the prior quarter) are more likely to broadly track one another because they both exclude off the plan sales.

CoreLogic privately calculates all of the indices described above, however our primary reference for measuring the change in house and unit values is the hedonic regression index thanks to the timeliness of the measure, the absence of any bias in the measurement and the fact that the index measures value growth across the entire housing portfolio rather than only those properties that have transacted.

In order to get a complete understanding of the housing market there is a vast array of other housing market measures that need to be viewed in context with indices that measure price and value movements.  CoreLogic also provides weekly updates on auction markets and clearance rates, private treaty metrics such as average selling time and vendor discounting rates, transaction numbers, listing counts and rental information as some examples.

Additionally the performance of the housing market will vary substantially across the different product types and geographically, so it’s important to analyse the housing market at more granular levels than just capital city dwelling performance.

At CoreLogic, we place the utmost importance on our data and analytics assets.  We dedicate more than $20 million each year in acquiring and maintaining our data sets.  Our collection, analysis and research methods are audited regularly, and we are independent of any real estate, media or banking interests.  CoreLogic continues to grow with over 480 people employed in ten locations in Australia and New Zealand. Over 20,000 customers and 150,000 end users in property, finance and government use CoreLogic services and platform more than 30,000 times a day.

The housing market is looking worryingly like a pyramid sales scam

From The UK Conversation.

Are you on the property ladder? You might want to look again. That comforting metaphor of an aspirational route to economic security has come to dominate our thinking, but what if it wrongly describes the phenomenon? There has been a steady decrease in the number of first-time house buyers since 1980, with the biggest drop of 47% occurring from 2007 to 2008. It may be that the British housing market now resembles the classic pyramid scheme scam that rewards those at the top and punishes the fools who dive in too late or can’t dive in at all.

I’m certainly not the first to think of the housing market in this way. As journalist Gabby Hinsliff observed:

Rather like pyramid-selling scams, housing markets need a constant stream of fresh-faced hopefuls coming in at the bottom in order to keep delivering big returns at the top.

So is this really true, and if it is, should we continue to tolerate such a mainstream social practice which seems to be so ethically dubious?

A losing game

The classic pyramid scheme is essentially a sales scam. Someone is recruited and pays a fee to join a team ostensibly flogging something – health supplements, perhaps, or even providing no product or service at all. This recruit then gets a cut from the fees paid by the salespeople he or she newly recruits. They then do the same. Very quickly, the scheme reaches saturation point.

Two more generations of suckers? EPA/HANNAH MCKAY

So how does this relate to the housing market? Let us begin with an essential feature of pyramid schemes: most people lose. This involves the membership factor in which new recruits pay a progressively higher fee to get onto the pyramid. In other words, the pyramid is driven by a top-down dynamic. Those at the lowest level try to recoup what they paid to become members by making a profit off those wishing to gain access to the scheme. Chronologically, those who come later have a greater risk of losing.

Under the current economic system, those pensioners sitting on six-bedroom townhouses in chic parts of London, bought for pennies in the post-war period, are our equivalent of pyramid scheme bosses – through no fault of their own, of course.What makes the housing market more restrictive than a classic sales scam is that its sale item is finite in supply. There may be an almost unlimited supply of health supplements in the example above, but with housing there is only so much land available. This makes entry into the scheme more competitive, and by virtue of that, it has the effect of increasing demand.

In short, most people lose in the housing market because most people who do not own property can never really afford to do so. Despite government efforts to help, first-time buying has continued to struggle, and the odds of finding an affordable price are stacked against non-owners. They may even find that those most willing to buy property already own some. Indeed, such speculators know that the more they buy up land, the more it will tend to be in higher demand.

Saturation

There is a second essential feature of pyramids: most people lose because there is no one left to pay the higher fee. In effect the market reaches saturation point. In housing, this happens because non-owners, who usually constitute the majority of the population, cannot find the means to make the high fee payments – in other words, a mortgage deposit and monthly payments. And this is where the ethically dubious nature of the scheme emerges.

In classic pyramids, the good or service being sold is not really important. With the housing market, the good in question is essential. One can easily live without health supplements, for example. Yet, show me one person who can live and work without access to land or shelter. In other words, at the sake of making a profit for the few, the majority of people are denied access to land, which is access to the opportunity to flourish.

It will have damaging effects more broadly, too. In a build-up of the housing market, the allure of property investment is so high that money is diverted to buying property rather than to production. Without investment in production, non-owners do not see an increase in their wages. If we go back to the pyramid scheme set-up, investment in production is like telling a salesperson to concentrate on selling the vitamin supplements, rather than on recruiting more salespeople into the scheme, which is where the easy money lies.

No knockdown prices here. stockcreations/Shutterstock

Why fund a new business and wonder about whether it is going to succeed when you can buy the land on which either the business relies or on which its employees rely in order to live? If investing in property means diverting money from production and wages, then the economic system is bound to break. In other words, we are all bound up in this giant pyramid scheme whether we like it or not; whether we own property or not; whether we are suckers are not.

The obsession with maintaining the everlasting growth in the housing market places the economy in a stranglehold and engenders something that looks very much like a pre-crash phase. It’s not just the non-owners who lose, but because production itself takes a hit, property owners also lose in terms of property investments which do not make a return.

So why hasn’t the housing market caused the economy to break once and for all? Well it certainly came close in 2008, but our economic system seems flexible enough to make adjustments that keep us afloat. However, these adjustments are makeshift reactions to a system’s fundamental problems rather than a remedy. Why not fix the problems? Why not raze the pyramid that is the housing market? To do that would require a philosophical change: an appeal to understanding how land (and thus housing) constitutes a unique kind of primary good that cannot be subject to the same kinds of conventions as capital.

Author: Todd Mei, Lecturer in Philosophy, University of Kent

So Just How Much Are Home Prices Rising?

The statistical “fog of war” appears to have descended on Australian home prices, partly fueled by the RBA’s recent statements, and the latest chart pack data. Because of perceived issues with the CoreLogic data series, we see plots from a number of data providers, including the ABS (whose June 2016 data should be out later on – they are disgracefully slow on releasing their quarterly price data).

housing-pricesNow, we see there are some significant variations between the series, and of course in turn mask the significant differences between locations. CoreLogic has been tweaking their series, and the RBA specifically mentioned this in their recent report. These differences are driven by different methodologies, as well as some series breaks.

So, what is the truth about home price momentum? Of course the RBA wants to show prices growing more slowly despite the cut in the cash rate, thanks to their careful management; whilst others want to talk up the positive movements, to encourage more transactions. Our surveys suggest demand is still quite strong.

As best we can tell, price momentum did moderate in recent months, but now is on the rise again, thanks to low rates, and ongoing interest from investors. Somewhere between 2.5% and 7.5%! The high auction clearance rates appear to confirm this.

But, the real amount of the movement is uncertain. Yet another example of the problems we have getting meaningful, prompt and reliable statistics in Australia.

More Strong Auction Results Today

According to the latest APM PriceFinder provisional auction results, there was another strong result today. This confirms the strong demand for property, especially in the south-eastern states and points to continued momentum into the spring.

Nationally, there were 1,646 properties listed, with 77.5% clearance, compared with 73.1% last week, and 73.3% this time last year, albeit off a higher number of listings.

In Sydney, 80.7% were cleared from the 574 listings, compared with 78% last week and 72.5% last year. Melbourne achieved 77.9% clearance from the 877 listings, compared with 73.2% last week and 76.9% last year, again from a higher number of listings. Of the 53 listings in Canberra, 79% cleared; of the 86 in Brisbane 49% cleared; and in Adelaide of the 56 listed, 61% cleared.

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Property Market to Cool in 2017?

NAB’s latest Housing Market Report, Winter 2016 edition, suggests indicators painting a mixed picture of market conditions. Any near term strength likely to be temporary, with a more subdued market expected for 2017.

Property prices have continued to prove more resilient than expected in 2016 (to date) which are likely supported by better than expected population growth and the recent RBA cut to interest rates, although different price measures are providing
conflicting signals. An example of this can be seen in the Sydney market where quality adjusted house prices have increased significantly in the past 6 months. There are also a number of other (non-price) indicators that point to more mixed conditions in the housing market, including turnover, time on market and vendor discounts. Consequently, we still expect that overall market fundamentals will become less favourable going forward.

Indeed, the NAB Residential Property Survey has softened with moderation seen in each of the major eastern markets. Consistent with the more difficult environment facing property investors, the Survey showed a fall in the share of foreign buyers of new property as well, although observations on this vary considerably by State – Victoria and NSW saw a surprise lift in demand despite a further deterioration in rental yields and relatively poor affordability. Investor housing credit growth has remained relatively subdued in Q2, with annual growth dipping well below APRA’s imposed ‘speed limit’ of 10% (currently 6%) – although this could suggest some upside potential going forward. In contrast, growth in owner-occupied credit has remained fairly robust.

Our (quality adjusted) price forecasts have been revised higher this month in recognition of the strength seen in prices to date. Nevertheless, we are not convinced that the fundamentals have changed significantly since last quarter, although the near-term risks may have shifted more to the upside. Rather, we expect that once the recent resurgence in prices runs out of steam, we are likely to be left with a market that remains soft for a little longer than previously expected.

Our average national house price forecast in 2016 has been increased significantly to 5.1%, from 1.5%, although this is still a slower pace of growth than in 2015 (7.8%). Our unit price forecasts are also higher, at 3.6%, up from -1% previously – but less than half the rate of growth seen in 2015. The weakness previously expected for 2016 has now been shifted to 2017, with house prices forecast growth to be relatively subdued at 0.5%, while large additions to supply are expected to contribute to a decline in unit prices of 1.9%. The NAB Residential Property Survey showed that respondents actually upgraded their price expectations for the next 2 years – especially in NSW – despite deterioration in market sentiment.

NAB-Pty-2016---Winter

Auction Clearances Up Again Today

The latest data from APM’s PriceFinder shows Sydney auction clearances reach 82.8%, up from 72.4% last week, on listings of 464, compared with 728 this time last year. Melbourne reached 79.5%, compared with 73.7% last week, on 522 listings compared with 612 last week and 773 last year. So while the number of properties listed are down, the clearances are astonishingly high.

APM-13-Aug-16Looking nationally, clearances were 77.4%, on 1,153 listings compared with 71.2% last week, though a year ago, 1,696 properties were listed.  Adelaide listed 45 and cleared 62% whilst Brisbane listed 77 and achieved 46% clearance.

APM-13-Aug-16-1

Another Set of Good Auction Results

It may be a moot point whether home prices are rising or not, but the latest results from the APM PriceFinder team shows that nationally 76.3% of  property for auction sold, compared with 68.6% last week, and 75.1% last year. However, the total number for sale was lower at 1,177, compared with 1,288 last week, and 1,989 last year.

Sydney led the way with 79.4% clearance from 393 listings, but there was more activity in Melbourne, with 676 listed, though 77.9% cleared. Both are higher that a year ago, when 74% cleared in Sydney and 71.7% in Melbourne.

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Global Home Prices, On Average Back to 2007 Levels

The latest data from the IMF Global Housing Watch says shows that, on average, prices are almost back up to where they were at the start of 2007. That said Australia and a number of other countries have had much stronger growth over this period.

IMF-GP-JulyThere is a fair bit of cross-country variation, however. While house prices have increased over the past year in most countries in the sample, the pace of increase varies quite a bit. And there are still a dozen or so countries where house prices have fallen over the past year, including Brazil, China and Russia.

IMF-GP-July1 Both real house prices and real GDP growth in the 2007-2015 period were well below the boom experienced during 2000-2006. In the earlier period, global real GDP grew by over 4% per year while real house prices surged by about 9% on average. In the more recent period, these grew by just 2% and 1% per year, respectively. The simple correlation between real growth in house prices and GDP growth was very similar in the two periods at about 0.6.

The pace of credit creation also fell sharply between the pre- and post-crisis periods from 17% to 6%. The correlation between growth in house prices and credit expansion fell substantially from 0.8 to 0.3. Given that many countries sharply eased monetary policy during the post-crisis period, it seems reasonable to posit that slow credit growth was a result of diminished investment opportunities, reduced risk appetites on the part of lenders, and the adoption of macroprudential policies designed to reduce the probability of boom/bust cycles in the future. Moreover, the decline in the correlation between house prices and credit expansion suggests that other country-specific factors may have played a role in determining house prices.

One such factor is fiscal policy. We use as our indicator the change in the cyclically-adjusted primary fiscal balance as a percentage of GDP during each sub-period. The correlation between the change in the policy stance and home prices went from nearly zero to almost -0.5, suggesting that country-specific policy developments have played a role in determining the development of real estate prices.

Over the last quarter, there have been discussions of housing sector developments in IMF staff reports in over a dozen cases. One feature of the discussions has been a growing emphasis on the role of supply constraints in driving house price increases—this was flagged for instance in the case of Denmark and Germany. Another is the continued active use of macroprudential policies in several countries, among them Canada and the United Arab Emirates. Concerns about the extent of house price growth were flagged in the cases of the Czech Republic (“a strong housing market is becoming a potential source of risk”), Denmark (“rapid house price increases call for early policy action”) and Norway (“high and rising house prices and household debt in Norway pose important macro-financial stability risks”).