A Deeper Look at Recent Auckland Housing Market Trends: RBNZ

The Reserve Bank of New Zealand has published an analytic note “A Deeper Look at At Recent Housing Market Trends; Insights from Unit Record Data. It highlights the influence of investors and their impact on the overall market and the impact of LVR controls.

In October 2013 the Reserve Bank placed a temporary ‘speed limit’ on high loan-to-value ratio (LVR) residential mortgage lending, restricting banks’ new lending at LVRs over 80 percent to no more than 10 percent of total residential mortgage lending. This policy was implemented to reduce financial stability risks associated with the housing market, against the backdrop of elevated household debt, high and rapidly rising house prices, and a large share of new lending going to borrowers with low deposits. The policy had an immediate dampening effect on housing market activity and house price inflation, and facilitated a strengthening in bank balance sheets. However, since late 2014, upward pressure on the housing market has re-emerged, predominantly in Auckland, posing renewed risks to financial stability.

With the housing market showing renewed signs of strength, this paper provides a detailed overview of market conditions and examines developments following the imposition of the speed limit on high-LVR lending. We find that increased housing market activity in recent months has been driven by strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit. Much of the increase in investor purchase shares has coincided with a fall in the share of movers, with the first home buyer share increasing slightly following its decline after the introduction of LVR speed limits.

We also investigate whether the LVR policy has led to an increase in cash buying activity or borrowing from institutions outside of the regulatory. We do not find evidence of the former with cash buyer shares falling in Auckland and remaining broadly flat in the rest of the country. There is some evidence of a modest increase in the share of transactions involving non-banks since October 2013, although non-bank activity remains low.

We then undertake a more detailed analysis of investor activity given their heightened prevalence in the market. The primary driver of their increased market share has been a rising incidence of small investors (that are heavily reliant on credit) in the market, as opposed to greater activity among larger investors. This suggests that the incoming changes to the LVR restrictions could have a significant dampening effect on Auckland housing market activity and house price inflation. We also find that investors are disproportionately represented at both ends of the price spectrum, contrary to popular opinion that investors predominantly buy relatively cheap properties for use as rentals.

Finally, we offer some additional insights into cash buyers, with the evidence pointing towards increased investor leverage relative to other market participants, consistent with the strong growth in investor-related mortgage commitments in recent months.

Will Cameron’s 200,000 starter homes really help solve the housing crisis?

From The Conversation.

British prime minister, David Cameron, has pledged to turn “Generation Rent” into “Generation Buy”, by building 200,000 affordable starter homes for under-40s by 2020. The price of the starter homes will be capped at £250,000 (£450,000 within London), and buyers will not be able to sell the properties on for five years. While the prime minister’s announcement will help address the UK’s chronic housing shortage, it is also likely to have unintended consequences.

We really ought to be building 240,000 new homes each year in England alone, if we are to meet need. Currently, we are only building about half of that amount. In fact, it was as far back as 1978 when we were last building the numbers of new houses we need today.

Challenge accepted

Minister for Housing and Planning Brandon Lewis recently said that building 1m new homes in the life of this parliament would be a good achievement. But, welcome as those homes would be, they are still fewer than we need.

The real challenge is to rebuild the construction capacity that we lost after the credit crunch, when many small and medium sized builders went out of business and many skilled construction workers left the industry as house prices fell and small builders found it hard to raise finance. So building more homes will involve boosting the number of small- and medium-sized construction firms, as well as skilled labour – all of which will take time and money.

As though the challenge of building a million homes wasn’t enough, we also need to ensure these homes are spread across all tenures: we need homes for private and shared ownership, newly built and professionally managed private rental homes and affordable rental homes. The prime minister’s announcement of additional starter homes is a useful contribution to meeting the gap between what we need and what we are currently building.

But these homes are to be secured by relaxing planning obligations for developers. Herein lies the potential for unintended consequences.

Over the last two decades, planning obligations have proved to be a very useful way of securing funds for infrastructure – such as open public spaces, schools, roads and public transport – and new affordable homes, including shared ownership and affordable rental homes.

Local authorities can use planning laws to negotiate with developers to incorporate affordable homes into their projects, and contribute toward the local infrastructure needed to support the new residents they attract. Over the years, large sums have been secured for infrastructure and affordable homes. Developers obviously incur costs when making these provisions. They ensure they can afford these extra costs by paying less for the land they buy than they would have done, if they did not have to comply with these obligations.

Prices for land tend to rocket when planning consent is granted, and it has long been regarded as reasonable for some of this potential increase to be diverted to fund infrastructure and affordable homes. Crucially, planning obligations have enabled private funding to replace publicly funded grants to housing associations, while maintaining the output of new affordable rented homes.

What’s the catch?

Now, developers will be required to provide starter homes at a discount, instead of contributing to infrastructure and affordable rental homes. This trade-off could mean that new starter homes are built, but the supporting infrastructure isn’t. It could also prevent communities from securing the new affordable rental and shared ownership homes they need. This will be a critical loss, especially since the latter have proved an effective way of helping low-income earners to get a foot on the “housing ladder”.

And while financial institutions are keen to invest in newly built privately rented housing, the scale of this activity is still modest and will not be adequate to meet the gaps in rented housing provision in the immediate future.

Perhaps the government has yet to unveil plans to increase public funding for infrastructure and to provide additional grants to build new affordable rental homes. But this seems unlikely, given the cuts to public spending we’re expecting, as we await the outcomes of the public spending review.

What we need, in addition to the government’s aspiration to build 1m new homes by 2020, is clarity about all the resources to be provided. This will allow the house-building and construction industry to gear up with confidence, and aim to reach that target across all tenures. Starter homes will help – but they shouldn’t come at the cost of schools and affordable rental homes.

Author: Tony Crook CBE, Emeritus Professor of Town and Regional Planning, University of Sheffield

Are Australian House Prices Overvalued?

Within the 65 pages of the IMF report there is a comprehensive section on Australian house prices.  Housing market risks they say remain heightened. They conclude that house prices are moderately overvalued, probably around 10 percent. The problem is concentrated in Sydney and is fuelled by investor credit and interest only loans. Current rates of house price inflation imply rising overvaluation. Current efforts to rein in riskier property lending might not be sufficiently effective.

International comparisons persistently signal warnings. The level of real house prices and the house price to income ratio is high relative to the OECD average (though similar to other buoyant markets). House price inflation picked up to 7-10 percent in 2014-15—driven by rapid increases in Sydney and to a lesser extent Melbourne (prices in the resource states have fallen back in recent months). While foreign investment in real estate has increased, the main driver has been local investor lending and interest-only loans. Sydney house price to income ratios are much higher than for other cities at around 7—similar to Auckland, London, Stockholm and Vancouver.

Can the increase in house prices be explained?

  1. The housing market and financial system have changed significantly over the past two decades with a shift to low inflation, low nominal interest rates and financial liberalization which loosened credit constraints. Households’ borrowing capacity increased and they moved to a higher steady state level of indebtedness and higher house prices relative to incomes.
  2. Supply side constraints may also keep prices high. Although Australia is big, much of the country is remote and the population is concentrated in a few cities where there are geographical or other barriers to expansion. Population growth has also been much more rapid than for other OECD countries, whereas housing investment as a share of GDP is only at OECD average levels. Supply bottlenecks also reflect planning issues and transport restrictions.

IMF-Aust-1IMF-Aust-2Are high and rising prices a problem? There has been no generalized credit boom and lending standards are generally high (and being tightened), so financial stability risks seem contained. The run-up in house prices has also not been accompanied by a construction boom (unlike Ireland and Spain). But with already high debt and house prices, rapid house price inflation raises the risk of a sharp reversal, which would damage the macroeconomy.

Do models point to overvaluation? Estimating overvaluation is inherently difficult. Rather than relying on one model, staff used four different approaches.

  1. Statistical filter. Deviations from an HP filter suggest overvaluation of about 5 percent.
  2. Fundamentals. The standard model used in the Fund, estimated since the early 2000s, with fundamental explanatory variables—affordability, incomes, interest rates, and demographics―estimates overvaluation of around 15 percent and equilibrium growth rates around 3-4 percent.
  3. Including supply factors. A model using similar longrun fundamentals, but adding credit and the housing stock to take into account supply constraints, points to an overvaluation of around 8-10 percent.
  4. User costs. Estimates of user costs (whether it is more expensive to own than to rent) suggests that renting is about as costly as buying a house based on average real appreciation since 1955 (Fox and Tulip, 2014). However, this estimate is highly sensitive to interest rates and expectations of future house price appreciation. Using a plausibly lower expected appreciation term results in an overvaluation of 10-19 percent.

IMF-Aust-3Bottom line: House prices are moderately overvalued, probably around 10 percent. The problem is concentrated in Sydney and is fuelled by investor credit and interest only loans. Current rates of house price inflation imply rising overvaluation.

In their house price modelling, they assume a  baseline projection is for a soft landing, with house price inflation slowing to a sustainable 3-4 percent, based on medium-term fundamentals. This implies no change in the estimated overvaluation and housing market risks thus remain heightened.

Current efforts to rein in riskier property lending might not be sufficiently effective. Against a backdrop of already high house prices and household debt, this could give rise to price overshooting and excessive risk taking. A sharp correction in house prices, possibly driven by Sydney, could be triggered by external conditions (e.g., a sharper slowdown in China or a rise in global risk premia), or a domestic shock to employment.

This might have wider ramifications if it affects confidence. The house price cycle could be amplified by leveraged investors looking to exit the market and a turning commercial property cycle. Though currently small, investors in self managed superannuation funds that have added geared property to their fund portfolios would also be adversely affected in a downturn. In a tail scenario, APRA’s stress tests suggest banks would probably face ratings downgrades/higher offshore funding costs and would likely resist capital ratios falling into capital conservation territory by sharply tightening credit conditions, thus transmitting and amplifying the shock to the rest of the economy.

Five reasons the Turnbull government shouldn’t let us spend super on a home

From The Conversation.

Allowing first homebuyers to cash out their super to buy a home is a seductive idea with a long history. Like the nine-headed Hydra, which replaced each severed head with two more, each time the idea is cut down it seems to return even stronger.

Both sides of federal politics took proposals to the 1993 election to let Australians draw down their super. After re-election, then Prime Minister Paul Keating scrapped it amid widespread criticism. Former Treasurer Joe Hockey raised the idea again in March and was roundly criticised by academics and the media. This month the Committee for Economic Development of Australia (CEDA) has again resurrected the idea.

House prices have skyrocketed again over the past two years, particularly in Sydney. So politicians are attracted to any policy that appears to help first homebuyers to build a deposit. Unlike the various first homebuyers’ grants that cost billions each year, letting first homebuyers cash out their super would not hurt the budget bottom line – at least, not in the short term. But the change would worsen housing affordability, leave many people with less to retire on, and cost taxpayers in the long run.

It is a bad idea for five reasons.

First, measures to boost demand for housing, without addressing the well-documented restrictions on supply, do not make housing more affordable. Giving prospective first homebuyers access to their superannuation will help them build a house deposit, but it would worsen affordability for buyers overall. Unless supply increases, more people with deposits would simply bid up the price of existing homes, and the biggest winners would be the people who own them already.

Second, the proposal fails the test of superannuation being used solely to fund an adequate living standard in retirement. The government puts tax concessions on super to help workers provide their own retirement incomes. In return, workers can’t access their superannuation until they reach a certain age without incurring tax penalties.

While paying down a home is an investment, owner-occupiers also benefit from having somewhere to live without paying rent. These benefits that a house provides to the owner-occupier – which economists call housing services – are big, accounting for a sixth of total household consumption in Australia. Using super to buy a home they live in would allow people to consume a significant portion of the value of their superannuation savings as housing services well before they reach retirement.

Third, most first homebuyers who cash out their super would end up with lower overall retirement savings, even after accounting for any extra housing assets. Owner-occupiers give up the rent on their investment. With average gross rental yields sitting between 3% and 5% across major Australian cities, the impact on end retirement savings can be very large. Consequently, owner-occupiers will tend to have lower overall lifetime retirement savings than if the funds were left to compound in a superannuation fund

Frugal homebuyers might maintain the value of their retirement savings if they save all the income they no longer have to pay as rent. In reality, few will have such self-discipline. Compulsory savings through superannuation have led many people to save more than they would otherwise. A recent Reserve Bank study found that each dollar of compulsory super savings added between 70 and 90 cents to total household wealth. If first homebuyers can cash out their super savings early to buy a home that they would have saved for anyway, then many will save less overall.

Fourth, the proposal would hurt government budgets in the long run. Superannuation fund balances are included in the Age Pension assets test. The family home is not. If people funnel some of their super savings into the family home, gaining more home equity but reducing their super fund balance, the government will pay more in pensions in the long-term.

Government would be spared this cost if any home purchased using super were included in the Age Pension assets test, but that would be very hard to implement. For example, do you only include the proportion of the home financed by superannuation? Or would the whole home, including principal repayments made from post-tax income, be included in the assets test? The problems go away if all housing were included in the pension assets test, but this would be a very difficult political reform.

Fifth, early access to super for first homebuyers could make the superannuation system even more unequal than it is today. Many first homebuyers are high-income earners. Allowing them to fund home purchases from concessionally-taxed super would simply add to the many tax mitigation strategies that already abound.

Consider the case of a prospective homebuyer earning A$200,000. Their concessional super contributions are taxed at 15%, rather than at their marginal tax rate of 47%. Once they buy a home, any capital gains that accrue as it appreciates are tax-free, as are the stream of housing services that it provides. Such attractive tax treatment of an investment – more generous than the already highly concessional tax treatment of either superannuation or owner occupied housing – would be prone to massive rorting by high-income earners keen to lower their income tax bills.

What, then, should the federal government do to make housing more affordable?

Prime Minister Malcolm Turnbull has tasked Jamie Briggs with rethinking policy for Australia’s cities. Mick Tsikas/AAP

Helping fix our cities

Above all, new federal Minister for Cities Jamie Briggs should support policies to boost housing supply, especially in the inner and middle ring suburbs of major cities where most people want to live, and which have much better access to the centre of cities where most of the new jobs are being created. The federal government has little control over planning rules, which are administered by state and local governments. But it can use transparent performance reporting, rewards and incentives to stimulate state government action, using the same model as the National Competition Policy reforms of the 1990s.

Other reforms, such as reducing the 50% discount on capital gains tax and tightening negative gearing, would also reduce pressure on house prices and could be implemented straight away. Such favourable tax treatment drives up house prices because it increases the after-tax returns to housing investors. The number of negatively geared individuals doubled in the 10 years after the capital gains tax discount was introduced in 1999. More than 1.2 million Australian taxpayers own a negatively geared property, and they claimed A$14 billion in net rental losses in 2011-12.

There are no quick fixes to housing affordability in Australia. Yet any government that can solve the problem by boosting housing supply in inner and middle suburbs, while refraining from further measures to boost demand, will almost certainly find itself rewarded, by voters and by history.


Authors: Brendan Coates, Senior Associate, Grattan Institute;  John Dale, John Daley is a Friend of The Conversation, Chief Executive Officer , Grattan Institute.


90% of Property was Sold at a Profit – CoreLogic RP Data

CoreLogic RP Data’s Pain and Gain Report for the June 2015 quarter shows that 9.1% of all homes resold recorded a gross loss when compared to their previous purchase price. However, vast majority (90.9%) of properties resold over the quarter did so at a profit. In fact, 30.8% of homes resold for more than double their previous purchase price.

The vast majority (90.9%) of properties resold over the quarter did so at a profit. In fact, 30.8% of homes resold for more than double their previous purchase price. Across those homes which resold at a profit, the total value of this profit was recorded at $16.1 billion with the average gross profit recorded at $259,174.

Those recording a loss over the March 2015 quarter was (8.9%) and slightly higher than the 8.6% recorded over the June 2014 quarter. Although the proportion of loss-making resales rose, the figure has been fairly steady over the past 12 months. Across those dwellings which resold at a loss over the quarter, the total value of loss was $411.3 million with an average loss of $65,585.

The data also highlights the fact that ownership of property, whether for investment or owner occupier purposes, should be seen as a long-term investment. Across the country, those homes that resold at a loss had an average length of ownership of 5.3 years. Across all sales recording a gross profit the average length of ownership was recorded at 9.9 years, while homes which sold for more than double their previous purchase price were owned for an average of 16.4 years.

Sydney remains the only capital city housing market in which units had a lower proportion of resales at a loss (1.8%) than houses (2.2%) over the quarter. The differential in loss-making resales between houses and units was quite substantial across most capital cities and reflects the fact that house values tend to increase at a more rapid pace than units.

Trends across some of the major regions of the country which are intrinsically linked with the resources sector have been analysed and in most instances a heightened level of loss-making sales is evident as the mining investment boom slows. Over the June 2015 quarter, 47.6% of resold properties in Mackay sold at a loss. Across the other regions analysed the figures were recorded at: 35.6% in Fitzroy, 10.9% in the Hunter Valley (excluding Newcastle), 19.3% in Outback SA and 32.6% in Outback WA.


Residential Real Estate Now Worth $5.76 trillion

The ABS released their data on capital city house prices today, to June 2015.  Total property is now worth $5.76 trillion, reflecting recent significant price rises in Sydney and Melbourne. The number of dwelling rose to 9.53 million, and the average price was $604,700.

The capital city residential property price indexes rose in Sydney (+8.9%), Melbourne (+4.2%), Brisbane (+0.9%), Adelaide

The price index for residential properties for the weighted average of the eight capital cities rose 4.7% in the June quarter 2015. The index rose 9.8% through the year to the June quarter 2015.

(+0.5%) and Canberra (+0.8%), was flat in Hobart (0.0%) and fell in Perth (-0.9%) and Darwin (-0.8%).

Annually, residential property prices rose in Sydney (+18.9%), Melbourne (+7.8%), Brisbane (+2.9%), Canberra (+2.8%), Adelaide (+2.7%) and Hobart (+1.5%) and fell in Darwin (-1.8%) and Perth (-1.2%).

The total value of residential dwellings in Australia was $5,761,607.2m at the end of June quarter 2015, rising $271,939.1m over the quarter.

The mean price of residential dwellings rose $26,200 to $604,700 and the number of residential dwellings rose by 38,400 to 9,528,300 in the June quarter 2015.

Long-run Trends in Housing Price Growth

The RBA in their latest edition of The Bulletin has included an article examining the factors driving long-run trends in Australian housing price growth over the past three decades. They look at factors like supply, inflation and population growth.

However the glaring omission in our view is the direct impact easier credit and capital ratios have had on bank lending. Without the credit boom we could not have had a house price boom. Whilst they do point out that price to income ratios are high (but more static), we think this is a function of income growth, and is directly connected with the current level at which banks are willing to lend.

During the 1980s, housing prices grew broadly in line with general price inflation in the economy. The period from the 1990s until the mid 2000s saw relatively strong housing price growth associated with a significant increase in the debt-to-income ratio of Australian households. Since the mid 2000s, strong population growth has played an increasing role in explaining housing price growth.

Over the past 30 years, Australian housing prices have increased on average by 7¼ per cent per year, and over the inflation-targeting period by around 7 per cent per year However, these averages mask three distinct phases:

  1. During the 1980s, annual housing price inflation was high, at nearly 10 per cent on average, but so too was general price inflation. In real terms, housing price inflation during the 1980s was relatively low, at 1.4 per cent per annum compared with 4.5 per cent during the period from 1990 to the mid 2000s, and 2.5 per cent over the past decade.
  2. The 1990s until the mid 2000s were marked by quite high housing price inflation, of 7.2 per cent per annum, on average, in nominal terms.
  3. Annual nominal housing price inflation over the past decade was lower than either of these periods, at a little over 5 per cent on average.

They note that housing price growth, has outstripped the rate of inflation in other prices in the economy including inflation in the cost of new dwellings. They posit a range of drivers, for example population growth….

House-Prices-RBA-1Price to income and household debt to income ratios have never been higher than they are now. Part of this is explained by freeing up the financial system, so finance was easier to get.  The increased access to credit by Australian households over this period can be seen in the steady increase of the ratio of household debt to income. A similar trend is observed in the dwelling price-to-income ratio. While deregulation and disinflation were largely complete by the mid 1990s, the adjustment of the economy to the new steady state took well over a decade. These adjustments appear to have largely run their course, with the household debt-to-income ratio fluctuating around 150 per cent over the past decade.

House-Prices-RBA-2Finally supply did not keep up with demand. When compared with the range of underlying demand estimates, completions suggest that, over much of the past decade, the supply side has been slow, or unable, to respond to the significant increases in underlying demand (based on estimates of underlying average household size, rather than actual household size). More recently, the gap between underlying demand for and supply of new dwellings in Australia looks to have become smaller. Much of the aggregate gap was accounted for by developments in New South Wales. Underlying demand-supply gaps in Queensland and Western Australia also look to have contributed to the aggregate gap, although the estimates of underlying demand on a state level are subject to even larger uncertainty than those at the national level.

House-Prices-RBA-3They conclude that during the 1980s, housing price inflation broadly followed general price inflation in the economy, which was relatively high and
volatile. Following the financial deregulation of the mid 1980s and disinflation of the early 1990s, cheaper and easier access to finance underpinned a secular increase in households’ debt-to-income ratio that was closely associated with high housing price inflation from the early 1990s until the mid 2000s. The past decade saw a stabilisation of debt-to-income levels, but also a prolonged period of strong population growth – underpinned by high immigration – and smaller household sizes that led to increases in underlying demand exceeding the supply of new dwellings.

Looking ahead, they say it seems unlikely that there will be a return to the rather extreme conditions of the earlier episode when significant increases in household debt supported high housing price growth. Nonetheless, protracted periods of changes in population growth that are not met by adjustments in dwelling supply could lead to periods of sizeable changes in housing price growth. One important factor for housing price growth is the ability of the supply of new dwellings to respond to changes in demand. The significance of this is made clear by the recent increases in
higher-density housing and lower growth of those prices relative to prices of detached houses, whose supply has been less responsive.

We think the generous capital adequacy ratios and the banks fixation to lend on property however is the root cause. We think they should have looked harder at credit supply, and capital ratios in the context of bank profitability.

Tapping super not the answer to home ownership decline

From The Conversation.

“All Australians should be able to retire with dignity and decent living standards.”

So states the recently released superannuation report of the Committee for Economic Development of Australia (CEDA).

CEDA’s report is commendable. And although I agree with most of its recommendations, including what the purpose of super should be, how retirement income products dealing with longevity risk should be developed and how super tax laws should be made more equitable, I have one serious misgiving: I do not believe active employees should be able to use their super funds to invest in owner-occupied housing.

The American 401(k) system (also a defined contribution model like Australian super) provides a cautionary tale on the damage caused by what’s known as pre-retirement leakage. Unlike Australia, it is fairly easy for US workers to access their 401(k) retirement accounts during active employment. Even prior to preservation age, which is 59½ in the US, individuals are able to use their workplace retirement accounts for a number of purposes, both with and without tax consequences.

For instance, the US tax code allows individuals under specified circumstances to take loans against the value of their retirement funds without tax penalty. Although such funds are required to be secured and paid back like any other commercial loan, studies show many employees are never able to restore the money to their 401(k) accounts. Not only does this lead to diminished pension pots, it also means there will be less money upon which interest or investment returns can build on in the long-term.

The US 401(k) system also permits employees to take hardship distributions for a number of reasons, including purchasing of a first home, university education and medical expenses. In these circumstances, not only does the individual not face any tax penalties for the withdrawal (except for having to pay ordinary income tax), they are also not required to pay back the money to their account.

Finally, employees can take money out of their 401(k) accounts if they “really” want. What I mean is, absent even an authorised loan or hardship distribution, employees before preservation age can withdraw funds from their retirement accounts. We call this “expensive money” because both a 10% excise tax and 20% employer withholding of funds apply. In the end, these employees receive 70 cents in the dollar for withdrawing money prematurely from their retirement account.

Such leakage in the US causes a significant erosion of assets in retirement – approximately 1.5% of retirement plan assets “leak” out every year. This can potentially lead to a reduction in total retirement assets of 20% to 25% over an employee’s working years, according to experts.

Remember the role of super

I do not disagree with the CEDA report that housing makes a critical contribution to sustaining living standards and helping to address elderly poverty. Needless to say, there should be a multipronged federal government response to the spectre of increasing poverty in old age because of the lack of home ownership. Many useful suggestions are made in the CEDA report in this regard.

But using super, even if only for first-time home buyers, should not be the answer. Indeed, CEDA agrees with much of the recent Financial System Inquiry report (the Murray report), which concludes that super legislation should state explicitly and clearly that its purpose is to provide retirement income.

While increasing home ownership for younger workers is an admirable policy prescription, it is not consistent with the retirement income focus of super. Allowing workers to use their super funds to buy homes means there will be much less money in the pension pot to grow over time to provide the necessary retirement income.

And the harm is ongoing. Making such a change would lead to a further constrained supply of housing, meaning more money chasing the increasingly limited stock of property, tending to drive home prices up even further.

Of course, when, not if, the housing market crashes, much of the super savings tied into such property will also be lost. This problem stems from a lack of diversification in one’s retirement portfolio through an over-investment in the family home. The consequent lack of investment diversification among asset classes means super is less likely to be able to survive future shocks to the Australian economic system.

The lesson from the United States is clear: pre-retirement leakage from super should be permitted only under the most exceptional of circumstances. Even for the very best of reasons, like first-time home ownership, Canberra should prevent super fund leakage during active employment to ensure the primary objective of super: retirement income adequacy.

Author: Paul Secunda, Senior Fulbright Scholar in Law (Labour and Super) at University of Melbourne

Capital Gains Up, But Rental Yields Down – CoreLogic RP Data

According to the CoreLogic RP Data August 2015 Home Value Index, capital city dwelling values continued to rise over the month whilst growth in weekly rental rates shifted to a new record low for annual growth over the month of August.

2015-09-01-indices-tableThe headline results show that dwelling values were 0.3 per cent higher over the month across the eight capital city index. The highest month-on-month movement was in Sydney, where dwelling values were 1.1 per cent higher, while dwelling values also moved higher across Adelaide (0.7 per cent) and Darwin (0.3 per cent), and were flat over the month in Melbourne and Brisbane. The remaining capital cities recorded a month-on month fall in dwelling values.

While the August results indicate a slowdown in the rate of appreciation in dwelling values, the quarterly figures highlight just how strong the housing market has been over the past three months; combined capital city dwelling values are 5.3 per cent higher over the three months to the end of August this year.

Sydney dwelling values are 17.6 per cent higher over the past year, and since the beginning of 2009, Australia’s largest capital city housing market has recorded a cumulative capital gain of 76 per cent. Using the median house price from January 2009 as a base, the typical Sydney home owner has seen the value of their home increase by approximately $309,000 since the beginning of 2009.

The only cities where dwelling values declined over the past twelve months have been Darwin (-4.6 per cent), Perth (-1.8 per cent) and Canberra (-0.9%).

Growth in weekly rental rates shifted to a new record low for annual growth over the month of August. Across the combined capital cities, the median weekly rental rate rose
by just 0.7 per cent over the past twelve months, with house rents up 0.5 per cent and unit rents up a higher 1.6 per cent.

Since May 2013, dwelling values have risen at a faster pace than weekly rents. “The result of the disparity between dwelling values and dwelling rents has been a consistent downwards trend in gross rental yields.

Gross yields are at record lows in both Sydney and Melbourne. A typical dwelling is attracting a gross yield of just 3.3 per cent and 3.1 per cent respectively across Australia’s two largest cities. Mr Lawless said that the low yield scenario has largely been overlooked by investors who appear to be more focused on chasing future anticipated capital gains rather than aiming for cash flow.

The Long-Term Evolution of House Prices: An International Perspective

Excellent speech from Lawrence Schembri, Deputy Governor, Canadian Association for Business Economics on house price trends. The speech, which is worth reading, contains a number of insightful charts. Australian data is included. He looks at both supply and demand issues, and touches on macroprudential.  You can watch the entire speech.

I have highlighted some of the main points:

First, Chart 1 shows indexes of real house prices since 1975 for two sets of advanced economies. Chart 1a shows Canada and a set of comparable small, open economies (Australia, New Zealand, Norway and Sweden) with similar macro policy frameworks and similar experiences during and after the global financial crisis. In particular, they did not have sizable post-crisis corrections in house prices. For comparison purposes, Chart 1b shows a second set of advanced economies that did experience significant and persistent post-crisis declines in house prices.

Real-House-PricesSince 1995, house prices in Canada and the set of comparable countries have increased faster than nominal personal disposable income (Chart 2a). During this period, all of these countries experienced solid income growth, with the strongest growth in Norway and Sweden (Chart 2b).

Price-to-IncomeDuring the global financial crisis, these countries also experienced house price corrections. This caused the ratios of house prices to income to decline temporarily, after which they continued climbing.

One of the factors that has affected population growth rates is migration. Net migration was highest in Australia and Canada over the entire sample. In addition, net migration increased importantly in all five countries in the second half of the sample period (Chart 3b)

population-GrowthIn Australia, Canada and New Zealand, the rate of population growth of the approximate house-owning cohort of those aged 25 to 75 declined in the second part of the sample period. This likely reflects the aging of their populations as the postwar baby boom generation moved from youth into middle age (Chart 4). Nonetheless, the growth rate of this cohort still remains well above 1 per cent for these three countries.

CohortsChart 9 provides some suggestive evidence on the impact of land-use regulations on median price-to-income ratios. Many of the cities with higher ratios also have obvious geographical constraints—Hong Kong and Vancouver are good examples—so the two sources of supply restrictions likely interact to put upward pressure on prices.SupplyWhen we look at the post-crisis experiences of the countries in our comparison group, they have similar levels of household leverage, measured by household debt as a ratio of GDP (Chart 12). Household leverage has risen along with house prices, as households have taken advantage of low post-crisis interest rates. The one exception is New Zealand, where a modest degree of household deleveraging seems to have occurred. For Canada, the ratio of household debt to GDP has risen since 1975, although the growth of this ratio has notably declined since 2010. For Sweden and Norway, the ratio also grew at a modest pace in the post-crisis period. Note Australia has the highest ratios.

LeverageCharts 13a and b draw on recent work by the IMF, which shows that macroprudential policies in the form of maximum loan-to-value (LTV) or debt-to-income (DTI) ratios have tightened across a broad range of countries over the past 10 years. The IMF’s research, as well as that of other economists, has found evidence suggesting that the tightening has helped to: reduce the procyclicality of household credit and bank leverage; moderate credit growth;
improve the creditworthiness of borrowers; and lower the rate of house price growth.

The most effective macroprudential policies to date appear to have been the imposition of maximum LTV and DTI constraints. Increased capital weights on bank holdings of mortgages have also had an impact. While long-term evidence on these instruments is not yet available, permanent measures that address structural regulatory weaknesses and that are relatively straightforward to implement and supervise will likely be the most effective over time.

MacroprudentialInteresting to note that in Canada, they have had four successive rounds of macroprudential tightening, primarily in terms of the rules for insured mortgages. The maximum amortization period for insured loans has been shortened from 40 years to 25. LTV ratios have been lowered to 95 per cent for new mortgages, and 80 per cent for refinancing and investor properties. These latter two changes effectively eliminate new insurance for refinancing and investor properties. Qualification criteria such as limits on the total debt-service ratio and the gross debt-service ratio, as well as requirements for qualifying interest rates, have also been tightened.


Let me conclude with a few key points from the mountain of facts, graphs and analysis that I have reviewed with you today. As I mentioned at the outset, the purpose of my presentation is to help provide more context for an informed discussion about housing and house prices given their importance to the Canadian economy and the financial system.

First, real house prices have been rising relative to income in Canada and other comparable countries for about 20 years. There are many possible explanations, mostly from the demand side, but also from the supply side.

Second, in terms of demand, demographic forces, notably migration and urbanization, have played a role in the evolution of house prices, as have improving credit conditions through lower global real long-term interest rates and financial liberalization and innovation. There are, of course, other demand factors that warrant more data and analysis, including the impacts of foreign investment and possible preference shifts.

Third, in terms of supply, the constraints imposed by geography and regulation have decreased housing supply elasticity, especially in urban areas. This reduced supply elasticity has interacted with demand shifts toward more urbanization to push up house prices in major cities.

Fourth, the credible and effective macro and financial policy frameworks in place in Canada and the other countries considered here have contributed to a high degree of macroeconomic and financial stability. Consequently, in the face of a protracted global recovery, their countercyclical policies successfully underpinned domestic demand in the post-crisis period. The resulting strength in the housing market has increased household imbalances, but the risks stemming from these vulnerabilities have been well managed by complementary macroprudential policies.

The experience in these countries therefore suggests that macroprudential policies that address structural weaknesses in the regulatory framework are best suited for mitigating such financial vulnerabilities. They reduce tail risks to financial stability and enhance the overall resilience of the financial system.