Budget may encourage downsizing with superannuation breaks

From The Real Estate Conversation.

The government is considering offering exemptions to new superannuation limits for retirees who downsize from their family home, according to reports.

The upcoming Federal Budget could contain measures that allow elderly Australians who sell the family home to be exempt from new superannuation caps, according to media reports.

A report in The Australian Financial Review is claiming that proceeds from the sale of the family home could be quarantined from both the $1.6 million cap on super retirement funds, and the non-concessional amount that can be contributed to super annually.

It’s widely expected that proceeds from the sale of the family home will not be excluded from the age pension assets test.

The anticipated policy is designed to tackle housing affordability problems by freeing up more housing stock on the market, in particular housing for families.

The Federal Budget, which will be handed down on 9 May, is widely expected to contain several measures aimed at tackling housing affordability.

Read the The Australian Financial Review article here (subscription only).

Housing’s Echo Bubble Now Exceeds The 2006-07 Bubble Peak

From Of The Two Minds Blog.

If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble.

A funny thing often occurs after a mania-fueled asset bubble pops: an echo-bubble inflates a few years later, as monetary authorities and all the institutions that depend on rising asset valuations go all-in to reflate the crushed asset class.

Take a quick look at the Case-Shiller Home Price Index charts for San Francisco, Seattle and Portland, OR. Each now exceeds its previous Housing Bubble #1 peak:

Is an asset bubble merely in the eye of the beholder? This is what the multitudes of monetary authorities (central banks, realty industry analysts, etc.) are claiming: there’s no bubble here, just a “normal market” in action.

This self-serving justification–a bubble isn’t a bubble because we need soaring asset prices–ignores the tell-tale characteristics of bubbles. Even a cursory glance at these charts reveals various characteristics of bubbles: a steep, sustained lift-off, a defined peak, a sharp decline that retraces much or all of the bubble’s rise, and a symmetrical duration of the time needed to inflate and deflate the bubble extremes.

It seems housing bubbles take about 5 to 6 years to reach their bubble peaks, and about half that time to retrace much or all of the gains.
Bubbles have a habit of overshooting on the downside when they finally burst. The Federal Reserve acted quickly in 2009-10 to re-inflate the housing bubble by lowering interest rates to near-zero and buying over $1 trillion of mortgage-backed securities.

When bubbles are followed by echo-bubbles, the bursting of the second bubble tends to signal the end of the speculative cycle in that asset class. There is no fundamental reason why housing could not round-trip to levels below the 2011 post-bubble #1 trough.

Consider the fundamentals of China’s remarkable housing bubble. The consensus view is: sure, China’s housing prices could fall modestly, but since Chinese households buy homes with cash or large down payments, this decline won’t trigger a banking crisis like America’s housing bubble did in 2008.

The problem isn’t a banking crisis; it’s a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.

China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.

About 15% of China’s GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing’s share of U.S. GDP barely cracked 5%.

Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)

There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose a majority of their operating revenues, and there is no other source they can tap to replace this lost revenue.

Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth. The end of that “rising tide raises all ships” gravy train will dramatically alter China’s household wealth and local government income.If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble. Oops, did I say bubble? I meant “normal market in action.”

Who is prepared for the inevitable bursting of the echo bubble in housing? Certainly not those who cling to the fantasy that there is no bubble in housing.

Auction Activity Rose Last Week

From Core Logic.

Auction activity increased significantly across the combined capital cities this week after last week’s Easter period slowdown, with 1,732 homes taken to market and a preliminary clearance rate of 72.1 per cent, down from 73.9 per cent last week across fewer auctions (493).  Melbourne saw the most significant increase in activity, with volumes increasing from 102 last week to 823 this week, also returning the highest clearance rate of all the capital cities (76.8 per cent). Both clearance rate and volumes are higher than what was seen over the corresponding week last year, when 69.7 per cent of the 1,565 auctions cleared.

Four charts which should worry you about rising house prices and inequality

From The Conversation.

When we want to measure the economic activity of a country, we tend to reach for the gross domestic product, or GDP. This may be an imperfect measure, but it does allow us to track where the money comes from for every item bought and sold. It tells us whether we worked to earn it through wages, or whether it came from capital income – including stock dividends, rents and capital gains on assets such as housing.

When it comes to the US, economists became used to the idea that the share of GDP attributable to labour income fluctuated around 60% while the remaining 40% was capital income. Then came Thomas Piketty. His 2014 book, Capital in the 21st century explained that the labour share has actually been more unstable over the past century than commonly assumed.

Piketty’s data also showed that the capital share has increased quite significantly at the expense of the labour share over the past three decades. Both in the US and in the UK, for example, the labour share declined from about 70% in the 1970s to about 60% in recent years. This was seized upon as it helps to explain the recent increase in wealth inequality. A large majority of the population gets most of their income almost exclusively in the form of wages. Only a few lucky ones own enough financial assets such as real estate and stocks to earn the equivalent of an annual wage.

More than 80% of the stock market’s value in the US is held by the top 10%. With an average interest rate of 5%, US$1m in stocks are needed to get a return of US$50,000, which is close to the median household income. The person who can make a living from his capital income is certainly no average Joe.

Capital gains

A look at four charts helps to show why this matters, and the impact it can have on those without the means to live on income from capital assets.

Author/Erik Bengtsson and Daniel Waldenström, Author provided

The chart above shows the average capital share for 17 advanced economies from 1875 to 2012. This new dataset, based on work by Erik Bengtsson and Daniel Waldenström, includes more countries than Piketty’s original analysis. The figure confirms the same inverted U-shaped pattern, with high values for the capital share at the beginning and at end of the 20th century, that Piketty found for some major economies such as the US and the UK.

He argued that three major global shocks, the two world wars and the Great Depression, led to a large reduction in wealth around the world. This destruction of capital can also explain the very low capital share in the post World War II period. The recent increase might thus simply represent a reversion towards a value that is more in line with the historic long-run average.

So why is this important for workers? Well, the next chart shows the net capital share in the US from 1929 until 2012.

Author/Erik Bengtsson and Daniel Waldenström, Author provided

Some economists argue that the net share is more relevant than the gross share if one is concerned about inequality. The net share excludes depreciation, the gradual decline in the value of physical capital such as machinery, which is normally included in the GDP figures – even though it is not an income stream to anybody. The data clearly shows the recent increase in the net capital share from a low of 22% in the early 1980s to a high of 30% in 2010. This means that an additional 8% of net national income now takes the form of capital income instead of wages.

So, why is it important if capital takes a larger slice of the pie? If the economy is still growing, surely everybody must win? Well, not quite. The answer is, of course, that capital ownership is highly concentrated. The increase in the capital share effectively means that capital incomes have grown at a faster pace than wages. This leads to a more unequal society since most of the stock market and even a significant portion of real estate is owned by a wealthy few. The more money invested in assets such as property and stocks, the less available to pay workers and boost productivity.

This can work out as a significant hit to the average worker. Net national income in the US was about US$48,700 per person in 2015. Had the net capital share remained at the low value of 22%, an additional US$3,900 per person would flow in the form of wages instead of capital income. This translates to an additional US$10,000 per employed person, certainly a sizeable amount of money.

The importance of real estate

Some researchers, including Piketty, point out that the recent increase in the capital share is related to the rising values of real estate. The next chart shows the average value of real house prices, adjusted for inflation, for the same 17 economies from 1870 until today.

Author/Jorda, Schularick and Taylor, Author provided

House prices stayed fairly constant for almost a century after 1870. However, over the past 50 years real house prices have more than tripled. In some countries such as Australia, they have even increased by a factor of ten over the same time period. Furthermore, these are just national averages. Big cities, including New York, London, and Stockholm, have experienced even larger increases in the value of real estate.

The following chart describes the impact of that and compares the median net worth of families in the US who are home owners with those who are renters. The gap widened significantly during the years of the housing boom. The net worth of home owners exceeded those of renters by a factor of about 46 in 2007. House prices have recovered from the bust in 2008 and are now as high as before the crisis.

Author/Federal Reserve, Author provided

This is a challenge chock full of concerns for policy makers – especially those politicians hoping to win the votes of home owners. But rising house prices, especially in big cities, and the rise of the capital share are both trends which decisively favour asset owners over workers and which slowly chisel out a crevice between the two. Inequality could well increase much further without adequate responses from national governments. These charts should be a simple way of explaining just why things such as subsidies for housing construction in high-demand areas, easing of zoning laws, and higher taxes on capital income should be put on the table by anyone serious about reducing inequality.

Author: Julius Probst, Phd candidate in Economic History with a focus on long-run economic growth, Lund University

More warnings about the Australian housing market

From wsws.org.

Australian house prices have continued their unprecedented ascent, with median home values in Sydney this week hitting a record $1.15 million and in Melbourne, $826,000, after rising by 13.1 percent and 7.6 percent respectively in the first three months of the year.

The frenzied growth of the east coast market has prompted a series of warnings pointing to the contradiction between inflated house prices and the stagnant or declining incomes of working people, amid a slump across manufacturing and other industries.

Last week, Moody’s cautioned that Australia’s housing market was among four in the world most susceptible to a crash in the event of an economic shock or a renewed downturn. The international ratings agency drew attention to the mountain of debt upon which the property bubble has been built, stating: “Australian households stand out for lower financial buffers and higher leverage.”

Moody’s drew a parallel between debt-to-liquid asset ratios in Australia, and in Ireland before the collapse of the property market in 2007. It commented: “[I]n the event of a negative income shock, the scope for Australian households to draw down parts of their financial assets to maintain debt service and overall spending is more limited than elsewhere.”

Deloitte Access Economics likewise pointed to the buildup of debt this week, noting that household debt to income ratios are the second highest in the world after Sweden. National household debt currently stands at 185 percent of annual disposable income, up from around 70 percent in the early 1990s.

Deloitte has estimated that house prices are around 30 percent overvalued compared to national income, the highest margin in over three decades. The firm’s director, Chris Richardson warned that in “global terms our housing prices are asking for trouble.”

In comments to the National Press Club last week, Richardson warned of the vast implications of any slowdown of the Chinese economy for the Australian housing market and financial system. He predicted that a sharp crisis in China could result in the collapse of house prices by around 9 percent, as part of a broader downturn that could destroy almost $1 trillion of national wealth.

Martin North, of Digital Finance Analytics, drew parallels with the US subprime mortgage crisis that played a key role in precipitating the global financial crisis of 2007–08. He listed declining incomes, rapidly rising household debt and a growth in mortgage stress as features in common.

North told Fairfax Media: “This falling real income scenario is the thing that people haven’t got their heads around.” National wage growth across the private sector was just 1.8 percent last year, the lowest level since records began in 1969. Modelling by North has indicated that 669,000 families, or 22 percent of borrowing households, are already in mortgage stress.

Other reports have pointed to the mounting social crisis caused by the ongoing rise in house prices, prompting warnings of a rise in mortgage arrears and defaults.

In its Financial Stability Review released last week, the Reserve Bank reported that around one third of mortgaged households have not built up any substantial repayment buffer, or are a month or less ahead of mortgage repayments. In other words, they are vulnerable to economic fluctuations and any change in their circumstances.

An ALI Group survey last month showed that 41 percent of homeowners feared that they would be unable to keep up with mortgage repayments if they lost their job.

This finding tallied with figures late last year from financial management software company Moneysoft, which found that more than 25 percent of non-investor home loans were “unhealthy.” Loans were deemed to be in bad health if they had grown by at least 5 percent over the course of the loan. Another 25 percent were termed “neutral,” meaning that they had neither grown nor substantially fallen.

The precarious situation of many has contributed to a growth in delinquent housing loans. They rose from 1.15 percent of all housing loans last December, to 1.29 percent in January, according to Standard and Poor’s. In some states the figure is far higher, with Western Australia, which has been hit by the collapse of the mining boom, registering 2.33 percent.

These conditions have led to intensified calls for the Reserve Bank to raise its official interest rate from a historic low of 1.5 percent, and take other measures to rein in speculative loans, including interest-only loans that do not require the borrower to pay off any of the principal for fixed periods of up to seven years.

Minutes from the central bank’s April meeting stated that it “would consider further measures if needed,” but did not spell them out. Any rise in interest rates, however, could lead to a rapid fall in borrowing, along with a rise in mortgage defaults, potentially provoking a dramatic contraction of the entire market.

The soaring cost of housing, which has made it unaffordable for many young people, has intensified the crisis of the Liberal-National government of Malcolm Turnbull. Like its Labor Party predecessor, the government has maintained capital gains tax concessions, and other policies, such as negative tax gearing, which have provided a boon for property developers.

Amid reported divisions within the government, various proposals have been floated, including allowing first homebuyers to access their superannuation funds to purchase a house and making limited reductions in the 50 percent capital gains tax concessions.

The Labor Party has demagogically denounced negative gearing tax incentives for investors. Their posturing was punctured by reports this week that federal Labor politicians own some 72 investment properties in total. Their Liberal-National and Greens colleagues likewise have substantial material interests in the ongoing housing boom.

None of the measures being discussed by the government, or any section of the political establishment, will resolve the housing affordability crisis and the massive growth of property market speculation that has fuelled it.

Loans to investors made up around 39 percent of all housing loans in January, with only 7 percent of loans for first homebuyers. The proportion of investors is higher in Sydney and Melbourne, the centres of the property boom.

According to the Australian Bureau of Statistics, investor loans grew by 27.5 percent on a seasonally adjusted basis, between January 2016 and 2017. The growth was well above the 10 percent annual limit placed on the banks by regulatory authorities.

The rise has coincided with an ongoing decline in productive investment. Corporate investment in new buildings, equipment and machinery fell in each quarter last year, with a decline of 2.1 percent in the December quarter alone.

As has happened around the world, the deepening crisis of global capitalism and the escalating slump in the real economy has seen the corporate elite turn to ever-more speculative financial operations. These do not produce real social wealth but inflate the value of existing assets, in this case, leading to a housing crisis for millions of working people.

This Weeks Auction Results

The preliminary auction clearance results for today from Domain are in, and show ongoing momentum, though at a slower clip than in the weeks before Easter.

Sydney cleared 75% with 304 sold, compared with 68.9% on 275 a year ago. Melbourne cleared 79.5% with 419 sold, compared with 71.5% on 331 last year. Nationally 810 were sold at 75.3%, compared with 958 at 68.1% a year ago.

Brisbane cleared 50% with 99 scheduled, Adelaide 65% of 73 scheduled and Canberra 68% of 46 scheduled auctions.

Super funds targeted in Shorten’s housing affordability package

From The Conversation.

Labor will promise to ban direct borrowing by self-managed superannuation funds, as part of a housing affordability policy released on Friday to pre-empt the government’s package in next month’s budget.

This “limited recourse borrowing” – where a creditor has limited claims on the loan if there is a default – has increased from about A$2.5 billion in 2012 to more than $24 billion. Almost all of it is in residential or commercial property.

The Murray Financial System Inquiry in 2014 recommended restoring the prohibition that had been lifted in 2007. It warned that “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”.

Among other measures, a Shorten government would double the screening fees on foreign investment and financial penalties that apply to foreign investment in residential real estate. Foreign investment purchases nearly tripled over the three years to 2014-15. The ALP says the higher fees and penalties would “help level the playing field between first home buyers and property speculators”.

The centrepiece of the ALP housing policy remains the changes to negative gearing and the capital gains tax discount that Labor took to the election, but the latest package surrounds those with several other initiatives.

The opposition announcement comes as the government’s expenditure review committee struggles to stitch together a credible package, and after a much-publicised split among ministers over whether first home buyers should be able to use their superannuation for housing. Malcolm Turnbull last week apparently ruled that option out.

Labor says its package would see the construction of more than 55,000 new homes over three years and increase employment by 25,000 new jobs a year.

The ALP would establish a Council of Australian Governments process to achieve a more efficient and uniform vacant property tax across the main cities.

It would provide $88 million over two years for a new Safe Housing Fund for transitional accommodation for victims of domestic violence, vulnerable young people and older women at risk of homelessness. This would restore cuts made by the Coalition in the 2014 budget.

It would also work with state governments to get better outcomes in the National Affordable Housing Agreement. And it would establish a bond aggregator to increase investment in affordable housing – something the government is moving towards.

Labor would also re-establish the national Housing Supply Council and re-instate a minister for housing, the policy says.

It says that “any housing affordability package that doesn’t involve reforms to negative gearing and the capital gains tax discount is a sham”.

“Demand for housing is being turbo-charged by unfair, unsustainable and distortionary tax concessions for investors.” The ALP’s long standing policy is to limit future negative gearing to new housing and reduce the capital gains tax discount from 50% to 25%.

Labor says the super funds’ ban “will prevent the unnecessary buildup of risk in Australia’s superannuation system, reduce future calls on the aged pension as a result of a less diversified superannuation system and make the financial system more resilient in the face of potential economic shocks”.

It says that although foreign purchases in residential real estate account for a relatively small amount of overall annual purchases, the amount has grown by 275% in the three years to 2014-15.

Under the Labor policy, from July 1 2019 the foreign investment application fee would go from $5000 to $10,000 for a property up to $1 million; from $10,100 to $20,200 for one between $1 million and $2 million, and from $20,300 to $40,600 for one between $2 million and $3 million.

For foreign buyers who acquired dwellings without approval, the criminal penalty would be increased to $270,000, and $1.35 million for a company.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

AFG Highlights First Time Buyers

AFG has released their mortgage index today including Q3 2017. The overall volume of lodgements fell again, though volumes are still higher than last year at this time.

This data provides additional insights into the market, with the caveat, it reflects transactions via the AFG channel only.

The mix between majors and non-majors remained similar to last quarter, when the non-majors share grew a little.

The volumes of first time buyers rose a little, whilst refinanced transactions fell a little.


The national First Home Owner Grant (FHOG) scheme funded by the states and territories has largely been hailed a success as it seeks to ease the hefty upfront costs for new entrants to the market. The effectiveness of the scheme however has been questioned of late and it appears this may have encouraged governments to act. “The Victorian state government has recently announced a number of changes to the scheme in that state and New South Wales is currently examining their options to help counter rising house prices in those states,” said AFG Interim CEO David Bailey.

AFG data shows positive signs amongst the FHB market with lodgments lifting back up to 10% for the first time since the first quarter of 2014.

“First home buyer numbers have been in the single digits for some time. It is good to see state governments looking to support those trying to get a foot on the property ladder. Time will tell if the proposed changes to the scheme go far enough to assist those looking to buy their first home in our two most populous states.”

APRA-imposed lender policy changes have had an impact on both the investor market and refinancers as many lenders lift interest rates for borrowers.

“Lenders have been told by the regulator to rein in their exposure to the investor market and APRA continues to monitor growth in lending to investors,” said Mr Bailey. “As a result many lenders have embarked upon a series of rate increases and a tightening of credit policy for investors to comply with APRA’s guidelines.

“This activity has seen investor loans drop from 34% to 32% across the quarter.”

Those looking to refinance have also been impacted, with that segment of the market dropping from 38% to 35% last quarter – its lowest level since the third quarter of 2015.

In overall lodgment numbers, AFG has reported a lift of 8% on Quarter 3 last year driven primarily by increasing activity of upgraders. “With a significant amount of changes being made to the appetites and pricing of lenders, help from a mortgage broker can be vital for consumers trying to navigate the dynamic market that is home lending,” said Mr Bailey.

“A result that should please the regulators is a drop in the loan to value ratio (LVR) in all states apart from South Australia where a marginal increase of 0.4% was evident. The national LVR is now down to 68.6%, the lowest level since the first quarter of 2013,” he concluded.

Easter long weekend returns a rise in capital city clearance rate

From CoreLogic.

Across the combined capital cities, the auction clearance rate rose to 78.8 per cent last week, from 74.8 per cent the previous week. The number of homes taken to auction, however, fell to just 487 across the capital city markets, with Sydney host to the majority of auctions last week (275). Preliminary results for Sydney show that 82.4 per cent of reported auctions (187) were successful, the strongest clearance rate for the city this year; however it is likely that this will revise down as further results are captured over the coming days. In Melbourne, traditionally the country’s largest auction market, there were just 99 auctions held last week, with 55 results reported so far and a clearance rate of 85.5 per cent so it will be interesting to see what happens when the remaining results are obtained.

Federal government may cap number of investment properties

From The Real Estate Conversation.

The federal government is considering limiting the number of properties investors can buy, as it struggles with ways it can reign in property prices in booming markets only a few weeks out from the May budget.

According to an article in The Australian Financial Review, the government is looking at ways it can cap the value of tax breaks for property investment as it tackles housing affordability problems, which vary widely around the country.

Since 2012-2013, there has been a 9.2% increase in the number of property investors that own five or more properties, according to The Guardian’s analysis of recent Australia Tax Office data.

The federal government has ruled out getting rid of negative gearing according to Labor’s policy, and has indicated that it will consider more ‘surgical’ measures.

The government appears to have moved away from an earlier idea to allow first-home buyers to access their superannuation funds to accumulate enough money for a deposit.

Malcolm Gunning, president of the Real Estate Institute of Australia, told SCHWARTZWILLIAMS the percentage of investors in the market that own three or more investment properties is only very small, and therefore capping the number of properties those investors can own is only “clipping around the edges”.

Gunning said capping the number of properties investors could own would mainly be “political posturing”, and warned it could decrease the supply of new properties coming onto the market, which in turn could cause rents to rise.

“It’s a balancing act,” said Gunning.