An important report from the Special Rapporteur to the UN Human Rights Council highlights the “financialization of housing” and its impact on human rights. If you want to understand the rise in property investment in Australia, and the problem of housing affordability, read this! Sydney and Melbourne are “Hedge Cities”. You cannot fix housing affordability without addressing the investment class.
The financialization of housing has its origins in neo-liberalism, the deregulation of housing markets, and structural adjustment programmes imposed by financial institutions and agreed to by States. It is also tied to the internationalization of trade and investment agreements which, as discussed below, make States’ housing policies accountable to investors rather than to human rights. The financialization of housing is also the result of significant changes in the way credit was provided for housing and more specifically, of the advent of “mortgage-backed securities”.
The amount of money involved in the purchase of housing and real estate is almost impossible to digest. Cushman and Wakefield, an American global real estate services firm engaging in $90 billion worth of real estate sales per year, publishes an annual report entitled “The Great Wall of Money” which includes a calculation of the amount of capital raised each year for trans-border real estate investments. The total in 2015 was a record $443 billion, with residential properties representing the largest single share. The report notes that “cross border flows will continue to transform real estate investment across the globe”
Housing prices in so-called “hedge cities” like Hong Kong, London, Munich, Stockholm, Sydney and Vancouver have all increased by over 50 per cent since 2011, creating vast amounts of increased assets for the wealthy while making housing unaffordable for most households not already invested in the market. Land prices in the 35 largest cities in China have increased almost five-fold in the past decade and prices for urban land in the top 100 cities in China have increased on average by 50 per cent in the past year.
The report examines structural changes that have occurred in recent years whereby massive amounts of global capital have been invested in housing as a commodity, as security for financial instruments that are traded on global markets, and as a means of accumulating wealth. The report assesses the effect of those historic changes on the enjoyment of the right to adequate housing and outlines an appropriate human rights framework for States to address them. The report reviews the role of domestic and international law in that sphere, and considers the application of principles of business and human rights.
The report concludes with a review of States’ policy responses to the financialization of housing and some recommendations for more coherent and effective strategies to ensure that the actions of global financial institutions and actors are consistent with ensuring access to housing for all by 2030. The Special Rapporteur suggests that, as a way forward, States must redefine their relationship with private investors and international financial institutions, and reform the governance of financial markets so that, rather than treating housing as a commodity valued primarily as an asset for the accumulation of wealth they reclaim housing as a social good, and thus ensure the human right to a place to live in security and dignity.
- The expanding role and unprecedented dominance of financial markets and corporations in the housing sector is now generally referred to as the “financialization of housing”. The term has a number of meanings. In the present report, the “financialization of housing” refers to structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets. It refers to the way capital investment in housing increasingly disconnects housing from its social function of providing a place to live in security and dignity and hence undermines the realization of housing as a human right. It refers to the way housing and financial markets are oblivious to people and communities, and the role housing plays in their well-being.
- Housing and real estate markets have been transformed by corporate finance, including banks, insurance and pension funds, hedge funds, private equity firms and other kinds of financial intermediaries with massive amounts of capital and excess liquidity. The global financial system has grown exponentially and now far outstrips the so-called real “productive” economy in terms of sheer volumes of wealth, with housing accounting for much of that growth.
- Housing and commercial real estate have become the “commodity of choice” for corporate finance and the pace at which financial corporations and funds are taking over housing and real estate in many cities is staggering. The value of global real estate is about US$ 217 trillion, nearly 60 per cent of the value of all global assets, with residential real estate comprising 75 per cent of the total. In the course of one year, from mid-2013 to mid-2014, corporate buying of larger properties in the top 100 recipient global cities rose from US$ 600 billion to US$ 1 trillion.3 Housing is at the centre of an historic structural transformation in global investment and the economies of the industrialized world with profound consequences for those in need of adequate housing.
- In “hedge cities”, prime destinations for global capital seeking safe havens for investments, housing prices have increased to levels that most residents cannot afford, creating huge increases in wealth for property owners in prime locations while excluding moderate- and low-income households from access to homeownership or rentals due to unaffordability. Those households are pushed to peri-urban areas with scant employment and services.
- Elsewhere, financialization is linked to expanded credit and debt taken on by individual households made vulnerable to predatory lending practices and the volatility of markets, the result of which is unprecedented housing precarity. Financialized housing markets have caused displacement and evictions at an unparalleled scale: in the United States of America over the course of 5 years, over 13 million foreclosures resulted in more than 9 million households being evicted. In Spain, more than half a million foreclosures between 2008 and 2013 resulted in over 300,000 evictions. There were almost 1 million foreclosures between 2009 and 2012 in Hungary.
- In many countries in the global South, where the majority of households are unlikely to have access to formal credit, the impact of financialization is experienced differently, but with a common theme — the subversion of housing and land as social goods in favour of their value as commodities for the accumulation of wealth, resulting in widespread evictions and displacement. Informal settlements are frequently replaced by luxury residential and high-end commercial real estate.
- While much has been written about the financialization of housing, it has not often been considered from the standpoint of human rights. Decision-making and assessment of policies relating to housing and finance are devoid of reference to housing as a human right. Issues related to business and human rights have received some attention in recent years. However, the housing and real estate sector — the largest business sector with many of the most serious impacts on human rights — appears to have been mostly ignored.
- A report on the topic is timely as States embark on the implementation of the Sustainable Development Goals. If the commitment in target 11.1 to ensure access for all to adequate, safe and affordable housing and basic services is to be achieved by 2030, it is essential to consider the role of international finance and financial actors in housing systems. That will help to identify and address more effectively patterns of systemic exclusion, to ensure more meaningful human rights accountability for issues of displacement, evictions, demolitions and homelessness, and the engagement of all relevant actors in the realization of the right to adequate housing.
- Constructing human rights accountability within a complex financial system to which Governments are themselves accountable, involving trillions of dollars in assets, may seem a daunting task. However, the global community cannot afford to be cowered by the complexity of financialization.8 The present report aims to cut through some of the complexity and opaqueness of finance in housing to expose the central relevance and necessity of the human rights paradigm at multiple levels, from the international to the local.
- The report builds on important work undertaken by the previous Special Rapporteur on the right to housing. In her 2012 report on the impact of finance policies on the right to housing of those living in poverty (A/67/286), she warned of emerging trends towards the financialization of housing encouraged by States’ abandonment of social housing programmes and increased reliance on private market solutions. She documented attempts by States to rely on the private market and homeownership, which increases inequality and fails to address the housing needs of low-income and marginalized groups. More fundamentally, she called for a paradigm shift through which housing would once again be recognized as a fundamental human right rather than as a commodity. The present report takes up that challenge.
Each week we receive updated data from our household surveys. One element in the survey looks at investor appetite – specifically whether households are intending to transact within the next 12 months. It is a leading indicator of future investment loan volumes.
However, in the past three weeks we have seen a change in intention. It has started to fall quite significantly (and actually represents the biggest move in the 10 years of the survey).
The chart plots the average intentions each week against the volume of new investor loans written each month. We see a significant downward movement in intention. This is being driven by a range of factors including concerns about future property values, falling rental returns, rising investment interest rates and most recently concerns about potential changes to the generous tax breaks which currently are enjoyed by property investors.
It is early days but it does appear investor property purchase intentions are on the turn. If this is the case, then auction clearances, investor lending momentum and property price rises may be be impacted. We will watch the next few weeks’ data with interest.
The AFR has reported the Turnbull government is planning a crackdown on capital gains tax concessions for property investors to seize the mantle on housing affordability and provide revenue to help replace soon-to-be dumped budget cuts.
Given most property investors are benefiting more from rising capital gains than offsetting costs from negative gearing, this is a significant change of tune.
The policy backflip, to be unveiled in the May budget, comes after more than a year of savaging Labor’s proposal to halve the capital gains discount as an assault on badly needed investment.
It is understood the policy being worked on within government would be confined to property investment, and not apply to all investments such as shares, as Labor’s plan would. Neither would the Coalition policy target negative gearing, as Labor is doing.
Options being worked on include following Labor in halving the 50 per cent discount on capital gains tax to 25 per cent, or reducing it by another amount. The other is adopting a phased model in which the discount would increase the longer the property was held. A property would have to be held for several years before the investor was eligible for the full 50 per cent discount.
However according to the Real Estate Conversation, such a move is unlikely.
This morning Malcolm Turnbull and finance minister Mathias Cormann dismissed the reports.
“We do not support the Labor Party’s plans to increase capital gains tax,” the Prime Minister said in a press conference.
Turnbull also said the government was not considering to “outlaw negative gearing.”
The Property Council of Australia urged caution amid the conflicting reports.
“Increasing capital gains tax runs the risk of reducing the incentive to invest at a time when Australia needs to build new housing to cater for our growing population,” said Ken Morrison, Chief Executive of the Property Council of Australia.
“While there are conflicting media reports this morning, we urge the government to be extremely cautious if it is considering changing the CGT discount,” he said.
Morrison pointed out that the capital gains tax discount is intended to compensate for natural growth in asset prices due to inflation.
“The CGT discount is recognition that you should not tax people for inflation – inflation-driven capital growth is not real growth and investors should not be taxed for it,” he said.
Morrison said the construction cycle is already past the peak, and any disincentive to build should be considered carefully.
“The industry has passed the top of the construction cycle,” he said.
“The risk for the government is that if it moves too far, it runs the risk of tightening housing supply and adding further pressures to housing prices.”
Market watchers are expecting a bombshell to be dropped on the property market next week, with Commonwealth Bank reportedly about to close its doors to refinancing housing investors wishing to migrate from other banks.
Fairfax Media suggested this could send “shockwaves” through the property market – though whether it will cause a price correction is far from certain.
At present, the consensus view is that CBA is simply taking a breather from lending to investors so as not to breach the mortgage growth speed limit imposed by the regulator.
The Australian Prudential Regulatory Authority introduced the speed limit in late 2014, requiring banks to limit growth in their investment mortgage books to 10 per cent per annum.
But even if CBA does slam on the brakes on Monday, it won’t be nearly enough.
A broker’s view
One independent mortgage broker told The New Daily that the speed limit is a fairly weak measure for controlling the housing credit bubble because so many smaller lenders exist to pick up the overflow of demand from the big banks.
So an ANZ customer chasing a better deal at CBA may now find their broker raking up names they’ve never heard of.
AFG, for instance, offers what the broker calls a “white label” home loan built on funding from a number of other banks.
A confident investor should have no problem signing up with such a provider, although less savvy investors may baulk at moving away from the psychological safety of the big banks.
A second flaw
The net result of the speed limit is to slow lending to a degree, but it has likely helped smaller lenders take additional market share.
The latter is not a stated goal of the policy, and even the real goal – to reduce investor activity – really doesn’t go far enough.
To understand why, two factors need to be considered. The first is population growth and the second is inflation. Consumer price index inflation is currently running at 1.5 per cent per annum, and population growth is around 1.4 per cent.
Combining those two figures, the amount of money lent against the housing market would have to grow just under 3 per cent to stay ‘steady’ in relation to the rest of the economy.
In fact, although the value of mortgage debt in Australia has grown by an average of 8 per cent since the onset of the GFC, the last calendar year saw banks’ mortgage books grow by almost exactly the ‘steady’ amount – 2.9 per cent.
That’s partly due to lower volumes of homes changing hands, and partly due to a slow-down in house price growth.
Why 10 per cent is too much
What’s alarming about the 10 per cent speed limit, which CBA is apparently hitting and other banks are getting close to, is that it’s more than three times the ‘steady’ rate of growth.
That means the mortgage market continues to be rebalanced away from owner-occupiers and towards investors.
It is investors driving extraordinary price growth in Sydney – up more than 60 per cent since 2012 – and Melbourne, and it is first home buyers and young families being priced out of the market.
This has to change. One suggestion, from economist Leith van Onselen, is to halve the speed limit to 5 per cent. That would still see investment loans growing faster than the population and inflation, but it would at least be a start.
Let’s get the language right
It would also be useful if media commentators could start focusing on the younger, more vulnerable portion of the housing market rather than celebrating the windfall capital gains made by the older and wealthier portions.
To illustrate what I mean, I’ve prepared two charts from the same set of ABS numbers for Sydney – one with a happy upward slant, the other with a depressing downward slide.
The first, which many readers will be familiar with, shows the huge capital gains investors have made in the past few years –expressed as the house price to income ratio.
The second looks at this period of financial exuberance from the first home buyer’s perspective where the question is not “how many incomes is my asset worth?” but rather “how much of the asset is my income worth?”
From that perspective, the appropriate headline is not ‘House prices boom in Sydney’ or ‘Investor returns at record levels’ – it is ‘Purchasing power of wages plummets’ or ‘Housing affordability tumbles’.
We recently featured our analysis of Portfolio Property Investors, using data from our household surveys. We were subsequently asked whether we could cross correlate property investors and SMSF using our survey data. So today we discuss the relationship between property investors and SMSF. We were particularly interest in those who hold investment property OUTSIDE a SMSF.
To do this we ran a primary filter across our data to identity households who where property investors, and then looked at what proportion of these property investors also ran a SMSF. We thought this would be interesting, because both investment mechanisms are tax efficient investment options. Do households use both? If so, which ones?
We found on average, around 13% of property investors also have a self managed super fund (SMSF). Households in the ACT were most likely to be running both systems (17%), followed by NSW (14%) and VIC (12.8%).
We found a significant correlation between income bands and use of SMSF among investment property holders (this does not tell you about the relative number of households across the income bands, just their relative mix). Up to 30% of higher income banded households have both a SMSF and Investment Property.
Finally, we look across our master household segments. These segments are the most powerful way to understand how different household groups are behaving. The most affluent groups tend to hold both investment property and SMSF – for example, 30% of the Exclusive Professional segment has both. Less affluent households were much less likely to run a a SMSF.
This shows that more affluent households are more able and willing to use both investment tax shelter structures. It also shows that any review of the use of negative gearing, investment properties and the like, needs to be looked at in the context of overall tax planning. Given the new limits on superannuation withdrawals, we expect to see a further rotation towards investment property, which as we already explained has a remarkable array of tax breaks and incentives. We expect the number of Portfolio Property Investors to continue to rise whilst the current generous settings exist.
The number of Property Investing households in Australia in rising. Today we look specifically at the fastest growing segment – Portfolio Property Investors.
This sector, though highly leveraged, is enjoying strong returns from property investing, are benefiting from generous tax breaks and many are expecting to purchase more property this year. However, we think there are some potential clouds on the horizon, and that the risks linked to this segment are higher than many believe to be true. Our latest Video Blog post discusses the findings from our research.
The investment property sector is hot at the moment, with around 1.5 million borrowing households now holding investment property and the number of investment loans is the rise. In December according to the RBA, investment loans grew at 0.8%, twice as fast as owner occupied loans, and around 36% of all loans are for investment purposes.
But not all property investors are created equal. Using data from our large scale household surveys, we have looked in detail at those who hold multiple investment properties.
These Portfolio Investors have become a significant force in the market. For example, in November about twenty per cent of transactions were from portfolio investors – or about six thousand transactions. Whilst overall investment loans grew at 0.8%, there was an estimated 4% increase in transactions from Portfolio Investors.
If we plot the overall loan growth trends against the proportion who are Portfolio Investors, we see a that since late 2015, it is these Portfolio Investors who have been driving the market. In addition, more than half of these transactions are in New South Wales, which is the property investor honeypot.
Many Portfolio Investors will have three or four properties, though some have more than twenty and the average is about eight. Some of these households have taken to property investment as a full-time occupation, others see it as their main wealth building strategy.
Property portfolios vary considerably, although we note that there is a tendency to hold a portfolio of lower value property – such as would be suitable for first time buyers, rather than million dollar homes. This is because the rental income is better aligned to the value of the property, and there is more demand from renters, and greater supply.
About half of portfolio investors prefer to buy newly build high-rise apartments, whilst others prefer to purchase a property requiring renovation, because they believe renovation is the key to greater capital appreciation in the long run, even if rental income is foregone near term.
Property Investors are able to get a number of tax breaks, especially if negatively geared. They are able to offset both capital costs by way of adjustments to the capital value on resale and recurring costs, which are offset against income.
Together negative gearing and capital gains makes investment property highly tax effective. There is good information on the ATO site which walks through all the benefits, but in summary you can claim:
- advertising for tenants
- body corporate fees and charges
- council rates
- water charges
- land tax
- gardening and lawn mowing
- pest control
- insurance (building, contents, public liability)
- interest expenses
- property agent’s fees and commission
- repairs and maintenance
- some legal expenses
- travel undertaken to inspect the property, to collect the rent or for maintenance.
In terms of financing, you can also claim:
- stamp duty charged on the mortgage
- loan establishment fees
- title search fees charged by your lender
- costs (including solicitors’ fees) for preparing and filing mortgage documents
- mortgage broker fees
- fees for a valuation required for loan approval
- lender’s mortgage insurance, which is insurance taken out by the lender and billed to you.
Stamp duty and legal expenses can be claimed as capital expenses.
Given the strong capital appreciation we have seen in property values, especially down the east coast, portfolio investors are less concerned about rental incomes than capital values. Indeed, in recently published research we showed that about half of investment property holders were losing money in cash flow terms – but significantly, portfolio investors were on average doing better.
But these capital gains are now being crystallised by sassy portfolio investors.
If we chart the proportion of portfolio investors who have sold an investment property, to buy another property, it has moved up from 5% in 2012, to 11% in 2016. These transaction means they are able to release net equity for future transactions, and offset capital costs in the process. Once again, portfolio investors in NSW are most likely to churn a property.
Our surveys also show portfolio investors are most likely to transact again in 2017, are most bullish on future home price growth, and will have multiple investment mortgages.
Significantly, many portfolio investors are using equity from one investment property to fund the next, and are reliant on rental income to service the mortgage. They often have multiple mortgages with different lenders. In addition, we found that many portfolio investors are using interest only loans, to keep loan servicing to a minimum and interest charges as high as possible for tax offset purposes.
So long as property prices continue to rise, this highly-leveraged edifice will continue to generate high returns, which are, after tax, better than cash deposits or the share market. Of course the world would change if interest rates started to rise, capital values fell, or the banks clamped down on interest only loans. Overall, we think there are more risks in this sector of the market than are generally recognised.
In addition, we think there is a case to look harder at the tax breaks available to portfolio investors, and suggest that a cap on the number of properties, or value which can be so leverage should be considered. This is because as property values rise, tax-payers end up subsidising portfolio investors more than ever.
So, in summary, our analysis shows the market is being severely distorted, making homes less affordable, and shutting out many owner occupied purchasers who cannot compete. Risks are building, but meantime Property Portfolio Investors are having a field day!
We continue our update on our rental yield modelling, using data from our household surveys. Last time we looked across the average gross and net yields (in cash-flow terms) by state, and also at average capital gains. Today we drill into the location specific analysis and also look at our master household segmentation.
But before we look at the data specifically, it is worth reflecting on why we show the data the way we do. New rules from Basel will require banks to hold more capital against loans which are required to be serviced from income other than rent. As a result, the question of net yield – meaning rental income, less loan repayments and other costs before tax suddenly become more important. Whilst the Basel rules are yet to be finalised (there are internal squabbles between members as to where to set the limits), this data is significant – and needs to be separated from any equity held in the property – as equity is no guide to loan serviceability, only an indicator of potential risk should a sale be forced.
So now we turn to our household master segments. We find a startling truth. Most affluent households seem to be able to hold investment property where net yields are still positive, whereas less affluent households – those on the urban fringe, battlers, stressed older households and multicultural segments, as well as young growing families; on average have net yields in negative territory. Whilst there are a smaller number of these households, compared with the number of more affluent households who hold investment property, it is telling. In addition – and no surprise – more affluent households on average have more equity in the property (and more properties per household).
Another way to look at the investment portfolio is by regions and locations. We use a list of 50 or so, which cover the country. There are variations across these. On average households in Horsham, Ballarat and Wangaratta have little equity in their investment properties, and are well underwater in terms of net rental yields.
Investors in Warnambool, Canberra and in the Central Coast have the highest average paper capital profits (current property value less outstanding mortgage). But of course many investment households have large mortgages so they can offset interest against other income thanks to negative gearing.
The pressure of rising investment loan interest rates, low rental income growth, and in some cases, vacant property are all having an impact. But the fallout is not equally spread across the country, or across households.
New research has revealed that property investors are negotiating significant price discounts on home loans, despite measures to cool investor lending.
Speaking to Smart Property Investment’s sister publication Mortgage Business following the release of the JP Morgan Australian Mortgage Industry Report last week, Digital Finance Analytics (DFA) principal Martin North, who co-authored the report, said “there is strong evidence that investors are becoming able to secure significant discounts” on their home loans.
“We are seeing competition swinging back more into the investor loan space. Some of the discounts we are seeing are even better than what is available to FHBs or even owner-occupiers with a higher LVR,” he said.
Rate discounts for investors all but disappeared when regulatory measures saw banks introduce differential pricing last year. Lenders then started to offer attractive headline rates under 4 per cent in an effort to secure investor business, particularly as the growth rate of their books fell below APRA’s 10 per cent speed limit.
According to Mr North, before differential pricing you could get up to 120 basis point discounts on investor loans. Now, he says, those discounts are returning as fresh momentum gathers in the investor lending market.
“Property investors seem convinced that capital growth is still available,” he explained.
“The banks are recognising this. So what they have done is take away some of those great headlines rates, those good deals, and started to offer heavier discounting for investors.
“I’ve noticed that some investors who have been transacting over the last few months have been able to get a very significant discount off their investment loan.”
However, Mr North said banks are “picky” and that discounts are heavily dependent on the type of deal. Investor home loans that are principle and interest (P&I) with an LVR of 80 per cent or less are attracting the biggest discounts, he said.
“My view is that these discounts are now back in the market. But you have to know where to look for them and you have to ask. It’s not just a case of flicking through the comparison websites.
“That’s why there is a very significant correlation between these discounts and mortgage brokers. They know where to find these discounts.”
The revelation comes as new data from major mortgage aggregator AFG shows lending to property investors remains strong, falling by just two percentage points over the September quarter.
Comparethemarket.com.au analysed AFG’s September quarter data to find that borrowing by real estate investors declined marginally from 34 per cent to 32 per cent for the first quarter of the 2016/17 financial year.
Back in May APRA announced the big four banks and Macquarie would be required to hold additional regulatory capital against their loan books as protection against any increase in defaults.
Banks have also tightened their lending requirements. For example, Commonwealth Bank no longer lends to self-employed foreign property investors.
“Tighter regulations designed to cool the property market, and lending to it, hasn’t deterred investors,” Comparethemarket.com.au spokesperson Abigail Koch said.
The latest ABS housing finance data shows that the $31.4 billion worth of commitments in August was split between $19.5 billion worth of commitments by owner-occupiers and $11.9 billion in commitments to investors. The value of lending to owner-occupiers has fallen over two consecutive months while lending to investors has risen for the fourth consecutive month.
We have just finished updating our household surveys, and over the next few days we will be running through some of the key findings which in due course will flow into the next edition of the Property Imperative.
We start with an observation which, is at one level completely logical, yet at another level is surprising. We have been asking prospective property investors whether they are planning to purchase in the next twelve months, as usual. There is still strong appetite, thanks to strong returns, tax incentives and low interest rates. However, we have also asked about which state they were expecting to purchase in, and we have found some significant variations across the states. We conclude that NSW and VIC are investment property honeypots, attracting both local and interstate interest, especially from WA. Another reason why prices are on the rise here.
The first chart shows the relative proportion of property investors in each state, who expect to purchase in their home state. Almost all NSW based investors are expecting to buy in NSW, and those in VIC, mainly in VIC. But there are more residents in QLD, SA, ACT and WA who are expecting to buy interstate than in their home states.
We then asked those considering interstate transactions, to identify their likely target state. In NSW, the small number considering interstate investment picked VIC, whilst residents in VIC going interstate will pick NSW. Across the other states, the majority of those seeking investments interstate will pick NSW, or second VIC. A smaller number would also select ACT. These three states captured the bulk of the interstate attention.
So, we can conclude that demand in NSW and VIC for investment property is heightened by interested interstate investors who are attracted by the higher returns in these two states. Further evidence of the two speed housing market.