Only higher interest rates or macroprudential tools can realistically end the housing boom; Over the past year Sydney has seen home values up 16% and Melbourne up 12%
Tweet Topic Started: 8 Sep 2014, 09:31 AM (2,681 Views)
Winter’s property prices gains recorded by the RP Data CoreLogic Home Value Index were the largest rises across capital cities for the period since 2007.
No small feat, with prices now on average 10.9% higher than over the past year, and recording 4.2% growth in the three months to August 2014.
However, this growth has largely been led by Sydney and Melbourne, and it’s unsurprising that talks of a slowdown are now prominent. Over the past year Sydney has seen home value results up 16.2%, and Melbourne up 11.7%. Adelaide was the next strongest performer at a much slower 5.9% pace.
Senior research analyst Cameron Kusher notes that when extending the growth analysis to June 2012, Sydney and Melbourne remain strong at 27.2% and 18.5% growth respectively. However, Darwin and Perth also recorded double-digit figures – at 20% and 15% respectively.
“A longer term and retrospective outlook shows that the strength in the housing market has really been all about Sydney and Melbourne - from the market peak in March 2008, to its low point in December 2008, combined capital city home values fell by 6.1%. From that point, values once again began to increase,” Kusher said.
Since December 2008, the picture becomes even more divided. Sydney home values are up 50.1%, Melbourne home values have also soared by 47.5%. Darwin, Canberra and Perth also recorded fairly strong growth at 29%, 21.5% and 15% respectively. However, Hobart values are 1.4% down, and Brisbane and Adelaide only recorded an uptick of 5.3% and 9.9%.
“In light of the recent value growth it is important to realise that it is really a Sydney and Melbourne story with value growth only moderate elsewhere,” Kusher said.
The suggestion, then, is that Sydney and Melbourne will be the first to slow. But to understand why they may do so it's recommended that you first look at the reasons for growth.
Kusher points to six factors that drove the two markets:
Mortgage rates are extremely low (note that this isn't just the case for Sydney and Melbourne).
For eight of the past 10 years both Sydney and Melbourne have recorded the greatest increase in in population of all cities. In fact, for each of the past 13 years Melbourne has recorded the greatest population increase of all capital cities.
The outflow of residents from Sydney and Melbourne to other states, particularly Queensland and Western Australia, has slowed dramatically since the financial crisis.
The comparatively stronger value growth between 2009 and 2012 in Sydney and Melbourne means home owners have the equity to purchase investment properties or to upgrade from their current home. The sluggish recent value growth in other cities does not afford home owners the same level of equity and therefore less of an opportunity to upgrade or purchase investment properties.
Investment activity has been very much focussed on Sydney and Melbourne as values have grown, which has encouraged further growth. Investors are seemingly targeting capital growth rather than rental returns with Sydney and Melbourne having the lowest rental returns of any Australian capital cities. Of course, this growth won't continue forever.
The New South Wales and Victorian state governments have changed the availability of first home buyer grants to apply to new rather than existing properties. This has discouraged first home buyers from entering the market, creating more opportunities for upgraders and investors.
So what might be the factors causing a downturn?
“Given these factors are those driving demand and subsequent growth in home values, should these change, we may see a slowdown in value growth across these cities,” he said.
The obvious one? A rise in interest rates. Kusher notes that this could slow down the exuberance in the Sydney and Melbourne markets.
At present, the RBA has pointed to stability as the likely course of action, with experts predicting rises in 2015.
“With interest rates already at historic low levels and returns on safe investment classes so low, the maintenance of current interest rate settings is likely to continue to encourage investment in housing,” he said.
The other option to dampen house price growth: macro prudential control, alike to that seen in the UK and New Zealand.
At present, limitations to lending have been introduced in New Zealand to allow just 10% of lending to mortgages of LVRs above 80%. In the UK the picture is similar, bringing in limitations to just 15% of new mortgage lending going to mortgages 4.5 times the annual income of the mortgagee.
Kusher notes that given current median prices in Sydney and Melbourne, it’s fair to say that 15% of mortgagees are borrowing above 4.5 times their annual income.
“Of course, other sectors of the economy need lower interest rates so they have continually flagged a period of rates stability,” he said.
“With home values in Sydney and Melbourne continuing to march higher it seems as if only higher interest rates or the introduction of macro prudential tools can realistically stop the growth in home value.”
Once prices rise above the level of affordability of the buyers, the market will slow and then stall. It's just a matter of time regardless of interest rates and MP tools, although they would certainly be effective.
Any expressed market opinion is my own and is not to be taken as financial advice
Once prices rise above the level of affordability of the buyers, the market will slow and then stall. It's just a matter of time regardless of interest rates and MP tools, although they would certainly be effective.
Once prices rise above the level of affordability of the buyers, the market will slow and then stall. It's just a matter of time regardless of interest rates and MP tools, although they would certainly be effective.
Depends on how elastic that demand is.
Or to put it another way, how many of the houses are being bought by cashed up Asians.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
There is a lot of fantasy land talk about macroprudential.
The RBA have never said a word about using interest policy to lower the exchange rate with or without MP.
There is no way the RBA are going to target house prices with MP.
That is a highly political decision to take and the fact that New Zealand has done it tells us nothing about Oz.
If you are concerned about the exchange rate being inflated by the sale of public and private debt off shore that should be your focus – serious capital regulation – and the pollies are the only ones who can give the green light.
It is fanciful to expect the RBA to target the exchange rate with interest rates and house prices with MP.
They are public servants with a charter to guard inflation (and who push their luck) – they are not the elected representatives responsible for managing the economy.
Some of the more excitable headlines about the place on Wednesday suggested the Reserve Bank's Financial Stability Review marked the launching of Operation Loan Stoppers. War was declared on the housing market, mortgage providers will be incarcerated, real estate agents bashed and investors executed.
But, no, Glenn Stevens isn't getting carried away with the Team Australia thing.
Malcolm Maiden was a too-rare calm voice as he reported that the RBA is giving notice of wanting to ensure that no such war needs to break out. (Memo Mal – you'd get a lot more attention if you instead claimed a massive housing bubble is about to destroy life as we know it, poison the water supply and enslave our grandchildren. Death by housing crash competes with naked starlets in the click-bait stakes.)
The actual RBA review, as opposed to extrapolations of some comments in the executive summary, is a relatively reassuring document.
Our financial system remains in good shape. The problems bedevilling much of the rest of the world aren't evident here. Household financial stress is generally low despite the pickup in the unemployment rate. Our banks are strong, profitable and well supervised. They have some of the lowest cost-income ratios in the world. Shadow banking is small here and shrinking as a proportion of the market. Insurers are doing nicely, partly because the seasons have been kind.
There are risks – there always are. Some bits of the nation's many real estate markets are heating up, a couple are hot, but the authorities are well aware of the dangers. The chaps at the RBA and APRA are sharing cups of tea, keeping a close and wary eye on it and hosing down areas of potential spot fires.
Part of that is the job of warning people that prices can fall as well as rise, especially after they've risen sharply and quickly. It's very unfortunate for individuals if they buy at the top of a market and have to wear some pain on a correction, but that's part of the risk/reward game we play. One person's terrible mortgagee auction is another's buying opportunity.
Unless the game is played on too large a scale, it doesn't much matter. If housing speculators get carried away, the market sorts them out. That's already happening in some areas, such as small "investor specials" high-rise Brisbane CBD units. It's happened before – on the Gold Coast it seems to happen all the time – and life goes on.
If, as the RBA suggests, there are more of some sorts of investment properties being built and bought than the market requires – the FSR specifically mentions small Melbourne CBD units - rents and prices will fall. What the RBA wants to ensure is that most investors are able to handle that pain. Hence the move towards ensuring lenders ensure borrowers have a safety margin, a buffer, if the game turns against them.
For investors, financial stress can come from lower-than-expected or no rent. For owner-occupiers and investors, pain can come from rising interest rates or lack of other income (unemployment).
That's also a potential danger for the commercial property market, as the Australian Financial Review has reported, although I'd argue that the Financial Stability Review is more about outlining a risk than stating that the RBA is "worried" about it happening. It's a possibility rather than a forecast.
But this is where some perspective is necessary about rate rises and the unemployment bogey.
What should be obvious first of all is that we're extremely unlikely to have both. If unemployment is rising, interest rates won't be – they'll fall.
Perhaps more important to consider amongst some of the scary headlines around the place though is the likely extent of rate rises when they do occur.
For all the fear and loathing about when the US Federal Reserve might try to scrape rates off the floor, it would be a brave and optimistic forecaster to predict that the American economy is going to be so strong and booming as to require any more than a most modest monetary move. And financial markets are doing a nice job of anticipating that anyway. Like the start of the quantitative easing tapering, the reality might well prove to be less disruptive than prior speculation.
Similarly, as previously reported here, the level of Australian indebtedness means the RBA wouldn't have to raise rates much to achieve a solid impact. It's the "hot snow load" factor again.
I've not heard a good argument against Shane Oliver's prediction that the next cycle should peak with a cash rate of about 4 per cent – only 150 points above today's.
The AMP Capital chief economist and strategist shows that there's been a steady decline in the real interest rate peaks over the past few cycles. The increased RBA "bang for its buck" works wonders.
So the buffer required to shield against eventual rate rises doesn't have to be large, but don't let me spoil the usual Hanrahan chorus when the RBA does it in the FSR
He is asking the question why isn't housing debt accelerating at the same rate as house prices. Is it Foreign buyers or are investors using a lot more equity these days. Frankly most investors use the equity out of another house to fund the deposit so the lending should still be accelerating at the same rate as prices.
Maybe he is using aggregate debt in his graph and people are currently repaying their loans faster than ever before due to the low rates.
Note that on Monday Mr Kusher is releasing a new index based on the RPData Valex system. These days when an application is lodged with a bank a valuation is ordered if the deal looks ok, and that valuation is done usinf the Valex system, which RPData own. So they know about almost every house being purchased in Australia within days of someone signing a contract. They know the purchase price, and they know the valuation of that house.
This should be the best housing data ever.
Any expressed market opinion is my own and is not to be taken as financial advice
1) i have never found housing expensive. 2) I have bought 3 properties in the last 15 years that have included a free house and i am looking at buying my 4th. 3) I argue that buying a house has never been more affordable, yo can get a new house for $330,000 in Margaret River.
So in summary, if a person wishes to buy lets say a Rolls Royce and i must say they are a very nice car and it will cost you $1m.
Now if you have free cash-flow of say $2m per year a Rolls Royce may be just the thing.
If you have say free cash-flow of $10,000 per year then a nice little Corolla may be the answer.
Houses are no different really.
So in reality houses can never be expensive just like the Rolls Royce can never be expensive.
It is price point marketing. Nothing more, nothing less.
If you need to buy the most expensive painting in the world then start earning, or go buy yourself some paint and a canvas.
Once prices rise above the level of affordability of the buyers, the market will slow and then stall. It's just a matter of time regardless of interest rates and MP tools, although they would certainly be effective.
I don't agree with that. Prices can go way above affordability due to the banks being hopelessly pro-cyclical.
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