Welcome Guest [Log In] [Register]


Reply
The property bubble myth that refuses to die; Australia's housing market problems laid bare
Topic Started: 15 Oct 2014, 12:54 PM (607 Views)
Admin
Member Avatar
Administrator

Quote:
 
Australia's housing market problems laid bare

Michael Janda

There is a growing mountain of evidence that Australia has fundamental housing market problems, and the nature of those problems is clear.

After a scant mention in the Reserve Bank governor's post-meeting statement on Tuesday, a speech yesterday by the head of the bank's financial stability department, Luci Ellis, made it plain that the RBA is still worried by current property price rises in Sydney and Melbourne.

Dr Ellis also made it clear that the cause for the price spike is property investment, which now makes up close to half of all new home lending even though private renters make up just a quarter of households.

"That share is noticeably higher than rental housing's share of the housing stock, even allowing for a possible faster rate of churn in investor loans. Obviously that can't continue forever," she told a conference on financial stability.

The bank has repeatedly acknowledged that a boost in property investment is an expected outcome of low interest rates.

However, it perhaps underestimated just how much property investment, and home prices, would jump by not focussing enough on two other factors.

Foreign investment boom

The first is foreign investment.

The RBA has fairly consistently downplayed this segment of the market, relying on Foreign Investment Review Board approvals numbers to show it is relatively small.

The problem with this analysis is that those annual numbers - already undermined by their lack of timeliness - have now been all but completely discredited by the House of Representatives Economics Committee.

Its inquiry into the rules around foreign investment into residential real estate revealed that FIRB only has eight staff monitoring this area, and that it relies almost totally on the honesty of the buyers to submit an application.

That means there are an unknown number of foreign investors in the market buying and owning residential property not captured in the figures.

Surveys of the real estate and development sectors consistently show the foreign buyer influence is high, particularly in Sydney and Melbourne.

The latest this week from the Australian Property Institute (API) found 96 per cent of industry players rated foreign investment a "significant driver" of residential property demand and prices in Sydney - more than half of those said it was "very significant".

The results were only slightly lower in Melbourne, with 95 per cent saying it was significant, including 41 per cent who said it was "very significant".

A lower proportion said foreign buyers were significant in Brisbane and Perth, but it was still over half the respondents.

The respondents to this survey should have a fairly good idea - they included three of the four major banks, some of the world's biggest real estate agencies (including CBRE and Colliers), as well as major developers Lend Lease and Mirvac.

Negative gearing tax breaks

The same survey exposes the other major driver of the recent residential property price surge - negatively geared investors.

In Sydney and Melbourne, nearly two-thirds of respondents saw negative gearing as a "significant driver" of demand and prices although, unlike foreign investment, none saw it as "very significant".

Interestingly, respondents saw negatively geared self-managed super funds as even more significant in driving price rises in these two markets.

The use of negative gearing has allowed investors to flood the market in record numbers despite very low rental returns.

The latest national RP Data figures show zero rental growth for houses in the September quarter and a 1.3 per cent fall in apartment rents.

In the markets where property prices are booming, Sydney and Melbourne both recorded flat unit rents and a 1 and 2.6 per cent rise in house rents respectively.

Given the concentration of the investment boom in inner-city apartments in those two cities, it is not surprising the flood of extra rentals on the market is starting to push down rents.

Negative gearing, combined with record low interest rates, has allowed investors to borrow large amounts and accept very low gross rental returns while waiting for a capital gain.

Debt outpacing housing supply

The problem that the Reserve Bank confronts is that all this investment is resulting in a lot of extra debt - Australia's housing debt to income ratio recently hit a fresh record - but relatively little extra housing supply and economic activity considering all the money borrowed.

"Part of the anticipated effect of monetary policy is to induce more construction activity. Higher prices are the incentive to get that expansion, which is indeed happening," Dr Ellis said.

"But it is worth noting that the vast bulk of that new borrowing is to purchase existing properties."
Investor lending: new vs existing dwellings Photo: Investors have gradually moved further away from buying newly built housing.

Lack of supply being rated as the third main factor driving up home prices in the API survey, this adds to the concern of a lengthy boom, leaving Australia vulnerable to a housing bust.

That is why the Reserve Bank recently told a Senate committee that "something will be done" to limit more risky investor lending.

However, such loans limits are merely a band aid that may help limit the supply of investment loans, but will do nothing to dent the demand for them.

Where there is unmet demand, there will surely eventually be some form of shadow banking or regulatory workarounds that spring up to fulfil it.

For a long-term solution to Australia's high and rising, it is up to the Federal Government to address the key drivers of surging investor demand.

The first area is acting on the Economics Committee's likely recommendations around stricter enforcement of Australia's foreign investment regime to ensure that overseas buyers are adding to, not soaking up, the housing stock.

The second area is to tighten or close the negative gearing and capital gains tax discount breaks that interact to allow investors to subsidise losses before enjoying a low-taxed capital gain.

Luci Ellis says there have been fundamental changes to Australia's financial system that justify current housing prices and make a large correction unlikely.

"Australia went from being a high-inflation country to a low-inflation country in the early 1990," she explained.

"One result of that was that average nominal interest rates fell, and so the sustainable amount of debt rose relative to income - permanently.

"People should therefore not expect ratios of housing prices or debt to income to revert to their long-run, multi-decade averages."

Dr Ellis is right, but ignores the key policy changes, especially the capital gains tax discount, that are also now factored into higher prices.

If those policies do change, a significant correction could follow.

If they do not, the rampant investor demand that has led to the latest price boom is unlikely to be halted by tighter lending rules alone.

Read more: http://www.abc.net.au/news/2014-10-10/private-surveys-lay-bare-australian-housing-market-problems/5805196
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
Admin
Member Avatar
Administrator

Quote:
 
The property bubble myth that refuses to die

James Laurenceson
14 Oct, 8:56 AM

Despite valiant efforts by commentators such as Bernard Keane and Michael Pascoe to slay claims that Chinese buyers are making it harder for ordinary Australians to enter the housing market, the notion refuses to die. It is the 'zombie idea' afflicting the Australia-China economic relationship.

And there is a danger the zombies will multiply. Last week the Australian Financial Review reported that China recently eased restrictions on outbound investment -- the implication being “a fresh wave of capital [is] expected to make its way into the Australian property market”.

The Sydney Morning Herald continued with the same theme listing several recent examples of Chinese-funded projects with values reaching into the billions.

But all these reports lack one critical factor: context.

Even if Chinese investment is rising, it is still a small proportion of the market

All foreign investment in Australian real estate requires approval from the Foreign Investment Review Board.

According to FIRB, over the period 2009-10 to 2012-13, approvals for Chinese investment in Australian real estate totalled $16.6 billion.

At first blush this seems an impressively large figure. But it is actually less than 10 per cent of the total value of foreign investment approvals in the sector.

Approvals to Chinese investors have lagged behind those from the United States. They have also not been much more than those from the United Kingdom, which has an economy around one quarter the size of China’s and less than 5 per cent of the population.

The scale of Chinese investment seems again smaller when viewed against the size of the market. In a report earlier this year, the Reserve Bank of Australia observed that total foreign investment approvals in residential real estate have historically only been around 5-10 per cent of the value of home sales. Chinese approvals are just a proportion of this percentage.

It is also important to keep in mind we are talking about approvals here, not purchases. This means FIRB data overstates the true value of foreign investment.

For example, a property developer in Australia can apply to the FIRB for approval to sell all new dwellings in a large scale real estate project to foreign buyers. In its submission to the Inquiry into Foreign Investment in Residential Real Estate, the Commonwealth Treasury noted that based on past experience only around 35%, on average, of such dwellings end up in the hands of foreigners.

Also don’t forget that FIRB data is gross, not net. In any given year some foreign investors will seek FIRB approval for new purchases. Meanwhile others will sell down their existing portfolios. As a result, simply adding the value of FIRB approvals from year to year exaggerates the size of the stock of Australian real estate assets held by foreigners.

What all this means is that Chinese investment can grow strongly and still not come close to flooding the market. Citing preliminary FIRB data from the first three quarters of 2013-2014, the Commonwealth Treasury noted a sharp jump in foreign investment approvals over the previous year, particularly from China. But as the RBA shows, this still only takes the value of total foreign investment approvals to around 12-13 per cent of total sales.

Chinese investment actually increases housing supply

Issues of scale aside, Chinese investment has the effect of increasing housing supply. This acts to restrain price growth.

Regulations also limit Chinese investors to buying new properties. Exceptions are few. For example, a Chinese student may purchase an established property to live in while studying in Australia. But it must be sold once they return home.


Building new housing requires a lot of capital. A report earlier this year by the Australian Housing and Urban Research Institute found a leading cause of the undersupply of housing in Australia is the availability of finance. Banks are the first port of call for most developers. Yet banks generally demand pre-sales, or sales of dwellings before their construction even begins, of between 50-100 per cent of the value of the loan being sought.

Michael Pascoe put it like this: “Without the stimulus of investors to get the country building now, we’ll face demand-induced price pressure all of our own soon enough”.

With a small population and a limited domestic savings pool, Australia has a long tradition of accepting and benefiting from foreign investment in capital-intensive sectors of the economy. The real estate sector is no different: a dollar of Australian savings tied up in housing is a dollar that cannot be productively invested elsewhere.

Other benefits of Chinese investment include the very real jobs created in Australia’s construction industry and associated sectors, such as housing appliances.

Are foreign investors breaking the rules?

Recent allegations that some foreign investors have skirted FIRB rules to purchase established housing have attracted much media attention. This claim does nothing to undercut the benefits brought by foreign investment. Rather, it is a complaint about existing rules not being enforced.

The intensity of enforcement is entirely at the discretion of Australian authorities. The FIRB reviews around 2.5 per cent of housing transactions to verify compliance. Simple economics says that scrutinising every one of the 600,000 housing transactions each year would not be an efficient use of resources. The FIRB employs the same risk-management approach that Australian Customs uses when screening imports for contraband and counterfeit products.

Another factor that troubles commentators about Chinese investment is that some of this money finds its way to Australia via the 'grey economy' or the shadow banking system.

But there is nothing sinister about it. China has a prominent informal financial system because its formal banking sector functions so poorly. It regularly offers savers negative real returns and supplies a dearth of credit to dynamic private sector firms.

Without an informal financial system to overcome these deficiencies, China’s growth would have been much slower than it has been and Australia would be worse off as a result. Similarly, the flow of Chinese capital to Australia would have been reduced and so too would the benefits received. There would be less housing supply and fewer construction jobs.

Knee-jerk arguments blaming Chinese investors for high Aussie house prices may be refuted with hard evidence. Unfortunately, zombie economic ideas have a habit of rising again.

Read more: http://www.businessspectator.com.au/article/2014/10/14/property/property-bubble-myth-refuses-die
Follow OzPropertyForum on Twitter | Like APF on Facebook | Circle APF on Google+
Profile "REPLY WITH QUOTE" Go to top
 
skamy
Member Avatar


The Irish property price bubble

Posted Image

The Australian property price bubble
(Data from ABS)

Posted Image

Humph and I suppose next you will say we are are different.

Dublin house prices almost tripled (ie grew by ~270%) over 7 years prior to the crash, Sydney prices have increased about 35% over the past 8 years.

Sure - Australia is just gonna choke on its massive bubble - :dry:
Posted Image
Definition of a doom and gloomer from 1993
The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
Profile "REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
ZetaBoards - Free Forum Hosting
ZetaBoards gives you all the tools to create a successful discussion community.
« Previous Topic · Australian Property Forum · Next Topic »
Reply



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy