Steve Keen: Australian housing bubble began to burst in 2012 but has been given new lease of life; Is there an Australian property bubble? The experts have their say
Tweet Topic Started: 4 Oct 2013, 03:04 PM (4,631 Views)
The fact is the Australian house prices are very reasonable by any International comparison. We also have some of the largest homes in the world, eg the Median home in the UK is about 90sqm.
Skamy, just because lots of people are buying at current prices, does not mean prices are reasonable or affordable. The almost total absence of FHBs would seem to confirm that. Affordability is not measured by the prices at which people are buying, it’s measured by their ability to pay those prices. If they cannot pay, they need to borrow. If they’re able to borrow lots, then their ability to pay those prices is increased. Ergo, prices can go high if lenders are willing to lend more. That does not translate to the borrowers being able to pay off that debt over the long term.
Again, the high proportion of interest-only loans seems to indicate an inability to pay off principal and debt in the initial years – indicating that the borrowers are unable to generate the cashflow necessary to meet that obligation. If borrowers are unable to pay off principal and interest in the years closest to their purchasing commitment – the years which cashflow can be most reliably forecast – what is the guarantee they can service their debt over the long term?
If RE is the only game in town, people are going to pile into it. I don’t argue with that. I do question the rationale that something is affordable simply because people are able to borrow at high levels at pay those prices. In a hypothetical situation, if median prices reach $1m, and I could borrow (regardless of my financial situation) that $1m from a willing lender, then the seller of a $1m property will have no reason to drop his price to accommodate me. The price will still be $1m, but that doesn’t mean it is affordable or that I can actually service the debt. It simply means someone is willing to lend me the money that I don’t have myself.
And, when I do default on that debt, then what happens to the price?
Over the last few months and in particular over the weeks since the federal election there has been a great deal of chatter about a so-called residential property bubble.
This has been fueled by a few factors that have, to my view, been overly magnified. Yes we have seen some good, even record auction results, strong demand for new mainly off-the-plan projects and land releases, and improving house prices led mainly by Sydney and Perth. But these do not alone create a ‘bubble’.
There are much deeper aspects of the market that go well beyond what has been suggested as a possibly reckless rush of buyers on the back of low interest rates and still in some areas a well acknowledged lack of immediate supply. Both of these are ongoing influences but I do not see evidence of recklessness.
What may at first appear surprising is how quickly the market has become so active. Currently, there is strong demand and buyers are very lively, and this has caught some sectors by surprise. I stress ‘surprise’ with no foundation for any sort of alarm, in fact the activity should be welcome.
Only six months ago there were alarm bells ringing about the continued flatness in the housing market and the lag in construction. Now with strong buyer interest there will be an incentive for more building and development at a time when the economy is adjusting from a slowdown of the mining boom.
Location remains key
As always demographics are playing a big part in the market and the appeal of inner city living is currently on an upward trend that has been evident now for at least a decade. The only difference is that it is no longer a trend but an everyday reality that we have yet to satisfy. You only have to look at the pressures on many of Sydney’s inner city schools as they try to accommodate an increase of 20-25% in class enrolments. Although we do need to ask: "didn’t anyone see this coming?"
There has also been a big increase in single person households and this is creating an additional layer of demand, as people are anxious to live near services and facilities. But it is not only the inner city where demand is strong, in Sydney’s south-west and north-west new housing stock is in demand and here the promise of improved infrastructure and a strong lifestyle offering are helping to drive demand.
Interest rates
The current low interest rates may well not last forever, but in the current market I believe that low rates are acting as a comfort factor, making loans more affordable. But I also suggest that as first time buyers remain conservative and investors are still looking for a solid return, again there is no run away mentality among borrowers, who remain cautious. Still the gap between today’s interest rates and what be seen as a high number between 7-8% can well be seen as an opportunity for many buyers, and if rates rise they are capable of managing that.
Along with interest rates, recent falls in the Aussie dollar have helped to fuel an already strong inflow of buyers from Asia and in particular China, and this is a reality of our market that is not going to change. Offshore buyers will always be attracted to Australian property; they are attracted by the lifestyle here that can be measured in simple terms of space, a good natural environment and freedom to move.
By 2014, Indonesia and China are expected to have more millionaires than the USA and even if only a small fraction of these wealthy buyers look to Australia to buy a home or investment then that demand will be long-term, and in many respects is nothing new.
A faster pace backed-up by the fundamentals
I think that we need to keep in mind that some markets have been tough over the past 12 months and the long lead up to the federal election may have depressed activity. Also some properties are being taken to market for a second go as confidence builds, however given the size of our market the sales inventory is still modest.
We still have a long-term shortage of housing, and as developers meet market expectations with quality, and as rents stay high and vacancy rates are low for investors the market is attractive, so they will act. Owner occupiers are attracted by lower rates, but weaker employment may well temper demand, but these same buyers realize that in five years’ time today’s values will not prevail and today’s prices will look attractive as major centres attract more residents.
Developers in particular need to concentrate on the fundamentals, and not take the market for granted, sticking to the best locations and delivering quality, and while this might now all be at a much faster pace, that does not create a bubble; it creates a strong market that will remain attractive for both local and offshore buyers not forgetting our continued population growth.
The improved market activity of the last few months needs to take all of these factors into consideration and not simply see stronger sales as somehow being over-inflated.
Skamy, just because lots of people are buying at current prices, does not mean prices are reasonable or affordable. The almost total absence of FHBs would seem to confirm that. Affordability is not measured by the prices at which people are buying, it’s measured by their ability to pay those prices. If they cannot pay, they need to borrow. If they’re able to borrow lots, then their ability to pay those prices is increased. Ergo, prices can go high if lenders are willing to lend more. That does not translate to the borrowers being able to pay off that debt over the long term.
Again, the high proportion of interest-only loans seems to indicate an inability to pay off principal and debt in the initial years – indicating that the borrowers are unable to generate the cashflow necessary to meet that obligation. If borrowers are unable to pay off principal and interest in the years closest to their purchasing commitment – the years which cashflow can be most reliably forecast – what is the guarantee they can service their debt over the long term?
If RE is the only game in town, people are going to pile into it. I don’t argue with that. I do question the rationale that something is affordable simply because people are able to borrow at high levels at pay those prices. In a hypothetical situation, if median prices reach $1m, and I could borrow (regardless of my financial situation) that $1m from a willing lender, then the seller of a $1m property will have no reason to drop his price to accommodate me. The price will still be $1m, but that doesn’t mean it is affordable or that I can actually service the debt. It simply means someone is willing to lend me the money that I don’t have myself.
And, when I do default on that debt, then what happens to the price?
Hi Balls,
Nice post.
Unfortunately, the inherent logic of your argument will be utterly lost on Skamy.
In one ear and out the other.
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
Skamy, just because lots of people are buying at current prices, does not mean prices are reasonable or affordable. The almost total absence of FHBs would seem to confirm that. Affordability is not measured by the prices at which people are buying, it’s measured by their ability to pay those prices. If they cannot pay, they need to borrow. If they’re able to borrow lots, then their ability to pay those prices is increased. Ergo, prices can go high if lenders are willing to lend more. That does not translate to the borrowers being able to pay off that debt over the long term.
Again, the high proportion of interest-only loans seems to indicate an inability to pay off principal and debt in the initial years – indicating that the borrowers are unable to generate the cashflow necessary to meet that obligation. If borrowers are unable to pay off principal and interest in the years closest to their purchasing commitment – the years which cashflow can be most reliably forecast – what is the guarantee they can service their debt over the long term?
If RE is the only game in town, people are going to pile into it. I don’t argue with that. I do question the rationale that something is affordable simply because people are able to borrow at high levels at pay those prices. In a hypothetical situation, if median prices reach $1m, and I could borrow (regardless of my financial situation) that $1m from a willing lender, then the seller of a $1m property will have no reason to drop his price to accommodate me. The price will still be $1m, but that doesn’t mean it is affordable or that I can actually service the debt. It simply means someone is willing to lend me the money that I don’t have myself.
And, when I do default on that debt, then what happens to the price?
Balls. In Broken Hill they have the same banks as in Sydney. Same lending criteria, similar construction costs (less expensive labour, more expensive building products (transport costs).
How come the prices aren't the same as in Sydney?
Why is the median price 1/5 of Sydney's median (this figure may be wrong but it's something like that)?
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
As another round of Saturday auctions loom, you can bet on one more weekend of frenzied reporting about the heat in the housing market.
Auction clearance rates in Sydney have topped 80 per cent for 11 weeks running, a clear signal that buyers are suddenly worried about missing out in a rising house market after years of stagnation. Melbourne clearance rates are holding above 70 per cent and hit 80 per cent late last month.
House prices are playing catch-up after five years of weakness following the financial crisis, fuelled by low interest rates and pent-up demand. Despite much huffing and puffing over a new housing bubble, the level of house prices now is roughly the same as three years ago (A few home truths to quash the hysterics, September 27).
Despite more than 200 basis points of interest rate cuts, housing credit rates are still subdued, with housing finance for new dwellings only up one per cent year-on-year and finance for new home buyers down 10 per cent.
But affordability has improved and confidence levels are showing signs of picking up. Once borrowing picks up – and it will as long as the Reserve Bank keeps rates relatively low – the signs are in place for a new boom for developers, builders and building materials firms alike.
The Housing Industry Association’s construction index this week showed that new orders expanded in September for the first time since April 2010, driven by demand for off-the-plan apartments (which has included buyers from overseas, particularly China).
But the recovery in residential construction – which is still in its early stages – looks very different this time round. Fewer single-dwelling homes are being built and much of the growth is in multi-unit dwellings.
Over the past year, building approvals for multi-unit dwellings have surged by 22.9 per cent, around five times the growth rate for single-family homes of 4.6 per cent, according to recent data. As a result, multi-family dwellings now account for more than 40 per cent of all approvals, compared with an average rate of 30 per cent over the past 30 years.
The trend towards multi-family developments suggests that the recovery won’t look the same for building materials suppliers either, which are generally more exposed to the single-family sector.
The businesses of CSR and Boral are heavily skewed towards freestanding family homes so the impact is being clearly felt on their profitability. Partway into the current housing recovery, they are still losing money.
Townhouses, units and flats simply require less materials – bricks, timber, roofing and windows – than sprawling, single dwellings on the former dream of the quarter-acre block (the average block size is now 450 square metres for Stockland).
Boral’s reported losses from its Australian building products division were at a cyclical low in the year to June as revenues slid 10 per cent. And yet the company only forecast a narrower loss in the current year for the division, not a return to profitability.
It has taken steps to help return to eventual profit, deciding to close or exit several businesses including a timber mill, an engineered flooring plant and two window fabrication plants. About 800 jobs have been cut since January.
Meanwhile, Fletcher Building’s Australian earnings fell 22 per cent last financial year, and the unit expects minimal growth in the current year.
Another factor that will affect profitability of the building materials companies is the shrinking size of properties, after the welcome fading of the McMansions trend. The average three-bedroom house has shrunk by 25 per cent in internal floor space over the past five years.
So construction activity is likely to peak at lower levels than in the past, and require a more modest use of materials.
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