CHRISTOPHER JOYE
Australia’s housing boom leaves others far behind
PUBLISHED: 3 HOURS 40 MINUTES AGO | UPDATE: 0 HOUR 0 MINUTES AGO
Australia’s housing boom leaves others far behind
Since the end of 1995, Australian home values have experienced total capital gains of 283 per cent, massively outstripping any other peer country. The closest competitors are British and New Zealand house prices, which have risen by 194 per cent and 181 per cent. Australian home values have climbed 2.7 times further than US values. Photo: Louise Kennerley
Comment
CHRISTOPHER JOYE
With Australian house prices re-accelerating over the last three months after spectacular growth on the back of a speculative investment boom, many people are asking how our frothy market compares to the rest of the world.
So The Australian Financial Review has crunched the numbers, carefully evaluating the performance of the best house price indices across the Western world.
Specifically, we have tracked changes in house prices in Australia, the United States, New Zealand, Britain and Canada since the end of 1995.
We select this period for two reasons. First, the mid-1990s coincided with the big surge in household leverage across Western economies, which was the principal cause of unusually strong house price growth in the ensuing years.
Second, the jump in leverage was itself a function of Western central banks adopting explicit or implicit inflation targets in the mid-1990s, which many believe helped lower inflation and significantly reduce interest rates. The Reserve Bank of Australia argues that the substantial fall in nominal borrowing costs over the 1990s and 2000s drove the once-off jump in leverage and house prices during that period.
Our findings are striking. Since the end of 1995, Australian home values have experienced total capital gains of 283 per cent, massively outstripping any other peer country.
The closest competitors are British and New Zealand house prices, which have risen by 194 per cent and 181 per cent, respectively, over the same period. Compared to the US, Australian home values have climbed 2.7 times further.
The same pattern holds if we start the analysis at the end of 1999, which allows us to include Canadian housing data. Canada’s resources-backed economy, which only experienced a dip in house prices during the GFC and is dominated by five strong banks, is often regarded as being quite similar to Australia’s. Yet home values in Australia have risen 34 per cent further than their Canadian counterparts since the end of 1999.
What about the performance of these five “Anglo-sphere” countries during and after the GFC? We have quantified changes in house prices since the start of 2007 and 2008 to minimise the reliance on any specific date.
Whereas booming New Zealand house prices propelled by cheap interest rates forced its central bank to introduce caps on loan-to-property-value ratios, bricks-and-mortar across the Ditch cannot hold a candle to the $5 trillion-plus of residential property here.
Since January 2007 Australian house prices have appreciated by 40.4 per cent. This is more than property price changes in Canada (40.0 per cent), New Zealand (24.7 per cent), the UK (2.1 per cent) and the US (-12.2 per cent).
Similar rankings emerge if the analysis begins in January 2008, with the only difference being that Canadian house price growth has been slightly higher than capital gains here (26.9 per cent versus 24.3 per cent).
Some pundits were critical of my calls that the housing market was recovering in mid-2012, would experience double-digit growth after August 2013, and that this would persist right through 2014.
With national auction clearance rates spiking over 70 per cent at the weekend – and north of 80 per cent in Sydney – in concert with 15 per cent annualised capital growth across the eight capital cities over the last quarter, it is clear the boom is not cooling as many, including the RBA, hoped.
The current boom, which is pushing valuations higher than they have ever been before, is different from its predecessors in 2007 and 2010 because it is being driven by a speculative investment craze the likes of which we have not seen since 2003. Extraordinary foreign-buyer demand and the advent of geared self-managed super funds are two additional “knuckle-balls”.
Moody’s is right to also raise concerns about the recent increase in risky lending. Investment loans, which now account for about 40 per cent of all new lending, have higher probabilities of default and loss severity than owner-occupied credit. This is partly because over 50 per cent of all investment loans are interest-only products that result in no pay-down of the original principal sum.
The bottom line is that the banks and the RBA need to get serious about Australia’s brewing housing risks.
The Australian Financial Review
BY CHRISTOPHER JOYE
Christopher Joye
Christopher Joye is a leading economist, fund manager and policy adviser. He previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of YBR Funds Management Pty Ltd.
This is a good hunt for facts... basically hot money will pay a premium for good government and good quality of life.
I have no doubt that based on local income, Australian mkt looks pricy however external forces such as migrant and their purchasing power may have been under-estimated just like what happened in Singapore, HK and UK.
Anyway, Australia remains a well regulated market and given social welfare that under-write the society structure, some complains could well be from the perspective of those that prefer slower pace of life in the society.
1 cent worth
GG
(02-09-2014, 06:09 PM)piggo Wrote: [ -> ]http://www.economist.com/news/finance-an...othy-again
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Seems like countries with AAA or AA ratings tend to have overpriced properties vs rents.
RBA’s Glenn Stevens ramps up warning over property investment
GARRY SHILSON-JOSLING AAP SEPTEMBER 03, 2014 2:15PM
RESERVE Bank of Australia boss Glenn Stevens has warned against excessive risk-taking in the housing market while interest rates are low.
The RBA was aware that monetary policy worked by affecting financial risk-taking behaviour, and did not want to foster too much of a build-up of risk, he said.
“That could leave the economy exposed to nasty shocks in the future,” Mr Stevens said in a speech in Adelaide today.
“The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle.
“It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that.”
Low interest rates could make funding easier to find, and smooth the way to expansion of credit, but it could not add to the supply of land and houses, or improve the responsiveness of the construction sector to demand for new housing, he said.
“Other policies have to do that — and it’s important that they do if we are to see easy credit resulting in more dwellings as opposed to just higher prices for the existing dwellings.” Monetary policy could also not ensure policies for creating necessary infrastructure or generating the technological change and innovation necessary for the wellbeing of the country’s citizens, Mr Stevens said.
“Other policy areas have to be right — and then the innovators and their backers have to be willing take the necessary risk,” he said.
It was up to businesses to drive economic and employment growth, as the country moves away from its reliance on the mining investment boom, Mr Stevens said.
Figures showing a recent rise in the unemployment rate were “concerning”, he said.
“The bank’s reading, which we have had for a while, is that the labour market has a degree of spare capacity, and that it will be a while before we see unemployment decline consistently,” he said.
Ideally, the non-mining sectors of the economy would grow a bit above their long-run trend pace for a while, after having been below par recently.
“We may not be quite there yet, but we are I think slowly building a foundation for better performance,” Mr Stevens said.
The best the RBA could do to help was to run an accommodative monetary policy — or low interest rates — not only to encourage borrowing but to spur a search by investors for higher yield.
However, while high interest rates can force people to borrow and spend less, low interest rates could not make them borrow and spend more, he said.
“They have to want to,” Mr Stevens said.
Households had already built up their debt levels during the 1990 and 2000s, while governments were hampered by the need to tidy up their balance sheets and reducing borrowing, he said.
Household consumption spending could grow in line with incomes, or maybe a little faster, but the odds are against households driving growth as strongly as they did a decade ago, Mr Stevens said.
“That leaves the business sector,” he said.
Mr Stevens acknowledged it wasn’t business managers’ jobs to drive growth “out of a public-spirited desire to help the economy”, but at some point it would be in the interests of businesses to start investing more.
Sowing the seeds of their own destruction
FRANK GELBER THE AUSTRALIAN SEPTEMBER 04, 2014 12:00AM
THE problem with strong markets is that they don’t stay that way. They sow the seeds of their own destruction.
It’s the very strength of investment returns and the inflow of funds that causes overinvestment, eventual oversupply and a downturn.
That looks like happening to industrial property — not yet, but in a few years.
It was easy to see a buoyant market returning. From having been a secondary investment class 10 years ago, prime industrial property has become a much more mainstream investment for both small and large investors, including super funds.
Now the newly emerged darling of the property investment community has moved upmarket. Expectations of strong returns became
self-fulfilling as inflows of funds caused a firming of yields, leading to price rises augmenting solid rental yields and boosting total returns.
And the larger investors, particularly super funds, want prime, long-leased warehouse properties. There’s strong demand. But there’s limited supply — or is there?
We could just move the whole tenancy structure upmarket. And that’s what’s happening. The opening up of road systems, particularly in Sydney and Melbourne, created plenty of good quality, well-positioned industrial land. And it’s cheap.
Developers were hammered after the global financial crisis and are keen to turn land with a negative cashflow into a positive proposition. For a developer, there is a ready take-out of prime quality property, provided there is a long quality lease attached.
It’s easy to build attractive premises at rents matching the market. The result has been a surge in building prime quality industrial premises. In some cases, developers will take on the residual lease to attract tenants. It makes it easy for the tenant to switch to new, quality space in good locations.
The result is we are cannibalising the leasing market. With building only limited by the ability to get tenants, much of the backfill space has been left empty. High vacancies have led to incentives to attract tenants, while effective rents for vacated existing space have fallen.
But the logic of the development market is different.
With plenty of demand for investment properties into the future, it will get worse.
Developers will continue to build and attract tenants, leaving more space vacant and putting strong pressure on the secondary markets.
Our forecast for building activity is for strong growth for the next few years. And that will end in oversupply. The strength of investment can’t be sustained.
We’ll end up building too much. Vacancies will rise, incentives will increase, effective rents fall, investment returns weaken, yields soften and prices correct. Developers won’t stop until investors do. Something has to give.
We’ve seen similar cycles in other sectors, and will again. For industrial property, were there constraints on readily available land, investment demand would lead to a stronger firming of yields and prices rather than driving building.
The Brisbane and Perth office cycles provide a contrast. Here, problems arose because of unforeseen fluctuations in demand. In the boom, undersupply led to tightening leasing markets, driving rents and prices to high levels.
Now demand is weakening, but boomtime supply levels are locked in for a few years yet. Oversupply. Disaster.
Long lead times slowed the supply adjustment, both when leasing demand was rising and now when demand is falling. The anomaly is that rents and prices remain at levels that underwrite the financial feasibility of development.
Again, something has to give. Hence our forecast of substantial falls in rents and property prices.
I’ve been painting a picture of the next stage of the industrial property cycle. But it won’t happen immediately. The market will stay strong for a few years yet, until the oversupply becomes evident. Only then will there be a correction, but the writing is on the wall.
fgelber@bis.com.au
Frank Gelber is chief economist for BIS Shrapnel.
Space no object as bargain hunters clamour for little pot of gold
THE AUSTRALIAN SEPTEMBER 04, 2014 12:00AM
Greg Brown
Property Reporter
Sydney
THE booming price growth of inner-city apartments in Sydney and Melbourne has led to a surge of bargain hunters snapping up tiny units with less than 45 square metres.
Known as micro apartments, their dwellers are often confined to a single room with a bed, kitchen and living area all in one.
Melbourne real estate agent Robert Eggers, from Dingle Partners, said demand for micro apartments had risen over the past two years as they offered first-home buyers an affordable entry into the market. “They can range from $200,000 upwards and to get your (own) little piece of real estate is still very much the Australian dream,’’ Mr Eggers said.
Dingle Partners is marketing a 19sq m apartment on Flinders Street in the Melbourne CBD for $150,000, and a 43sq m apartment on Little Collins Street for about $300,000.
Mr Eggers added that while first-home buyers were busy in the 40-45sq m range, investors usually bought even smaller apartments as banks demanded larger deposits.
“The tenants for these locations tend to be single people or a couple who are working in the city so they are looking for a convenient type of lifestyle to live and work close by,” he said.
Chinese development giant Greenland Holding Group’s first Australian development, the Greenland Centre on Bathurst Street in Sydney’s CBD, featured apartments as small as 38sq m.
The Victorian government is worried that Melbourne micro apartment building has skyrocketed due to a thirst for extra profits by developers, leading to reduced quality of living.
The government is considering proposals by a Melbourne City Council report banning studio apartments less than 37sq m and one-bedroom apartments less than 50sq m.
More demand than supply
Housing Rebecca Thistleton
558 words
6 Sep 2014
The Australian Financial Review
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Cashed-up and bullish homebuyers appear set push home prices higher through spring, defying the RBA governor's attempts to jawbone capital gains.
Confronted by warnings that house prices might be in bubble territory, governor Glenn Stevens has repeatedly tried to hose down the sector through carefully crafted words rather than interest rate hikes. Yet his warnings to lenders and buyers have done little to stymie growth and more price rises are expected in coming months.
The number of new houses coming on to the market has not risen in line with spring expectations and buyer demand has been ahead of supply. Homes are selling faster and ahead of auction and overall transaction numbers are low despite demand.
Agents, buyers advocates and analysts expect competition for homes to continue and have speculated on why there is less stock on market than is traditionally listed in September.
Melbourne Property Advisory director Kate Vines said a disproportionate number of homes were selling off-market and agents were negotiating with disappointed auction underbidders before homes were even listed.
Ms Vines said some home sales had been brought forward by vendors keen to sell their home while the market was still performing. Hence home sales remained steady throughout winter, skipping the traditional hiatus.
Ms Vines said a flood of new homes into the auction market may dilute bidder numbers and she agrees with fellow market watchers that this year's spring market could run well into summer.
Sydney-based auctioneer Damian Cooley said the average bidder number recorded at his auction house was 4.7 per property in June, which rose to 5.4 in July and crept up again in August to 6.7. "Rising values are a by-product of more bidders and that's taking sale prices well above vendor expectations," he said. "Auctioning has also become the more popular way to sell, it's the best way to take advantage of the competition."
Ms Vines and Mr Cooley both agreed one or two rate rises in 2015 would do little to reduce buyer demand – particularly from investors who have driven the market revival.
The latest RP Data Core Logic home value index showed median values rose 4.2 per cent in the three winter months, the strongest winter performance since before the financial crisis.
RP Data spokesman Robert Larocca said he expected on-market levels to be higher than this time last year and said buyers would face more vibrant market conditions and higher prices.
Propell National Valuers national research manager Linda Phillips said growth would slow otherwise the RBA would lift rates, but for now, buyers were assuming rates would remain low for the next year. Mr Stevens sounded similar warnings around the housing market and investor risk in 2009, and in the following months, he upped interest rates. His predecessor, Ian Macfarlane, was regarded as having some success with jawboning attempts in 2003. Real Estate Institute of NSW president Malcolm Gunning praised the RBA's decision to keep rates on hold. "We must once again caution those seeking to take out a mortgage to ensure that they are realistic with their abilities to service debt," he said. "Interest rates will not remain at these record lows and future interest rate increases must be factored in," Mr Gunning said.
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House price growth to slow
Larry Schlesinger
383 words
4 Sep 2014
The Australian Financial Review
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Melbourne house prices will rise by between 3 per cent and 5 per cent this financial year, according to Fairfax-owned Domain Group.
This would be a significant slowdown from the 9.3 per cent growth recorded in 2013-14 but better than the 3.8 per cent recorded the previous year.
If correct, it would mean a total rise of up to 18.1 per cent since the market fell 5.6 per cent between 2010 and 2012, according to the Australian Property Monitor, also owned by Fairfax.
Domain Group senior economist Andrew Wilson said, after a solid winter season, the outlook was for a generally robust spring selling season.
But he said price growth would be "mixed over the remainder of 2014 and into 2015 as the waning effect of historically-low interest rates and underperforming local economies impact home buyer activity".
"Price growth has softened from the peak December quarter results and annual capital city performances for 2014 are set to converge to relatively similar levels, Mr Wilson said.
"Sydney and Melbourne will record significantly lower levels of house price growth over the 2014-15 financial year compared to the strong results of the previous year.
"As a consequence of underlying flat income growth, rising affordability barriers will act to generally constrain price growth capacity," he said.
He forecast moderate gains for Adelaide, Brisbane, Hobart and Darwin; similar results to the previous year. No forecast was made for Perth.
Taking a closer look at Melbourne, Mr Wilson said inner suburban mid-price range markets would be the best performers in 2014-15. "The outer east will continue to attract buyers although price growth will be lower as the impact of affordability barriers emerge after the recent unsustainably strong prices growth. Prestige properties in the inner east will also continue to find buyers over spring."
In a separate report released at the end of June, BIS Shrapnel forecast an immediate slowdown in Melbourne house price growth .
BIS Shrapnel residential market analyst Angie Zigomanis said the number of new apartments being built in Melbourne would impact on values.
BIS Shrapnel forecast Brisbane to be the strongest market over the next three years. Momentum would continue in Sydney for the next few years, it said.
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Developers lash out at levy
Larry Schlesinger
569 words
4 Sep 2014
The Australian Financial Review
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Developers have strongly condemned a proposal to impose an additional stamp duty levy on foreign buyers of Australian real estate.
The proposal, which is being considered by the parliamentary committee examining foreign investment in real estate, chaired by Liberal MP Kelly O'Dwyer, is based on a 15 per cent charge levied on foreign buyers in Singapore as part of efforts to cool down that market.
"It's a really bad idea," said Stephen Speers, head of development at Chinese-backed Hengyi Australia.
Mr Speers said penalising foreign buyers would have wider repercussions for local buyers, for jobs and for sectors such as construction and architecture.
Hengyi Australia is developing Light House, a 69-level high-rise apartment complex in central Melbourne with an end value of $320 million. The project was 75 per cent sold out in June, with about half the buyers from offshore.
"We have a great functioning market at the moment. Any government interference would be to its detriment," Mr Speers said. He further warned that overseas investors would be taking note of the tone of current debate in light of the recent remarks made by Palmer United Party leaderClive Palmer on the ABC's Q&A program. "It's very unhelpful and it impacts on overseas relations" .Mr Palmer has since apologised for referring to the Chinese government as "mongrels".
Mr Speers said Hengyi aimed to achieve a 50/50 split between overseas and local buyers.Discerning buyers
"Overseas buyers are incredibly astute and well informed, " he said
Far from throwing their money around, these buyers looked for something that suited their needs. This might be a pure investment, somewhere for their children to live while they studied in Australia or a holiday flat.
Asked recently if foreign investors would quit the market if FIRB rules were changed, Meriton boss Harry Triguboff said: "The Chinese are very practical people; they will buy if there is a buck in it. But they do not forget if you pick on them."
Luke Hartman, chief executive of Metro Property Development, which sells about 30 per cent of new apartments in Brisbane to offshore buyers, believed any tax charge on foreign purchases would be a "very silly move".
"It will slow down the number of new projects. Supply would dry up , construction would slow and it would have an impact on prices," Mr Hartman said.
"The banks already control the amount of property a local developer can sell offshore."Foreign ownership 'positive'
He added that there was a "general misconception about how foreign ownership works. It's a very positive thing for the development industry".
Melbourne developer Michael Yates said rather than a tax, the FIRB needed stricter disciplines in gathering information.
"Had we not had foreign investment in real estate in last two years, we would not have recovered to this extent that we have.Foreign investors have aided the property market recovery."
Mr Yates said local buyers accounted for 75 of the 114 apartments sold in his Yarra House in South Yarra.
Ms O'Dwyer told The Australian Financial Review the committee was looking at the stamp duty option, but also at improving the amount of information on foreign investment.
"You can't rely on anecdotal evidence. You need to look on the facts." she said.
The inquiry will give recommendations to Treasurer Joe Hockey in October.
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Offshore buyers push housing growth
THE AUSTRALIAN SEPTEMBER 08, 2014 12:00AM
Greg Brown
Property Reporter
Sydney
FOREIGN buyers are helping ease Australia’s housing shortage, with offshore investment spurring on higher-than-expected home development levels.
A report to be released today by property consultants RP Data and the Property Council of Australia forecasts further strengthening of the housing market, with 180,000 new homes expected to be built by June next year.
This is about 30,000 higher than average of recent years and about 10,000 ahead of forecasts six months ago, said Nick Proud, executive director of the Residential Development Council.
Mr Proud said the increase in foreign buyers, who now make up about 8 per cent of new home buyers, would push the construction of up to 14,000 extra homes this year.
Higher levels of construction were needed as Australia’s housing market begins to tighten.
“On average, Australia builds 150,000 homes each year, but this is simply not enough to meet demand, let alone reduce the housing shortage.
“These increased construction rates are expected to continue for the next 12 to 18 months — but the challenge is to keep up this level of activity to meet undersupply,” Mr Proud said.
Building approvals in the year to June, at 193,667, were at a 30-year high.
Local developers are noticing the change. Meriton Apartments founder Harry Triguboff said a surge in demand from offshore Chinese-based buyers in the past three years had given the group more confidence that its projects would stack up financially.
“They are different from our purchasers because they are consistent buyers,” Mr Triguboff said.
“They don’t wait for the market to come up or come down they just decide and they come and they buy. That makes it very easy for any developer because then he knows he has a buyer who is there all the time.”
David Milton, CBRE’s managing director of residential projects, said offshore buyers were a key factor in local apartment projects getting off the ground.