Hot property market is part of unfolding China story
TERRY MCCRANN THE AUSTRALIAN MAY 30, 2015 12:00AM
Is there life after the mining boom?
The surge in prices in the Sydney and Melbourne property markets is not a bubble. The surges are the consequence of the intersection of two secular shifts, which are producing a fundamental and likely permanent reassessment of global asset values and Australia’s in particular.
The first is the obvious one — the very low interest rates that prevail around the world and are accompanied by an extraordinary amount of fiscal deficit-creating and central bank-validating liquidity. The second is the desire of the rising Chinese affluent class to buy property in the developed world. This is dramatically leveraged in the case of Australia, in both the established and new housing markets.
It is the exact opposite of the dynamics in the market for our biggest export, iron ore. There, too much and expanding supply is chasing a static volume of demand, and so prices have fallen. In Melbourne and Sydney property, too much demand is chasing relatively fixed supply, and so prices are rising.
I make the comparison with iron ore for a more fundamental reason, for what we are seeing in the property market is the second phase of the extraordinary and explosive growth in the Chinese economy and its impact on the developed world, especially on Australia.
The first phase, which had started in the closing years of the 20th century but really gathered pace from around 2003, was that raw Chinese growth. It was a growth that seemed designed to benefit Australia, if not quite alone certainly to a unique extent. One side was China’s enormous appetite for our resource exports. Never before had we or arguably any other country quite got to both have our cake — the massive expansion in volumes sales — and get to eat it also — with the explosive rise in the prices we received. Now, of course, we are experiencing what happens after you get to eat an unlimited amount of very rich cake.
The other side was the explosive growth in China’s export of seemingly ever-cheaper consumer goods into the global marketplace. This was a mixed blessing for most of the developed world — cheaper goods for consumers, lost jobs for workers. The same happened here, except we didn’t have as big a local manufacturing industry.
In total, we picked up far more on the swings than we lost on the roundabout. This very large net gain was encapsulated in, and also delivered by, the Aussie dollar going above parity against the greenback.
Phase One of the China boom saw 20 million or so people moving from the country to the cities every year. From the 19th century to the 21st century. In Phase Two, 70 million people in the Chinese affluent class — as a Chinese businessman put it to me during the week — want to move to Australia. From their 21st century to ours. If they can’t do it physically, they will endeavour to do it financially.
Now none of this is particularly original or shockingly revealing. What I do think has tended to be missed about the China story is the way it has operated outside the broader global dynamic while, of course, being directly linked to it. It was almost as if the developed world had suddenly started trading with Mars. This was shown most acutely, and again directly for us, after the global financial crisis. The rest of the developed world slid straight into the worst recession since the 1930s; China briefly stumbled, “disconnected” from that global dynamic, and surged into double-digit growth rates — bestowing in the process its munificence on us.
Exactly the same reality of the mother-of-all “exogenous” forces, operating disengaged from the conventional global economic and financial dynamics, is now at work with Chinese capital exports. And once again we are a favoured destination and the leveraged impact is dramatic.
At its most basic, normal profit-seeking rules have been abandoned. If you want to get money out of China, building a non-China and a non-yuan asset base, it’s irrelevant whether you “lose” money from either a fall in the purchased asset value or a currency depreciation. Better to keep 80 per cent of your exported capital as against risking the loss of 100 per cent at home. Further, from a Chinese perspective, developed world property, in particular Australian property, really is cheap, when you account for all the other things you buy with it — the established infrastructure of our cities, breathable air, our amenity, our broader society. Shanghai and Beijing might be exotic, but would you really like to live there permanently?
This dynamic has collided with low global interest rates and the search for yield and its own impact on global share (and bond) and property values.
Now one might reasonably argue that both will end at some point. That’s the nature of markets; but even more, this low-rate/high liquidity era will more than likely end badly.
I would say a couple of things. I doubt we are going to go back to significantly higher interest rates anytime soon. So yes, if this is a bubble — and bubbles always burst — even on that basis the bursting is a long time away.
It seems to me this central bank era could end badly in one of two ways. We either end up ultimately getting the inflation we conventionally expected from so much money-printing; or we get a weird combination of continued global liquidity and activity recession. The first would be “good” for property prices, the second more neutral.
As for China, Phase One could very well be over but Phase Two is in its early stages. It will run on for years, if not decades, and be spurred by a slowing or failing real economy in China.
You call that a house price boom?
Robert Harley
443 words
29 May 2015
The Australian Financial Review
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Panicked about house price growth in Sydney and Melbourne? You have a short memory, according to analysts CoreLogic. The current boom is moderate compared with that of 2001-04.
Since the latest upswing started in May 2012, Sydney house values have risen 38.8 per cent, according to CoreLogic. In the three years after 2000, the rise was 60.2 per cent.
Similarly in Melbourne, the latest rise is 23.6 per cent over the past three years compared with 58 per cent in the three years after 2000.
CoreLogic's national research director, Tim Lawless, said that although the rate of capital growth in Sydney, and to a lesser degree Melbourne, was strong, it was "nowhere near as strong" as the rapid home value growth recorded between 2001 and 2004.
The house price growth is also much less than in the boom of the late 1980s when Sydney house prices nearly doubled in a year after interest rates were cut following the stockmarket crash, negative gearing was re-introduced for housing, and the city was recovering from a housing shortage and a strong rise in rents.
Mr Lawless said the current boom differed in several aspects from the earlier surge in house prices.
Nationally house price growth is lower, peaking at an annual rate of 11.5 per cent in the year to April 2014 compared with 21 per cent in 2002.
The current boom is also "lopsided", Mr Lawless said. By comparison with previous cycles, the price growth is far more focussed in Sydney, which is catching up after a lost decade, and in Melbourne, which continues to enjoy strong population growth.
Since the low in 2012, Brisbane home values are up 10.9 per cent, Adelaide is up 7 per cent, and Canberrra has risen 8.5 per cent. Perth, which bottomed in October 2011, is up 14.5 per cent.
The level of transactions is lower. In the previous boom, the number of homes sold peaked at 75,000 in the six months to August 2001. By comparison, the peak of the current boom, at least so far, has been 57,000 home sales in the six months to November 2013.
"Transactions are a good proxy for the market," Mr Lawless said. "There have not been a lot of upgraders or first- home buyers in this boom, partly due to transaction costs."
Mr Lawless said the latest boom was characterised by less consumer and business confidence than in the early 2000s; by a higher level of investor buying; by a ramp-up in supply and a stronger regulatory response.
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New home sales hit five-year high as apartments snapped up
Michael Bleby
560 words
30 May 2015
The Australian Financial Review
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New home sales in April rose to their highest level in more than five years, with demand for apartments picking up as detached home sales slowed.
Sales rose 0.6 per cent from March to 8120, the highest number since the first quarter of 2010, the Housing Industry Association said on Friday.
The disparate nature of the housing economy shows, however, that just as Sydney and Melbourne are booming while others slow, the mix of housing sold is also changing.
Detached home sales rose in the two largest cities — and even accelerated to 7.2 per cent last month from 4.2 per cent in March in NSW — but Queensland suffered an unexpected 9 per cent decline after a smaller 2.3 per cent fall in sales in March.
Even in NSW and Victoria, however, there are signs that sales of stand-alone houses have peaked.
Figures for the three months to April give an indication of a moderating market. NSW chalked up 3649 detached home sales in the April quarter, up 0.5 per cent on the previous three months, but down 10.9 per cent from the 4095 sales in the same period a year earlier.
In Victoria, the April quarter's 5534 sales was up 7.4 per cent from the previous three months and down 4.2 per cent from 5774 a year earlier. Over the same period, however, apartment sales jumped 57.7 per cent to 5291 nationally, from 3356, in the same three months of 2014.
"The rate of sales of apartments is continuing unabated at the moment," said Andrew Buxton, the managing director of MAB Corporation, which has sold about 85 per cent of the 420 apartments in its two-tower Promenade development in Melbourne's Docklands and will in coming weeks bring its next tower, the adjacent 110-apartment Banksia, to market.
"We're just about to go to market, with Banksia pitched purely at owner-occupiers," Mr Buxton told The Australian Financial Review. Month on month, sales of apartments, townhouses and semi-detached dwellings were up less than 1 per cent, the HIA figures show.
The total new sales figure was the weakest out of the past four months of uninterrupted growth.
"This is still a strong result," HIA chief economist Harley Dale said. "The profile for new-home sales in 2015 is consistent with a new-home building cycle where further upward momentum resides largely in the 'multi-unit' sector and where the eastern seaboard states are driving the further growth."
Opinions are divided about the strength of housing construction, but the report adds strength to arguments that the cycle, driven by pent-up demand in Sydney, record low interest rates and constant investor demand, is reaching its peak.
The report gives more detail on sales of detached houses - the builders of which make up the HIA's core membership - than of apartment sales. It shows that apart from the key drivers of NSW and Victoria, where sales rose 2.7 per cent, stand-alone house sales rose 0.9 per cent to 1505 in WA.
While Queensland marked the biggest decline, home sales also fell 1.9 per cent in SA to 418. The HIA report does not give details for Tasmania, NT or ACT.
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Lending curbs pointless: investors
Michael Bleby
365 words
28 May 2015
The Australian Financial Review
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Diane Kennedy recently bought a two-bedroom unit in Newcastle for $415,000.
While the current tenants pay $320 a week in rent, Kennedy, a Sydney chiropractor, says that lease will expire soon and she plans to raise the rent to $370, giving her a gross yield of about 7.7 per cent.
Kennedy, who owns a number of properties, says efforts by policymakers now being implemented by banks to curb investment borrowing are pointless.
"If the government is serious on people funding their own retirement, then effectively they're just chopping the legs out from underneath," she says.
With the return on residential property - as seen in Kennedy's plan for her Newcastle unit - still higher than many alternative investments, experts question whether macroprudential measures will have any real effect on calming the heated demand for property, especially when it plays such an entrenched role in people's wealth plans. Kennedy bought her first property 20-odd years ago.
"There are market forces at play, and as much as any government may try and control it, I don't see it exactly slowing," says Paul Caine, a director of Melbourne real estate agency Caine. "The other options have got to be more competitive before people will stop buying property."
Rich Harvey, the managing director of Sydney buyers' agent PropertyBuyer, says tighter lending measures could cool investor demand, which could give a "glimmer of hope" to first-home buyers.
But, he cautioned, investing in property would remain attractive to many because it permitted leverage, something that other investments generally didn't. That will be the case even if banks started requiring a 20 per cent deposit on investor loans, he says.
"For every dollar you've got, you can leverage it $5," Harvey says. "When you compare shares with property, I look at absolute returns. People may say the sharemarket's gone up 10 per cent, but if you can only put $100,000 into shares, you can put $500,000 in the property market."
Kennedy agrees.
"For someone who is wanting to have a comfortable retirement, then it's a key part of their portfolio," she says.
^^^ Leverage cuts both ways.
How high will the housing boom go?
Michael Bleby
813 words
21 May 2015
The Australian Financial Review
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Is Australia's biggest housing boom being cut short? The Housing Industry Association says it is, and that dwelling commencements - a key measure of new housing construction - will peak this year before dropping 10.6 per cent next year, pulled down by supply constraints such as a lack of land and planning delays.
Some analysts are more optimistic, however. BIS Shrapnel associate director Kim Hawtrey agrees that while this year is likely to mark a peak, the likely numbers are higher, with a figure above 210,000 housing starts that holds "in the vicinity of" 200,000 next year, as the momentum of the current record approvals keeps construction ticking over.
Others say the cycle has not even peaked. Deutsche Bank analyst Emily Smith predicts that this year's 203,200 housing starts will rise further to 205,600 next year because of continued low interest rates and expectations of continued solid migration.
With record low interest rates, the unleashing of pent-up demand that has dogged Sydney ever since then premier Bob Carr declared in March 2000 that the city was "full up", and a voracious investment appetite for property from local and foreign investors as well as strong population growth, the housing economy is growing faster than ever. Total housing starts in the year to December were a record 197,972 - nearly 30 per cent above the 30-year average of 153,297.
"We will go at higher levels for a number of years," says Robert Lynch, the chairman of listed home builder Tamawood and former Investa Property Group residential head.
The question for developers and builders alike, however, is how high and how long this housing boom will go.
Last year detached house starts jumped more than 17 per cent to 112,245 from 95,547 in 2013. It's a large gain, but in historical terms less notable. For the past 45 years in fact, construction of detached houses has been remarkably constant, averaging 103,654 starts each year, even taking into account the decade NSW lost by failing to release more land for housing.
The growth that is changing the housing construction market is coming primarily from apartments. While commencements of these have averaged 42,953 for the past 45 years, last year they were nearly double that, at 83,987.
In a further contrast with the past, apartments take longer to build after approval than detached houses, and this is also lengthening the cycle.
Credit Suisse analyst Andrew Peros says housing booms historically last 2.3 years from trough to peak of approvals. The current one, not yet even two years old, has much further to run, he says.
"Based on the pipeline of approvals which are yet to commence, it's clear this cycle will surpass the average length of previous cycles," Peros says.
How long the boom continues, then, depends in part on the willingness and capacity of local authorities to keep approving new apartments. In the short term, it is likely to remain strong. The latest Ai Group/Australian Contractors Association Construction Outlook report predicts the growth in the value of multi-level apartments to more than double to 14.9 per cent this year - from 7.1 per cent - before moderating to 4.1 per cent next year.
The current boom may give little more than a temporary lift. The unprecedented demand is drawing more production of houses, even without state and local governments having to tackle the blockages in timing and planning that are holding up supply, BIS Shrapnel's Hawtrey says.
"One irony of this housing boom is that it's going to mean that policymakers simply defer any real action on the supply side," he says. "One of the tragedies, or ironies, of this upswing is that it camouflages for a certain period the structural barriers that still exist on the supply side." But even if this is the case, the unstoppable Sydney market is likely to keep going. Those unresolved structural constraints will limit the roll-out of new usable land, but will ironically keep activity at its current buoyant level at least for the next two years and "maybe a long time after that", Lynch says.
At the same time, the regional disparities in the housing economy have been laid bare and that, he says, will be the pattern of housing construction in Australia for the foreseeable future.
"Sydney won't drop off," Lynch says. "Melbourne is going to tick along as it is. Brisbane is not at such a high level at all. There is a bit more growth in the Brisbane market, but WA is going to drop off a fair bit."
Key pointsThe Housing Industry Association says the housing boom will peak this year.
Other analysts including BIS Shrapnel and Deutsche Bank are more optimistic.
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This is where the bloodbath is...
Defaults up in mining towns
Larry Schlesinger
460 words
29 May 2015
The Australian Financial Review
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Mortgage arrears have risen sharply in mining towns over the past 12 months, coinciding with a fall in the iron ore price and a pull-back in mining investment, according to a new Standard & Poor's report.
S&P found the proportion of home loans in major mining areas a month or more in arrears, while still low, had risen from 1.5 per cent to more than 2 per cent since March last year - a rise of more than 30 per cent.
By comparison, the overall proportion of prime mortgages more than a month in arrears fell 11 per cent over the same period to a low 1.05 per cent, according to S&P's RMBS Performance Watch report.
S&P report authors Erin Kitson and Narelle Coneybeare said the latest rise in mining town mortgage arrears was "not surprising given that mining areas are highly dependent on a few key employers and the flow-on effects of a downturn in a key industry are more pronounced in such areas".
Mining town arrears rates could rise further over the next decade with broker Citi downgrading its long-run iron ore price forecast form $US81 a tonne to $US55 a tonne by 2025 and quarterly Australian Bureau of Statistics figures showing private-sector mining investment down 4.1 per cent in the March quarter, its sixth straight quarterly decline.
LJ Hooker Pilbara estate agent Marg Hunter said there were "no inquiries whatsoever" for properties she was selling in the WA mining zone.
Ms Hunter said prices had fallen by as much as 50 per cent for some properties. "Properties that had been rented out at $2500 a week a year ago are now available at $400 to $500 a week," she said.
Ryan Crawford, director of the Crawford Property Group, which has offices in Hedland, Newman and Karratha, said over the last 12 months demand for housing in the Pilbara has reduced substantially "as mining companies large and small begin to tighten their belts in reaction to global resource prices and decreased exploration and expansion activity".
"The recent downturn has brought previously overheated pricing down to much lower levels in these regions, while existing investors are battening down the hatches and adjusting to lower rents," he said.
The level of arrears in mining towns is still low compared with the worst performing areas on the east coast, where unemployment is the primary factor in mortgage delinquency.
The list of 10 worst performing post codes was topped by Bamboo Creek, an agriculture area near the banana-growing region of Innisfail in far north Queensland, where the proportion of loans in arrears was nearly seven times the national average.
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Auction 'frenzy' in Sydney, Melbourne
May 31 2015
by Nick Lenaghan
Sydney's booming housing market is showing no sign of fatigue, galloping to another strong result on the weekend.
A four-bedroom Lilyfield house, in Sydney's inner west, sold for $2.27 million under the hammer, well above its $2 million reserve.
Bidding for the property at 20 Maida Street opened at $2.13 million with an offer from the eventual purchaser, a family from nearby Rozelle.
"It was an an outstanding result for a property without parking on a 250 square metre block," said selling agent Lynsey Kemp, co-principal of Belle Property Balmain.
The clearance rate in Sydney hit 86.5 per cent of the 1.120 homes taken to market, a marginally better result than the previous week, on preliminary CoreLogic RP Date figures.
In Melbourne, Australia's largest auction market, the appetite was also strong, with a 78.3 per cent clearance rate of the 1,221 homes put on the block.
Property analyst Louis Christopher, of SQM research, is forecasting at least 15 per cent price in the Sydney market this year, and up to 12 per cent in Melbourne.
"I don't think we're at the top yet. We're in the fourth quarter, in Sydney at least, but the fourth quarter could get extended time," Mr Christopher said.
Clearance rates were now at all-time record in Sydney, with the market in a "frenzy" and no slowdown in sight.
The usual triggers for a market downturn - oversupply, a rise in interest rates, or a global shock - were not apparent at this point, he said.
Even the macroprudential squeeze initiated by the baking regulator had had little impact at this point.
"The market is in a frenzy, it creates uncertainty because the price is moving very quickly," Mr Christopher said.
"There is broad knowledge that prices have rapidly risen. In Sydney there is general consensus that the market is abnormally strong right now.
"Many would-be sellers are holding back, thinking they are going to get a higher price. But they are fearful if they can't buy back into the market they will lose some potential gains.
"Buyers are very fearful they may be buying close to the top, and they'd be fully aware they are paying top dollar, but their fear is the market could go even further up.
"Our indicators suggest that is exactly what it's going to do. There is a lot fear, there is a lot of greed out there right now. There's a degree of uncertainty in terms of exactly where valuation is."
The most expensive home sold in Sydney over the weekend was a five-bedroom home at Seaforth, which exchanged hands for $4.425 million.
The property at 52 Edgecliffe Esplanade is set on 1,450 square metre on the Seaforth Bluff.
In Melbourne, the most expensive home sold was in the Golden Mile section of Canterbury, in the bosom of Melbourne's leafy east.
But the property at 36 Wentworth Avenue was, which traded for $3.95 million, was sold not for its four-bedroom home, but for its 936 square metre allotment.
The new owner, a Chinese migrant living in nearby Balwyn, intended to knock the current dwelling down and build a new family home there, said Jellis Craig agent Tom Ryan.
The land rate of above $4,200 square metres was a very high price for the area and the property sold well above its reserve, he said.
"It tells us that the demand for land in those areas has become pivotal. They want to build their family homes there. They will build substantial family homes there.
"They want to be close to the schools in that area and beyond and they want to be surrounded by quality family homes. They will pay a lot of money for the land in order to achieve that."
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