Earth moves under Australia's housing recovery

It's a housing recovery Glenn, but not as we know it.

Australians are changing the way they live and the property industry must adapt to survive.

In an insightful speech to the Australian Institute of Building last night, the Reserve Bank’s assistant governor (economic), Christopher Kent, gave an update on recent developments in the housing market while also highlighting some fundamental changes in the property landscape over the past decade.

Pouring equal measures of cold water on housing bulls and housing bears, Kent said the bank’s liaison with the housing industry suggested there had been a welcome pick up in demand for new housing. But the market remains “relatively subdued”.

Nationwide, house prices have risen about 4 per cent over the past year, but remain below their peak of October 2010. Melbourne and Brisbane remain particular weak spots, their property parties having ended somewhat later than Sydney’s did in the early 2000s.

But while prices are picking up, debt appetite remains suppressed.

Housing credit extended to owner occupiers is growing more slowly than credit to investors, partly because existing borrowers are choosing to pay down their mortgages faster. Housing credit is now growing in line with incomes growth at about 4.5 per cent.

And long may we expect this to continue.

Borrowers' adjustment to the new era of low inflation and low interest rates, which pushed house prices up sharply in previous cycles, now appears to have “run its course”, according to Kent.

And so we must expect a more subdued outlook for house prices than in the past decades.

Tellingly, turnover in the market remains historically low. About one in 25 homes are now changing hands each year, compared to one in 12 during the early 2000s.

If it turns out this lower turnover is more the historic norm, this would have massive implications for the real estate industry.

According to Kent: “If that is right, it means that those who make a living from turnover – real estate agents being the most obvious example – are unlikely to see a return to the easier days of the first half of the previous decade.”

So while we may expect a cyclical upswing in property construction and prices in response to the Reserve Banks’ radical low interest rate medicine, there are structural forces at play.

Perhaps the most interesting, highlighted by Kent, is the trend towards apartment living.

Of the pick up in dwelling approvals over the past few years, almost all the strength has been in units and apartments. The building of new detached homes remains in the doldrums.

Kent identifies three major drivers of this shift.

First, the long-run ramp up in land prices, relative to incomes, is forcing new home buyers to economise on space. Apartments deliver this.

Second, the increasing level of congestion on capital city roads and public transport routes is imposing a cost on those choose to live on the fringe. As urban infrastructure fails to keep pace with a growing population, Australians are seeking to avoid the cost of congestion by living closer to where they work. And despite the best intentions of urban planners to create multi-centric cities, the relative success of our professional and finance industries, which tend to be located in central business districts, and relative decline of our manufacturing industries located in outer areas, is driving jobs, and commuters, inwards.

Third, there does appear to be a preference shift, particularly among younger Australians, towards living closer to the inner city, with all the access to infrastructure, shops and entertainment that inner cities provide.

The great outward migration of our cities to the suburbs appears to be reversing. 

Australians, it seems, are no longer living on the edge.

And this, again, has implications for the property industry.

“If this is a durable, structural change in the market, it will have important implications for builders and developers, particularly those whose business model is focused on detached housing.”

What Kent is talking about, albeit in central-banker-eese, is the death of the suburban McMansion.

Australians have tested the limits of their love affair with housing. While housing construction can be expected to pick up from recent lows, we are not on the cusp of the next boom.

The lower turnover of houses, which Kent speculates may be permanent, also puts an end to the renovations and alterations frenzy which usually accompanies the decision to sell.

Bad news, again, for the tradespeople, building materials suppliers and furniture retailers who make a living feeding this renovating boom.

So while the green shoots of recovery in the housing sector are there, the headwinds will remain for some time to come.

The Reserve Bank is hoping to engineer a housing and consumption-led recovery to drive the economy forward as the mining boom runs down.

Structural forces at play in the housing market suggest it may have to keep interest rates lower for longer than it would have previously to achieve such an outcome.