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.

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Just imagine 3% interest rates ad infinitum. No more housing bubbles, no more feeding spruikers. It could be a pretty good economy.

Building will always be an important sector for jobs. However the real estate model has to adapt to a new economy. No more free lunches for the rent seekers.

Re the boom bust cycle consider that it is driven by land speculation. Land ownership has features of a monopoly because land is in fixed supply and has locational advantages. This is in contrast to markets for man made goods which respond to supply and demand.

Society's development, combined with a naturally rising population, is guaranteed to increase competition for prime locations. If land were adequately taxed, price rises would remain reasonable. When land taxes are inadequate (as in most economies) these price rises tend to be excessive – even on their own. They are further aggravated by people who speculate or invest in land. Speculators and investors take note whenever land begins to rise in price and immediately add a contribution by bidding against anyone who wants to use land immediately, or by hanging on grimly to whatever sites they own in the vicinity. The existing landowners also have a comparative advantage in that they can borrow against their asset to buy more scarce resources.

If the land market behaved like other markets, land speculation would not be so bad. Buying up a commodity, to 'corner' the market, can work only so far in a freely competitive market. The incentive to 'corner' is to increase returns through higher selling prices, but the rising prices encourage new entrants, thus forcing the price back down. But there can be no increase in the supply of land, or at least of land of the quality required, so the land speculator becomes a monopolist extracting excess economic rent from users.

Land speculation produces nothing in an economy, and rewards the inefficient use of land. It holds money out of the economy, which would otherwise be invested in productive activity, and prevents the economy from creating jobs to keep labour fully employed.

Even when the inevitable 'bust' follows the boom, land speculators will behave differently to other investors. Some, who are financially stretched, might sell out at lower prices, but those who can afford to ride out the slump will do so.
This link

Is to a brief graphic presentation of the boom bust cycle.

One interest rate has to fit every industry, as it has since financial deregulation freed the greed of the banksters.

Unaffordability is a term once again defined away, with some skill in this case. Instead of a McMansion simply being unaffordable, "the long-run ramp up in land prices, relative to incomes" causes people to prefer flats as a lifestyle choice. So necessity is transformed into preference.

Stripped of the warm atmosphere of latte-sipping aspirationals indulging in a lifestyle "preference shift" we actually see increasing polarisation of income and opportunity, with the most marginalised forced into the outer suburbs. That is a recipe for increasing social problems, naturally avoided in an article focussed on further profiting from exploiting the commoditisation of shelter – to fair-minded people one of a functioning society's three most basic needs.

As researchers from Flinders University noted in Sept 09:
"The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance."

Any effective remedy must therefore involve substantial price reductions, and MUCH MUCH MORE PUBLIC HOUSING.

Quality typical australian housing is likely to slowly edge up higher and higher and the
Reserve Bank will finally realise that it’s policy of holding interest rates up too high
compared to the rest of the world has created a building shortage and consequently
will create exhuberant demand when it is forced to drop interest rates to record lows
as the Australian dollar falls.

It is very rare for government policy to achieve it’s intended outcome.

The Reserve Bank in NZ is close to panic for similar reasons.

As usual lower interest rates usually do not stimulate much construction but rather turnovers of existing stock. Once again with the industry dominated by investors/ agents it is existing stocks that gets championed in such debates. If we are serious about substituting the declining mining activity with housing construction we should need a federal version of a new home buyer's grant which has proven its mantle as a policy measure, rather than interest rates.

As a medium property developer in Qld, I can tell you what's wrong with the development industry, home buyer market, it's simple TAXES!!!

Local, State and federal taxes now make up up to 40% of a new home development, that's right 40%
The Golden Goose has been killed, there will be no more new building of any moment until this theft is fixed, no one is holding their breath for that to happen, in the meantime, buy used housing its way cheaper than new for this very reason

To help this happen, head all your future articles, taxed at 40% housing dying

At the local level, that tax will simply represent the removal of the implicit taxpayer subsidy of new building works, whether councils provided such services at less than or no cost.

A vacant dwellings tax would, incidentally, tend to reduce unaffordability, by discouraging the massive land-banking that is occurring (Lend Lease is sitting on 33 years' supply to keep the price high), and pushing the sale and use of the 10% of housing stock that is long-term vacant.

Look like we may have to ship pre-assembled house kits from overseas thanks to our taxmentarians legalmentarians, these CKDs will soon become the only ones we can afford, or small cages in down town job empty centres due to the acceleration of white collar jobs offshoring through telecommuting to lower wages countries.
Due to further taxes it will be good to assemble them ourselves quickly, to satisfy the greens they will also be made of recyclable materials, and transportable if we don't like the job market around, or the locally elected politicians.

One has to also look to where our migration is coming from to see the type of housing preferred today. The old English style has been superceeded
Richard McNaught

The housing market needed a correction bigtime and it is having it - don't be surprised if Labour brings in a first home buyers bribe before the election to further destroy things. Maybe real estate agents might have to trade the luxury BMW for a commodore wagon. A government may even realise they have taxed the guts out of the property market and review that for developers. All good if the savings get passed on. I think things will get a lot worse before they get better, but it may be a generation before a boom hits again - well that may be an exageration but it will be a long time.

Paul Keating once said in about 1990 as housing interest rates hit 19%pa that it was "a recession we had to have" and in my view the next 3 to 10 years we should expect another recession we have to have with official RBA interest rates around 2.5 to 3% and maybe 1% wont be out of the question in my humble opinion, realising I'm putting my head on the block for even suggesting such a possibility,

So if I am right property prices wont be going up as so many pundits are trying to predict. How could the predictions of rising house prices come about except through minor speculations by Real Estate Agents trying to stimulate sales? Mining development investments are dropping off naturally and due to ALP & new NLP actions in Qld. Minerals sales revenues are also falling off; so where will the next wave of activity be generated? I cant see our manufacturing industries reviving from its current dying throws except from the temporary $1.6 Billion being spent on our Ports in Victoria providing easier access by competing foreign exports, so can only see current manufacturers closing local plants and replacing them with imported products because as a nation we just cant compete with any country let alone the asian nations whose workers and manufacturing plants dont have a Greens Party or the same level of EPA Greens amd red tape or high wage oncosts to manufacture anything. Our competitors might just have to deal with a little bit of corruption payments to people who know the right people in government, much like our own ex-politicians now in the lobby business.But lobby [bribe] money is cheaper in Asia than in Australia I would imagine. So everyone is thinking that these current low rates are going to encourage locals and first home buyers with insecure jobs to rush out and buy new homes? I very much doubt it. I can see the new rich in Asia coming to buy more apartments until they discover like some already have that for the same money they can buy a loverly home in our leafy eastern suburbs in Melbourne in Camberwell as an example which includes a nice garden too. Why would anyone wish to buy any CBD apartment with nowhere to park and angry neighbours on 6 sides when for a couple $million they can get paradise on a quater acre block. I kid you not there lots of these holiday homes in Camberwell which are only occupied for a few weeks in a year. Harry Trigaboff might be hoping for another property boom, but I'm betting our low rates wont achieve the desired ends and those of his developer friends and agents are hoping for no matter how many asylum seekers get residency.
Business finance is still to expensive and scarce and nothing like housing interest rates and I bet import finance would be more easily approved than manufacturing finance ....just go out a try and tell me I am wrong and then you might realise that our manufacturing sector is already doomed due to our excessive wages and conditions as compared to the rest of the civilised world in UK or USA. Do compare Kitchen and bathroom installation in those countries compare to in Australia but our politicians cant or wont admit our dire situation as more public servants want to play catch up with other sectors by demanding more wage increases. We need a real Razor gang in all 3 tiers of government before we can go forward imo and more unemployment is the only answer which the Federal LNP must deliver if they have the courage to slash the government services sector, because otherwise the few remaining taxpayers will not cop it any longer. The question will be, will Tony Abbott have the balls to do as he implies or will he fake it?

I recall an article by Jessica early this year in the Courier Mail saying property prices are going no where within the next twelve months she now seems to be catching on that this may not be so
Jessica says RBA has cash rate radicaly low . We have new construction at dangerously low levels any lift in rates from here would cause a boom in prices and large rent increases due to a lack of supply. The suburbs Where supply constraints exists now are experiancing higher values and this will continue into next year all because of demand . Without sufficient work for trades people in this industry you would have an economy set for failure unable to grow

Unit living? No thanks! I grew up in a unit in Europe and I prefer to have a bit of distance between myself and my neighbours, the bigger the distance the better. Besides, I want land, and I want to own the land.

Living in inner city units may be okay for single people and for couples without kids, but once there are ankle-biters areound, unit living quickly loses its appeal.

Then there are body corporates, idiotic state laws relating to them, irritating neighbours and strata managers, uuuuugggghhhh! As an owner of two strata title properties I can tell you that dealing with strata management matters are sheer hell. Then there are the hoops occupants of strata complexes must jump through if they wish to keep a et. If I want a dog or cat, I just go out and get one, I do not need permission from my neighbours, if my tenants from the strata property want to keep a pets, my permission alone is not sufficient, they also need to obtain the permission from the other owners in the complex.

The RBA analysis is rather steady state. I can understand the longevity of the trend for young people towards inner-city living (apparently except the Docklands here in Melbourne), but if the pressure to move closer to workplaces is fuelled by constrained infrastructure, then investments in infrastructure (or radical capacity improvements like self-driving cars) will have huge impacts (some local).

FACTS - approvals dont mean building. The VAST majority of apartments approved are NOT going ahead - approx 8% of those approved since 2010 are actually moving (not necessarily to building - some are just being put up for sale with permits). House builders are sacking production, estimating and design staff (Metricon are doing it today) - there is not much work for them as well. So forget the "recovery" - deal with the facts. It isnt whats being reported.