Architects of housing fortune

House prices are surging and the rate at which prices are increasing is, if anything, accelerating. This should not only kill off the remaining iota of hope for a further interest rate cut, but it could see the Reserve Bank of Australia move to a bias to hike interest rates before year end.

According to RPData, house prices in the five major cities have risen a stonking 1.4 per cent so far in March (annualised pace of close to 20 per cent) and are now are up a solid 2.7 per cent year-to-date in 2013 (annualised pace of 12 per cent). It seems uncontroversial to be thinking, given this strength, that house prices will rise 10 per cent this year. The risk is building that the rise could be significantly more.

And when house prices pick up in Australia, they usually have a year where the rise is 15 to 20 per cent. With interest rates as low as they are now, the unemployment rate anchored at a remarkably low rate and real wages registering solid gains, there is no reason why there shouldn’t be a rise well above 10 per cent by year end.

It is important to again take account of the fact that there have been several years of weak housing construction, while at the same time there is still strong population growth. These dynamics of low supply and high demand are underpinning prices. With rents also relatively high and borrowing costs low, the motivation for people to buy is strong.

The base from which the current bullish outlook for house prices comes is important to recall. House prices fell moderately in 2011 and 2012 – the peak to trough decline during this time was around 7 per cent. This means that the first part of the current price rebound is only recapturing these losses. This translates to a picture where even with a 10 per cent rise in 2013, the rolling three-year gain will be a trifling 3 per cent per annum. This context is important for hosing down the house price bubble proponents or those who are taken with a phobia every time they see house prices tick higher. 

This fundamental background to house price changes makes it hard for the Australian house price bears to hold their ever erroneous view.

Another guide to the buoyancy on the housing market is the high level for auction clearance rates, particularly in Sydney and Melbourne. Since the start of the year, the auction clearance rates have generally been between 65 and 75 per cent, a success rate that is indicative of buoyant prices. This time it looks to be no different.

Also supporting house prices is the jump in wealth that has been delivered via the stock market surge since the middle of 2012.  The ASX has lifted around 25 per cent from the low point, which has added some $300 billion to the stock market’s capitalisation and simultaneously, boosted wealth that can be transferred to house prices. The correlation between household wealth and financial well-being and then house prices remains strong.

Further house prices gains are ahead and prices should remain strong at least until the Reserve Bank not only moves to a bias to tighten interest rates, but when it has hiked at least a couple of times.

While general inflation is low, the eurozone continues to provide headwinds and the Australian dollar is so high, those rate hikes are likely to be later rather than sooner. 

If the interest rate futures market is to be believed, interest rate hikes are not even on the agenda until well into 2014 and even then, no economists – even the headline grabbers – are forecasting even a 1 percentage point cumulative hiking scenario through to the end of 2014.

These market forecasts and the economists will inevitably be wrong and will be repriced, but interest rate hikes in the near term, say out six to nine months, are unlikely. 

It will take an unexpectedly hawkish stance for the Reserve Bank to arrest what is increasingly likely to be the next Australian house price boom, which looks to have started as 2012 came to a close.

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Yes...next interest rate move should be up....( but not just yet)....and gosh....what a sad day...if already inflated house prices do increase by 10% this year...
If they do....the chain of events is very easy to predict...
1. Interest rates at 5.5% on home mortgages= ( let's just grab a figure) 1 in 20 that can't service their loan.
2. House prices rise 10% in 1 year ...now 1 in 15 can't service their loan ( more expensive houses = bigger loans)
3. Because of rising house prices ( and the fact that rampant inflation is just around the corner) ...interest rates go up ....now 1 in 10 can't service their loan.
4. Once the inflation genie is out of the bottle...its very hard to put back ( ala 1987) ..and interest rates rise further ...now 1 in every 8 can't service their loans.

No...we don't need a surge in house prices and to make sure it doesn't happen...its a MUST...that the land locked up for future development...be made available sooner rather than latter.

A bigger worry Stephen is that the next budget may place extra taxes on superannuation which would then push those looking for a tax break into negatively gearing property instead: that would send property prices up 20% this year !
Our children will never forgive us.

There is an economically beneficial way to prevent speculative booms in land prices, instead of putting up interest rates which is obviously destructive.
An adequate level of land value tax is a holding fee that encourages people to either use land or sell it to someone who will, stimulating the economy.

There is significant recognition of this overseas since the GFC with the UK’s Mirlees Report, and reports from the IMF, World Bank and OECD.

George Monbiot, UK Guardian columnist says

“For the simplest, fairest and least avoidable levy is one that the major parties simply will not contemplate. It's called land value tax.
The term is a misnomer. It's not really a tax. It's a return to the public of the benefits we have donated to the landlords. When land rises in value, the government and the people deliver a great unearned gift to those who happen to own it.
In 1909 a dangerous subversive explained the issue thus. "Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived ... the unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done."

Who was this firebrand? Winston Churchill. As Churchill, Adam Smith and many others have pointed out, those who own the land skim wealth from everyone else, without exertion or enterprise.
They "levy a toll upon all other forms of wealth and every form of industry". A land value tax would recoup this toll.

http://www.guardian.co.uk/commentisfree/2013/jan/21/i-agree-with-churchi...

In Australia a first step would be the substitution of stamp duty and existing land taxes with an annual broad-based land tax. The ACT has a plan for this including addressing the situation of the low income home owner and those who have recently paid stamp duty, as described in The Drum:-
http://www.abc.net.au/news/2013-02-01/janda-stamping-out-inefficient-dut...

It is the tax the buyer of land pays anyway in their mortgage, with interest. Once established it could gradually substitute for deadweight taxes such as income tax and payroll tax. Home owners should consider the boost to small business if dollars spent otherwise repaying mortgages were available to consumers.

Sorry Alex, but all existing home owners have already paid their stamp duty and hence are not will to pay land tax on top of that. I've already made a lifetime contribution to state tax coffers by the $50,000 stamp duty on my home. Given that most voters are existing home owners who've also made their contribution, your idea will never get past voters. I find it amusing that people like yourself who advocate a land tax replacing stamp duty are always people who haven't contributed stamp duty themselves. Thinly veiled self interest.

James , do not dismiss an economic proposal only on the immediate effect on ones own hip pocket. It is always more complex than that.
Re stamp duty you may not have taken the time to read the Drum article:-

“to restrict the new land tax to properties changing hands after a particular introduction date, so that those who already paid stamp duty are not taxed twice”
“buyers of properties after this date could be offered a choice: either pay stamp duty up front, or agree to pay land tax into the future at a rate set that would roughly equal the stamp duty they would have had to pay plus inflation”
Once a property had switched onto land tax, however, it could not switch back onto stamp duty the next time it was sold. Gradually, almost all of the housing stock would move onto land tax,”

And why get rid of stamp duty:-
“Economic logic, and several studies, have confirmed that stamp duties do act as a significant deterrent against people changing homes. This leads to a sub-optimal allocation of the nation's housing stock - i.e. people stay in homes that are too small or too big, or in an inconvenient location, simply because it would cost them so much money to move”
“The same effect also means that Australia's workforce becomes less mobile, as people have a strong financial disincentive against moving to take up a job, or a better job.”
“Workers who have to move frequently are either financially discriminated against by paying more tax in stamp duties, or forced to remain as renters because the duties would be prohibitive”

Consider this result of our tax system:- The rich who own land and homes in prime locations, can claim all their lifetime income tax back in one land boom period. The renting poor who may pay hundreds of thousands of tax in a lifetime get nothing back. In this system the rich get subsidies from the poor.

Your assumption that I have never paid stamp duty is incorrect. Like most Australians I have moved house about every 9 years so have paid stamp duty a few times. I live on a prime residential block so would be eligible for land value tax above the current site value rating.
You are right though about self-interest. If an economy works efficiently and on a basis of social justice it will work better for everyone. An analogy would be to work like a sports team, where the skills of each individual benefit the whole team.
In the 80′s investors constituted 12% of all housing loans, but as per recent Housing Finance figures (5609), investors now account for 35.9%. With SMSF’s now allowing tax free capital gains for residential, this is simply the latest tool to pump housing up post GFC.
Our tax system in effect fines work and saving with about 130 taxes and we are actively directed into property investment with subsidies and incentives. This drives up the price of sites for housing and business making our children what the Chinese call the “housing slavery” generation and further restricting enterprise. The 18 year boom bust business (land) cycle is led by land speculation. The GFC would not have happened with adequate land value tax in USA, UK and Europe

Regardless of all the reasons for property prices going up including population growth they have now simply reached the point of being a bad investment. Everything including property reaches a price level where it does not make any sense and is simply not worth it, that has now occurred. After all all you get is a pile of sand, bricks and tiles.

Hi Stephen,

Interesting take and nothing seems to stir up more heated debate than the future direction of house prices.

"House prices fell moderately in 2011 and 2012 – the peak to trough decline during this time was around 7 per cent"

Those house price falls you refer to as "moderate" were actually the steepest falls EVER recorder for australian property prices. Hence, its not at all unusual after such big declines to see prices bounce from short term oversold levels. But that doesnt mean its a bottom, it could also be a bear market rally. Bear market rallys are also reffered to as "suckers rallys" becuase many investors get sucked in thinking its a bottom when its really not.

So in trying to determine wether its a bear market rally that shortly fizzles out before making new lows or a new "boom" as you describe, its worth looking at the characteristics that define bear market rallies. They are short but very sharp rallies that deliver what look like "stonking returns" when annulaised but the problem is they dont last much more than a few months let alone a whole year.

the second characteristic is that bear market rallies bring out more sellers than they do buyers. Sellers see the bounce in prices as an opprtunity to sell rather than buyers veiwing the bounce as a time to buy. Looking at auction listings in the 2 biggest markets that are running 20% above their 10 year average in early 2013. That is, the recovery in prices seems to be motivating sellers to sell rather than buyers to buy. Where are all the first home buyers for example?.

So a market bottom or bear market rally for house prices? i guess we will find out soon enough. But..... "makes it hard for the Australian house price bears to hold their ever erroneous view."....with house prices still well below their peaks of a few years ago the house price bears veiws havent been erroneos as you say they have actually been right? its actually the house price bulls that have been very worng over the past few years.

Cheers,

It is false to claim that bear market rallies are always short sharp rallies. It is also false to claim an increasing number of sellers also indicates a bear market rally. It can also indicate the herd selling at exactly the wrong time.

Hi John,

sorry, but having just worked through one hell of a bear market i can assure you both of those claims are in fact true, tried and tested to be correct.

here are few other definitions of bear market rallies for you.....

Bear Rally:

"A rapid increase in prices following a downturn. A bear rally occurs when investors begin buying in large amounts, which represents an increase in demand and therefore raises the price. However, because fundamental information has not improved, the bear rally is short-lived and is unlikely to be sustained. A bear rally is thus a brief respite between two downturns."

"A period in which prices increase during a bear market. A bear market rally is usually a short-lived market increase following a period of market decline and is followed by another period of market decline leading to a pronounced down trend."

plenty of information on bear market rallies on the net if you want to look into them.

Cheers,

Ah yes the internet, the source of all wisdom ....

No John, the internet is the place where amost wisdom get posted..

So no sign here of a housing bubble Stephen ?

Perhaps the headline to your rosy article should read 'Architects of a Housing Bubble' ?

No ? House prices to the moon again so we can all feel artificially more wealthier at the expense of current and future generations, let us totally ignore the record levels of private debt being taken on to ensure the bubble keeps getting bigger.

It is madness pure and simple, we appear to have learnt absolutely nothing from events unfolding overseas.

Full steam ahead then it shall be - damn the torperdoes and the icebergs as we all know Australia house prices only ever go up ?

Take both mining and housing out of the economy and Australia has nothing.

Once China has set it self up in Africa and no longer needs Australia for its resources down the whole deck of cards will come

Neither mining or housing will be worth anything.

The Australian economy has two industries - Houses and Holes.

Yes and as a result one day Australia is going to end up in one giant hole

Absolutely agreed. Except one is a distortion or waste of economic resources or waste of allocated capital. The other is unsustainable wealth generation for the nation.

Increases in mortgage expenses means less money for retail and discretionary spending.

Less money available for retail means more business closures, job losses and an increase in unemployment. In turn this will cause mortgage distress (not just stress, distress) as people default.

Over all high housing costs are bad for the Australian economy. This may seem like a simplistic summation but some times the root causes are this basic.

I agree... I remember when I had a "crippling mortgage" of $50,000 (30 years ago). All the cash that I paid in interest to the banks, who paid it out themselves in interest to their overseas lenders... could have been spent in Australia supporting business, manufacturing, etc. In my view, the multiplier effect of those interest payments would have generated more "real wealth" than all the increases in house prices. If I move house, and have to spend the same amount as I receive... how am I better off? Where is the "wealth". High housing costs do not seem like "wealth" to me.

I agree... I remember when I had a "crippling mortgage" of $50,000 (30 years ago). All the cash that I paid in interest to the banks, who paid it out themselves in interest to their overseas lenders... could have been spent in Australia supporting business, manufacturing, etc. In my view, the multiplier effect of those interest payments would have generated more "real wealth" than all the increases in house prices. If I move house, and have to spend the same amount as I receive... how am I better off? Where is the "wealth". High housing costs do not seem like "wealth" to me.

A Babet what you say will happen anyway because when interest rates are low people tend to load themselves with debt buying houses at inflated prices ....as a direct result of lowering rates...and when a hicup occurs in their lives they are unable to keep up payments. Have a look and see how many are suffering mortgage stress now in times of record low rates.I predicted when rates were set at record lows the price of real estate in this country would go through the roof and that is exactly what has happened.And negative gearing has nothoing to do with it !!

I agree with you Alan. The deregulation of of the banking industry is another cause of this debt burden.

The average punter used to be allowed to borrow a maximum of 30% of their income. Since deregulation the average Sydney mortgage is 40-60% of household income.

That's an extra 10-30% of household income pulled out of discretionary spending and spent on housing. People involved in real estate and banking may be doing well but it sucks the life out of the rest of the country.

I doubt housing prices will increase much at all, you need to remember that there are only half the amount of sales taking place now compared to previous years (pre-GFC) so this can have the effect of forcing up prices a little due to the lack of stock on the market. If anyone has ever looked at month by month price moves of a particular suburb they'll see that the average price for that suburb can change dramatically from one month to another due to the fact that there has only been a handful of sales during that month (it's very misleading). I think it's more likely that housing prices will go nowhere until unemployment rises and then we'll see prices fall. I certainly would not be buying another house in Australia at the moment as I think there is a greater potential for price drops than rises. Much better bet to buy a home in the US where home prices had fallen heavily (have already rebounded 20% in the past year) or the UK which is looking like great value.

Sweet! I'll just ignore then the government land valuation notice I received yesterday that says my property dropped in value by 4.5% in the past year.

Interest rates go down and people stampede into buying overpriced property and pushing rpices then even higher, then rates go up and they complain.

Likes lambs to the slaughter

What this country badly needs is a very serious discussion about the level of government debt vs private debt.

We resemble the Celtic tiger, with its low govt debt vs high private debt (real estate bubble anyone ?) at its apex.

So why did Ireland go down the toilet. Well all that privately held real estate debt quickly became government debt when the silly buggers decided to bail out their banks. And with our banks holding more than 60% of the asset side of their ledgers in mortgage debt any serious impact to our houses and holes economy will have us all speaking with an Irish lilt before too long.

Well......until debt do us part..

There is no doubt that to much money is being sucked into and tied up in the Australian property market. One day when it corrects as all markets throughout history have done(as nothing defies gravity), a lot of money will just end up disappearing into thin air.

Bob,Gary,Alan,Jim,A.Brabet and Steven:thanks,will show my children your posts for reassurance...they all pass the common sense test.Not much of that around anymore.