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Monday, April 24, 2017
By Tim Lawless
A solution to housing affordability is extraordinarily complex, requiring a multifaceted response from a variety of public sector and private sector stakeholders. The goal of affordable housing can also be at odds with the aims of maintaining capital inflows from foreign investment and sustaining the value of domestic assets. A coordinated and cooperative approach is likely to be one of the largest challenges to improving housing affordability – can we get all the stakeholders to agree on the best strategy and then execute the plan?
The three layers of government have separate and sometimes conflicting agendas, limiting a coordinated response to housing affordability. One of the prime examples of the imbalance between federal, state and local polices is population growth, which is a primary driver of housing demand.
It’s not a coincidence that the two states with the highest population growth (Victoria and New South Wales) have the highest growth in dwelling values. Both states are seeing a solid upward trend in net overseas migration rates, while interstate migration is also remarkably higher than average in both states (despite remaining negative in New South Wales). Strong population growth stimulates the economy, providing a larger taxation and consumption base. It also puts upward demand pressure on existing dwellings and transport and requires an adequate investment in new infrastructure.
The federal government sets migration policy, state governments need to supply more infrastructure and local governments need to ensure land is appropriately zoned for appropriate population densities and additional housing. While the federal government sometimes contributes funding for these initiatives, state governments are generally faced with the funding challenge for these new projects.
An underinvestment in efficient transport infrastructure projects relative to population growth can be one of the primary contributors to high dwelling values in certain areas because housing demand becomes focussed within those areas that are in a convenient location relative to work and essential amenities. This is one of the reasons why growth rates are so disparate between Australian capital cities and regional areas.
Strategically located and zoned land
A shortage of strategically located, appropriately zoned land is another key contributor to higher housing prices and, consequently, the affordability challenges many cities are facing.
Take Sydney as the worst case example, where the dwelling price to income ratio for detached housing is approaching ten times the median gross annual household income. Buying a house within 20 km of the Sydney CBD generally involves a purchase price of at least one million dollars. Demand for housing is substantially higher across the inner city suburbs, along the coastline and along the transport spines, while demand for housing located in the city outskirts is often undesirable for many aspiring home owners due to the long commuting times and lack of essential amenities.
Of course, focusing on transport infrastructure in isolation is unlikely to push house prices down. Indeed, new infrastructure projects often increase demand from investors looking for new growth areas. The complexity of a solution to housing affordability is therefore about adjusting the interplay of many demand factors in addition to housing supply considerations.
Investors are contributing substantially higher-than-average levels of demand to the housing market. Investors have historically comprised around 33% to 40% of housing demand, however the latest data from the Australian Bureau of Statistics shows that investors comprised closer to 50% of new mortgage demand nationally (excluding refinances) and closer to 60% in New South Wales. The high participation rate of investors has contributed to housing market activity and added to the upwards pressure on housing prices.
Recently, APRA and ASIC have cracked down on mortgages originating on interest-only terms and lenders are implementing stricter servicing standards and writing fewer mortgages on small deposits. These measures should help to slow investment in housing, however investors are still incentivised to participate in the housing market via taxation policies like negative gearing and the 50% capital gains tax concession that applies after twelve months.
However, considering the unprecedented number of high-rise apartments currently under construction, it is important that investor demand is not dramatically reduced. The large majority of apartment stock under construction is reliant on investors being able to settle their off-the-plan purchases.
Regulators and policy makers are likely to be mindful of this risk when adjusting their policy settings and dampening investment demand. The 2011 Census showed that apartments were more than two and a half times more likely to be owned by investors than owner occupiers highlighting that ultimately a large proportion of new unit stock is being purchased by investors.
Foreign investment and low rates
Other factors affecting the demand side of housing affordability include additional demand from foreign buyers and the stimulatory effect of low mortgage rates. Foreign investment adds to overall housing demand and the fact that official figures on the level of foreign buying approvals haven’t been updated for almost two years makes quantifying the effects of foreign demand problematic. Additionally, historically low mortgage rates are also stimulating higher demand; even though mortgage rates are now edging higher, they remain close to the lowest levels since the 1960’s.
Furthermore, the inflationary effects of historically low interest rates has boosted home owner’s equity. Home owners are searching for returns and Sydney and Melbourne housing has been attractive due to the ongoing strength of returns relative to other asset classes.
Housing supply challenges
While understanding the drivers of housing demand is critical to forming a strategy for improving affordability, so too is understanding housing supply. The interplay between these two factors push housing prices higher or lower.
The Australian economy is benefitting from an unprecedented dwelling construction boom, however, one must question whether the record levels of new supply is the ‘right kind’ of supply that will help to address housing affordability. Building more dwellings is key to improving housing affordability, but if the majority of new dwellings being built have a mismatch with buyer preferences, then a disconnection between demand and supply will remain.
Based on the latest building activity data from the ABS, there are just over 152,600 units under construction across Australia and 65,700 detached houses. While detached house building is only 7.2% higher than the decade average, the number of units under construction is 85% higher than the decade average and virtually double the thirty year average. Additionally, ABS data confirms the large majority of apartments which are under construction are in high rise projects, which, at least anecdotally, are more likely to be oriented towards investors rather than first-home buyers or family households.
The current boom in housing construction is better described as a high rise building boom, with the number of detached houses under construction peaking at about the same level as previous cyclical highs. A trends towards higher densities is natural for mature cities like Sydney, Melbourne and Brisbane, however the surge in high rise dwelling construction has happened against a back drop of a substantially lower proportion of low and medium density dwellings.
Ten years ago, based on building approvals data, townhouses comprised 48% of all non-house dwelling approvals; the latest data shows townhouses now comprise only 24% of all non-house approvals, while at the same time, high rise units (classified by the ABS as unit projects with at least four storeys) have moved from being 39% of all non-house approvals only ten years ago to 70% based on the latest data.
It’s reasonable to argue that much of the housing stock that is being built at the moment, being high rise units, is more suited to investors and consequently rental markets, rather than families, who would generally prefer to live in lower density dwellings. Furthermore, the majority of new unit stock is one or two bedrooms which is generally not appropriate for families.
Other factors affecting housing supply include town planning legacies which prevent infill development in strategic locations close to major working and transport nodes, insufficient transport infrastructure linking affordable housing markets with major working hubs, and high development fees and headworks costs associated with developing land.
Additionally, high transactional costs such as stamp duty are a major disincentive to upgraders or downsizers. Many of these potential home sellers are simply staying in their home for longer which detracts from the efficient transfer of housing stock across generations.
Overall, there is no silver bullet for solving housing affordability issues in Australia. Housing demand and supply levers can be pulled, however the ability to do so is not straight forward. Changes in both demand and supply factors could have broader consequences for household wealth and economic growth.
Australian households have more than half of their wealth tied up in the residential housing sector and about 70% of their debt is housing related; a larger than expected downturn in housing values would likely result in less household consumption and impact negatively on economic growth and Australian retirement assets.
Investors are an important component of the housing market from both a demand perspective and delivering new rental supply. Turning down the volume on investment activity is important, however, reducing investment demand at the same time as a record number of off-the-plan apartments is about to settle is a proposition fraught with risk.
Perhaps the most logical course to improve housing affordability is a gradual adjustment to some of these factors.
Arguably, one of the most strategic solutions is to build more efficient transport linkages that connect the regions where housing is affordable with regions where jobs are located. New infrastructure creates greater productivity, provides jobs and opens up affordable areas that were previously less desirable.
Another long-term strategy is to work towards greater geographic distribution of employment opportunities. The past five years has seen 75% of Australia’s jobs created in NSW and VIC, with the vast majority of these positions located in Sydney and Melbourne. More businesses and government departments located outside of the largest metropolitan areas would help to attract larger populations to these regions where housing prices are typically substantially lower than what is available across the large cities. State governments should be looking at taxation incentives to attract large businesses across state borders and there should be further support for new businesses seeking to establish themselves in key areas.
Whatever the strategy, in order for there to be a cohesive and coordinated plan, there needs to be someone in charge. A federal housing minister who is tasked with formulating and executing a housing strategy would be a logical first step. Counterpart roles within the state governments makes sense, as well as a broader coordinated town planning strategy for the metropolitan areas that sets the framework for local government planning schemes (the Greater Sydney Commission is one of the best examples of a coordinated approach to town planning).
Tuesday, March 21, 2017
By Tim Lawless
Recent building activity data released by the Australian Bureau of Statistics (ABS) showed that the amount of new supply flowing into the unit market across Australia is unprecedented. What’s concerning is that settlement risk is yet to peak.
Based on building activity data, there are approximately 153,000 units currently under construction nationally, with the vast majority of this stock likely to have been purchased ‘off-the-plan’. To provide some context, the scale of unit construction over the September quarter of 2016 was 86% higher than the decade average and 141% higher than the twenty-year average.
It’s probably safe to say that the number of units under construction moved through the peak early last year. Unit approvals reached a record high in October 2015 and have been trending lower since that time, and unit commencements peaked in March 2016, which coincides with a levelling in the number of units under construction.
The next phase in this unprecedented unit construction boom will be the completion and settlement of these 153,000 units. There is already evidence that a large proportion of settlement valuations are coming in at less than contract price. In fact, metadata from CoreLogic valuation platforms shows approximately 45% of off-the-plan unit valuations are less than the contract price at the time of settlement.
There are several risks for off-the-plan unit buyers; if their valuations are coming in low, they are facing an immediate negative equity situation at the time of settlement. The other complication is that buyers may need to top up their deposit in order to meet the lenders’ loan to valuation ratio requirement. Some buyers may be unable, or at the least, unwilling, to contribute more capital at the time of settlement. When settlements aren’t able to occur, this creates problems for developers and financiers who had considered those properties to be sold, and will need to find a replacement buyer.
With a surge in unit settlements just around the corner, it’s likely that settlement risk will become more pronounced over the remainder of 2017. Unit projects that have some differentiation based on their location, the quality of the developer and development, as well as a healthy mix of owner occupiers and investors are likely to demonstrate a healthier settlement profile. However, unit stock located within the supply epicentres and offering little in the way of differentiation are likely to be the most at risk of negative equity at the time of settlement.
Thursday, February 16, 2017
By Tim Lawless
The latest Reserve Bank ratios on household debt relative to household incomes highlights one of the barriers to higher interest rates. The data shows that the household debt to income ratio reached a record high of 186.9% in the September quarter of 2016, meaning that household debt levels are almost 87% higher than annual household disposable income.
A significant component of household debt is attributable to housing debt. In fact, the housing debt to household income ratio was recorded at 132.2% in September, which is also a record high.
While the cash rate is likely to remain low for the foreseeable future due to low inflation and below average economic growth, we can expect that, eventually, interest rates will rise from their current record lows.
Higher mortgage rates are likely to test the resilience of household balance sheets. CoreLogic measurements on mortgage servicing indicate that the average capital city home buyer will dedicate 36.4% of household income to servicing a mortgage. When mortgage rates do rise, it’s likely that households will be dedicating a larger portion of their incomes to debt servicing.
Historically, 90+ day mortgage arrears rates have tracked well below 1% of Australian mortgage portfolios; this is likely to remain the case as households continue to service their debt obligations, despite higher interest payments. If this situation does occur, we could see household consumption muted as home owners sacrifice spending in other areas.
We expect this to be a key scenario for consideration by policy makers when contemplating a future rise in interest rates. As to what extent households can withstand higher costs of debt without causing mortgage stress, and without creating an imbalance in household consumption remains to be seen.
Inflation currently remains below the RBA’s target range. Recently, the Reserve Bank stated that although headline inflation is likely to head back towards the target range this year, underlying inflation will remain below and take some time to return. Given this, increases to interest rates may be a distant prospect.
Tuesday, December 13, 2016
By Tim Lawless
With 2016 nearing its end and the New Year just around the corner, it’s worthwhile looking back over the year that’s transpired and reviewing the hot topics we can expect to tackle next year.
The two words that are useful when describing the housing market in 2016 would be: diversity and complexity.
Diversity: Because we continue to see dwelling values streak higher in Sydney and Melbourne, while in Canberra and Hobart, these markets gathered some pace over the second half of the year. Coasting along with modest growth rates were Brisbane and Adelaide, while Perth and Darwin markets saw values trend lower since 2014.
Regionally, the lifestyle and tourism-centric markets have seen a bounce back in buyer demand, which is pushing values higher. Those regional areas connected with the resources and mining sectors remain soft as they try to find a floor after significant value falls and low buyer demand.
Complexity: Because it’s hard to recall a time when there has been so much diversity and so many conflicting signals in the market. On one hand, dwelling values are generally showing strong growth, mortgage rates are at their lowest since the 1960’s, advertised stock levels are close to record lows, auction clearance rates have held firm at high levels and homes are generally selling quickly in the hot markets. On the other hand, transaction numbers have trended lower, housing finance requirements have tightened up which is resulting in lower credit growth, unprecedented levels of high-rise unit supply in the pipeline and record low rental yields due to soft rental conditions against a backdrop of rising values.
Looking out to next year, we’re likely to see evolutions around market trends. Broadly, we expect the pace of capital gains to moderate during 2017 due to natural affordability constraints, higher supply levels, tighter lending and potentially less investment demand as the prospects for capital gains wind down and rental yield plumb new lows.
The four key trends that I believe are likely to influence the housing markets are: speculation that interest rates will rise, a peak in the construction cycle, more from regulators on investment activity and debate around housing affordability and how to fix it.
As for interest rates, there is growing acceptance that interest rates have reached the bottom of their cycle and will potentially start to rise in late 2017. The catalyst for higher interest rates could be an improved level of comfort with regards to the Australian dollar and an expectation that the US dollar will rise on the back of higher US interest rates and higher inflation, a lack of comfort with the pace of growth in dwelling values, and the rise in household debt which can at least partially be attributed to the low interest rate setting.
Financial markets are no longer pricing in any rate cuts. If rates do start to move higher next year, the rises are likely to be small and gradual with the RBA mindful of the record high household debt levels and a requirement to stimulate the broader economy and keep the dollar low. Higher interest rates are likely to dampen buyer demand and place more focus on the record low-yield profile that is evident in Sydney and Melbourne.
Housing Construction: It is becoming increasingly clear that dwelling approvals have peaked, with the Australian Bureau of Statistics reporting sharp falls in approvals for high rise construction and more modest falls across other sectors of residential construction. Despite the slowdown in approvals, the construction pipeline remains substantial with an unprecedented number of high-rise units currently under construction. As these units, which have largely been sold off the plan, approach completion, the risk of non-settlement is likely to become more visible as valuations fall short of contract prices and foreign buyers fail to secure finance. Well located projects that are differentiated and that have less of a skew towards pure investor markets and overseas buyer markets, aren’t likely to show the same risk profile.
Another important consideration is where the next pillar of economic growth will come from after the residential housing construction sector took a smooth baton pass from the resources sector. With the residential construction sector winding down over the next year or so, ideally, the next ‘boom’ would be based on an infrastructure boom, fixing the congested roadways and linking outer lying more affordable housing options with the key working nodes via more efficient transport options.
Investment: Investment activity has been a key feature of the current housing boom. Since APRA weighed into the market with a 10% speed limit on investment credit growth and higher capital requirements for investment loans, the value of investment mortgages showed a substantial reduction. Since May 2016, investors have been consistently stepping up their activity in the market. Based on September ABS data, investors comprised 49% of all new mortgage demand (excluding refinanced loans) and the value of investment related housing finance commitments has increased by 14.5% since the May rate cut. If regulators are uncomfortable with this level of investment (at a time when rental yields are at record lows) we may see a further regulator response aimed at curbing investor activity. This could take the form of a tougher speed limit on investment growth (currently set at 10% per annum), loan to valuation ratio limits or geographical polices aimed at slowing investment in the hottest markets such as Sydney (these policies have already been rolled out in New Zealand), or lenders may be required to hold even more capital against investment related mortgages which would widen the spread between owner occupier and investment mortgages that already exists.
Affordability: The housing affordability topic is always bubbling below the surface, however recent months have seen the issue become debated more fiercely in the public policy arena. The CoreLogic dwelling price to income ratios range from 8.4 in Sydney to 4.7 in Darwin, indicates that affordability of housing is vastly different from region to region.
On the measure of household incomes compared with dwelling prices, affordability has worsened in Sydney and Melbourne, held reasonably firm across most of the smaller cities, but has improved substantially in markets like Perth and Darwin where values have fallen.
The solution to housing affordability isn’t to see a crash in housing values (this would likely cause significant disruption to the economy considering more than half of household wealth in Australia is held in housing), rather to make affordable housing options more accessible and plentiful through infrastructure development and upgrades, as well as more efficient of housing supply that is strategically located and well designed so as to appeal to owner occupier buyers.
There are likely to be a wide range of other factors that impact on housing markets next year, including the unknown effects of the Trump presidency. One thing that is certain is change and we can expect a lot of that next year.
Tuesday, November 15, 2016
By Tim Lawless
The topic of stamp duty has become increasingly heated over recent times, with many market commentators and economists calling for the removal of the land transfer tax, replacing it with a more broad-based and efficient land tax that would apply to all property owners, not just those who are purchasing.
Large revenue source
For state governments, stamp duty is one of the largest revenue sources. In the 2014-15 financial year, state and local government taxation revenue was recorded at $89.278 billion, having increased by 7.0% over the year. The taxation revenue was comprised of $45.203 billion, or 50.6%, from property. While total tax revenue increased 7.0% over the year, property tax revenue increased by 10.5%, highlighting that property taxes are the largest source of taxation revenue for state and local governments and are rising at a rapid pace.
Importantly, the revenue from stamp duty is reliant on both housing turnover, as well as pricing movements. When prices fall or activity falls, stamp duty revenue declines. The reliance of such an important revenue stream on the housing cycle makes state government budgeting less certain and more volatile.
A barrier to housing market activity
On the other hand, stamp duty costs can be a substantial barrier to activity in the housing market. Based on the median dwelling price in each capital city, it’s clear that the high cost of housing and aggressive stamp duty rates in New South Wales and Victoria are a substantial cost burden.
The median dwelling price in Sydney is currently $800,000, and the median dwelling price in Melbourne is $200,000 lower at $600,000. Based on purchasing a median-priced dwelling in either city, buyers are confronted with a stamp duty cost (plus other government fees) of circa $32,000. That’s after pulling together a deposit, which is more often than not, expected to be around 20% of the purchase price.
Compare that cost burden with Brisbane, where stamp duty rates are less than $10,000 thanks to lower housing prices but also less aggressive rates of stamp duty.
The costs of stamp duty have increased across every capital city over the past five years, however the increase in Sydney and Melbourne has been substantially more than other capital cities. Based on median prices five years ago, government fees on a real estate purchase have risen by $13,275 (+72%) in Sydney and increased $11,703 (56%) in Melbourne.
The bottom line
I’ve recently seen some commentary that stamp duty costs aren’t likely to be a significant factor in slower housing turnover. I’m not so sure about that … in markets like Sydney and Melbourne where buyers of the median priced dwelling are facing costs in excess of $30,000, plus the cost of deposit, plus other transactional costs like pest and building inspections, conveyancing fees, removalist costs etc., and it becomes pretty clear that it’s not just the price of housing that is becoming unaffordable. The transactional costs play a large role as well.
Tuesday, October 25, 2016
By Tim Lawless
The housing market growth cycle has broadly been running for almost four-and-a-half years, with dwelling values across CoreLogic’s combined capital city index rising by 40% since June 2012. Sydney dwelling values have risen by 63% since values started pushing higher, and dwelling values in Melbourne are up a lower – but still strong – 46% over the same time frame. Considering the maturity of the growth cycle, the new unit supply moving through record levels, rental yields producing historic lows and mounting affordability pressures, it’s worthwhile revisiting what housing market downturns have previously looked like.
The last time we saw a housing market growth cycle this long and strong was the ‘boom’ period that broadly tracked from early 2000 through to early 2004.
At that time, the pace of capital gains was even faster, as housing markets were spurred on by a combination of low interest rates, improving economic conditions and a strong mix of first home buyers and investors. As a refresher, using the same number of months that the current cycle has been running, the Sydney housing market reached a peak rate of cyclical growth in September 2003, with dwelling values rising 77%. That’s a faster pace of capital gain than what we've seen over the current cycle.
In Sydney, dwelling values peaked in March 2004, before falling by 8.2% over the next 21 months. It took 42 months for the Sydney housing market to stage a nominal recovery, with values recovering to their 2004 high point in September 2007. The recovery was, of course, short-lived, as the GFC was just around the corner, causing Sydney dwelling values to fall by a further 6.2% across 2008. On the back of a range of stimulus measures, including lower mortgage rates, first buyer incentives and cash handouts, Sydney home values surged higher in 2009 and 2010, before dwelling values fell by 5% between November 2010 and June 2012.
The three most recent periods of decline across the Sydney housing market are a stark reminder that dwelling values don’t always rise. Generally, growth cycles are followed by a period of decline, or more stable market conditions, which provides time for yields and affordability to improve.
If the past two decades of housing market cycles are anything to go by, it is rare for a growth cycle to last more than four years. Natural disincentives, such as low yields and affordability constraints, are likely to curb buyer demand. Additionally, lenders will become increasingly cautious about lending into markets where home values have risen substantially which is also likely to act as a brake on the high rates of capital gain. Add high supply levels, particularly across the unit market, and it seems likely that the Sydney housing market is rapidly approaching its peak. However, the main difference between previous housing market cycles and the current cycle is that previously, interest rates were rising, but today they have been falling.
While values across Australia’s largest housing market may fall, the magnitude of any downturn across Sydney is likely to be muffled by the positive effects of ongoing population growth, low interest rates providing an ongoing incentive to buy, and continued robust economic conditions. The offset to these stimulatory factors will be seen in the significant unit supply pipeline, growing lender caution and low rental returns, which are likely to act as a disincentive to investors who currently comprise more than half of all mortgage demand across New South Wales.
Supply levels across Sydney’s detached housing market have been much lower than medium-to-high density supply additions, which suggests that the detached housing sector may be less exposed to a housing market downturn than the unit sector.
Tuesday, September 20, 2016
By Tim Lawless
A year ago, investors were a dominant share of housing market demand, with investors comprising more than half the overall level of newly committed housing finance.
As a proportion of all new housing finance commitments, investments reached a record high in May 2015, when investor mortgage commitments accounted for just under 55% of the market (excluding refinanced loans).
Since that time, investment lending has moderated – a trend that can be partly explained by design, and partly by market factors.
Investment slowdown by design
An investment slowdown by design relates to the regulatory changes introduced by the Australian Prudential Regulation Authority (APRA) from late 2014. APRA limited overall investment lending for residential housing to 10% per annum, and implemented higher capital requirements for residential investment mortgages that saw roughly a 30 basis point premium added to investor mortgage rates.
The result has been that growth in investment credit has reduced from 10.8% in May 2015 to just 4.8% over the year to July 2016.
Investor lending strikes back
Recently, however, there has been a turnaround in investor lending. The past three months of housing finance data released by the Australian Bureau of Statistics has shown a consistent rise in the value of investment lending.
The figures show the value of housing finance commitments for investment purposes has increased by 9.2% between April and July this year, taking investor finance commitments to the highest level since August last year.
There are likely to be a few reasons behind the investment upswing.
Firstly, considering lenders have well and truly met their APRA obligations around the speed of growth in investment credit, they arguably have scope to expand their lending to investors.
It’s doubtful the pace of investment will move substantially higher, as lenders appear to have become more cautious, particularly around lending for inner city apartments, however investors may be finding it a bit easier to secure finance compared with earlier in the year.
Another factor that is likely contributing to an increase in investment participation is simply that mortgage rates have moved lower, providing an incentive to invest rather than save. Despite what is generally a very low-yield profile for housing, the low cost of debt helps to offset the low yield.
Finally, another contributor to the investment turnaround is that other asset classes aren’t all that attractive.
Conservative investment channels like government bonds and cash are generally providing annual returns of less than 3%. Equities, despite providing a strong total return (total returns from the ASX 200 were 9.3% over the past year), remain volatile. Bricks and mortar still have a wide level of appeal to Australian investors.
Prospective investors who are considering entering the housing market should be aware of some potential headwinds however.
The growth cycle has been running for more than four years, which has eroded affordability and created a significant savings hurdle if buyers are to provide a 20% deposit.
Housing supply moving through record levels in the unit sector, which could result in some downwards pressure in this segment of the market.
Additionally, with yields as low as they are, and rental markets showing some weakness, serviceability could be harder once interest rates start to rise, or there is a change in the investor’s financial circumstances.
Tuesday, August 23, 2016
By Tim Lawless
We all know that housing market conditions are very different from region to region, with values continuing to show strong growth conditions in Sydney and Melbourne, while dwelling values are trending lower in Perth and Darwin. One of the fundamental drivers of housing market performance comes back to the balance between housing supply and demand.
All too often, we reference supply levels to the amount of new housing stock that has either been approved for construction, or recently completed. From this perspective, we are absolutely seeing a surge of apartments into inner city markets across the largest capital cities. However, another facet of housing supply relates to how many homes are currently being advertised for sale.
Listing counts, which typically reflect how many established homes are currently available for sale (as opposed to developer stock, or off-the-plan listings, which generally aren’t advertised for sale individually on the major real estate portals such as realestate.com.au) are also an important measure of housing supply.
The number of properties being advertised for sale provides a vital clue about the direction of housing prices. Those cities where advertised stock levels remain short are continuing to see upwards price pressures, while cities with historically high stock levels are seeing downwards pressure.
Take Sydney as a case in point. CoreLogic is currently tracking just over 18,800 listings across the metro region of Sydney. While this headline figure is approximately 4% higher than a year ago, overall stock levels remain historically low. As a comparison point, when the Sydney market was moving through a down phase between late 2010 and mid-2012, CoreLogic was tracking just over 40,000 properties on the market.
The fact that Sydney listing numbers remains so low is one of the factors providing the upwards pressure on housing prices. Buyers simply don’t have a lot of stock to choose from, which creates urgency in the market and provides leverage to vendors when setting and negotiating their prices.
At the other end of the spectrum is a city like Darwin, where listing numbers have recently moved through historically high levels. CoreLogic is currently tracking just over 1,600 homes for sale across Darwin. Considering the past 12 months saw approximately 2,160 dwellings sold across Darwin, we can estimate there is roughly 9 months of ‘effective’ housing supply across the Darwin market.
Watching the trend in listing numbers is an important aspect to understanding local housing market performance. Most cities are still recording a relatively low number of property advertisements compared with historic levels, however with Spring approaching, we are likely to see an upwards trend of newly advertised properties enter the market.
With transaction numbers already trending lower, this upswing in stock levels will provide a timely test of the market’s strength.
Tuesday, July 19, 2016
By Tim Lawless
While it is becoming increasingly rare, I still occasionally hear the phrase that property values ‘double every ten years’. This rule of thumb used to be bandied about regularly, however the past ten-year period has shown a remarkably different performance, with only one capital city region recording a doubling in value.
Over the ten years between June 2006 and June 2016, combined capital city dwelling values increased by 71.3%, or an annual compounding growth rate of 5.5%. An annual compounding growth rate of at least 7.2% is required for a value to double over ten years.
The ten-year period covers several market cycles. Dwelling values were broadly rising during 2006 and 2007, values fell during 2008, rebounded in 2009 and most of 2010 before falling again between late 2010 through to mid-2012. The current growth cycle has been running since June 2012, with values rising substantially over this time.
Melbourne is the only capital city market where the annual pace of capital gains has achieved the 7.2% benchmark for annual growth, which has seen dwelling values double (just) over the past ten years. Sydney isn’t too far behind, with dwelling values rising by 6.6% per annum. Every other capital city has seen values rise at the annual rate of 5% or less over the past decade, with the softest growth rates recorded in Hobart (1.4% pa) and Perth (1.6% pa).
In contrast, the ASX 200 index has recorded an annual growth rate of just 0.7% per annum over the past decade. So in comparison, the housing market has recorded a much greater rate of capital growth than the equities market.
The performance of the housing market over the previous decade (1996 to 2006) was very different. Every capital city saw remarkable rates of capital growth over this ten-year period with dwelling values more than doubling across all the capital cities. The annual rate of dwelling value growth across CoreLogic’s combined capitals index came in at 10.1% over the previous decade. Perhaps it’s this previous decade of such strong capital gains that inspired the myth that dwelling values should double every ten years.
Looking forward, there is a likelihood that the rate of capital gains will ease over the coming years. The Peth and Darwin housing markets have already moved through their peaks, with dwelling values in both cities declining by approximately 7% since their 2014 peak. The growth run in Sydney and Melbourne probably can’t last much longer, considering the affordability constraints that are becoming more obvious in these markets as well as low rental yields and tighter financing conditions which are likely to dampen demand in these markets.
While the rate of capital gains is likely to slow at a macro level, dwelling value forecasts released by CoreLogic and Moodys Analytics indicate that some cities will see the rate of value growth gather some pace over the coming year. Brisbane, Canberra and Hobart all show some acceleration in their rate of growth after market conditions have underperformed the larger capital cities for the past two growth cycles.
The recent decade highlights how cyclical asset values can be; values don’t always rise, they also fall and track steadily. The key lesson for investors based on the past two decades of data is that property values don’t always double over ten years. Therefore, it may be better to err on the side of caution and factor in more conservative growth estimates when planning to invest.
Tuesday, June 21, 2016
By Tim Lawless
Residential property investment is becoming increasingly popular within the self-managed super fund sector. According to the Australian Taxation Office (ATO), the value of residential property assets held in self-managed super funds has increased by $9.81 billion (67.1%) between June 2011 and March 2016 to reach $24.4 billion in value. In comparison, dwelling values across Australia’s capital cities increased by 26.2%, demonstrating that most of the increase in SMSF’s investing in residential property has been fuelled more by uptake rather than appreciation of the asset value.
Despite the strong growth in SMSF’s investing in residential real estate over the past five years, investment housing still comprises a relatively small proportion of net SMSF assets at 4.3% compared with non-residential real estate at 13.1% of net assets, listed shares comprising 30.2%, and cash/term deposits comprising 27.3%.
The slant towards non-residential real estate within SMSFs is understandable. Small business owners can purchase a business premises within their super fund and rent it from the fund, thereby funnelling business rental payments into their savings as well as (hopefully) benefitting from capital gains in the value of the asset.
Residential real estate within a SMSF has different rules. A dwelling purchased within a SMSF can’t be lived in by a fund member or their related parties, and it can’t be rented by a fund member or their related parties. In simple terms, a residential real estate investment must remain completely at arm’s length from the fund member.
Super funds are generally unable to borrow capital to fund an investment, however, since September 2007, SMSFs have been the exception, with a provision for limited recourse borrowing arrangements (LRBAs) available for self-managed super funds. According to the ATO, a limited recourse loan means the lender's rights are limited to the asset held in the separate trust; there is no recourse to the other assets held in the SMSF, which provides some protection to the overall value of the fund.
Growth in limited recourse borrowing within SMSF’s has been nothing short of spectacular, rising from just $1.4 billion in June 2011 to $19 billion in March 2016 (1,260% growth).
Those SMSF investors who got into the Sydney or Melbourne market early would have seen enormous growth in their residential assets, providing a boost to their overall retirement wealth. Since the beginning of 2009, Sydney dwelling values have increased by 86% and Melbourne dwelling values are up by 71% over the same time frame.
However, the growth cycle won’t last forever. In fact, over the past twelve months, we have already seen dwelling values in Perth and Darwin decline by slightly more than 4%. The trend rate of growth showed a strong bounce during April and May this year, however it’s likely that housing market conditions will continue to moderate due to a range of factors including affordability constraints, low rental yields and tighter finance arrangements from the banking sector.
With the residential housing cycle now likely through its peak rate of growth, it will be interesting to see if residential property investment by SMSF’s continues to grow at the same pace.