Australia Property

[specuvestor]

CHRISTOPHER JOYE
Record housing investment boom accelerates
PUBLISHED: 01 SEP 2014 13:53:00 | UPDATED: 02 SEP 2014 00:05:46

Record housing investment boom accelerates
New data shows Australia’s immense investment-backed speculative housing boom has continued at a ferocious pace over the past 3 months even in “seasonally-adjusted” terms. Photo: Nicki Davey
Analysis
CHRISTOPHER JOYE
Homes market hits seven-year winter high
New data shows Australia’s speculative housing boom, which is as big as the last investment “bubble” in 2003, has ­continued at a ferocious pace over the past three months, even in seasonally adjusted terms.

RP Data, the nation’s largest property information supplier, reports that after stripping out seasonality in price movements, home values across ­Australia’s eight capital cities climbed at a 15 per cent annualised clip over the three months ended August 31, representing a remarkable 3.6 per cent ­quarterly growth rate.


Investors leveraging off the cheapest mortgages rates in history now account for as large a share of all new housing finance commitments as during the speculative craze that caused concerns for the Reserve Bank of Australia in 2002 and 2003.

The Australian Financial Review‘s analysis finds that last financial year investors made up nearly 39 per cent of new housing finance commitments, an almost identical level to the peak of the boom in the early 2000s. It also makes the boom over the past year very different to its predecessors in 2007 and 2010.


Investment demand is being fuelled by an influx of foreign buyers, which UBS says make up about 40 per cent of all newly developed homes in Sydney and Melbourne, and the $560 billion self-managed super fund sector, which can now leverage its cash five times when purchasing properties. In 2002 and 2003, these forces were not in play.

Capital city home values are also 64 per cent dearer than they were in 2003. Indeed, RP Data’s August index shows home values in the capital cities are 26 per cent above their peak prior to the global financial crisis and 10.2 per cent above the levels touched in 2010.

The bidding war among investors has seen the most expensive properties outperform more affordable assets.

RP Data divides its national index into cheap, medium-priced and expensive homes. In the quarter ended August 31, cheap and expensive homes increased in value 7.9 per cent and 21.7 per cent, respectively. A similar trend has been evidenced over the past year. RP Data’s index suggest that at the end of August, rental yields in Sydney and Melbourne were the lowest among the key capital cities.

Gross yields for houses in Melbourne and Sydney are only 3.2 per cent and 3.6 per cent respectively, which is less than inflation after transaction costs.

While the share of mortgages approved with loan-to-value ratios above 90 per cent fell in the June quarter, this may have been driven by heightened investor activity and the fading of first-time buyers.

Reserve Bank research shows that a much lower proportion of investors take out loans with LVRs greater than 80 per cent and 90 per cent compared with owner-occupiers. Investors have far greater appetite for riskier interest-only loans. Whereas over one-half of investors use interest-only loans, only one-quarter of owner-occupiers do.

This explains the Australian Prudential Regulation Authority’s revelation last week that a stunning 43.2 per cent of all new mortgages in June were interest-only products, which is way above 34 per cent average since March 2008. A proliferation of interest-only investment loans with very low rates was a hallmark of the US sub-prime crisis.

Australian home values measured relative to disposable incomes are ­currently breaching the all-time records set in both 2007 and 2010.

Yet I expect the current boom, which is arguably turning into a bubble, to ­continue until the Reserve Bank starts raising interest rates. Importantly, you do not require mania or double-digit credit growth to have a bubble, as some pundits claim.

What you do need is asset prices way above reasonable estimates of fair value and high levels of leverage, both of which Australia possesses today.

Credit growth numbers are only meaningful relative to incomes and the level of leverage. Like house price appreciation, credit growth is running at ­multiples of incomes and increasing leverage, which should give us all pause.

Anyone not worried about current Australian house price dynamics is a fool. This only ends two ways: higher interest rates and/or macro-prudential brakes on lending.

The Australian Financial Review

BY CHRISTOPHER JOYE
Christopher Joye
Christopher Joye is a leading economist, fund manager and policy adviser. He previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of YBR Funds Management Pty Ltd.

@cjoye

Sounds very much like Singapore 2 years ago isn't it? There is nothing new under the sun unless we choose to say "this time it is different". But it is a very bold and politically incorrect though true statement to say "Anyone not worried about current Australian house price dynamics is a fool", he should also remember that a market can remain irrational longer than one can remain solvent. Like I said, every rational person can see a bubble but everyone chooses whether they want to take their chances because nobody knows when it will end.