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27-09-2014, 12:06 AM
Why price rises won’t bring the house down
THE AUSTRALIAN SEPTEMBER 27, 2014 12:00AM
Adam Creighton
Economics Correspondent
Sydney
No property bubble according to John McGrath
What bubble?What bubble? Source: TheAustralian
No property bubble according to John McG...What bubble?
I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning ... people are always saying that (house) prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them.
2013 Nobel economics Laureate professor Eugene Fama
WHETHER house price bubbles exist, let alone whether they warrant a response, divides economists as much as anxious first-home buyers. Controversial Australian economist Steve Keen sold his Surry Hills flat in inner Sydney in late 2008, claiming that a borrowing binge had paved the way for house prices to plunge. Yet, after wobbling in early 2009, Sydney house prices have since surged 49 per cent.
The property bears are back, and likely to be equally wrong.
Yes, mortgage interest rates of below 5 per cent — the lowest since the 1960s — have fanned double-digit percentage gains in Australian capital city house prices over the past year. In Sydney, which makes up 40 per cent of the national market by value, the increase has been 16.5 per cent compared to 10.1 per cent nationally.
The Reserve Bank even weighed in pessimistically this week, suggesting Australia’s housing market had become “unbalanced”, and was suffering from a “speculative excess” owing to investors’ “unrealistic expectations of future price growth” — unusually strong language.
It vaguely foreshadowed introduction of new limits on loans to investors, worried that their growing presence had fuelled unsustainable price rises in parts of Sydney and Melbourne. Left unchecked, the RBA felt, falls in house prices that undermined confidence, spending, and made its goal of sustainable economic growth more difficult were more likely.
It is true investors’ share of new loan approvals is now more than 45 per cent of the total in Sydney. The monthly value of new investor loans has jumped 90 per cent in NSW and 50 per cent in Victoria over the past two years to almost $4.5 billion and $2.5bn, respectively. Meanwhile, first-home buyers’ share of new home loans has dwindled to a record low of 12 per cent. And almost two-thirds of new loans to investors are ‘‘interest only’’, compared to 31 per cent of owner-occupiers, suggesting capital gains are motivating.
But the Reserve was not suggesting any house price ‘‘bubble’’ was about to pop. Analysis by its own economists in June explicitly concluded “recent data do not show signs of a bubble”. Indeed, even in effervescent Sydney, a different picture emerges once inflation is accounted for. Over the 10 years to June 2014 — a period during which the consumer price index rose 31 per cent — real house prices increased by an annual compound average of about 1.2 per cent a year. For Melbourne, the figure is 3.8 per cent.
“The RBA is not saying we have a bubble, only that we could do — if the current dynamics continue for much longer,” says Saul Eslake, chief economist of Bank of America Merrill Lynch.
The Switzerland-based Bank for International Settlements, oblivious of local concerns, concluded in September that Australia’s overall level of real house prices had in fact fallen by about 1 per cent over the past three years. In fact, house prices in rich countries have done little spectacular since 2009, following significant ‘‘bubbles’’ in the US and Britain.
People are notoriously bad at understanding the effects of inflation. If a $600,000 house bought in 2008 had not risen to a value of at least $690,000 by 2014, it would be worth less in real terms.
“In Sydney prices are becoming a little frothy now but the national average house price to income ratio is around 4.2, only a little above 4.1, which is the average for the past decade” says Paul Bloxham, chief economist at HSBC.
Bloxham is a longstanding critic of foreign analysis, whether by International Monetary Fund or The Economist magazine, that routinely argues Australia’s house prices are unreasonably expensive.
“Sure, house price to income ratios are much higher now than for much of the period after WWII but such comparisons ignore the impact of financial deregulation, which has led to permanently lower interest rates, and the growth of double-income households,” Bloxham tells Inquirer.
“Furthermore, comparisons with other rich countries aren’t fair because housing density in Australia’s big cities is much lower than in say Singapore or New York, meaning bigger and more expensive houses make up a larger share of our sales,” he adds.
Eslake also dismisses housing bubble talk. “That requires unsustainable growth in debt and price growth that rests on self-fulfilling and irrational belief in rising prices — at the very least we don’t have the first,” he says.
While growth in credit has picked up and investors are hoovering up a rising share of it, the total value of loans to households grew only 6.5 per cent over the year to July (to $1.38 trillion), about a third as fast as it grew before the financial crisis. Meanwhile loans to businesses — the sort of lending the RBA would like to grow — grew an anaemic 3.2 per cent to $760bn.
Tim Lawless, head of research at housing analysis firm RP Data, says the risks are concentrated in particular inner-city apartment markets like Docklands and South Bank in Melbourne, and Newtown and Ultimo in Sydney, where investors own more than 50 per cent of the dwellings compared to about 33 per cent nationally.
“Gross rental yields — before rates, utilities, insurance maintenance — for detached houses have fallen to 3.2 per cent in Melbourne, the lowest since 1990,” Lawless says.
Such market realities are likely to mitigate house price growth better than heavy handed intervention. Nationally, gross rental yields have fallen steadily since 2012 to about 4 per cent (the same as a no-frills, ‘‘high interest’’ online savings account) while rents are growing more slowly than inflation. Vacancy rates have been steadily creeping up since the global financial crisis too.
Kelly O’Dwyer, who is heading a parliamentary inquiry into the impact of foreign buyers on Australian residential property, says up to 20 per cent of new apartments are purchased by foreign residents, according to big builders such as Mirvac and Australand. “But expert submissions we’ve received are divided over whether foreign demand helps locals by encouraging new supply or boosts prices because of added competition, especially for new apartments,” she adds.
Mark Steinert, managing director at Stockland, Australia’s largest diversified property developer, tells Inquirer house price growth in Sydney will probably slow to about 5 per cent. He says the NSW government is “taking very positive steps to create new housing supply, particularly in Sydney’s northwest and southwest growth centres. However, the Sydney housing market is coming off a decade of chronic undersupply.” He points to similar helpful steps in Victoria.
Whatever the case, while population growth flatlined, home building has accelerated. The rate of council approval of new houses and apartments is now at the highest level in 14 years. For most of 2014, about 6000 apartments and 9000 new houses have been approved each month.
The Reserve Bank has been at pains to emphasise Australia’s financial stability is not under threat from rising house prices. Only 0.6 per cent of banks’ housing loans are delinquent in any way, according to APRA, a share that has fallen steadily since 2010. About 2 per cent of business and personal loans are ‘‘non-performing’’.
“Australian mortgages are on average 24 months prepaid, plus they are full recourse — unlike in most US regions, where people can throw away the keys,” says Bloxham, noting banks here tended not to adjust borrowers’ repayments when interest rates fell.
Even if investors bet on house prices, would it matter? Investment loans are overwhelmingly held by better-off people. About 80 per cent of the $467bn in outstanding housing investment loans are held by the top two income quintiles (60 per cent by the top fifth). Further, loans to investors have lower loan-to-valuation ratios and investors are typically older with substantial other assets.
Demands for policymakers to ‘‘do something’’ in response to the recent house price jump are unlikely to abate. Eslake reckons the standard policy response to elevated house prices — lifting interest rates — would damage Australia’s weak non-mining economy.
“And so-called macroprudential tools are a 21st century name for 20th century regulations that were abolished decades ago,” he says, noting introducing limits on loan-to-valuation ratios would hit first-home buyers the hardest, given they tended to borrow the most. Similarly coping with resurgent house prices, New Zealand has capped at 10 per cent the share of new loans banks can issue with loan-to-valuation ratios above 80 per cent.
From next month, British banks will face limits on the number of loans they can grant with values more than 4.5 times the borrower’s income.
Key federal crossbench senator and former home builder Bob Day says government shouldn’t do anything directly to try to stop house prices rising.
“But there’s a lot they can and should do about fringe development, where there’s an infinite supply of land available and a housing industry ready, willing and able to put top-quality houses on it at unbelievably low prices,” he adds.
Eslake prefers ending negative gearing for new investors, a tax inducement he says has bid up prices and distorted the economy, noting 93 per cent of investors buy existing rather than new dwellings.
“Interest on borrowings undertaken to purchase any asset should — for assets acquired after the date of the announcement — only be deductible up to the amount of the income produced by that asset in each income year, with any excess ‘‘carried forward’’ to be offset against the capital gains tax liability when the asset is eventually sold,” he explains.
Whatever the underlying pros and cons of investing in property versus shares or bank deposits, investors’ decisions are massively skewed by the tax system. The 2010 Henry review showed the real effective marginal tax rates varied wildly for people on the top marginal tax bracket.
Recent increases in the top two marginal tax rates to 39 per cent and 49 per cent have only increased the appeal of tax-favoured investment strategies.
THE AUSTRALIAN SEPTEMBER 27, 2014 12:00AM
Adam Creighton
Economics Correspondent
Sydney
No property bubble according to John McGrath
What bubble?What bubble? Source: TheAustralian
No property bubble according to John McG...What bubble?
I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning ... people are always saying that (house) prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them.
2013 Nobel economics Laureate professor Eugene Fama
WHETHER house price bubbles exist, let alone whether they warrant a response, divides economists as much as anxious first-home buyers. Controversial Australian economist Steve Keen sold his Surry Hills flat in inner Sydney in late 2008, claiming that a borrowing binge had paved the way for house prices to plunge. Yet, after wobbling in early 2009, Sydney house prices have since surged 49 per cent.
The property bears are back, and likely to be equally wrong.
Yes, mortgage interest rates of below 5 per cent — the lowest since the 1960s — have fanned double-digit percentage gains in Australian capital city house prices over the past year. In Sydney, which makes up 40 per cent of the national market by value, the increase has been 16.5 per cent compared to 10.1 per cent nationally.
The Reserve Bank even weighed in pessimistically this week, suggesting Australia’s housing market had become “unbalanced”, and was suffering from a “speculative excess” owing to investors’ “unrealistic expectations of future price growth” — unusually strong language.
It vaguely foreshadowed introduction of new limits on loans to investors, worried that their growing presence had fuelled unsustainable price rises in parts of Sydney and Melbourne. Left unchecked, the RBA felt, falls in house prices that undermined confidence, spending, and made its goal of sustainable economic growth more difficult were more likely.
It is true investors’ share of new loan approvals is now more than 45 per cent of the total in Sydney. The monthly value of new investor loans has jumped 90 per cent in NSW and 50 per cent in Victoria over the past two years to almost $4.5 billion and $2.5bn, respectively. Meanwhile, first-home buyers’ share of new home loans has dwindled to a record low of 12 per cent. And almost two-thirds of new loans to investors are ‘‘interest only’’, compared to 31 per cent of owner-occupiers, suggesting capital gains are motivating.
But the Reserve was not suggesting any house price ‘‘bubble’’ was about to pop. Analysis by its own economists in June explicitly concluded “recent data do not show signs of a bubble”. Indeed, even in effervescent Sydney, a different picture emerges once inflation is accounted for. Over the 10 years to June 2014 — a period during which the consumer price index rose 31 per cent — real house prices increased by an annual compound average of about 1.2 per cent a year. For Melbourne, the figure is 3.8 per cent.
“The RBA is not saying we have a bubble, only that we could do — if the current dynamics continue for much longer,” says Saul Eslake, chief economist of Bank of America Merrill Lynch.
The Switzerland-based Bank for International Settlements, oblivious of local concerns, concluded in September that Australia’s overall level of real house prices had in fact fallen by about 1 per cent over the past three years. In fact, house prices in rich countries have done little spectacular since 2009, following significant ‘‘bubbles’’ in the US and Britain.
People are notoriously bad at understanding the effects of inflation. If a $600,000 house bought in 2008 had not risen to a value of at least $690,000 by 2014, it would be worth less in real terms.
“In Sydney prices are becoming a little frothy now but the national average house price to income ratio is around 4.2, only a little above 4.1, which is the average for the past decade” says Paul Bloxham, chief economist at HSBC.
Bloxham is a longstanding critic of foreign analysis, whether by International Monetary Fund or The Economist magazine, that routinely argues Australia’s house prices are unreasonably expensive.
“Sure, house price to income ratios are much higher now than for much of the period after WWII but such comparisons ignore the impact of financial deregulation, which has led to permanently lower interest rates, and the growth of double-income households,” Bloxham tells Inquirer.
“Furthermore, comparisons with other rich countries aren’t fair because housing density in Australia’s big cities is much lower than in say Singapore or New York, meaning bigger and more expensive houses make up a larger share of our sales,” he adds.
Eslake also dismisses housing bubble talk. “That requires unsustainable growth in debt and price growth that rests on self-fulfilling and irrational belief in rising prices — at the very least we don’t have the first,” he says.
While growth in credit has picked up and investors are hoovering up a rising share of it, the total value of loans to households grew only 6.5 per cent over the year to July (to $1.38 trillion), about a third as fast as it grew before the financial crisis. Meanwhile loans to businesses — the sort of lending the RBA would like to grow — grew an anaemic 3.2 per cent to $760bn.
Tim Lawless, head of research at housing analysis firm RP Data, says the risks are concentrated in particular inner-city apartment markets like Docklands and South Bank in Melbourne, and Newtown and Ultimo in Sydney, where investors own more than 50 per cent of the dwellings compared to about 33 per cent nationally.
“Gross rental yields — before rates, utilities, insurance maintenance — for detached houses have fallen to 3.2 per cent in Melbourne, the lowest since 1990,” Lawless says.
Such market realities are likely to mitigate house price growth better than heavy handed intervention. Nationally, gross rental yields have fallen steadily since 2012 to about 4 per cent (the same as a no-frills, ‘‘high interest’’ online savings account) while rents are growing more slowly than inflation. Vacancy rates have been steadily creeping up since the global financial crisis too.
Kelly O’Dwyer, who is heading a parliamentary inquiry into the impact of foreign buyers on Australian residential property, says up to 20 per cent of new apartments are purchased by foreign residents, according to big builders such as Mirvac and Australand. “But expert submissions we’ve received are divided over whether foreign demand helps locals by encouraging new supply or boosts prices because of added competition, especially for new apartments,” she adds.
Mark Steinert, managing director at Stockland, Australia’s largest diversified property developer, tells Inquirer house price growth in Sydney will probably slow to about 5 per cent. He says the NSW government is “taking very positive steps to create new housing supply, particularly in Sydney’s northwest and southwest growth centres. However, the Sydney housing market is coming off a decade of chronic undersupply.” He points to similar helpful steps in Victoria.
Whatever the case, while population growth flatlined, home building has accelerated. The rate of council approval of new houses and apartments is now at the highest level in 14 years. For most of 2014, about 6000 apartments and 9000 new houses have been approved each month.
The Reserve Bank has been at pains to emphasise Australia’s financial stability is not under threat from rising house prices. Only 0.6 per cent of banks’ housing loans are delinquent in any way, according to APRA, a share that has fallen steadily since 2010. About 2 per cent of business and personal loans are ‘‘non-performing’’.
“Australian mortgages are on average 24 months prepaid, plus they are full recourse — unlike in most US regions, where people can throw away the keys,” says Bloxham, noting banks here tended not to adjust borrowers’ repayments when interest rates fell.
Even if investors bet on house prices, would it matter? Investment loans are overwhelmingly held by better-off people. About 80 per cent of the $467bn in outstanding housing investment loans are held by the top two income quintiles (60 per cent by the top fifth). Further, loans to investors have lower loan-to-valuation ratios and investors are typically older with substantial other assets.
Demands for policymakers to ‘‘do something’’ in response to the recent house price jump are unlikely to abate. Eslake reckons the standard policy response to elevated house prices — lifting interest rates — would damage Australia’s weak non-mining economy.
“And so-called macroprudential tools are a 21st century name for 20th century regulations that were abolished decades ago,” he says, noting introducing limits on loan-to-valuation ratios would hit first-home buyers the hardest, given they tended to borrow the most. Similarly coping with resurgent house prices, New Zealand has capped at 10 per cent the share of new loans banks can issue with loan-to-valuation ratios above 80 per cent.
From next month, British banks will face limits on the number of loans they can grant with values more than 4.5 times the borrower’s income.
Key federal crossbench senator and former home builder Bob Day says government shouldn’t do anything directly to try to stop house prices rising.
“But there’s a lot they can and should do about fringe development, where there’s an infinite supply of land available and a housing industry ready, willing and able to put top-quality houses on it at unbelievably low prices,” he adds.
Eslake prefers ending negative gearing for new investors, a tax inducement he says has bid up prices and distorted the economy, noting 93 per cent of investors buy existing rather than new dwellings.
“Interest on borrowings undertaken to purchase any asset should — for assets acquired after the date of the announcement — only be deductible up to the amount of the income produced by that asset in each income year, with any excess ‘‘carried forward’’ to be offset against the capital gains tax liability when the asset is eventually sold,” he explains.
Whatever the underlying pros and cons of investing in property versus shares or bank deposits, investors’ decisions are massively skewed by the tax system. The 2010 Henry review showed the real effective marginal tax rates varied wildly for people on the top marginal tax bracket.
Recent increases in the top two marginal tax rates to 39 per cent and 49 per cent have only increased the appeal of tax-favoured investment strategies.