Australia Property

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RBA voices growing concern over house prices
JAMES GLYNN AND AAP DOW JONES SEPTEMBER 16, 2014 4:54PM

THE Reserve Bank of Australia is becoming increasingly concerned by soaring house prices, minutes of this month’s policy meeting published today show.

In its severest warning yet on house prices, the RBA said surging investor demand for property may cause the market to overheat and invite sudden price falls.

A housing-market crash might undo a lot of the central bank’s efforts supporting a still-fragile economy trying to cope with a downturn in mining investment.

Record-low interest rates were supporting the economy, but policy makers needed to be aware of the risks to future growth accompanying “a large further build-up in asset prices,” the minutes of the bank’s September 2 policy meeting said.

“Additional speculative demand could amplify the property price-cycle and increase the potential for property prices to fall later.”

Still, the RBA said current interest rates were appropriate for now, adding that the most prudent course forward was likely to be a period of rate stability.

Australian capital-city house prices have risen by more than 10 per cent over the past year, with Sydney posting gains of closer to 15 per cent.

Record-low rates, favourable tax treatment of property investment, and rising foreign demand are some of the factors that have driven the increase in house prices. The amount of loans going to property investors has jumped sharply.

The central bank has held its cash-rate target at 2.5 per cent for more than a year to cushion the economy against the slowing of a decadelong boom in mining investment.

So far, there has been little to show for it other than the sharp rise in house prices.

Falling house prices would spook consumers and likely slow economic growth, the minutes said. “The main risks in such a scenario would likely be to the stability of the macro-economy ... particularly if households were to react to declines in their wealth by cutting back on their spending,” the central bank said.

It noted that there had been a big increase in competition between the commercial banks in the area of mortgage lending, adding that it had so far seen no general deterioration in lending standards.

Reserve Bank assistant governor Christopher Kent said home price growth had recently shown signs of renewed strength, particularly in Sydney and Melbourne, with most of the growth coming from the investor market.

“Are we concerned about it? Well, we are always careful to watch these sorts of developments,” Dr Kent told a Bloomberg economic summit in Sydney today.

“We’ve been at great pains to always tell people that when you’re making investment decisions, make them with great care.

“Don’t assume prices will always go up, don’t assume the price increase that we’ve seen in the past is a reflection of where prices will be going in the future and don’t always assume interest rates will stay low for the length of your loan.”

Federal Treasurer Joe Hockey, however, rejected suggestions of a housing bubble, dismissing it as “lazy analysis”.

David Rees, head of Australasian research at Jones Lang LaSalle, said although Australian housing was very expensive compared with much of the rest of the world, there was no housing bubble.

A housing bubble was when prices move away from fundamentals, but in Australia’s case, prices were responding to fundamentals, such as low interest rates, population growth and an undersupply of new housing, Dr Rees said.

He said restrictive planning laws had created concerning affordability issues in the Sydney market.

“If you make it difficult and expensive to produce houses through a range of policies and if you encourage people to live in a congested area, in other words, increase demand and reduce supply, then the market will do what it’s supposed to do, which is prices going up,” Dr Rees said.

“There’s good reason to be concerned about (affordability) because it’s pretty tough getting into the Sydney housing market, especially if you’re a first-home buyer.”

Kelly O’Dwyer, chair of a parliamentary inquiry into foreign investment in residential real estate, said investigations were under way into whether foreign investment, though crucial to supply, was creating competition for first-home buyers, potentially locking them out of the market.

There was evidence to suggest current foreign investment restrictions were not being enforced by the Foreign Investment Review Board (FIRB), she said.

“FIRB have demonstrated that they have not been doing their job in that regard,” Ms O’Dwyer said.

“I think there’s been a failure of leadership at FIRB.”

Ms O’Dwyer said she was open to the idea that first-home buyers be allowed to tap into their superannuation to help them get a foot on the property market ladder.

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Joe Hockey dismisses talk of housing bubble as ‘lazy analysis’
THE AUSTRALIAN SEPTEMBER 17, 2014 12:00AM

Adam Creighton

Economics Correspondent
Sydney
JOE Hockey has played down fears record-low interest rates and a stampede of foreign investors are fuelling an unsustainable bubble in house prices at the same time the Reserve Bank signals it is ­becoming more concerned.

Mr Hockey yesterday conceded “a lot of cash” was flowing into property, especially in Sydney and Melbourne, but blamed rapid price increases on a shortage of supply rather than speculation.

“It is just an easy mantra for international commentators and for analysts based overseas to say ‘well there’s a housing bubble emerging in Australia’; it is a rather lazy analysis because fundamentally we don’t have enough supply to meet demand,” the Treasurer said.

“That doesn’t suggest there’s a bubble, there might be a price increase of some substance, but you would expect the market to react by producing more houses,” he said at a Bloomberg finance conference. “I don’t see at the moment any substantial risk.”

Mr Hockey called on state governments to do more to ease supply constraints.

Minutes from the Reserve Bank’s most recent meeting, released a couple of hours after Mr Hockey spoke, confirmed speculation bank officials have become increasingly worried about the double-digit percentage increases in dwelling prices in Sydney and Melbourne.

“Members considered that the risks associated with this trend warranted ongoing close observation,” the minutes concluded, echoing governor Glenn Stevens’s comments earlier this month that appeared to rule out cuts in official rates for fear of stoking unsustainable increases in house prices.

“Policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage,” the minutes said.

At the same conference Liberal MP Kelly O’Dwyer, chairwoman of a parliamentary economics committee inquiry into foreign ­investment in real estate, slammed the Foreign Investment Review Board’s lax oversight of foreign investment rules and called for tougher penalties for foreigners caught buying established dwellings.

“FIRB have demonstrated they have not been doing their job,” Ms O’Dwyer said, endorsing the existing framework that prevents non-resident foreigners from buying existing dwellings but decrying the lack of enforcement.

“There has been failure of leadership in FIRB,” she said, pointing to zero prosecutions or divestment orders since 2006.

“FIRB said compliance has improved but I think that defies credibility,” she said.

Ms O’Dwyer said the existing $85,000 fine for illegal purchase by foreigners was inadequate — seen as a “cost of doing business” — and advocated its replacement by a fee related to the value of the property.

“FIRB has a limited number of people but (that) doesn’t excuse not following through,” she said, hinting the inquiry, due to report next month, would also call for more accurate data on foreign purchase of local property. The number of units built in Australia has jumped from fewer than 40,000 in 2009 to more than 70,000 last year — while the number of new detached houses has fallen from 103,000 to 96,000.

Anecdotal evidence has suggested foreigners, especially Chinese, are driving a growing share of demand for new dwellings.

“That may well continue for some period of time,” Mr Hockey said of the trend.

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Houses could be overvalued for a long time
THE AUSTRALIAN SEPTEMBER 17, 2014 9:09AM

Alan Kohler

Business Spectator Columnist
Melbourne
NOW we know why the Reserve Bank is worried about the property market: according to yesterday’s minutes, it’s not because banks might get into trouble, but because if prices went up some more, that would increase the potential for them to fall later, and households could cut back spending if their wealth declined.

Could. If. Maybe. If house prices go up a lot, they might come down. Well, yes.

Have they gone up a lot already? Um, “(RBA board) members considered that the risks associated with this trend warranted ongoing close observation.”

Well, yes, again.

You decide.

Yep, it’s all about Sydney; nothing much going on anywhere else, and Sydney’s rise of about 30 per cent in two years probably has something to do with what Kelly O’Dwyer, MP, was talking about yesterday.

She told a forum in Sydney that the Foreign Investment Review Board was not properly policing the restriction on foreign investors (read: Chinese) buying existing dwellings.

“We … encourage foreign investors to invest in new dwellings because we see that as having a strong benefit for the country, both in terms of supplying new housing but also in terms of the economic output that flows from that,” she said.

“But there are restrictions already in place for nonresident foreign investors wanting to purchase existing dwellings, and some of the evidence to date that has been presented to the committee is that the foreign investment restrictions on those people have simply not been enforced.”

(Kelly O’Dwyer is heading a joint Parliamentary committee considering ways to make it harder for foreigners to buy Australian real estate.)

But a large part of the foreign buying of local real estate is not from Chinese citizens flouting the local regulations in the apparently correct belief they won’t get caught, but because of “Business Innovation and Investment visas”.

There are three types of these (to quote the Department of Immigration fact sheet):

● The business innovation stream — for people with a successful business career and a genuine and realistic commitment to be involved as an owner in a new or existing business in Australia

● The investor stream — for people with a successful record of qualifying business or eligible investment activity who will make a designated investment in a state or territory of Australia and have a realistic commitment to continue to maintain business or investment activity in Australia after the designated investment has matured.

● The significant investor stream — for people who are willing to invest at least $5 million into complying investments in Australia and want to maintain business and investment activity in Australia after the original investment has matured.

In other words, you don’t need $5m — you just need to be in business or be an investor.

And you have to live somewhere: not Mudgee or Mildura, thanks very much, but Sydney or Melbourne, please. They are not ‘foreign buyers’ after they migrate, and therefore do not fall under FIRB rules.

At the same time as it has stopped the boats, the Abbott government has opened the airports — to business and investment migrants. There is apparently a quiet flood of it.

In either case — foreign investors dodging the rules or business migrants and their families buying a home to live in — the flow of Chinese money into Australian real estate, in fact into real estate all over the world, has only just begun.

The wave of money out of China, spurred in part by President Xi Jinping’s huge crackdown on corruption, could last for decades and raise property prices a lot higher than they are now.

And this has nothing to do with interest rates or the Reserve Bank.

There are three main effects of rising property prices, two of which are good and one is bad:

1. The ‘wealth effect’, as discussed by the RBA, lifts consumer confidence and encourages spending and boosts employment;

2. Under-funded retirees are able to sell their family homes and free up equity by downsizing into an apartment or ‘lifestyle community’; and

3. Young people can’t afford to buy a house and have to keep renting.

The reason No. 3 is bad, and making everyone so upset about high house prices, is not that real estate is such a great investment (at these prices, it’s not!) but because it’s one of only two tax-free investments.

The other is super, once you’re in pension phase.

If you think about it, home ownership and superannuation are both, in reality, retirement plans. When most people retire, their two assets are super and their house, and most people cash both of them in.

It’s true that owning a home is enforced saving, with a very large “fee” (interest) going to the bank. But rent is less than mortgage repayments, so a household that’s renting can theoretically save more in super and therefore lose less to the bank.

Of course, the problem is that super is only enforces up to 9.5 per cent of salary, and most young families will spend what they have over that if it’s not going on a mortgage, probably on education.

But then again they won’t have to support their parents, and in fact their parents can probably support them instead, because the houses that are too expensive will fetch a good price for their empty-nest parents when the kids move out and rent.

What’s more, the wealth effect on consumption and investment of rising house prices will help ensure they all have a job.

The point is that it’s not entirely clear that expensive housing is a bad thing, although I am talking my book, of course, as a homeowning, empty-nest baby boomer (with frustrated, renting children).

It is true that a bubble followed by a crash would be undesirable, to say the least, but is that what we have coming?

I doubt it. As a rule of thumb, if everything thinks it’s a bubble, it isn’t one. Bubbles occur when everyone is complacent.

There is a shortage of housing, especially inner city, and plenty of demand, augmented by foreign investment, business migrants and SMSFs. It looks to me like the market at work.

And the demand from foreign buyers, especially Chinese, has a long way to go.

Australian houses, especially in Sydney and Melbourne, could be theoretically overvalued for a very long time.

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Report tips more house price hikes
THE AUSTRALIAN SEPTEMBER 17, 2014 2:52PM

Greg Brown

Property Reporter
Sydney
AUSTRALIA’S capital city housing boom is set to continue into mid next year despite many experts predicting a slowdown, with prices to increase nationally by up to 9 per cent, according to SQM Research.

In a report released today, SQM forecasts Sydney’s house prices will rise between 8 per cent and 12 per cent in the year to June 2015, while Melbourne’s prices will increase between 5 and 9 per cent.

Prices in Sydney and Melbourne rose 15.6 and 9.3 per cent respectively in the year to June, meaning SQM expects only a modest slowdown.

Brisbane would perform better than last year, with growth of between 5 and 8 per cent in the coming year, while price growth in Adelaide (up to 7 per cent), and Hobart (up to 6 per cent) may also improve.

The report said there could be slowdown in Perth and Canberra, with Perth’s prices growing 1 to 4 per cent and Canberra potentially seeing prices range between a fall of 2 to a 3 per cent rise.

The forecasts are conditional on interest rates remaining unchanged and the Australian dollar staying above $US0.85. SQM expects lower growth if rates rise.

SQM managing director Louis Christopher said that, while the market was overvalued, claims by many analysts were overstated.

“I don’t believe at this stage the market is in a bubble. Some cities are heading into overvalued territory, but the point overall is the market is far from a bubble situation when taking into account historical valuations over the past 30 years,” Mr Christopher said.

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In more upbeat comments, Mr Costello seemed to back Treasurer Joe Hockey’s optimism for the future of the property market. On Tuesday, Mr Hockey rejected as “lazy analysis” claims it was in a bubble and risked crashing.

Mr Costello suggested Australia’s strong population growth would likely continue to support the property market.

He insisted that housing was “not expensive” in Australia, compared with overseas markets.

“Building a house is comparatively cheap,” he said. “What is expensive in Australia is land.

“So we have an increasing demand but we have quite a restrictive supply of land.

“As a result, prices are high.” He blamed that on state taxes imposed on the release and transfer of land.

Mr Costello said sooner or later world economies would normalise, with the US winding back its money printing stimulatory measures and interest rates rising again.

“It could still be a good time for property if things revert to normal ... (but) there could be a fair bit of hardship that we have to go through and readjustment,” he said.

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Global financial elite grab valuable Australian properties
PUBLISHED: 17 SEP 2014 19:54:00 | UPDATED: 18 SEP 2014 05:59:16

Global financial elite grab valuable Australian properties
The agent selling a Eureka Tower five-bedroom, eight-bathroom apartment said about 10 of the 12 people who have seen the $22m propterty were from overseas looking for an alternative investment they could live in ‘two or three’ times a year.  Photo: Arsineh Houspian
DUNCAN HUGHES
Some of Australia’s most valuable apartments are being sold to a new ­generation of global gypsies who use them as an investment they can live in occasionally, according to local ­property specialists.

Pristine properties in the world’s ­safest and most desirable cities are in record demand for a transient global financial elite seeking an alternative investment and physical retreat.

“Just five years ago it was in its infancy, but now it’s already worth hundreds of millions,” said John Meagher, a director of Melbourne-based 360 Property Group, about the surge in overseas demand for local prestige projects.

The 82nd floor of Melbourne’s Eureka Tower has a five-bedroom and eight-bathroom apartment, which has never been lived in, that is selling for about $22 million in a private sale.

Gerald Betts, agent for RT Edgar, which is selling the property, said about 10 of the 12 people who have seen the apartment were from overseas looking for an alternative investment in which they could also live “two or three” times a year. Mr Betts agreed there is a rapid growth of a wealthy international ­community seeking to increase their personal safety and wealth by investing across asset classes and countries.

ELITE TARGETED BY TOP DEVELOPERS
The new property-owning elite is being targeted by top developers for multimillion-dollar apartments in new projects, such as Sydney’s Barangaroo and Melbourne’s 108 Australia, a 100-storey skyscraper.

“These types of people have one of these in each major city,” Mr Betts said.

According to property specialists,this is a worldwide phenomenon that began to emerge in the wake of the global financial crisis, which shredded the value of global property and equity assets. It has resulted in some of the world’s most expensive addresses in some of the most exclusive postcodes being unoccupied for large chunks of the year.

The response for buyers from around the world for apartments at One Hyde Park, a major residential and retail complex in Knightsbridge, central London, is claimed by experts to be the beginning of the trend.

Its completion coincided with the height of the global financial crisis in 2009 and did not stop a mix of the world’s financial and business elite, including Arab sheiks and Indian­ ­mining families, from paying up to $100 million for each apartment.

ALSO IN MANHATTAN
The demand has also been replicated in ­Manhattan, particularly in plush Upper East and Upper West sides along Central Park, where Russian ­oligarchs, such as Dmitry Rybolovlev, paid more than $88 million for a condo.

Overseas commentators said they are typically unoccupied for up to 10 months a year.

Mr Meagher said Australia – par­ticularly Melbourne and Sydney – offer the same mix of financial security, physical safety, some unique properties and long-term investment returns.

“They are investing in something that has a track record,” he said.

“The long-term investment track record has been outstanding.

“Australia is also seen as a safe economic environment.”

Being able to shop for properties and the ease of global travel are also contributing to the strong growth in demand, he said.

The Australian Financial Review

BY DUNCAN HUGHES

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Foreign funds among biggest office property buyers
THE AUSTRALIAN SEPTEMBER 19, 2014 12:00AM

Kylar Loussikian

Journalist
Sydney
CEO of Investa Office CAmpbell Hanan picutred in Sydney. Investa Office CEO Campbell Hanan says it is inevitable that foreign capital would come to Australia chasing attractive yields. Source: News Limited < PrevNext >
••
AUSTRALIAN commercial properties have become increasingly attractive to foreign investors, who make up a significantly larger proportion of purchases than seen in the last decade.

A Reserve Bank paper released yesterday has found overseas buyers were especially active in the first half of the year, purchasing nearly $5 billion worth of commercial properties or about 40 per cent of the value of all sales.

Previously, foreign capital accounted, on average, for about one-quarter of commercial property purchases.

Net sales, taking into account asset sales by overseas investors, amounted to $4bn for the first six months of the year, “close to its level for all of 2013”.

Data published by the Foreign Investment Review Board showed ­approvals for investments in commercial property increased from $11bn in 2010 to nearly $35bn in 2013, but the RBA paper dismisses that figure as an inaccurate ­estimate.

The recent increase has been “most pronounced in the market for office property” and most ­active in Sydney, according to the RBA researchers, with foreign purchase of retail and industrial assets accounting for only about 15 per cent of sales, although these were more evenly distributed across Australia.

About one-third of foreign purchases since 2008 have been made by pension funds and sovereign wealth funds after two decades of little activity.

Separate statistics compiled by real estate agency CBRE show Singapore has been the single biggest net investor in Australian commercial property since 2005, at just over $5bn, followed by Germany, the US and China. Malaysia, Canada, South Korea and Britain are also significant investors, Most of the purchases were for existing buildings, a preference “reflecting foreigners’ desire for commercial buildings as passive investments” because of a predictable income stream. While some local builders have raised concerns about an influx of capital pushing up prices considerably, the RBA researchers suggest most foreign firms are partnering with local companies, “effectively supporting the financial position of domestic developers and enabling them to undertake additional construction activity”.

Campbell Hanan, chief executive of Investa Office, said it was inevitable foreign capital would come to Australia chasing attractive yields.

“The great thing about globalisation is that people take their own return expectations elsewhere and apply it to your own market and if that means that a market like Australia looks cheap on a relative basis then you’ll see an inflow of foreign capital,” he said. The CBRE research noted up to $US75bn in funds controlled by Asian life insurers could be invested in global commercial property as deregulation of the sector continues in China and Taiwan.

But Stephen McNabb, CBRE’s head of research, said while the trend would continue over the next 18 months, Australia’s relative attractiveness would fade.

“An improvement in global economic growth and a return towards ‘normal’ interest rate settings, while appearing some way into the future, will be the likely catalyst,” he said.

Additional reporting: Greg Brown

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Chinese developers on buying spreefor apartment sites
THE AUSTRALIAN SEPTEMBER 19, 2014 12:00AM

Greg Brown

Property Reporter
Sydney
CHINESE developers are roaring into Australian apartments, with R&F Properties negotiating to buy a site in Sydney’s northwest in a deal worth about $130 million.

The Hong Kong-listed and Guangzhou-based R&F is in due diligence on a site in Norwest, with the group set to enter Sydney after paying top prices to snap up land parcels in Brisbane and Melbourne in the past two months.

It is thought R&F would aim to build units on the site, but it is not yet known if it would include a commercial or community component.

The group in July paid more than $60m for an inner Melbourne site with planning approval for 1500 homes. The seller, Richard Gu’s AXF Group, paid just $17m for the property in 2007.

In inner city Brisbane, the group finalised a deal to buy a site for $46m, more than double the $22m David Devine’s Metro Property Development paid for the property last year.

R&F follows a host of Chinese developers that dominated the race for apartment projects.

The Australian revealed last week that a company run by Australia’s richest Chinese-born citizen, BRW rich-lister Hui Wing Mau, was in due diligence to buy a Sydney CBD office tower with development potential at 175 Liverpool Street for close to $400m. Meanwhile, China’s richest man, Wang Jianlin, has led the property arm of Dalian Wanda Group into the Gold Coast, with a half stake in the $1 billion Jewel apartment and hotel complex.

Country Garden, controlled by China’s richest woman, Yang ­Huiyan, is building an apartment complex in Sydney’s northern suburbs. Leading executive Shaoqun Tan’s company, Fuxing Huiyu Real Estate, is launching a $550m project in Parramatta in the city’s west, through its Australian arm Starryland.

The largest player, state-owned Chinese developer Greenland Holding, has invested $1.4bn in Australian development projects in the past 18 months.

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Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.

RBA drawn to house bubble controls
Jacob Greber and Vesna Poljak
909 words
20 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Price growth across the bubbling housing market could be more than halved if regulators impose the first restrictions on mortgage lending in a decade, according to a leading forecaster.

Increasingly alarmed by signs investors are taking on too much risk and ignoring the potential for price falls, officials at the Reserve Bank of Australia are actively considering a range of measures to slow categories of borrowers, which some expect might be unveiled in a financial services review on Wednesday.

While both RBA governor Glenn Stevens and Treasurer Joe Hockey remain deeply reluctant to adopt such controls, the double bind of having to maintain record-low interest rates and keep downward pressure on the Australian dollar mean tightening monetary policy is not an immediate option.

House prices have surged almost 16 per cent over the past year and will gain by as much as 9 per cent over the next 12 months, says Louis Christopher, a managing director at SQM Research.

Mr Christopher, who correctly predicted last year's surge, said controls on mortgage lending were a logical and real possibility, and if introduced, would cut next year's price gains to as little as 2 per cent and no more than 5 per cent.

Mr Hockey, speaking during the lead-up to this weekend's Group of 20 finance minister's meeting in Cairns, said "obviously the Reserve Bank will look at some of the macroprudential" policy issues – or the use of restrictions on lending – could be an option to prevent the property market from becoming dangerously overvalued.

The RBA on Tuesday ramped up warnings about the potential for investors to get burnt when prices fall.

Amid speculation about shifting official attitudes to the state of the housing market, banks and leading economists cautioned that direct intervention may fail and create unintended consequences.

Australian Bankers' Association chief executive Stephen Münchenberg said the experience of New Zealand – which imposed controls last year that largely hit first-time buyers – should be a lesson. Mr Münchenberg said the RBA and Australian Prudential Regulation Authority were already keeping an "incredibly close" watch on lending standards and housing market developments, and that what is being contemplated was a form of mortgage rationing.

"The danger of these sorts of things is we see what's happening in housing is not a demand-driven thing, in the sense that we're not providing extra loans that are driving the market, we're just meeting demand in the market," he said. "The other consideration with this is there's a lot of talk of the fact that house prices are driven by investors so they won't necessarily be affected by any of these sorts of tools, because they're not necessarily getting funding from the bank."

Experts said one way regulators could lean on lending would be by forcing banks to hold more capital against the loans they provide, essentially making such lending more expensive. However, industry figures said such moves were complicated.

Bank of America Merrill Lynch economist Saul Eslake said examples from around the world, including from New Zealand and Canada, showed such efforts were not always successful. "My understanding is that the Reserve Bank thinks macroprudential is a 21st-century term for a mid-century form of intervention that doesn't work and distorts the financial system," Mr Eslake said.

"They don't like it philosophically… and the RBA and [deputy governor] Phil Lowe are very close to the Bank for International Settlements point of view that if you have a bubble you have to lift rates," Mr Eslake said.

The last time anything close to macroprudential tools were used was in 2003 when APRA responded to an explosion in investment buying by raising risk weights on housing loans and capital requirements for lenders' mortgage insurers.

Bill Evans, Westpac's chief economist, this week questioned whether the current market was anything as strong as the 2000 to 2003 boom, when growth in credit to investors peaked at 30 per cent and total housing credit hit 22 per cent a year. Today's annual credit growth for investors is running at 8.9 per cent, while total growth is 6.7 per cent.

Graham Wolfe, Housing Industry Association chief executive for industry policy, said, "if we start doing things to financial systems and access to borrowing on the basis of what might be perceived as a price problem in Sydney, how do you minimise the impact in Canberra, Hobart and other places? In some respects a macroprudential approach is a fairly blunt tool".

Mark Bayley, a credit strategist at Aquasia was struck by how the RBA had warmed to the idea. "At the end of the day you're trying to stop buyers being over-extended in maybe Sydney and Melbourne property market, and that is largely by investors rather than owner-occupiers. Equally, you don't want to stop first-home buyers from getting on to the property ladder, so how do you address that?"

Peter Jones, Master Builders Australia chief economist, said there was no case for restricting lending where there was no housing bubble. "One of the reasons why the RBA cut rates was to encourage new homebuilding. "A rising market encourages builders to be active. We have a housing deficit and we don't want to risk limiting the number of new homes being built."

with Rebecca Thistleton


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High-end landlords face tight returns

Larry Schlesinger
556 words
20 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Property A boom in investment is making life hard for those eager to rent out houses.

Developers Tony Farah and Mansoor Parker grew so tired of trying to find a tenant willing to pay the asking rent for their renovated sandstone residence in Sydney's Woollahra, they gave up and put it on the market.

The pair were asking $2500 to $2750 a week for a four-bedroom home on Queen Street, one of the city's most exclusive addresses. "The best offer we could get was $2300 per week, which we were not ­prepared to accept," Mr Farah told AFR Weekend.

"We could not get the return we wanted, so we decided to sell and invest the money elsewhere," he said.

The removal of the living away from home allowance (LAFHA) in late 2012 is partly to blame. This provided a tax-free benefit to foreign workers renting in Australia who also maintained a home abroad. In suburbs like Mosman in Sydney, Melbourne's Toorak and Peppermint Grove in Perth, rental falls kicked in soon after changes to the tax rules.

Mr Farah and Dr Parker paid $2.4 million in November last year for the Queen Street property and, after renovations, are asking $3.6 million. At an asking rent of $2500 a week, their gross return would have been just 3.6 per cent.

It is not an isolated case. Landlords in the best neighbourhoods in Sydney, Melbourne and Perth are being forced to accept lower asking rents to secure ­tenants – or are consider selling.

"In premium or high-priced suburbs, where there is a predominance of owner-occupiers over renters, even small changes in the level of rental demand or rental supply can quickly change the rental dynamic in these regions," said RP Data's head of research, Tim Lawless.

"With investment demand at record levels nationally, the natural ­consequence is an increase in rental supply," Mr Lawless said.

On the demand side, cheaper access to funding is pushing more executive renters into property ownership while a slowdown in overseas migration and interstate migration are also factors.

"Interest rates are so low that families that might have rented these properties are opting to buy instead," said Randall Kemp of Ray White Woollahra , which reduced rents on three eastern suburbs properties. "Investors are at the mercy of the market," he said.

Another Sydney agent, Paul Liu from Millennium Capital Realty, cut the rent on a four-bedroom Paddington terrace by $150 a week to $2700 following ­"market feedback".

Mr Liu said he had seen many other examples in the ­eastern suburbs where the rent had been reduced.

With rents falling and annual land tax bills as high as $60,000 for a property rented out at $4000 a week, rental yields can be as low as 2 per cent gross.

This may not be much of a concern at present for investors as prices rise. But it could become a factor when the boom ends, leaving some holding a ­low-yielding asset with little in the way of capital growth potential. "If investors have stretched themselves too thinly and not allowed for interest rates to rise, then there may be some fallout as those investors look to exit the housing ­market," Mr Lawless said.


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