The ‘Australian property bubble’ has been talked up a lot. But is the future fate of our real estate sector really as black and white as ‘what goes up, must come crashing back down’?
And what would the ramifications be if our housing markets were to falter significantly over the coming decade? What social, political and economic consequences could we expect, that the government will do everything in their power to avoid?
The fine line
As a collective, our nation is at a tipping point of sorts. We’re experiencing a moment in time in a way that many never predicted possible, within the same decade of the worst global financial crisis in modern history.
The rest of the developed world is still working its way out of the sludge, with some countries only just starting to make a bit of economic headway now and most still awaiting any form of meaningful resuscitation.
Meanwhile, Australia seemingly charged full steam ahead, propelled by government policy designed to stimulate our most relied on (and culturally loved) commodity, being residential property!
Any time the global economic footing starts to look a little dicey, real estate jumps to the top of political agendas. It’s the asset considered most reliable to underpin other industries.
Consider how dependent major infrastructure and transport, as well as the retail, manufacturing and services sectors are on the stability of bricks and mortar.
Not to mention our four-pillar financial services system.
Throughout the GFC, between December 2007 and March 2009, while the value of equities dropped by 24.7 per cent, the Australian housing market sneezed and lost a mere 4.8 per cent in average dwelling prices.
The bottom line is this…we all need homes and traditionally, Australians worship the ideal of home ownership and the deity of the monthly mortgage.
According to a report from the OECD, Australia’s rate of home ownership was second only to that of Spain and Luxembourg in the 1990s, at 71.4 per cent. This is a changing trend however, with the ABS reporting a home ownership rate of 69.4 per cent in 2007 and then 67 per cent in 2011.
More on that later…
Property’s underlying stability as an asset class makes it a consistently reliable investment vehicle and therefore, perfect for investors looking to achieve balanced cashflow and long-term growth through sensible diversification.
The housing market is both highly influential on and highly influenced by human behaviour. It also runs independently of, and in response to other commodities, with the latter trend most recently evident in the wake of Australia’s resources boom.
The resources boom is very revealing
Specks of dust in the outback became thriving towns almost overnight, built on the back of China’s sudden insatiable thirst for our natural resources.
Infrastructure and housing construction went into overdrive and some industries caught the wave in a big way. As the mining monsoon moved relentlessly throughout northern Queensland, the NT and WA, entire communities sprang up overnight.
It all happened very quickly. Which is always one of the big problems with a boom. Once it starts to move too quickly, leaving other industries floundering in its wake, things get riskier as the wave becomes more of a speculative thrill ride.
One of the issues with the sudden expansion of any specific sector, such as occurred in the early stages of the resources boom, is that all the markets involved are rarely (if ever) moving to the beat of the same drummer.
Rather, they’re each underpinned by very distinct economic, political, cultural and social fundamentals across different countries and different markets within those countries. As such, each has its own agenda that can be difficult to identify and will move of its own volition
Consider this with regard to the resources boom. Another good example is the property construction industry.
The catalyst for the resources boom was a rapid – and I mean breakneck type rapid – expansion of China’s emerging economy, as a kind of mass modernization, industrialization and urbanization process occurred simultaneously throughout once under-developed parts of Asia.
Suddenly every country was scrambling to feed a hungry China endless supplies of steel, coke and iron ore, and given our geographic closeness to the continent and the richness of our mineral reserves, a resource based relationship just made sense.
One of the issues with the resources boom is that it was unprecedented in many ways, not the least of which was that it was entirely driven by a new economic juggernaut that seemingly had a long way to come from the ‘dark ages’.
In the wake of this never before seen stimulus, a lot of commentators and analysts got excited, making sweeping predictions as to how long we could expect this golden age (or at least the shiny steel stage) of economic prosperity to endure.
At the time, our resources and real estate sectors were pretty much entirely responsible for Australia’s relatively cool cruise through the GFC and beyond.
Interestingly, while many commentators and analysts were predicting continued double digit growth for our resources sector well into the 2020s off the back of China’s economic boom, others were suggesting real estate would crash and burn.
Economists from abroad in particular, have been blustering about housing bubbles for years, claiming our buoyant property market was and still is growing at an unsustainable pace.
Recently we’ve also heard whispers that the resources sector is at risk of dying a natural death, as China’s rate of growth trickles down to a more realistic long-term trajectory.
Is this happening? Or is this as plausible as an impending burst of our so-called housing bubble?
Industry experts insist the resources boom is not over until the fat lady sings. And she ain’t sung just yet, according to chief economist of the federal Department of Industry and Science, Mark Cully.
He says while the resources boom peaked in 2011, related business spending peaked in the last quarter of 2012 at 19 per cent of gross domestic product.
We are now, according to Cully, in the early stages of the ‘production boom’. He says China was only the beginning, with other developing countries hot on their heels.
“Economic growth in the highly populated emerging economies of Asia will continue to be a defining theme of this century,” he says.
He claims that Asia’s per person consumption rate of energy rich resources currently lags developed nations by a large margin, meaning as they play catch up, the continent’s consumption will grow by volumes that will challenge the production capacity of richer nations, including Australia.
What’s this got to do with housing?
One of the repercussions of the resources boom and the government’s reliance on the mining sector to shelter Australia from more serious economic implications on the back of the GFC, is that many other sectors got left behind.
As money and energy was poured into mining, including a large chunk of construction and infrastructure dollars, others were left behind and really haven’t fared very well since. Think retail for instance.
In neglecting business investment throughout other sectors, Australian regulators have once again found themselves in an interesting position, with a heavy reliance on residential real estate to keep local money moving.
The Reserve Bank introduced a further interest rate cut this month, dropping the cash rate to a record shattering low of 2 per cent.
This was a virtual admission that the only way to boost business and consumer confidence and bring any type of balance back to inflation and employment rates is to keep puffing away on Australia’s alleged ‘property bubble’.
It’s common knowledge that this low rate environment is stimulating a large amount of investor spending across our major city housing markets; the only area of genuine stability in Australia’s otherwise uncertain economy right now.
And what choice do they have? Imagine the political bloodshed if the value of everyone’s homes suddenly dropped by thirty to fifty per cent, as suggested by US based economist Harry Dent?
The problem currently facing policymakers like the Reserve Bank and even different tiers of government, is that not only is all of this economic argie-bargie a little bit different and unusual, it’s also come at a time when our nation is in the midst of a significant social transition.
Interest rates might be trending low, but our aged population is growing fast, as the generational baton is passed down to baby boomer offspring, who clearly have different values and life objectives than their parents did ‘back in the day’.
What does the Great Australian Dream look like for X, Y & Z?
The way we live is changing. During the seventies and eighties, it was all about the baby boomers, as they drove an unprecedented level of urban sprawl in search of the ultimate suburban McMansion and weren’t particularly bothered by a commute into the office.
They were busy raising families after all and the requirement for room to run around in the great outdoors took precedence, as sprawling family homes quickly became shiny social status symbols.
Now, it’s less about size and more about location, as younger generations embrace the café culture and recognise that growing employment opportunities in and around our major city centres are more conveniently accessed from ‘on trend’ inner urban postcodes, than via congested major arterials.
Not to mention the fact that children aren’t as physically inclined to run around outside these days, as they are to pick up an iPad and live vicariously through a virtual world of their choosing.
The point is we’re marrying later in life, opting to follow upward career trajectories over commencing families and downsizing accommodation as our lives become progressively busier.
Less time for pottering around in the garden means low maintenance vertical landscaping and rooftop terraces built into medium to high density apartment designs are becoming more popular than suburban backyards.
The once upsizing baby boomers are also continuing to downsize, further increasing demand for accommodation that’s less about square feet and more about accessibility to lifestyle amenity and essential infrastructure.
February data from the Australian Bureau of Statistics indicates that building approvals for higher density homes, including apartments and townhouses, has surged by 36 per cent since the start of 2014, with approvals for traditional detached housing falling by 1 per cent over the same period.
Major demographic shifts are driving this emergent trend, including average household sizes that have shrunk from 4.5 in 1911 to 2.7 today.
More of us are choosing to move back into our major cities, which makes sense when you consider this is where most of Australia’s commerce diversity, job opportunities and well established transport, health and education infrastructure is located.
It’s difficult to say whether our fascination with inner city living will continue in the same manner, particularly given the much maligned affordability issues around places like inner city Sydney and Melbourne.
But while higher density living might be a relatively new trend in Australia, it does seem to be catching on fast, particularly if the latest high-rise apartment construction booms across Melbourne and Brisbane are any indicator.
Housing as a social commodity
Housing started out as a social status in Australia – with the long regarded Great Australian Dream perpetuated after the Depression as something for baby boomers to aspire to. In turn, this would help to stimulate economic recovery.
Housing has recently undergone a cultural transition, as the baby boomers pass the baton to their X and Y offspring and generational attitudes toward how and where we live start to shift.
Before this however, many baby boomers had already started to change perceptions of property from the ‘family’ nest in the ‘burbs, to a tradable commodity in their investment portfolio that could help fund impending retirement.
This is perhaps the biggest baby boomer legacy when it comes to our housing markets; by unlocking equity in the ‘family home’ to invest in further real estate assets, our relationship with bricks and mortar has indelibly altered.
Now property is well and truly about the money – the dollars and cents are prioritized over any sense of building the family ‘castle’.
You just need to look at the fact that last year’s borrowing data culminated with investor related property lending as a record 41 per cent portion of all loans in December.
Then there’s the swelling SMSF sector, where housing is being ever pushed as a potential diversification tool.
But has this tradability trend started another market shift? Housing is discussed more and more in light of affordability barriers and first homebuyer accessibility issues.
We’re hearing of inner ring suburbs where it’s far more affordable to rent than buy, with many people who want to live in these areas forced into the rental market.
A recent report from realestate.com.au found that in the likes of Melbourne’s Mount Waverley – a traditional family neighbourhood – the monthly mortgage repayment averages $4,717, whereas the average monthly rent is $1,571.
Buyer’s agent and TV presenter for Your Property Empire on Sky News Business Chris Gray, says this rental trend reflects a changing ‘Great Australian Dream’, as well as ongoing instability around employment and consumer confidence.
“More and more families that can’t afford to buy in the places they want are becoming more entrepreneurial and saying ‘maybe owning land isn’t the great Australian dream’,” says Gray.
He adds that in time of economic distress, renting can be the safer alternative, “If you’re getting bonuses and work is going well, you can rent somewhere luxurious, but if something happens, like your partner gets made redundant, you’re not locked into a mortgage you can’t pay.”
So has the tradability trend of bricks and mortar assets created an entire rental generation that will never own property?
Have we got to such a tipping point that unless you’re fortunate enough to currently hold equity in your own home or an investment, you may never realise the traditional ‘Great Australian Dream’?
And if so, are we at a stage where housing will revert to more of a social commodity? Will we be forced to explore more socially aware and equitable alternative pathways to home ownership?
Is it time to seriously consider how we can put housing back into the hands of the people, rather than a financial services system perched on four pillars?
These are questions current and future governments will need to explore in their future policymaking efforts, given that all the RBA’s rate cuts seem to be doing is further stimulating the trade of property as a commodity, rather than home ownership.
New trends emerging
The social implications of focusing on real estate for retirement wealth, as opposed to the basic need for human shelter, are already apparent when you consider that much of inner Sydney’s property sector is a no-go zone for anyone earning less than a six digit salary.
This type of dwelling value hike is simply unsustainable, because what happens to your service based industries if service industry employees on the wages of say teachers, nurses and police officers, can no longer afford to buy a house in those areas?
Sure, you’ll see a spike in the tenant pool – which is also great for property investors. But as investors know, there still needs to be balanced demand from both tenants and owner-occupiers to sustain long term market growth.
Local government authorities in NSW have responded to the inner urban affordability issue by relaxing regulations around things like granny flat construction in most municipalities.
But again, this begs the question – is it young first homebuyers who are benefiting, or equity laden baby boomers with existing property that they can leverage to achieve a nice hefty rent return from a backyard granny flat let?
A glimpse into the future…
While predicting the fate of our housing markets into the future is anything but easy, there are certainly key indicators to watch out for, which might give us greater insight into where our relationship with real estate is heading…
Firstly, there’s the generational shift of economic and social power from the baby boomers to their offspring.
But the question here is, how much of the changes around how and where we choose to live – in smaller dwellings closer to major CBDs – are a conscious choice and how much has been (and will be) thrust upon X, Y and Z children due to issues like housing affordability and an apparently widening wealth gap?
Is the turnaround in young people opting to rent an apartment, rather than buy a family home in their desired inner suburbs really a comment on lifestyle choices and café culture? Or is it a social comment? About the haves and ‘have nots’?
More young people favouring rental accommodation over home ownership means a growing tenant pool and increasing demand, particularly in ‘expensive’ inner city areas where acquiring bricks and mortar is increasingly challenging.
This growing wealth divide is effectively creating a social hierarchy, with less lower and middle income households seeing housing as a realistic ‘dream’ to aspire to and more high income earners using it as a tradable, tax effective commodity.
They can’t let it end
Until more light is shed on the fiscal fortunes of our world, and we see who prevails in a time of shifting political and economic power right across the globe, the Australian government will continue to support the housing sector as a priority commodity.
And if any major threat to derail the resources sector is perceived, it’s likely the government will dig their heels in to the property markets even more, as employment and investment relies increasingly on the latest residential construction boom and property related professional services.
Consider the rise in SMSF advisory services alone, with the ATO reporting that the number of self managed super funds has increased by 24 per cent over the last five years, to 534,000 and total assets of $557 billion.
That’s a lot of ‘bickies’, particularly when you consider that many funds are encouraging SMSFs to gear into residential real estate.
This SMSF phenomena signals substantial economic stimulus and investment in its own right and is another reason regulators can’t afford to let our interest in bricks and mortar decline.
Some have suggested the slowdown of China’s economic transition will trigger the bursting of Australia’s so called property bubble. Others still believe the current off the plan construction boom will be the nail in our proverbial coffin.
But when value declines in the vicinity of 30 to 40 per cent are said to be on the horizon for our housing markets, can you really take all this talk seriously?
When you consider that Australian real estate markets have never experienced any type of earth shattering nosedive since the inception of record keeping, it’s difficult to conceive of this type of crash actually eventuating.
And if the so-called ‘bubble’ were to burst, we’d have much bigger issues to worry about than our housing markets.
In Australia, a property market collapse of such magnitude would trigger political bloodshed and a general decay of our entire social order, because it would mean the ultimate collapse of the foundation our present day economy is built on – being residential property.
If the housing sector became too unstable, reflecting an unstable political and social landscape, and unattainable for anyone who doesn’t currently hold equity in property assets, then where does that leave us?
What happens to us as a society? What happens to us economically, with the certain collapse such a dramatic price correction would trigger in a banking sector so very reliant on its mortgage books?
Socially aware property markets
The government will do anything to prevent this type of disaster, including the potential for dramatic policy shifts that could reflect a new social equity based housing system, less reliant on public funding and more focused on private innovation and investment.
Perhaps we’ll see a growth in consortium type ownership structures, where people choose to bypass the banks in favour of pooling their own resources and eliminate the funding burden of a third party, constructing their own form of ‘community’ type housing.
Or perhaps the shifts will be of a more basic nature, as children and their parents are forced into inter-generational living arrangements of a more permanent nature.
One thing that’s certain is this unprecedented period in time for our property markets is permanently altering our perception of housing. And the ‘Great Australian Dream’ will never be the same again.