In a few days, Australians will take to the polls to decide on the fate of two men and their respective parties. During this election campaign we’ve heard a lot of rhetoric around different topics, but some commentators think our housing markets and more specifically, the affordability issue, should also be on the agenda.
The media has once again ignited the affordability debate and talk of an inevitable property bubble, with a recent surge in buying activity from investors in the Melbourne and Sydney markets, who have been enticed to get their cheque books out and take advantage of our current low interest rate environment.
So is there really a growing property bubble just waiting to burst depending on who takes the leadership reins come this weekend, and should our housing markets be more of a priority for our pollies?
It’s all a bit negative
A few academics and socio-economic types are once again vilifying negative gearing and the tax breaks that encourage people into property investment, suggesting the future government needs to take a long hard look at what some consider to be an outdated legislative loophole.
The big bug bare for the negative gearing naysayers, is that it sees the Australian taxpayer handing over billions of dollars every year to support a system that was meant to encourage the construction of new dwellings. Yet how many investors actually build something and add to our housing supply, as opposed to buying established?
According to recent Property Australia statistics, only around 8% of the money that goes into negative gearing is spent on new dwellings, meaning most of the big bucks are going into established property.
Leading on from this issues is the other bone of contention, that negative gearing means more competition in the marketplace for already limited stock as investors try to outdo first home buyers and upgraders, who are simply looking for an affordable roof over their heads.
Former chief economist for ANZ Saul Eslake recently suggested that, “An investor-driven recovery is much more likely to put upward pressure on prices and is less likely to induce new dwelling supply, which is the opposite of what the Reserve Bank wants and what the country needs.”
How much is too much?
So are property investors the villains, and are they going to be solely responsible for the collapse of our major capital city housing markets if they keep snapping up stock?
Well there is a lot of talk that would suggest exactly that in the newspapers of late, but when we drill down into the current state of play, what can we really expect from real estate after the upcoming election?
There’s no denying that housing affordability is an ongoing issue for a large portion of the Australian population, namely those trying to get their foot on the property ladder.
In fact our national household debt is currently sitting at 150% of annual income, second only to the Netherlands on the global stage for developed countries. And yes, you guessed it, most of it is mortgage related.
This is largely due to the property boom we saw in the early “noughties” when just about every man and his dog decided to start a property portfolio and prices skyrocketed within a matter of one to two years.
The problem, experts say, is that unlike the US and UK housing markets where similar activity occurred, when the GFC hit Australian property came out relatively unscathed instead of suffering the same significant correction in values that we saw overseas.
In fact dwelling prices surged again in 2010 as the Reserve Bank moved to cut interest rates and the government introduced more first homebuyer incentives to encourage activity.
For the past couple of years, prices have stalled in most capital cities and in some areas we have witnessed a minor contraction in prices. But guess what? Prices are once again heading onwards and upwards, meaning we are yet to see any significant correction to bring the affordability equation back into balance. Great for investors, but not so good for those first timers.
Supply and demand
The same experts who argue that a lack of any real correction in prices is forcing many would-be buyers out of the market, are concerned that those middle income earners who once singlehandedly supported the construction of new dwellings on our suburban fringes have tightened the purse strings, as we all wait and see what economic path the new government will lead us down.
This has weakened new dwelling construction and once again ignited the good old supply and demand debate.
As discussed in our article regarding auction clearance rates, established inner city properties are once again finding favour with cashed up investors. A couple of weeks ago Melbourne outgunned other cities to record a massive 82% clearance for auction stock, compared to a dismal 57% the same time last year.
But those in the know say this is not the first sign of an impending boom, suggesting it is far too soon to start in with such speculation.
Real Estate Institute of Victoria chief Enzo Raimondo said with just over 650 auctions the high clearance rate was a result of latent demand.
“We are definitely not in a boom,” he said.
”We are still coming off a relatively low level of transactions. This high clearance rate is a reflection of an increase in latent demand after a couple or so years of below-average transactions.”
Mr Raimondo said that whilst Melbourne’s winter market has been quite buoyant, “it is too early to start declaring booms based on one week of very high clearance rates.”
But one thing the experts agree on is that we are again witnessing a shift in the cycle toward the recovery phase, after coming away from the correction phase relatively unscathed, suggesting that the spring outlook for real estate in Melbourne and Sydney hasn’t been this positive since 2009.
The latest Australian Bureau of Statistics showed Melbourne’s house price index increased by 2.4 per cent over the June quarter.
Investor revival
This glowing forecast is being buoyed by investor activity in the market and in particular, the many new self managed super fund proponents who are dominating the house price revival.
In Sydney, anything with a price tag of less than $1 million is being snapped up quickly, with enthusiastic bidders competing to push up winning auction prices beyond all expectations.
And it is this type of heightened activity that some commentators believe will see the Reserve Bank dealing with serious policy headaches if investment buying continues to surge into 2014.
Analysts estimate that prices across our capital cities have increased by as much as 2% over the winter months and believe if the strong demand from investors continues as the weather warms up, it won’t be long until we see house values pass the peaks reached in early 2011.
Most of the interest is around established, inner city apartment markets in Melbourne and Sydney and for investors it seems, this type of property will continue to be a no-brainer to add to the portfolio, as demand shows no signs of slowing in the near future.
Will it burst?
Many are questioning whether this recent activity and our housing markets in general are sustainable. What does the future hold and will it all collapse depending on who gets in this weekend?
Well, I for one am confident that we are in an enviable position when it comes to the general state of play for our economy and it is this overall fiscal wellbeing that will continue to see Australian real estate be a fantastic vehicle for long term wealth creation.
Our economy is chugging along nicely and continues to be the envy of most developed nations due to its self-sustaining good health, our population continues to grow, thereby ensuring demand for housing remains strong and most of us are in pretty good financial health after resuming the savings habits of our parents’ generations in the past couple of years.
Unlike some of our less fortunate overseas counterparts we still have relatively low unemployment and inflation levels, leaving the Reserve Bank with room to breathe in terms of our current low interest rate environment and it’s unlikely that we will see a significant increase in the official cash rate any time soon.
For investors, housing in and around our capital cities is still a strong and worthy asset class…and you can take that to the bank!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).