Add Category
Updated
OK, I apologise in advance for yet another column on the property market. There is something, however, worth highlighting.
We can all wax lyrical at the pub or at a BBQ about whether house prices are going to keep rising, or if we're about to witness a historic crash, but the reality is no-one really knows for sure.
Millennials trying to get into the housing market want prices — at the very least — to stop rising. While property investors after a capital gain want prices to keep rising.
So, who's going to win out at the end of the day? First home buyers or property investors?
You could argue the damage has already been done. Anecdotally many millennials have given up on the idea of home ownership.
Is there any hope at all, though? Two important organisations say there is hope, while another international group says housing affordability in Australia is set to remain an issue.
So, which organisations are saying these things, and why?
Come with me and we'll take a closer look.
UBS makes a big call
Recently global investment bank UBS made a rather big call. It said the property market had topped or peaked. Does that mean prices are going to come crashing down? Not so fast.
The investment bank is simply saying the amount of construction activity taking place around some Australian capital cities has been unprecedented, and it's now likely to wind down.
There are currently 220,000 dwellings under construction. This is forecast to fall to 200,000 this year, and 180,000 in 2018. So, there simply isn't the pent-up demand for new homes that there once was.
If you add to that already rising commercial interest rates, and home buying sentiment collapsing to its lowest level in 44 years — according to Westpac's March measure of consumer sentiment — you have the ingredients for what the bank calls a "moderation" in house price growth.
Note it's not calling a crash in prices. In fact, this year the bank still expects prices to rise, on average, 7 per cent.
So then why not the property market Armageddon millennials have been hoping for? Simple really. There's no indication the Reserve Bank is going to raise interest rates this year.
The Reserve Bank holding interest rates at record lows acts as a lovely little cushion for property investors.
Boutique Fund agrees
Roger Montgomery manages more than a $1 billion worth of client funds, under the investment firm, Montgomery Investment.
Montgomery Investment is not a "UBS" but it's just as 'invested' in building wealth for its clients.
He agreed with UBS that the market's growth rate had topped, but he went even further, suggesting prices would come down.
He noted some property developers in Queensland were already employing interesting strategies to make sure off-the-plan prices remained steady.
What does that mean? Well, simply that sellers are offering all sorts of lovely gifts like overseas holidays, and brand-spanking new cars to buyers, to keep the prices of the properties from falling.
"Here," the seller would say, "have this brand new car, and in return, you pay the advertised price for the property (rather than offering a discount on the price listed)."
That's partly because in Brisbane, at least, supply is starting to catch up with demand, and it's putting downward pressure on prices.
But Mr Montgomery also pointed to rising debt levels. We already know household debt levels are worryingly high at present — the Reserve Bank governor recently pointed out households were carrying "more debt than ever before".
Mr Montgomery argued there was a limit to how much Australians could borrow, and we were nearing that point now. Ultimately, if demand for loans slows down prices will stagnate and fall.
APRA has a say
So, what is the banking regulator's thinking on all this?
Well, the Committee for Economic Development of Australia set up a lunch gathering in the Sydney CBD to find out. APRA chairman Wayne Byres came to speak.
He made the point that prices would come down during the course of a natural economic cycle.
That means, ultimately, whether it's rising interest rates, or unemployment ratcheting up, or economic growth slowing, ultimately prices will be negatively affected and the market will ease off.
Not a lot of comfort in that, is there? Still, it's not saying it's going to get worse. That was left for Moody's!
Moody's has a different view
Believe it or not, international credit rating firm Moody's told me last week it expected housing affordability on Australia's east coast to worsen this year.
Why? A few things. While the ratings agency expects lower interest rates and rising incomes (albeit very modestly) are helping young home owners finance loans, rising house prices are still preventing many millennials from getting into the market.
The ratings agency expects low interest rates will further fuel the market this year, making housing even more expensive, leading to a worsening of the housing affordability crisis.
It conceded efforts by the regulator to curb investor lending would help, but not materially so for millennials this year.
Interest rates
Data from Digital Finance Analytics show there are enough people on the edge of their budget that if the Reserve Bank were to raise interest rates by 1 to 2 per cent, the property market, especially on the east coast, would correct as borrowers default on their repayments.
The reality is, though, without a sudden, dramatic spike in inflation, official rate rises of that magnitude are unlikely to happen.
Some economists are even forecasting the Reserve Bank may cut interest rates again. TD Securities' Annette Beacher is one such economist.
It's a fairly safe bet to assume the Reserve Bank isn't going to move much, up or down, in the next 12 months. Why? Well, the statements accompanying the past three interest rate decisions by the Reserve Bank have given no real bias, one way or the other, as to the direction of future interest rates.
Commercial rates, however, are set to creep higher as banks' funding costs rise. How high can they go? Moody's forecasts they could go as high as 0.5 per cent or 50 basis points.
Would that help first home buyers? A little, maybe.
Damage has been done
There's seemingly an endless line-up of people who believe they have the solutions to Australia's housing affordability crisis.
The reality is, though, much of the damage has already been done. Absent a major house price crash, which would cause its own damage, it looks unlikely 2017 will be the year for first home buyers.
Maybe next year? Even by then many first home buyers will have dropped at least another $27,000 on renting — based on 2016 median Sydney rent data from Domain Group.
No doubt investors and first home buyers will be listening to every word the Federal Treasurer has to say next Tuesday evening when he delivers the budget.
You can't blame younger Australians for being a little cynical though.
In part, that's because two suggestions that have already been flagged by members of the Coalition including: allowing first home buyers to dip into their superannuation; and increasing the first-home buyers grant for new homes, have been criticised by independent economist Saul Eslake as likely to only put upwards pressure on prices.
Investors are currently enjoying tax breaks for speculating in the property market.
Earlier this week Scott Morrison was asked during a press conference outside Treasury if first home buyers could be the beneficiaries of tax breaks.
He simply responded by saying that he very much had struggling families in mind in preparing this year's budget.
Topics: business-economics-and-finance, industry, housing-industry, government-and-politics, housing, australia
First posted