Welcome to Safe as Houses, a series delving into a topic close to the heart of many Australians – property. This is not a series on where the market might be heading. Instead we aim to explore how we view property and float some alternative ideas.
Phillip Dare from Deakin University argues there are myriad reasons why Australia’s property prices remain high and that our fundamentals can sustain them.
Is it axiomatic, if there is property price bubble, that the bubble bursts?
Really, the question is not whether Australia have a housing price bubble, but what fundamentals are in place that might sustain our housing prices.
Australians and the Australian media seem to have an intertwined fascination with property values and price bubbles - arguably one feeds off the other. Much has been written on Australian property values recently from different perspectives, with the most extreme a claim by visiting US forecaster Harry Dent that Australian property prices “will drop 50% maybe”. In the same article chief economist at AMP Capital Investors Shane Oliver is quoted as saying Australian property is “way overvalued” by as much as “25%”. The Economist magazine has also recently claimed Australian house prices could “plunge by as much as 25% as a result of European defaults”.
It is not the purview of this article to debunk these all-encompassing claim; but I do believe Dent’s claim of a 50% price drop is a gross generalisation.
Firstly, a little perspective: Australia is a big country, without shared borders with neighbouring economic powerhouses - or economic basket cases that might impact our population bases or locational living choices.
Our population flows remain largely static, but we basically follow jobs, usually Victoria to Queensland and back in the other direction. We are similar in area to continental Europe and the United States, but with a population barely 10% of those geopolitical entities. The majority of Australians live within the major urban hubs of each state, with most living along the eastern seaboard.
Contrary to the economic woes being experienced by Europe and even the US, our economy is chugging along nicely, keeping us out of recession with a tight fiscal regime, low public debt and a central bank with a flexible monetary policy that concentrates on taming inflation and achieving low rates of unemployment.
So it could be argued that compared to markets such as the UK, US and Ireland where prices have been in free-fall, Australian property prices may well look as if being overpriced simply because they have not receded in such precipitous levels.
These falls are inextricably linked to the catastrophic failures in the North Atlantic and European banking systems, while Australia has a robust banking system with strong prudential regulation. Thanks to this, we have not been burdened with a US-style sub-prime property disaster which figured so prominently in the 2008 global financial crisis.
But is this all that has kept Australian property prices from plummeting? Consider the following other factors supporting property prices:
- Negative gearing. The tax system favours investor borrowers to write-off interest against personal income
- 50% reduction in CGT payable. Property kept for one year attracts 50% less tax then when the system was first introduced.
- Profit on PPR non-taxable. Australians don’t pay tax on profit realised from when their principal place of residence is sold.
- No estate duties/death taxes. Death duties were abolished decades ago, with the result that significant amounts of value are transferred inter-generationally without attracting any tax.
- Land banking. Major builders and developers have bought large tracts of development land and holding for controlled release.
- Land Zoning. Rezoning of undeveloped land to development potential is costly, slow and at times politically motivated.
- Falling stock levels. Not enough new housing stock is being build to sate demand (such as new household formations and immigration)
- Supporting housing values as an election strategy, such as the first home owner scheme. Propping up hose prices was strategically used by previous governments for electoral purposes.
- Changes in foreign investment rules has seen prices in some areas being sustained.
- Speculative wealth generation schemes. Regular spruiking in the daily newspapers of get-rich fast with property seminars/schemes.
- Weakening of Loan to Valuation Ratios (LVRs) from 80% to 95% and 100%. Banking deregulation has seen housing finance freed from the shackles and once onerous (and at times ridiculous) lending guidelines.
Finally, just a couple of observations from my real estate selling days on these other points.
When I started selling real estate in the northern suburbs of Melbourne in 1977 housing finance was hard to come by, unless buyers had established banking histories maintained over long periods of time.
Banks would not approve a loan under 30 days, or settle in under 60 days – preferring 90 days - nor would they consider an LVR greater than 75% to 80%, with borrowers requiring proof of savings for the remainder including stamp duty and legal fees (though these fees could be saved in the 90-day settlement period).
Only a third of a wife’s income would be considered in loan calculations and income from working a second job was not considered at all, and a single employed woman would struggle to get finance at all. How things have since changed.
In 1984 Prime Minister Bob Hawke and Treasurer Paul Keating introduced a first homeownership scheme: a maximum of about $3500 – half as a lump sum and half paid over a number of months. This only fed into the bottom line on house prices and did nothing to reduce the amount of borrowings for first home buyers. Much the same happened in 2001 when John Howard and Peter Costello introduced their $25,000 first homeowner scheme; that is, housing prices were supported with these grants, with an eye on the politics, but dressed up as economic policy.
My final anecdote from my real estate days relates to bricks and mortar. While share ownership has increased with individual investors in recent years in Australia, my experience with mums-and-dad investors is they like the touchy-feely nature of residential real estate as investment vehicles.
They can drive by and keep an eye on the tenant and they like the very tangible aspect of the bricks and mortar, as opposed to the share certificate that sits hidden away in a draw somewhere. And perhaps this emotional connection provides the greatest clue.
This is the seventh article in the Safe as Houses series. Read the other instalments here:
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Part one: Why falling house prices aren’t the calamity the media would have you believe
- Part two: Debunking the myths peddled by Australia’s property bubble “deniers”
- Part three: As the Occupy movement targets housing, what can we learn here?
- Part four: A house for half the cost? Here’s how
- Part five: It’s time for a fundamental rethink of how we buy and sell property
- Part six: What has happened to the great Aussie backyard?