tag:theconversation.com,2011:/us/topics/property-bubble-7378/articlesProperty bubble – The Conversation2018-05-30T20:08:29Ztag:theconversation.com,2011:article/974602018-05-30T20:08:29Z2018-05-30T20:08:29ZAustralia’s foreign real estate investment boom looks to be over. Here are five things we learned<p>Australia’s Foreign Investment Review Board (FIRB) reported this week that foreign residential real estate approvals dropped significantly in the 2016-17 period.</p>
<p>Whereas 2015-16 saw 40,149 approvals granted, totalling A$72.4 billion, the figure for the following year was just 13,198 approvals, totalling A$25.2 billion. On these numbers, the foreign property investment boom looks to be over.</p>
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<a href="https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=370&fit=crop&dpr=1 600w, https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=370&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=370&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=465&fit=crop&dpr=1 754w, https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=465&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/220901/original/file-20180530-120505-1nrqx6t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=465&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">FIRB</span></span>
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<p>This is bad news for the property and financial industries, who are already feeling the pressure of weak household income growth, tighter lending restrictions on local borrowers, and a slowing in housing market activity in key Australian cities.</p>
<p>FIRB suggests that declining demand from China is a factor in the overall decline in overseas approvals. Chinese demand may have been weakened by a range of factors, including the new FIRB application fees, <a href="https://www.businessinsider.com.au/australian-house-price-growth-looks-set-to-slow-as-foreign-demand-drys-up-2017-7">Chinese overseas direct investment capital controls</a>, and the changing global economy.</p>
<p>But if the cycle is moving from boom towards bust, we have learned several things along the way.</p>
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Read more:
<a href="https://theconversation.com/essays-on-air-australias-property-boom-and-bust-cycle-stretches-back-to-colonial-days-96415">Essays On Air: Australia's property boom and bust cycle stretches back to colonial days</a>
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<h2>Lesson 1: We still need more data</h2>
<p>In 2014 the House of Representatives Standing Committee on Economics undertook an <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Foreign_investment_in_real_estate/Tabled_Reports">inquiry</a> into foreign investment in residential real estate. It acknowledged the growing public disquiet about the level of this foreign investment, adding that:</p>
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<p>…there is no accurate or timely data that tracks foreign investment in residential real estate. No one really knows how much foreign investment there is in residential real estate, nor where that investment comes from.</p>
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<p>Four years on, FIRB is still flagging the limitations of data collection and analysis. Without fine-grained data, it’s hard to forecast how much, if at all, the injection of foreign capital can push up local house prices.</p>
<p>The latest figures come with a caveat. The approvals data represent potential investment, rather than actual investment. There are key differences between the two. Potential investors might, for example, seek approval for multiple properties while only intending to buy one of them.</p>
<p>We need the government to collect <a href="https://dallasrogersblog.files.wordpress.com/2016/03/rogers-dufty-jones-2015-21st-century-australian-housing_new-frontiers-in-the-asia-pacific_-toc.pdf">more extensive and detailed data</a> on individual foreign real estate investment, and make it publicly available. This needs to cover more than approvals data at the city level, but data on investment levels in <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1745-5871.12280">neighbourhoods or even individual</a> housing developments. </p>
<h2>Lesson 2: People on the property ladder are less hostile to foreign buyers</h2>
<p><a href="https://www.tandfonline.com/doi/full/10.1080/00049182.2017.1317050">Data from Sydney</a> reveals widespread concern about foreign investment. Almost 56% of Sydneysiders believed foreign investors should not be allowed to buy residential real estate in Sydney. Only 17% of respondents in our study thought the government’s regulation of foreign housing investment was effective.</p>
<p>Just over half of Sydneysiders say they would not want Chinese investors buying properties in their suburb. And 78% thought foreign investment was driving up housing prices in greater Sydney.</p>
<p>Yet those who have <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1745-5871.12280">real estate investments</a> were more likely to support foreign investment than those who don’t. This suggests that Sydneysiders with equity in the housing market, such as homeowners or investors, might view foreign buyers pushing up housing values as positive. And they might fear that the new decline in foreign investment might depress their assets.</p>
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<strong>
Read more:
<a href="https://theconversation.com/sydneysiders-blame-foreign-investors-for-high-housing-prices-survey-77959">Sydneysiders blame foreign investors for high housing prices – survey</a>
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<h2>Lesson 3: Housing is built with specific buyers in mind</h2>
<p>When Chinese real estate investment started to rise significantly in 2013-14, property developers scrambled to model this new emerging market. The real estate media rushed to map out where Chinese investors were keenest to buy, and how best to design and market property developments to this new foreign client base.</p>
<p>In early 2012, Larry Schlesinger <a href="https://www.propertyobserver.com.au/finding/residential-investment/15696-feng-shui-will-influence-the-direction-of-australias-property-markets-bernard-salt.html">quoted the demographer Bernard Salt</a> as saying: </p>
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<p>The growing numbers of Chinese and Indian migrants in Australia means property investors need to consider the cultural sensitivity of the residential property they purchase to ensure they maximise the resell value.</p>
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<p>Between 2013 and 2017, property developers, both local and foreign, regularly contacted me to ask if I had any up-to-date research on foreign investors’ consumer preferences and market forecasts. I did not. But there was no shortage of advice out there, covering everything from feng shui-informed housing design to the key needs of foreign university students.</p>
<p>Some global real estate agents suggested to their clients that they could buy an Australian home to accommodate their child while they were studying at an Australian university, and then use the capital gain from the property sale to pay back the tuition fees. </p>
<p>Many property developers were formulating medium- to long-term development pipelines that included the foreign capital and consumer preferences of foreign investors. It is unclear, now, whether much of this housing stock will ever be built. If it is, will it suit the changing future needs of our cities, or address our ongoing housing affordability problems? </p>
<p>In other words, what sorts of properties will be left as the legacy of the recent foreign real estate investment mania?</p>
<h2>Lesson 4: Racialised housing debates are simplistic and harmful</h2>
<p>We need to take care not to conflate domestic Chinese-Australian buyers with international Chinese investors. Much of the <a href="https://www.news.com.au/finance/real-estate/brisbane-qld/foreign-investment-in-australias-housing-market-collapses-firb/news-story/1c312a82d39e892d03c3efd556e3c08f">media coverage</a> of the new report features stereotyped images of Asian families buying an Australian home. But given the foreign investment rules and logistics involved, these pictures are far more likely to depict Chinese-Australians than foreigners.</p>
<p>Understanding the long-term migration and education plans of the investors is important too. Different investor groups will interact with the city in different ways, and their impact on society can be vastly different too. For example, super-rich absentee investors will have a different impact on neighbourhood life compared with that of middle-class migrants or international students.</p>
<p>If the federal government wants to court foreign investment, then better education about the possible risks and benefits of individual foreign real estate investment is needed. <a href="https://www.tandfonline.com/doi/full/10.1080/00049182.2017.1317050">Our research</a> suggests that the government’s pro-foreign investment stance must be accompanied with strategies to protect intercultural community relations in Australia.</p>
<h2>Lesson 5: The boom-bubble-bust cycle goes on</h2>
<p>In 1982, Maurice Daly wrote in his classic book <a href="https://www.amazon.com/Sydney-Boom-Bust-Property-1850-1981/dp/0868611565">Sydney Boom, Sydney Bust</a> that the:</p>
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<p>…fluctuation in property prices recorded for Sydney have been caused by the forces linking the city to the Australian economy and to the remainder of the world.</p>
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<p>Daly charted the influx of foreign people and capital into Sydney between 1850 until 1981, as wealth was channelled through the financial services sector and into urban real estate. Along the way, he observed that one “group to attract the abuse of the general population were the Chinese”.</p>
<p>Domestic and foreign real estate investment have long been connected to the financial services industries, and the built environment is central to creating and storing surplus capital. Australian cities continue to be heavily influenced by global money today.</p>
<p>A key lesson is that domestic and foreign housing booms, bubbles and busts are thus better understood as cycles within our housing and financial system, rather than as a set of short-term ruptures to this system. </p>
<p>We need to think about the collective impacts of domestic and foreign real estate investment over the long-term in our cities if we are serious about addressing housing inequality.</p><img src="https://counter.theconversation.com/content/97460/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dallas Rogers recently received funding from The Henry Halloran Trust, Australian Housing and Urban Research Institute (AHURI), Urban Growth NSW, Landcom, University of Sydney, Western Sydney University, and Community Broadcasting Association of Australia (CBAA).</span></em></p>Foreign investment in Australian property has plummeted by more than half, signalling an apparent end to the China-fuelled real estate frenzy. Along the way we learned some useful lessons about boom and bust.Dallas Rogers, Program Director, Master of Urbanism. School of Architecture, Design and Planning, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/670562016-10-16T19:06:28Z2016-10-16T19:06:28ZThe risks in Australia’s housing market shouldn’t be downplayed<p>The Reserve Bank of Australia (RBA) sees housing finance as a smaller danger than in the past, judging by its latest <a href="http://www.rba.gov.au/publications/fsr/2016/oct/">Financial Stability Review</a>, but we aren’t back to happy days just yet. A number of economic indicators still show there’s cause for concern in the property market. </p>
<p>The review does acknowledge some problems in the apartment markets in Brisbane and Melbourne, but it sees major threats to the resilience of the Australian financial system overseas: examples are the rising debt levels in China, the low performance of European banks, the Brexit, and the impact of low milk prices on New Zealand farmers (with a possible feedback effect to Australian banks).</p>
<p>The review highlights Australian banks’ stronger capital buffers and compliance with toughened prudential standards from the Australian Prudential Regulation Authority (APRA). Because house price growth has moderated and mortgage borrowers are substantially ahead of their scheduled payments, the risk from mortgage lending is somewhat lower. </p>
<p>However, it’s surprising that the review doesn’t stress some aspects that are obvious.</p>
<h2>What the RBA didn’t say</h2>
<p>Although Australia hasn’t experienced the type of shock to the economy the United States did, due to the sub-prime mortgage crisis, there is substantial risk due to a large portion of mortgage loans being subject to interest-only periods of typically five years. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2781359">Research for US home equity lines of credit</a> finds the risk that people won’t be able to pay mortgage expenses increases substantially towards the end of flexible repayment terms, in particular during times of increasing lending standards.</p>
<p>Mortgage borrowers often have the expectation that they are able to refinance at the end of the interest-only term into a similar loan with a new interest-only period. However, this rollover is not possible in economic downturns when banks suddenly tighten their lending standards and and are likely to cut refinancing. </p>
<p>The RBA’s review shows that Australian banks have tightened their lending standards and have room for further tightening, but currently we do not see larger impacts on delinquencies. Current rates of people not being able to make their mortgage payments are low but may quickly change in an economic downturn. It’s also difficult to forecast whether this will change judging by medium- to long-term trends. </p>
<p>There might be other reasons why people might struggle to make their mortgage repayments. We have seen central banks following the European and US central banks in lowering interest rates and markets are expecting a reversal in the future. As most mortgage loans in Australia are at a floating rate this would imply that the largest relative payment increase will be to interest-only loans, should the RBA follow these leads. </p>
<p>In addition to this, Australia continues to enjoy low unemployment rates. This may change and lower the average income levels, putting more stress on people’s ability to pay mortgage loans.</p>
<h2>Other risk factors at play in the property market</h2>
<p><a href="http://www.afr.com/real-estate/canberra-house-price-growth-outpaces-sydney-melbourne-in-september-20150228-13rrbm">House prices continue to grow at annualised rates of approximately 10.2% and 9% in the largest cities Sydney and Melbourne</a>. Housing price growth has slowed down, but prices are still increasing and new mortgages are underwritten based on house prices that are disengaged with national income levels. The growth rate continues to be above the historic averages and other developed economies that have experienced similar rate cuts.</p>
<p>Banks have relatively reduced interest only loans and high loan to valuation ratio (LVR) style loans. However, it is also clear that origins of high risk mortgages continue at relative high levels. </p>
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<img alt="" src="https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/141753/original/image-20161014-30255-hmsy1f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Australian Prudential Regulation, new mortgage loans for ADIs with greater than $1 bn of term loans.</span>
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<p>The fraction of interest-only loans has come down from 44% in December 2014 to 36% in March 2016. While this is a noticable decrease, more than a third of loans continue to be interest-only.</p>
<p>The RBA’s review argues that Australian mortgage borrowers are on average approximately two and a half years ahead of the scheduled payments. This argument does not take interest-only loans into account. </p>
<p>Prepayments are generally made into offset accounts which include a redraw facility and are generally used when new properties are used. In other words, these prepayments may be quickly depleted to increase leverage but also in situations when borrowers have difficulties making payments. </p>
<h2>Dominance of housing loans on bank books</h2>
<p>The largest problem of Australian banks remains the dominance of housing loans on bank books. Approximately 60% of total loans are for residential properties, and 36% of loans are business loans dominated by commercial real estate loans and loans to small and medium sized companies, which are often backed by the real estate of the business owner. </p>
<p>This over-concentration is the Achilles’ heel of the Australian banking system and hard to protect against. It’s a reflection of demand for bank loans in Australia and alternatives to bank lending available to large firms. </p>
<p>International financial markets may provide a solution, allowing banks to diversify and risk transfer via asset risk swaps. <a href="https://theconversation.com/australian-banks-are-too-exposed-to-mortgages-but-what-if-the-world-was-flat-31000">Unfortunately, these solutions have not been explored much in the past </a>. The reluctance to do this is mostly based on the poor performance of overseas assets during the global financial crisis.</p>
<p>The RBA’s review further discusses the achievements under <a href="https://www.bis.org/bcbs/">the Basel Committee on Banking Supervision</a> to limit the systemic risk of financial institutions via increased regulation and higher capital buffers. The review further notes that no Australian bank is of global systemic importance. </p>
<p>However this is not a reason for complacency as the failure of one of the largest Australian banks would lead to a great shock to the Australian economy. A further concentration in the banking industry would make bank products more expensive than they would be in a competitive system.</p><img src="https://counter.theconversation.com/content/67056/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are still a number of factors pointing to the risk in Australia’s housing market that the Reserve Bank hasn’t noted in its latest risk analysis.Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/601312016-09-22T14:36:11Z2016-09-22T14:36:11ZThe UK is sinking deeper into property inequality – here’s why<figure><img src="https://images.theconversation.com/files/138816/original/image-20160922-22537-1hlvs5f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/surreykraut/769824705/sizes/l">surreykraut/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>Outrage has been mounting over <a href="https://theconversation.com/six-things-a-tax-haven-expert-learned-from-the-panama-papers-57308">the untaxed incomes</a> of the global elite, foreign <a href="https://theconversation.com/investment-in-urban-land-is-on-the-rise-we-need-to-know-who-owns-our-cities-63485">ownership of urban land</a> and <a href="https://www.theguardian.com/money/2016/may/05/rents-continue-rise-uk-london">soaring rents</a> in the private rental sector. Much of this boils down to two key matters: who owns property, and how they are treated. </p>
<p>The UK, it seems, is a place that makes it very easy for individuals to generate a great deal of wealth from property, with little concern for social justice or the provision of affordable housing.</p>
<p>But this problem is not uniquely British. Across the world – and particularly in many developing countries experiencing fast economic growth – capital is flowing rapidly into real estate. And increasingly, governments are waking up to the need to effectively capture some value from these investments, for the public good. Yet, as <a href="http://speri.dept.shef.ac.uk/wp-content/uploads/2016/09/Global-Brief-4-Property-Taxation-and-Economic-Development-Rwanda-Ethiopia.pdf">my research</a> shows, this can be extremely difficult to achieve due to complex historical legacies around land, as well as deeply entrenched vested interests.</p>
<p>Consultants from the UK and other rich countries are often the first on hand to provide advice and propose systems of property and land taxation, to enable governments in poorer countries to bring in revenues that reflect the real value of developments. Meanwhile, ironically, the UK’s primary property tax – a monthly “council tax” paid by residents to local authorities – remains <a href="https://theconversation.com/hard-evidence-five-maps-that-prove-its-time-to-reform-council-tax-in-england-53991">scandalously out of line</a> with modern property values. </p>
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<img alt="" src="https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=424&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=424&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=424&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=533&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=533&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138771/original/image-20160922-22527-9s3nm6.gif?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=533&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">House prices are rising – but council tax isn’t (London, 1995 to 2015).</span>
<span class="attribution"><a class="source" href="http://www.statsmapsnpix.com/">Alasdair Rae, University of Sheffield</a></span>
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<p>Of course, property inequality looks very different in British cities than it does in cities in developing countries. In many African cities, <a href="http://www.un.org/africarenewal/magazine/april-2012/towards-african-cities-without-slums">a clear majority of people live in slum conditions</a>, the like of which are (thankfully) consigned to the past in Britain. Yet the property markets are being transformed by very similar processes.</p>
<p>International capital flows are central in both cases: wealthier migrants from low-income countries now based in the US and Europe often <a href="http://nazret.com/blog/index.php/ethiopia-how-buying-a-real-estate-in-addis-can-be-a-nightmare-you-could-do-without?blog=15">channel their earnings into untaxed property back home</a>, while the UK solicits <a href="http://www.homesandproperty.co.uk/luxury/property/brexit-latest-boris-johnsons-mayorship-saw-overseas-property-investment-soar-and-now-the-capital-is-a102321.html">property investments from footloose international elites</a> Whatever the context, the outcome is largely the same: luxury properties abound, often <a href="https://www.theguardian.com/uk-news/2015/jan/25/its-like-a-ghost-town-lights-go-out-as-foreign-owners-desert-london-homes">unoccupied</a> and almost always undertaxed, while governments fail to provide proper incentives for developers to invest in cheap housing.</p>
<p>These issues are particularly concerning in poorer countries, not only because of the scale of inequalities and gaping absences of affordable housing, but also because investments in luxury properties divert funds from other sectors, which urgently need capital to make the nations’ economies more productive.</p>
<h2>What to tax?</h2>
<p>It seems clear that governments of both poor and rich countries need to find ways to reduce the appeal of massive investments in high-end property, and to spend more on housing and services for low-income groups. The question is: how? </p>
<p>Stamp duty is obviously one mechanism for capturing some of the value of property, but as this is a one-off payment it deals with only part of the problem. Updating the council tax is an important step in the UK – though this will be very politically difficult.</p>
<p>More fundamentally, however, simply updating council tax bands sidesteps major questions about exactly what we should be taxing when we tax property. Given the state of the UK property market, a proper debate is needed on these issues. But as this is also a global issue, the <a href="http://citiscope.org/habitatIII/explainer/what-habitat-iii">UN’s biggest conference on urban development issues in 20 years</a> should also provide a forum for discussing this at the global level.</p>
<p>One possibility that has aroused significant interest is a <a href="http://www.landvaluetax.org/what-is-lvt/">land value tax</a>. The idea is that public investments in infrastructure – rather than private individuals’ effort – make land valuable. So, the government should “recapture” this value for further public investment, by taxing property owners a proportion of the annual rental value of their land. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/138824/original/image-20160922-22530-x6zt8v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Less vacant land.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/sinkdd/8891872089/sizes/l">Sinkdd/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Some argue that taxing land also encourages people to use land productively, and deters speculation; in other words, if you are paying a relatively large amount of tax on a plot of land, you will want to make the best possible use of that land (by building a tall tower, for example), in order to maximise your profit. </p>
<p>By contrast, taxing buildings discourages investment and development, so many proponents of land value taxation argue that structures should simply be ignored. There is a certain progressive logic to this: for the most part, growth in land value provides a windfall to the owner, so it seems like a fair revenue to tax. </p>
<h2>Should buildings be off the hook?</h2>
<p>But a land value tax could have some undesirable consequences: exempting buildings from taxation encourages developers to build for maximum profit – and this often means constructing expensive, luxury residences for wealthy investors. What’s more, large buildings impose on the surrounding residents and public spaces in a number of ways which can be seen to warrant taxation – for example by blocking light, generating traffic and adding to pollution and noise. </p>
<p>In countries where forms of land taxation are relatively high, but building taxes small or non-existent, there is a tendency to speculate on buildings for which there is <a href="http://www.newtimes.co.rw/section/article/2016-03-27/198392/">no obvious demand</a>. This can be particularly harmful when there isn’t sufficient public infrastructure or services to support these looming edifices.</p>
<p>If we consider property tax as a means of redistributing wealth from the rich to the less well-off, then it makes sense to tax buildings. After all, why should one person be able to own a large, immovable asset without paying tax on it, when others pay tax on so many goods, services and incomes? Is it really fair for the residents of high-rise developments to pay a small fraction of a land value tax, regardless of the actual value of the luxurious apartment which they occupy (or, more accurately, <a href="http://uk.businessinsider.com/st-georges-wharf-tower-development-lies-nearly-empty-2016-5">don’t occupy)</a>?</p>
<p>No – taxing property wealth is not only about taxing the windfall of increased land values: it is about acknowledging that the playing field of society is not level, and that the rich should pay more because they can. And it’s not just a question of social justice – it’s also about the kinds of incentives we want to create for investment, and the kinds of lifestyles that this promotes. We should not be so keen to encourage intensive investment in land that we exempt buildings – no matter how extravagant and unnecessary – from any kind of tax. </p>
<p>In many developing countries, <a href="https://www.shareweb.ch/site/DDLGN/Documents/Synthesis_DDLGN%20E-Discussion%20Local%20Government%20Finance.pdf">innovative approaches</a> to valuing and taxing property are being proposed and piloted, and <a href="http://www.ictd.ac/impact-stories/182-the-ictd-and-local-government-taxation-in-sierra-leone">concerted efforts are being made</a> to overcome political resistance. The UK would do well to follow suit and bring its system of property taxation into the 21st century.</p>
<p>Politicians fear these issues, and public discussions about property tax has fallen all but silent since the Labour party failed to win the argument for a <a href="https://theconversation.com/if-cameron-wants-a-property-owning-democracy-he-has-to-support-the-mansion-tax-40203">“mansion tax”</a> at last year’s election. No solution is simple; but not talking about it won’t solve anything at all.</p><img src="https://counter.theconversation.com/content/60131/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tom Goodfellow received funding for this research from the International Centre for Taxation and Development.</span></em></p>Property inequality keeps on growing, stopping it will take strong principles and brave politicians.Tom Goodfellow, Lecturer, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/606552016-07-08T15:01:16Z2016-07-08T15:01:16ZJust building more homes won’t fix the housing crisis – here’s why<figure><img src="https://images.theconversation.com/files/129879/original/image-20160708-24087-1fu8059.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/ramnaganat/7366802232/sizes/l">Natesh Ramasamy/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>In major cities across the globe – from <a href="http://indy100.independent.co.uk/article/londons-housing-crisis-in-13-property-listings--lkkRKVsjXe">London</a> to <a href="http://www.manilatimes.net/ph-housing-bubble-forming-expert/220920/">Manila</a>, <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11579043">Auckland</a> to <a href="http://www.latimes.com/opinion/editorials/la-ed-brown-affordable-housing-20160527-snap-story.html">Los Angeles</a> – housing is becoming less and less affordable. This has caused <a href="https://www.theguardian.com/society/2016/apr/30/uk-throes-of--housing-crisis">a great deal of angst</a> over house prices. But so far, politicians and the media have been much more effective at whipping up public anxiety, than putting in place actual solutions. </p>
<p>Over-inflated house prices are caused by more than just <a href="https://www.parliament.uk/documents/commons/lib/research/key_issues/Key-Issues-Housing-supply-and-demand.pdf">supply and demand</a>. Policy changes often focus too narrowly on increasing housing supply, by opening up more land for development and <a href="https://theconversation.com/the-rose-and-the-property-developer-a-cautionary-tale-on-the-perils-of-hasty-urban-planning-59765">speeding up the planning process</a>. Of course, supply is important. If more people want to buy houses than there are houses available then prices may be forced upward. </p>
<p>But it is not enough to address only one cause. Another major driver of price increases is a housing market “bubble”. A bubble can be detected when property <a href="http://www.economist.com/node/4079027">prices increase significantly faster than rents</a>. In investment terms, this means you’re buying a more expensive asset, but it doesn’t give a higher return from rental income. </p>
<p>When prices are rising rapidly, buyers tend to anticipate that this will continue, guaranteeing a tidy profit when they eventually sell the property. Add <a href="http://www.telegraph.co.uk/business/2016/06/01/mortgage-rates-fall-to-record-low-as-bank-of-england-mulls-rate/">record low interest rates</a> and the resulting abundance of low-cost debt means that house prices can easily become over-inflated, relative to people’s incomes. </p>
<p>The <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/shiller-facts.html">2013 Nobel Prize-winner</a> Robert Shiller theorised this buyer behaviour and called it “irrational exuberance”. Housing markets in many cities across the globe are stubbornly following Shiller’s theory. As a bubble grows, more people are priced out of the market for buying property, while the <a href="http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11608770">apparent urgency to get onto the property ladder</a> increases. Even if housing supply is increasing, the expectation of increasing property values will continue to drive this kind of behaviour in the market. </p>
<p>It is thought that London alone requires <a href="https://www.london.gov.uk/what-we-do/planning/london-plan/current-london-plan/london-plan-chapter-3-0/policy-33-increasing">42,000 new homes each year</a>, based on population estimates. Between 2001 and 2011, Greater London’s population <a href="https://www.london.gov.uk/sites/default/files/gla_migrate_files_destination/Fitting%20a%20Quart%20into%20Pint%20Pot%20-Ian%20Gordon.pdf">increased by 12.6%</a>, while housing supply grew only 7.5%. It is only physically possible to meet this demand by putting more people into existing houses, leading to overcrowding, which is <a href="http://www.childrensrightswales.org.uk/UserFiles/resources/no-space-at-home.pdf">harmful to health and well-being</a>. </p>
<p>So, building more houses won’t discourage irrational investment on its own. In fact, it might encourage more people to take on debt and invest in an over-valued housing market. If the bubble bursts – which would most likely be caused by a recession, or an increase in the cost of debt – prices will undergo a “correction”. Whether this correction is large or small, the financial impact on households and the threat to the stability of the national economy are significant. </p>
<h2>How to rent a home</h2>
<p>To diffuse this situation, we need to question our common assumptions about housing. The key role of housing is to meet the basic human need for safe and secure shelter. Housing policies mostly assume that home ownership is the only way to do this. </p>
<p>This idea has its roots in the post-war era, when governments <a href="https://www.theguardian.com/commentisfree/2008/apr/21/thehomeownershipideology">promoted the idea</a> of owning your own home, as the mark of financial security. Home ownership is not wrong – although households should seriously consider the risks of taking on large, long-term debts. But arguably, it isn’t an appropriate one-size-fits-all solution for cities in 2016. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129442/original/image-20160705-791-brrmig.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Not ideal.</span>
<span class="attribution"><span class="source">from www.shutterstock.com</span></span>
</figcaption>
</figure>
<p>So, what other options do we have? For starters, better rental regulations could allow for long-term tenure and provide better protection for tenants. In Germany, <a href="http://www.independent.co.uk/property/house-and-home/why-the-germans-and-french-prefer-to-rent-2291077.html">only 39%</a> of the population owns their own home, compared with roughly 60% in the UK. </p>
<p>But they also rent under very different conditions to people in the UK. Local governments can limit the rate of rent increases, and <a href="https://england.shelter.org.uk/__data/assets/pdf_file/0019/392410/International_comparisons_briefing_v6.pdf">tenants have more rights</a> to occupy a property over a long-term period. These arrangements make renting a viable option for people looking for long-term accommodation, which frees up household income to invest in other assets, with lower risk. </p>
<h2>The real crisis</h2>
<p>There are even more inventive ways to emphasise the importance of access to shelter, over and above home ownership. For one thing, there are some creative and forward-thinking design solutions on show at this year’s “<a href="http://www.architectural-review.com/archive/home-economics-the-british-pavilion-at-the-venice-architecture-biennale-2016/10003239.fullarticle">Home Economics</a>” display, at the Venice Biennale. </p>
<p>But we also need to rethink the way we plan our cities. In reality, the housing crisis stems from the fact that house building is left largely to the private market. Private developments don’t always include smaller, more modest homes for low-income households as well as expensive homes for the wealthy (the latter are usually <a href="http://www.citylab.com/housing/2015/06/the-big-money-behind-tall-buildings/395690/">more profitable</a>). A <a href="http://www.ft.com/cms/s/0/4ea96f5e-bde6-11e4-9d09-00144feab7de.html#axzz4Dk9ceLCD">survey of developments</a> between 2014 and 2015 found that only 20% of the total number of homes built were deemed to be “affordable”. </p>
<p>Local governments require a certain share of new houses to cater to those on low incomes, but these affordable housing requirements are notoriously weak, too. In London, as little as <a href="http://homesforbritain.org.uk/a-damning-indictment-of-affordable-housing-in-london/">12% of dwellings</a> in new developments need to be “affordable” – a classification which allows rents as high as <a href="https://www.london.gov.uk/what-we-do/planning/london-plan/current-london-plan/london-plan-chapter-3/policy-310-definition">80% of market rate</a>. In some cases, the price of a home deemed “affordable” was equal to <a href="https://www.theguardian.com/society/2016/mar/15/london-record-low-new-affordable-housing-figures-show">30 times the average UK wage</a>.</p>
<p>Policies focused purely on expanding supply, without catering to different income groups, ignore the fact that cities depend on people who earn many different levels of income to provide key services. There are wider costs to society if cleaners, bar staff, creatives, cashiers and nursery assistants cannot afford to live in urban areas. Even if cheaper accommodation is available on the outskirts, this won’t offer a solution if commutes are long and costly. </p>
<p>We don’t know how or when the UK’s housing market bubble will burst, or how much prices might fall when it does. For the moment, those who don’t own property can take comfort in the fact that they aren’t taking on a mortgage in an overvalued property market. Meanwhile, leaders need to consider more innovative housing options, which focus on access rather than ownership. They need to provide meaningful alternatives for people on low incomes – or risk driving them out of our cities altogether.</p><img src="https://counter.theconversation.com/content/60655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jenny McArthur receives funding from Auckland Council. </span></em></p>Clue: the UK needs to get over its obsession with home ownership.Jenny McArthur, PhD candidate, infrastructure investment, urban growth and liveability, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/429882015-06-14T20:15:49Z2015-06-14T20:15:49ZBlowing bubbles: the tricky task of tackling Sydney’s property market<figure><img src="https://images.theconversation.com/files/84804/original/image-20150612-11437-14snd4z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Yes, no: the debate around Sydney's property market is complex.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The debate over Sydney’s property price bubble (Yes there is! No there isn’t!) sits smack bang in the middle of one of the most fascinating economic questions of our time: how risky is sudden asset price inflation?</p>
<p>And if the risk is judged to be high, what if anything are policymakers to do about it?</p>
<p>In the 24/7 world of US and European bond markets, traders’ Bloomberg screens have bleated dire warnings since bond yields went negative last year for the first time in modern economic history. In China, speculators watch equity markets in Shanghai and Shenzhen that have risen more than 150% in the past 12 months. And in Australia, Australian_property_bubble is its own Wikipedia page.</p>
<p>As my former boss Saul Eslake pointed out last week in The Sydney Morning Herald, to use the term bubble in relation to asset prices is “emotionally laden”. It has no definition in the academic literature, other than a generalised notion of a sudden and upward acceleration in asset price movements that poses the risk of a violent crash. </p>
<p>Alan Greenspan’s famous term “irrational exuberance” was another expression of emotion. Bubbles – the endgame of a bull market – are not as well defined as a bear market, which generally refers to a 20% or more fall in equity prices, or an economic recession, which is two consecutive quarters of negative GDP growth.</p>
<h2>What is a bubble and other tricky definitions</h2>
<p>One of the big challenges in defining a bubble is in establishing its start. Sydney property prices are a case in point. </p>
<p>In 2014, the ABS residential property price index for Sydney indicated a 14.7% rise for the year. That’s strong growth and was at least double the rate of growth seen in other capital cities. </p>
<p>But extend the starting point back five years and Sydney’s property prices have increased by 39%, roughly on par with Canberra (36%) and Melbourne (35%). Go back 10 years and Sydney’s property price growth of 57% is significantly less than the national weighted average of (85%) and less than half that of Darwin (168%) and Perth (133%), or even Melbourne (113%).</p>
<p>So are Sydney property prices in bubble territory, or are they just catching up after a period of flat-to-negative growth in the early 2000s? What of other factors such as the underlying dynamics of supply and demand, housing density, urban planning and land value?</p>
<p>When policymakers are staring in the face a potential bubble, their real concern is the underlying drivers of that sudden, rapid surge. Is the bubble a symptom of systemic risk?</p>
<h2>Growth in credit and foreign investors</h2>
<p>In Sydney’s case, two potential systemic risks merit scrutiny. The first is the very rapid growth in credit being used for property investment; that is, the expansion of leverage. The second is increasing foreign investment that is reportedly flowing into the Sydney property market, purportedly from China.</p>
<p>These are, however, two very different risk stories. Of the two, leverage is far more pernicious. Excessive household leverage in particular walks down a well-worn path toward financial instability - as the global financial crisis amply reminded us - where it can take years for families to repair their balance sheets after a hit. “Buyer beware” is a theoretically correct construct, but not a particularly practical one should a government have to face down armies of homeowners sinking under negative equity.</p>
<p>Rising capital inflows hold much less risk, particularly in an Australian context. A sufficient magnitude of outflows would dampen market prices, potentially cause the Australian dollar to weaken somewhat and ultimately require some current account adjustment. One could argue that this outcome may be an upside risk for growth, not a downside one.</p>
<p><a href="http://www.rba.gov.au/speeches/2015/sp-gov-2015-06-10.html">Reserve Bank of Australia governor Glenn Stevens’ comments</a> last week in Brisbane make it clear that his focus is squarely on the risk of leverage. He notes pointedly that Australian households already have a high debt burden taken on in the years leading up to the 2008 financial crisis; the point of the speech was a plea was for government to shoulder the burden by getting on with a boost in useful (non-mining) infrastructure investment while cheap finance is so plentiful.</p>
<h2>Macroprudential actions</h2>
<p>Should Stevens’ concerns on household indebtedness move from words to action, the policy response would be to temper leverage. The most targeted and effective approach is to make borrowing more expensive through more stringent customer debt-to-income tests. </p>
<p>The RBA and Australian Prudential Regulation Authority (APRA) could also reduce the allowable maximum loan-to-valuation ratios (LVRs), thereby requiring higher deposits – following the example of the <a href="http://www.rbnz.govt.nz/financial_stability/loan-to-value_ratio/">Reserve Bank of New Zealand</a> – or, in a nod to recommendations in the Financial Services Inquiry, increase the Big Four banks’ risk weights on capital held against mortgage loans.</p>
<p>These types of measures are often called “macroprudential"– that is, regulations applied to maintain financial system stability by directly addressing perceived underlying risks. Macroprudential regulation is a term that has come back into vogue in the post-GFC world. In reality, the concepts are not new. </p>
<p>As Luci Ellis and Paul Woolley pointed out in <a href="http://www.rba.gov.au/speeches/2012/sp-so-111012.html">an RBA paper back in 2012</a>, a macroprudential policy stance is more a state of mind around monitoring and acting on systemic risks rather than a specific set of policy measures or tools.</p>
<h2>Lower stamp duties, increase capital gains tax?</h2>
<p>A second course of action would be for the federal or state government to shift market dynamics through tax incentives. Lowering stamp duties would reduce transactions costs, potentially freeing up more supply in the existing housing stock. So could shifting the pension asset test to increase the incentive to downsize from the family home once it is no longer needed. Introducing greater capital gains tax on properties sold within a short period or reducing the benefits of negative gearing would go a long way toward discouraging investor-driven acquisitions, while imposing new levies on purchases by non-residents could dampen capital inflows.</p>
<p>The problem with changing property-related tax policies for residents is twofold; not everyone will be happy, and the need for gradual introduction to allow for adjustment means impacts may be slow. An additional issue with trying to limit property purchases by non-residents through tax is that its target is a great unknown. </p>
<h2>Hong Kong’s failure to deflate</h2>
<p>As will be discussed in depth in a paper released by the Australian Centre for Financial Studies and Finsia this week, there continues to be a remarkable lack of comprehensive and reliable data on both the source and ultimate destination of foreign investment into Australia, and particularly into the residential and commercial property market. With such thin evidence as to both the total size and the source of these anecdotal flows, policymakers are shooting in the dark.</p>
<p>Beyond this, it cannot be guaranteed that raising borrowing costs and shifting tax incentives would deflate a perceived property bubble. Hong Kong and Singapore have both tried it, and arguably failed. In 2010, Hong Kong moved to simultaneously require a significant increase in deposits for investment properties while also adopting additional stamp duties on investment properties, with higher penalties for non-resident investors. Singapore followed suit in 2013.</p>
<p>The impact on Hong Kong has been negligible. Despite concerns of market disruption in 2010, property prices continued to climb and hit an all-time high last year. </p>
<p>Singapore did see its property prices flatten in 2013, then fall by 4% in 2014.
However, there has also been a significant decline in the volume of both existing and new home sales according to the Urban Redevelopment Authority, suggesting that these measures may not have had the desired impact of increasing housing affordability or supply. And although prices have not increased, they remain high relative to Singapore household income.</p>
<p>Crazy indeed.</p><img src="https://counter.theconversation.com/content/42988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Auster does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Whether Sydney’s property market is in a bubble is hotly contested, but rising indebtedness has regulators worried. Can macroprudential tools help?Amy Auster, Executive Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/323662014-10-02T20:15:10Z2014-10-02T20:15:10ZRational talk on housing prices lost in a bubble<figure><img src="https://images.theconversation.com/files/60618/original/9g3rygkx-1412222124.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is our thinking on house prices blurred by irrationality?</span> <span class="attribution"><span class="source">Kesu/Shutterstock</span></span></figcaption></figure><p>The <a href="http://www.rpdata.com/images/stories/content/pressreleases/2014-10-01--rpdata-rismark-home-value-index.pdf">latest house price index</a> figures released by RP Data earlier this week show a year-on-year increase in property values in Sydney of 14.3%. This has sparked the current hot debate on property prices and <a href="http://www.news.com.au/finance/economy/is-there-a-housing-bubble-thats-about-to-burst-in-australia/story-e6frflo9-1227062516640">speculation</a> of a price bubble. Though, it seems many people have forgotten what house price indices represent.</p>
<p>The All Ordinaries, the index of broad Australian equities market movements, increased by around 9% in the 12 months to the start of September. As investors understand, this doesn’t equate to all stocks on the market increasing in price by 9% over that period. </p>
<p>For example, shareholders in BHP, one of the largest ASX companies by market capitalisation, have suffered a modest loss over that period, even after dividend payments are considered. And as the All Ordinaries Index value has fallen 6% over the past month, there have been some stocks that have fallen more (Myer shares tumbled nearly 20% in the month) and others that have gone against the trend (insurer QBE was up 1.2% in September).</p>
<p>Similarly, a house price index gives a measure of the broad property market movement. In the case of the RP Data-Rismark Index, the change in the index value reflects the average increase or decrease in property prices.</p>
<p>Prices in Australian capital cities, the typical benchmark measure of the Australian residential real estate market, increased by 9.3% in the year to September.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/60563/original/fx9nb9ry-1412182860.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Source: RP Data.</span>
</figcaption>
</figure>
<p>In Canberra and Perth, however, the reported growth in real estate prices was significantly lower at 3.2% and 1.7% respectively. Outside of capital cities property price growth was also a modest 3.3%. </p>
<p>Even in Sydney, which has experienced the strongest price growth of any capital city, there are marked differences in the rate of price appreciation between different suburbs. Western Sydney clearly captures this with residents in <a href="http://www.dailytelegraph.com.au/realestate/buying/price-hikes-for-homes-in-popular-western-sydney-suburbs-eclipse-annual-income-of-most-residents/story-fni0cate-1227049569685">South Granville</a> enjoying an increase in median property price of around 17.5%, while reported median prices have shown virtually no annual change in <a href="http://www.realestateview.com.au/propertydata/median-prices/nsw/fairfield/">Auburn</a>. </p>
<h2>Blunt policy tools are not the answer</h2>
<p>It wasn’t so long ago that the average price of Perth’s houses surpassed Sydney’s on the back of a mining industry-led boom in the West. At the national level, these differences in property price growth are the result of shifting labour and economic factors, and to a lesser extent state-specific regulation.</p>
<p>Within a city, local amenities and employment, as well as the preferences of the potential home buyers are reflected in price growth variation.</p>
<p>This is a key point that needs to be remembered when blunt policy tools are debated. Measures to tighten home loan lending, increase borrowing costs or remove negative gearing affect the market as a whole, whether in Sydney, Perth, or a regional centre. </p>
<p>For policy to be effective it needs to firstly identify what it aims to achieve. Housing policy is a double-edged sword. Rapidly rising house prices can put home ownership beyond the reach of younger and lower-income Australians. But policy designed to lower house prices can put existing homeowners at risk of falling “underwater” - holding negative equity in their property. Again, it is typically lower-income households that are most at risk in this scenario.</p>
<h2>Cooling the bubble talk</h2>
<p>The growing pressure for a policy response to rising house prices is in part due to fears of a price bubble. The last time the Australian or Sydney house price index increased at more than 10% in a year was 2009. Unsurprisingly, there were calls then too that increased regulation was required to prevent a property bubble burst and housing crisis. </p>
<p>Since 1996, Sydney real estate prices have grown at an average annual rate of 7.26% though, with considerable variation in that time. A growth rate in a single year of 10% in any other asset market with these dynamics would not be cause for alarm. Yet housing has this perception of being low risk, pervading our cultural psyche. Something idiomatically described as “safe as houses” is viewed as guaranteed or risk-free. </p>
<p>When faced with the reality that property prices go up and down, sometimes fast and sometimes slow, we seek ways to explain the conflict with these cultural expectations. Assigning the label or “price bubble” shifts the responsibility for our own irrationalities back on the market.</p><img src="https://counter.theconversation.com/content/32366/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danika Wright is affiliated with Sirca, as a member of the Sirca-RP Data Advisory Board</span></em></p>The latest house price index figures released by RP Data earlier this week show a year-on-year increase in property values in Sydney of 14.3%. This has sparked the current hot debate on property prices…Danika Wright, Lecturer in Finance, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/218122014-01-08T13:49:36Z2014-01-08T13:49:36ZFrom the art world to fashion to Twitter, we’re all living in bubbles<figure><img src="https://images.theconversation.com/files/38601/original/ncwm5tqm-1389120472.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're all living in a bubble these days.</span> <span class="attribution"><span class="source">The Infatuated</span></span></figcaption></figure><p>The term “bubble” is now part of everyday conversation, particularly since the financial crisis of 2008. But bubbles are not just a problem in the world of banking. They can affect the choices you make every single day.</p>
<h2>How financial bubbles work</h2>
<p><a href="http://www.newscientist.com/article/mg19926651.700-why-economic-theory-is-out-of-whack.html">Recent studies</a> seem to suggest that too much liquidity is poisonous rather than beneficial for a financial market. Monetary liquidity in excess – stimulated by easy access to credit, large disposable incomes and lax lending standards – combined with expansionary monetary policies, such as when banks lower interest rates or states offer tax breaks, flush the market with capital. This extra liquidity leaves financial markets vulnerable to volatile asset price inflation, the cause of which is to be found in short-term and possibly leveraged speculation by investors.</p>
<p>When these combine to create a bubble, we end up with too much money chasing not enough assets. These assets – both bad and good – become elevated beyond their fundamental value to an unsustainable level. Add <a href="https://theconversation.com/all-those-likes-and-upvotes-are-bad-news-for-democracy-21547">socio-psychological phenomena</a> like boom-thinking, group-thinking, herding and informational cascades, and it’s just a matter of time before the bubble <a href="http://www.thefreelibrary.com/Financial+Market+Bubbles+and+Crashes.-a0237362479">bursts</a>.</p>
<h2>Your daily bubble</h2>
<p>Behind every financial bubble, crash and subsequent crisis <a href="http://press.princeton.edu/titles/9934.html">lurks a political bubble</a>. These political bubbles are powerful enough to influence financial markets, as are bubbles in the property market. But you are touched by bubbles even when you are not buying a house or dabbling in the stock market.</p>
<p><a href="http://www.ted.com/talks/eli_pariser_beware_online_filter_bubbles.html">Filter bubbles</a>, for example, happen when the information we receive online becomes so tailored to our existing areas of interest that we are no longer exposed to views that challenge us. If we only follow like-minded people on Twitter, we start to live in a bubble in which counter-opinions don’t feature. </p>
<p>The fashion industry benefits in particular from bubbles. Getting everybody, or a selective few, to trend the same way is the entire point of its existence, aside from the occasional claims about artistic diligence.</p>
<p>And even the art scene is ridden with bubbles. As Julian Spalding wrote in <a href="http://www.independent.co.uk/voices/commentators/julian-spalding-damien-hirsts-are-the-subprime-of-the-art-world-7586386.html">The Independent</a> fortunes are made and lost when people buy into a particular artist and the hype around their work grows.</p>
<p>In science, academic papers gather attention when they are cited by others. While individual scientists may express doubt about the validity of using these citations as a measure of quality, they are still very much a part of assessment. This kind of endorsement from colleagues and institutions can be an important factor when grant proposals are submitted or when academics apply for promotion. Here, intellectual liquidity – in terms of the limited funding available for research – combines with lemming behaviour among scientists just like in a <a href="http://link.springer.com/article/10.1007%2Fs13347-013-0142-7">ballooning financial market</a>.</p>
<p>All these bubbles push collectives of agents in the same direction, often with negative results. People in a bubble not only buy the same stock or real estate but also think the same thing, subscribe to the same news, hold the same opinions and appreciate the same art. They “like” the same posts on social media, buy the same brand names and read the same science.</p>
<h2>Informational cascades</h2>
<p>Once you’ve put out your opinion on the marketplace of ideas, be it political, religious or just a personal view, it can gain popularity or prominence as it spreads. That opinion then becomes an asset that can be valued according to the number of people apparently subscribing to it in terms of likes, upvotes, clicks or similar endorsements, even if to like something online requires minimum personal investment.</p>
<p>Public opinion tends to shift depending on a variety of factors ranging from zeitgeist, new facts, current interests to premiums of social imprimatur. Opinion bubbles may accordingly suddenly go bust or gradually deflate – a recipe that was recently satirically documented by BuzzFeed in <a href="http://www.buzzfeed.com/tomphillips/the-29-stages-of-a-twitterstorm">The 29 Stages of a Twitterstorm</a>. Everyday personal opinions serve as intellectual liquidity, chasing assets of political or cultural ideas. As in financial markets, both can end up with exaggerated values.</p>
<p>Across spheres, from science to your wardrobe, bubbles share similar structures and dynamics. The term “bubble” is no longer confined to just financial movements. In the information age, it can refer to irrational, collective, aggregated behaviour, beliefs, opinions or preferences based on social proof in <a href="http://www.springer.com/medicine/book/978-3-319-03831-5">all parts of society</a>.</p>
<p>Over in finance, informational cascades have become a major factor in the <a href="http://www.thefreelibrary.com/Financial+Market+Bubbles+and+Crashes.-a0237362479">generation of bubbles</a>, where, as economist Harold Vogel notes, “individuals choose to ignore or downplay their private information and instead jump the bandwagon by mimicking the actions of individuals acting previously”. If you think about your own actions every day, you might uncover some uncomfortable truths about the bubbles you live in.</p><img src="https://counter.theconversation.com/content/21812/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vincent F Hendricks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The term “bubble” is now part of everyday conversation, particularly since the financial crisis of 2008. But bubbles are not just a problem in the world of banking. They can affect the choices you make…Vincent F Hendricks, Professor of Formal Philosophy, University of CopenhagenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/186582013-09-30T04:23:08Z2013-09-30T04:23:08ZAre SMSFs inflating a property bubble?<figure><img src="https://images.theconversation.com/files/32110/original/z6dsmdkf-1380442020.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's property market is heating up; but what role have self-funded superannuants played?</span> </figcaption></figure><p>Self managed superannuation funds (SMSFs) have come under criticism from regulators amid concerns that the sector is over-investing in the residential property sector. </p>
<p>The profession has hit back at the criticism, saying that most SMSF borrowings do not relate to residential property, and that the surge in the cost of housing is not due to SMSFs. So what is going on?</p>
<p>There are two separate issues at play here. Firstly SMSFs are becoming more active investors, including in the residential property market; and secondly the rules restricting borrowing by a superannuation fund have been relaxed since 2007. </p>
<p>The problem arises at the intersection of these two trends, where residential property is being aggressively marketed to the SMSF market on the basis that it can borrow for the purchase.</p>
<p>The fundamental rule of superannuation, known as the sole purpose test, is that the core purpose of a superannuation fund is to provide <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s62.html">benefits to its members in retirement</a>. Risky investments are discouraged as this could compromise the ability of the fund to pay retirement benefits; and benefits to members are supposed to be deferred until retirement.</p>
<p>Prior to 2007 superannuation funds were not permitted to borrow, however the restriction could be circumvented by the use of instalment warrants, a financial instrument that allowed the fund to leverage to acquire assets, accordingly in 2007 <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s67a.html">the superannuation legislation</a> was amended to allow superannuation funds to use such instruments to fund property acquisitions. </p>
<p>These changes were <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s67a.html">superseded in 2010</a> by the limited recourse borrowing provisions, which allow a superannuation fund to borrow to acquire an asset through a mechanism that ensures that the risk of borrowing is quarantined to the specific asset. This is intended to protect the remaining assets within the fund in the event of a default by the borrower.</p>
<p>It is within this framework that the concern over borrowings by SMSFs has arisen but there are several trends that coalesce around this issue. There has been a sharp rise in the number of Australians setting up SMSFs as many investors establish a self managed superannuation funds in order to manage their own investments, particularly in the wake of the GFC. This has been facilitated by the superannuation choice rules that allow a person to choose the superannuation fund their compulsory contributions will be paid into. Finally, Australians have always been attracted to bricks and mortar investments, and many investors lost faith in shares as the value decreased during the GFC. </p>
<p>The residential property market is already under pressure with concerns over affordability for home buyers. Activity by investors has increased due to the combination of low interest rates and increasing property values, and SMSFs are increasingly visible among investors. </p>
<p>The Reserve Bank, in its recent <a href="http://www.rba.gov.au/publications/fsr/2013/sep/html/contents.html">Financial Stability Review</a> noted that the ability to borrow for investments has resulted in an increase in property holdings. It shows that SMSFs have a higher proportion of assets in property than other funds, although property, without differentiation between residential and commercial, still ranks fourth behind cash, Australian equities and “other” investment classes. </p>
<p>The Reserve Bank did not limit its concerns to bricks and mortar, but also indicated that hybrid securities were an emerging problem area. The SMSF Professionals Association of Australia (SPAA) <a href="http://www.spaa.asn.au/library/spaa-media-releases/keep-smsf-property-investment-in-perspective,-says-spaa.aspx?categoryid=1371#.UkT3A38nJpQ">claims</a> that residential property is a minor element of the total SMSF investment market as most property held by SMSFs is commercial. </p>
<p>At 30 June, 11.7% of SMSF investments were in commercial property compared to 3.4% in residential property, and the <a href="http://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-statistics/Taxation-statistics-2010-11/?">latest Taxation Statistics</a> show that less than half of 1% of all property investment was geared. </p>
<p>SMSF trustees need to be aware that it is not always a tax effective strategy to borrow to acquire property in a SMSF. Superannuation funds pay a concessional rate of tax, so negative gearing within a superannuation fund will often be less tax effective than if the member invested directly, outside the fund. The income available to make the payments will be primarily from the return on the asset, with the shortfall from other income, particularly member contributions to the fund, which are subject to the contribution caps. </p>
<p>Borrowing may allow the SMSF to leverage up an investment in the hope of receiving a higher capital gain when the property is sold. Capital gains will be exempt in a SMSF but only if the property is sold after the fund enters the pension phase, which may be many years down the track. Accordingly this is only likely to be tax effective if the member is approaching pension age.</p>
<p>The worrying trend identified by the Reserve Bank is the increased promotion of leveraged property purchases to SMSFs. Activity in the residential property market is also highly visible, due to the increasing number of SMSFs in the market, and many of the promoters of this strategy are not regulated by APRA. </p>
<p>It is this lack of supervision of this sector of the industry that is of most concern. Not only is this strategy pushing up the price of real estate, but it is exposing SMSF members to risk if property prices crash.</p><img src="https://counter.theconversation.com/content/18658/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson was a Member of the Legislative Council in Western Australia from 1997 to 2001 representing the Australian Democrats. She is not currently a member of any political party.</span></em></p>Self managed superannuation funds (SMSFs) have come under criticism from regulators amid concerns that the sector is over-investing in the residential property sector. The profession has hit back at the…Helen Hodgson, Senior Lecturer, School of Tax and Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.