AUSTRALIA’S madly over-priced housing market seems to be holding up despite various economists’ analyses that dwellings in Australia are 30 to 40 per cent over-priced.
The analyses are basically right – that from an historic perspective, dwellings are around 40 per cent over-priced, or even higher. But the conclusion drawn from that – expect house prices to collapse any time soon – is a long bow. There are too many forces holding prices up.
Philip Soos, of Deakin University, has done a terrific set of charts indexing housing and land values and pitting them against an array of other figures, especially income and debt.
Everything goes beserk after about the late 1990s. Since then, we have gone heavily in to debt to buy houses that cost more than ever – especially the land component.
Soos concludes – rather grimly for property owners – that on seven measures houses prices would have to fall by between 37 and 57 per cent to revert to the late 1990s “trough”.
The measures are mainly house prices against inflation, income and rents.
The analysis is first rate. Housing prices are well above long-term historic trends.
Moreover, as Soos points out, the mountain of private debt mostly incurred in housing, is a much greater threat than the molehill that is public-sector debt. The later is well under control and historically extremely low.
But does all this mean that we have a housing bubble which will burst because of unsustainable debt and cause housing prices to tumble back to some historic average – a fall of perhaps 40 per cent?
There are lots of forces that militate against that. Bear in mind that the market for some things has gone to a new plateau and stayed there whereas the market for other things has fallen to a rift valley and stayed there.
Art plateaued. Blue Poles cost a trifling $1.3 million in 1973. It is now a hundred times that 40 years later. French Impressionists went to the stratosphere and show no sign of returning to some historic average.
The market in secondhand electronics and whitegoods has collapsed. The new ones are containered out of China at half the price of two years ago. People used to “trade in” their fridges, cameras and TVs and people bought the trade-ins. The concept now is laughable.
What militates against a collapse (or return to historic levels) in the housing market?
Immigration for a start. You can rely on governments to continue to import more and more people, even if it is against the long-term national interest. This keeps demand up.
Incidentally, one of Soos’s charts knocks on the head all of the self-serving whingeing by the Housing Industry Association and others that Australia is not building enough houses to keep up and that tracts of land should be opened up and unrestrained development should be allowed. The figures show fairly convincingly that dwelling construction has kept apace with population increases.
The tax system is next. Capital gains tax, stamp duty and negative gearing conspire restrict supply, and thereby hold prices up.
Capital gains tax is perhaps of much more significance than the more popularly discussed stamp duty and negative gearing, by the way.
The structure of the capital gains tax makes people hold on to housing which they might otherwise sell (and thereby increase the supply and put a brake on prices). A lot of investor housing stock bought before, say, 2002 sits with a large capital-gains-tax liability ready to mature on sale. So much so that to sell and reinvest in shares or an annuity for example would be madness.
The return after paying capital-gains tax would be less than the return on rent alone on the investment houses.
Stamp duty makes empty nesters and others reluctant to sell and buy smaller dwellings. Again this reduces supply and puts pressure on prices. True, eventually baby boomers will die or become too incapable to run big houses and there may be a glut in this part of the market. My guess, though, is that it will be met by cutting the big houses up or redeveloping to smaller dwellings.
Negative gearing and easy lending (at least before the global financial crisis) combined to push house prices ever higher – often out of reach of young first home-buyers.
Nearly 40 per cent of dwellings are now owned by investors, compared to just over 10 per cent in the 1980s. Governments say they will not abolish it. Worse, do-it-yourself superannuation funds are poised to enter the market and they can probably avoid capital gains tax.
Third is infrastructure. Rather than looking at present dwelling costs (six times annual income) as an historic high, one might well look at pre-1980s prices as the aberration. Before 1980 Governments borrowed money to build the suburban infrastructure and did not pass the cost on to home-buyers. Not so these days. Development charges are wound into the cost and will remain there. And governments these days show no sign of borrowing to provide suburban infrastructure
Fourthly, the cost of green tape and red tape, which mainly affect land prices, will not go away. These are now part of the cost of a dwelling.
Lastly, the housing market is less susceptible to correction than the share market. People can sell small parcels of shares and take modest losses. So they do so and this increases supply immediately and drives down the price. But with housing you have to sell all or nothing and people are very reluctant to sell for such a large loss in one go, so they tend to hang on, thus tending to keep the housing market higher than it should be.
The housing market has been remarkably resilient to predictions of bursting bubbles.
But what of the morality of all this? Baby boomers buying their first homes in the late 1960s and 1970s got cheap land serviced by the taxpayer and often were not condemned to the fringes of cities. They could service loans equivalent to one or two years’ income with 10 or 15 per cent of their income. Saving for a deposit was a realistic proposition.
Young people today are facing loans equivalent to five or six years’ income, deposits beyond reach without parental help, and loan-servicing costing 40 per cent of their income. They also face heavy marginal tax rates on their incomes and interest as they save for their deposits, while the investing boomers wipe out their tax liabilities through negative gearing
It is simply inter-generationally unfair – and I am one of the benefiting boomers. It is also socially corrosive, as we know that home ownership helps cohesion.
But since when has unfairness prompted governments into action? You can rely on them to do nothing. Indeed, many housing investors are. And that’s why the housing bubble is not likely to burst any time soon.
CRISPIN HULL
This article first appeared in The Canberra Times on 20 April 2013.
I find this disheartening, I was hoping for a fall to normality in house prices As a 35 year old single father on $65k a year its much cheaper to rent for the rest of my life than join the average mortgagee who payes an unhealthy 35% of their salary on average towards their home. A home is definitely not an investment when you start with an overpriced investment, pay double that again in interest and know that incomes can’t support any price increases. A friend in finance said to me eight years ago that all the houses in Australia will be owned by just 10% of the population, I can see that being likely one day.
“The new ones are containered out of China “. Are you trying to provoke old fashioned types who are trying to preserve English from the vandals? Would you have used “containered” when editor of the Canberra Times?
I agree with you, Crispin, that the bubble bursts of the past will not recur. Demografix may also be right but that is a fair way down the track. So much is driven by tax avoidance. Rural land is also valued way above its income producing potential by (a) tree changers realising tax-free capital gains on their city homes and buying into sub-divisions still within commuting distance and (b) farming losses reducing the tax bill on non-rural income; it only requires a farming investment of about $500,000 to qualify. All of this plus negative gearing, share trading on margin, salary sacrificing on super, private school fees, cars, medical insurance etc, etc means any above-average income earner who is paying more than the minimum tax rate should look for another accountant!
Interesting article. Obviously the boomers aren’t immortal (well, perhaps it’s not obvious to them :). Do you think there will be a period of increased sales by their heirs? Or are these the same heirs who can’t afford their own place, and will hence move right in. Thoughts?
Crispin, you nailed it. We’ve been in a bubble for years, but it really is defying gravity with all the government props and all the vested interests. Maybe Australia is different after all, which is a depressing thought, but probably realistic.
Demografix, you give the examples of suburbs in Brisbane, and while their populations are declining, as Crispin said, those larger houses will eventually be subdivided. Queensland prices have dropped significantly, but that seems to be an aberration compared with the rest of Australia. Here in Melbourne, immigrants are pouring in by the thousands each week, and while everyone notices the traffic congestion, as individuals we are powerless. There is a growing glut of apartments but most of them are tiny, overpriced shoeboxes, and if there isn’t enough people here to buy them, there are certainly more than enough Chinese investors who are happy to park their money here and leave those apartments empty, thereby keeping the prices up.
So, what to do? I think eventually the bubble will burst albeit a slow deflation, but it might not even happen in our lifetimes. By all measures it “should” have burst years ago, but now I can see that because of all the reasons outlined by Crispin, and then some, younger people are destined to become renters first and then buy later on in life unless they are fortunate to receive help from their parents. If it becomes more out of whack with rents, incomes, inflation etc. this might drive a lot of people overseas, but the government will be sure to replace them with cashed-up immigrants.
Mmmmm…… I think you may need to look further into the demographics and geography that may in fact cause the bubble to deflate.
Burbs like Rochedale, Chelmer, Jindalee in Brisbane have had a declining population from 2006 to 2011. Familys to lone occupants and the young could not afford to buy into these burbs. 23% of all our homes are lone occupants and well, they die and then what happens in those burbs mentioned above? None of the reasons you gave will supposrt the prices when our death rates, the death bust a reflection of the baby boom, happens over the next 2.5 decades. Our deaths double and our natural growth may drop to zero or perhaps even negative. Will an old ageing OZ accept the NOM to double ot treble? Me thinks not. Should I go on?