The real estate
commentariat have kicked off 2014 with broadly positive views on housing
markets and house prices. Media reports are running strong with headlines about
‘booms’ but amongst the positive signals in the market lies one worrying trend.
After such a long period of subdued market conditions, you
can’t blame people for being positive when signs start to emerge of
strengthening demand for housing. Developers, once struggling to find
sufficient depth of buyer demand for their product and meeting plenty of buyer resistance,
essentially put projects on ice for several years. Now they’re being dusted
off, particularly for apartments, as buyer demand re-emerges from a long
hibernation.
The recent
ANZ-Property Council industry survey reported a significant lift in
confidence, particularly in Queensland and NSW, when it came to housing market
performance driven by investor demand. Then
there have been other reports equally buoyant about the prospects for growth in
2014. Take this
one, for example, by credit reporting agency Veda which glowed about ‘the
strongest levels of housing finance in four years.’ The headline finance
figures are good, and the dwelling commencement figures will also strengthen during
the year – mainly for apartments – as more approved projects move into the
construction phase.
So with record low interest rates, which look like staying
down for some time, and with rising housing finance commitments and rising
prices, what could there possibly be to worry about?
As usual, digging a little below the surface of headlines
can be revealing. While total new housing finance commitments are rising and
this is a sign of stronger overall demand, that demand is coming almost
entirely from investors and upgraders. First home buyers, despite the record
low interest rates, remain largely still absent from the market.
The graph below shows the trend since 2000, when First Home Buyers
(FHBs) represented roughly half the total finance as investors and roughly a
third of that of upgraders. Over the decade, that broad relationship has blown
out, as investors and upgraders have become more and more dominant in the
market.
By late 2013, investor demand had risen from twice that of
FHBs to more than four times that required by FHBs, with upgraders keeping pace
with the investors. (The bump in FHB demand in 2009 represents the impact of temporary
additional FHB incentives).
The growth in this spread is a clear sign that something has
fundamentally changed in our housing markets. First time buyers are becoming an
at-risk species of buyer while investors continue to add to portfolios of
rental property every time their existing equity increases, and upgraders do
likewise. At auctions and open homes, whether for apartments or detached homes,
the competition from investors is intense, with first time buyers outbid.
Macrobusiness’ Leith
van Onselen described
this process as it’s been happening in Sydney as “speculators continuing to
eat their young.”
For developers, this is not a market problem. Their role is
to respond to opportunities and work within planning frameworks (as
dysfunctional as they might be) to deliver a product that sells. It is not the
market’s role to be concerned about the absence of first time buyers, or what
this means for Australia as a society.
This is, however, a legitimate role for public policy
makers. If falling rates of home ownership amongst a younger generation of
Australians is not of concern, then no policy action is needed. If we believe
it’s not a problem for this generation to reach future retirement with large
mortgages or never having owned and saved through housing, and for them to be more
dependent on the future taxpayer, then
no action is required. But for a host of reasons, many of which I outlined
here, it’s my view that some policy interest in this widening gap – and its
consequences for our society - is long
overdue.
Don’t get me wrong. I’ve been hoping to see an upturn for
some years now. This downturn has been longer and more frustrating than others
I can recall, which were typically deeper but much shorter. The general improvement
in housing and construction will generate significant employment, add to
confidence, and restore depleted government revenues. So in the main, it’s a
good thing. But it is hard not to be concerned about the lack of policy
interest in the absence of first home buyers, and what that could mean down the
track.
So while the media headlines continue to crow about a
housing recovery in 2014 and beyond, it might be worth sparing a little time to
question if this dominance of demand through investors and upgraders is a
balanced market, and whether it is sustainable. If not, how long before the
music stops?
