Robs Real Estate Report. Please enjoy the following articles I have included what I think are relevant and interesting to the Brisbane people and region.
First home buyer activity eases but still in line with the long-term average
The January housing finance data was released this week and it showed, as predicted, a slowdown in activity by first home buyers in January 2012. There are a couple of points to note about these results:
1.The fall in volumes was anticipated given the removal of first home buyer stamp duty concessions in the country’s largest housing market, New South Wales; and
2.The figures are not seasonally adjusted so you typically see a sharp slowdown in January each year due to many buyers and sellers being on holidays
The data shows that the number of first home buyer finance commitments fell by -21.6% over the month however, non-first home buyer finance commitments to owner occupier volumes fell by a slightly lower but similar -18.7% over the month. At this time of year it is much more telling to look at the proportion of first home buyers compared to all owner occupier finance commitments.
Over January 2012, there were 8,172 owner occupier finance commitments to first home buyers which equated to 20.3% of all owner occupier finance commitments. It was also right in line with the five year average proportion (20.4%) and it was much higher than the 16.2% of all owner occupier finance commitments in January 2011. It’s also telling to look at the difference in the number of first home buyer finance commitments this January compared to last year. The number of first home buyer commitments in January 2012 were 44.7% higher than what was recorded in 2011. On the other hand, non-first home buyer finance commitments in January 2012 were only 10.1% higher than the previous year.
At an individual state level the proportion of first home buyers increased across all states and territories except for New South Wales and the Australian Capital Territory over the past month. The proportion of loans to first home buyers in January 2012 varied from 14.0% in Tasmania to 23.0% in the Northern Territory. At the same time in 2011, the proportion of first home buyer loans varied from 13.1% in South Australia to 18.2% in Western Australia. Across each state except Tasmania the proportion of first home buyers in January 2012 was higher than in 2011.
We certainly aren’t expecting first home buyer volumes to come roaring back in 2012 however, activity has been improving on the back of an improved affordability scenario. Next month’s data should start to provide more clarity about any trend that is developing with regard to first time buyer activity. We would expect that lower property values and higher rental rates (which is what we are currently seeing) is likely to attract more first home buyers into the market. The exception of course is likely to be New South Wales with much of the demand brought forward due to the incentives for first home buyers that were in place in late 2011.
Reserve Bank Interest Rate Announcement
Against the backdrop of concerns over the global economy and weak consumer spending at home, the Reserve Bank opted to keep interest rates on hold today 4.75 per cent.
Many economists have tipped the Reserve Bank will now stay on the interest rate sidelines for at least a year and that if there is any movement, it will be down - but only if there is a sudden major shock to the economic outlook.
"Today's decision will certainly be welcomed by those with a mortgage," says Domain.com.au property expert Carolyn Boyd. "An increase in rates would have added unwelcome pressure for people trying to pay their mortgage. Households are becoming increasingly penny conscious - as can be seen by the recent spike in savings - and it really is true that every dollar counts."
Rates have been on hold since the Reserve Bank surprised borrowers with an increase on Melbourne Cup day last November.
Each 0.25 per cent interest rate rise adds another $60 to the monthly cost of an average Australian mortgage.
The official interest rate is now 4.75 per cent. Mortgage holders on variable interest rates are being charged a standard variable rate of about 7.83 per cent by their lenders.
Further details on what the decision to keep interest rates at 4.75 per cent means to you and the Australian property market will be outlined in this week's Domain.com.au Property Newsletter. If you are not already subscribed to our FREE weekly newsletter, click here to subscribe.
Many economists have tipped the Reserve Bank will now stay on the interest rate sidelines for at least a year and that if there is any movement, it will be down - but only if there is a sudden major shock to the economic outlook.
"Today's decision will certainly be welcomed by those with a mortgage," says Domain.com.au property expert Carolyn Boyd. "An increase in rates would have added unwelcome pressure for people trying to pay their mortgage. Households are becoming increasingly penny conscious - as can be seen by the recent spike in savings - and it really is true that every dollar counts."
Rates have been on hold since the Reserve Bank surprised borrowers with an increase on Melbourne Cup day last November.
Each 0.25 per cent interest rate rise adds another $60 to the monthly cost of an average Australian mortgage.
The official interest rate is now 4.75 per cent. Mortgage holders on variable interest rates are being charged a standard variable rate of about 7.83 per cent by their lenders.
Further details on what the decision to keep interest rates at 4.75 per cent means to you and the Australian property market will be outlined in this week's Domain.com.au Property Newsletter. If you are not already subscribed to our FREE weekly newsletter, click here to subscribe.
Housing activity still in the doldrums
The number of new owner-occupier housing loans rose by one per cent in July after rising by 0.6 per cent in June. The number of loans is 5.4 per cent higher than a year ago.
Loans for the purchase of newly erected dwellings fell by one per cent. However, they were still down 7.8 per cent on a year ago. Loans for the construction of homes fell by 0.8 per cent in July to 4,757 – below the decade average of 4900.
Government spending fell by 0.4 per cent in the June quarter after lifting by 0.7 per cent in the March quarter.
The broad measure of Australia's external position – the current account – improved in the June quarter with the deficit narrowing from $11.1 billion to $7.4 billion. The trade sector will slice 0.5 percentage points from overall economic growth (GDP) in the June quarter. We expect that the economy expanded by 0.8 per cent in the June quarter.
What does it all mean?
The latest improvement in housing activity is encouraging. However, it by no means suggests a reversal of fortunes, especially given that the pickup in activity is off a low base. In addition, approvals are still down almost three per cent since the start of the year. And other metrics such as housing credit, auction clearance rates and building approvals have all been decidedly weak in recent times.
Housing credit is bouncing of the weakest levels in 34 years and the lack of activity in new construction is a clear dampener on the sector. The weakness in housing activity does have flow-on effects for other parts of the economy. Asset values are falling, share markets remain sluggish and the result is that consumer confidence is at two-year lows. And looking forward, businesses will continue to find conditions tough.
At present, it is clear that the housing sector is decidedly weak, and the latest improvement in housing finance at most only provides a modest degree of hope going forward. Aussie consumers were already hesitant about spending, and the sustained drop in home prices and weakness in share markets will entrench the current mood of nervousness across the country.
It is important to remember that the Reserve Bank has raised interest rates just once in the past 16 months yet an array of sectors are unwilling to borrow and spending remains subdued. Clearly, rate hikes are off the agenda for the next few months. However, it is interesting to note that financial market participants are getting more dovish with overnight indexed swaps factoring almost four interest rate cuts with the cash rate falling to 3.75 per cent in a year’s time.
It is likely that the Australian economy expanded in the June quarter, returning to growth after the floods and cyclone knocked around the growth estimates in the March quarter. Overall, we are tipping growth of around 0.8 per cent – only a partial rebound after the 1.2 per cent contraction in the March quarter. Clearly the domestic economy has lost momentum with annualised growth likely to post at around 0.4 per cent, and even the Reserve Bank is not expecting a robust recovery to take place until early 2012.
What do the figures show?
The number of new owner-occupier housing loans rose by one per cent in July holding at 49,813 new commitments. However, the number of new loans has still fallen by 2.6 per cent since the start of the year. The number of loans is now up 5.4 per cent higher than a year ago.
Loans for the construction of homes fell by 0.8 per cent in July to 4,757 – below the decade average of 4900. Loans for the purchase of established dwellings (ex refinancing) rose by 0.6 per cent, while loans for the purchase of newly erected dwellings fell by one per cent. Newly erected home purchases are now down 7.8 per cent on year ago.
The value of new housing commitments (owner-occupier and investment) rose by 1.6 per cent in July. Owner-occupier loans rose by 1.4 per cent while investment loans rose by 1.9 per cent.
Banks accounted for 92.7 per cent of all loans taken out in July, up from 92.5 per cent in June.
The proportion of first homebuyers in the market held steady at 15.2 per cent in July – well below the decade average of 18.2 per cent. Fixed rate loans accounted for just 6.3 per cent of all loans in July, down from 6.5 per cent of loans. And the average home loan across Australia stood at $293,400, up one per cent on a year ago.
Government consumption spending rose by 0.9 per cent in the June quarter after a 0.8 per cent lift in the March quarter. But total public investment fell by 3.8 per cent in the June quarter after a small 0.3 per cent lift in the March quarter. Overall, spending by the government sector fell by 0.4 per cent in the quarter.
The broad measure of Australia's external position - the current account – improved in the June quarter. The current account deficit narrowed by $3696 million to $7419 million in the June quarter. The balance of goods and services surplus rose from $2747 million to $5599 million. But the net income deficit improved by $870 million.
In the June quarter, the current account deficit narrowed from 3.2 per cent to 2.1 per cent of GDP.
In the June quarter, exports of goods and services rose by 2.6 per cent. Goods fell 3 per cent with services up 0.2 per cent. Imports rose by 4.3 per cent in the quarter. The trade sector (exports less imports) will slice 0.5 percentage points from economic growth in the June quarter.
Export prices rose by 5.4 per cent in the June quarter (goods up 6.2 per cent, services up 1.2 per cent) but import prices were flat (goods up 0.5 per cent, services down 1.9 per cent).
The terms of trade (ratio of export prices to import prices) rose by 5.4 per cent to a record high of 122.6 in the June quarter.
Net foreign debt rose by $0.4 billion to $675 billion in the June quarter. New transactions added $1.3 billion, price changes added $6.2 billion, exchange rate changes subtracted $7.7 billion and other changes added $0.6 billion. Net foreign debt held steady at 49.4 per cent of GDP.
What is the importance of the economic data?
Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally, people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth. Trade has been a drag on economic growth over the past four years with a lack of productive capacity holding back exports while rising incomes have boosted imports.
What are the implications for interest rates and investors?
Interest rates are on hold. That is without question. All the data over the past month portrays an economy that has lost momentum. The terms of trade may be at record highs, but in the suburbs that doesn’t pay the bills or get people out to the shopping malls, car yards or real estate agents.
Over the past eight months, it is clear that conditions in the housing sector have been soft. Buyers have been holding off on purchases in all areas. Loans for the construction of new dwellings – a key forward looking indicator of home building – is still down on a year ago. And loans to purchase newly established dwellings are still down a cumulative 16.8 per cent in the past eight months. Clearly it is too early to claim a revival in the fortunes of the housing sector and the sustained weakness in house prices is unlikely to turn around anytime soon.
The biggest risk in the current environment is that people will lose confidence and retreat further into their burrows. Australia can’t afford the ‘new conservatism’ taking hold in a major way.
The Reserve Bank has already acknowledged that the economy is softer than it had previously thought and the prospect of rate cuts cannot be ruled out if activity levels deteriorate further.
Loans for the purchase of newly erected dwellings fell by one per cent. However, they were still down 7.8 per cent on a year ago. Loans for the construction of homes fell by 0.8 per cent in July to 4,757 – below the decade average of 4900.
Government spending fell by 0.4 per cent in the June quarter after lifting by 0.7 per cent in the March quarter.
The broad measure of Australia's external position – the current account – improved in the June quarter with the deficit narrowing from $11.1 billion to $7.4 billion. The trade sector will slice 0.5 percentage points from overall economic growth (GDP) in the June quarter. We expect that the economy expanded by 0.8 per cent in the June quarter.
What does it all mean?
The latest improvement in housing activity is encouraging. However, it by no means suggests a reversal of fortunes, especially given that the pickup in activity is off a low base. In addition, approvals are still down almost three per cent since the start of the year. And other metrics such as housing credit, auction clearance rates and building approvals have all been decidedly weak in recent times.
Housing credit is bouncing of the weakest levels in 34 years and the lack of activity in new construction is a clear dampener on the sector. The weakness in housing activity does have flow-on effects for other parts of the economy. Asset values are falling, share markets remain sluggish and the result is that consumer confidence is at two-year lows. And looking forward, businesses will continue to find conditions tough.
At present, it is clear that the housing sector is decidedly weak, and the latest improvement in housing finance at most only provides a modest degree of hope going forward. Aussie consumers were already hesitant about spending, and the sustained drop in home prices and weakness in share markets will entrench the current mood of nervousness across the country.
It is important to remember that the Reserve Bank has raised interest rates just once in the past 16 months yet an array of sectors are unwilling to borrow and spending remains subdued. Clearly, rate hikes are off the agenda for the next few months. However, it is interesting to note that financial market participants are getting more dovish with overnight indexed swaps factoring almost four interest rate cuts with the cash rate falling to 3.75 per cent in a year’s time.
It is likely that the Australian economy expanded in the June quarter, returning to growth after the floods and cyclone knocked around the growth estimates in the March quarter. Overall, we are tipping growth of around 0.8 per cent – only a partial rebound after the 1.2 per cent contraction in the March quarter. Clearly the domestic economy has lost momentum with annualised growth likely to post at around 0.4 per cent, and even the Reserve Bank is not expecting a robust recovery to take place until early 2012.
What do the figures show?
The number of new owner-occupier housing loans rose by one per cent in July holding at 49,813 new commitments. However, the number of new loans has still fallen by 2.6 per cent since the start of the year. The number of loans is now up 5.4 per cent higher than a year ago.
Loans for the construction of homes fell by 0.8 per cent in July to 4,757 – below the decade average of 4900. Loans for the purchase of established dwellings (ex refinancing) rose by 0.6 per cent, while loans for the purchase of newly erected dwellings fell by one per cent. Newly erected home purchases are now down 7.8 per cent on year ago.
The value of new housing commitments (owner-occupier and investment) rose by 1.6 per cent in July. Owner-occupier loans rose by 1.4 per cent while investment loans rose by 1.9 per cent.
Banks accounted for 92.7 per cent of all loans taken out in July, up from 92.5 per cent in June.
The proportion of first homebuyers in the market held steady at 15.2 per cent in July – well below the decade average of 18.2 per cent. Fixed rate loans accounted for just 6.3 per cent of all loans in July, down from 6.5 per cent of loans. And the average home loan across Australia stood at $293,400, up one per cent on a year ago.
Government consumption spending rose by 0.9 per cent in the June quarter after a 0.8 per cent lift in the March quarter. But total public investment fell by 3.8 per cent in the June quarter after a small 0.3 per cent lift in the March quarter. Overall, spending by the government sector fell by 0.4 per cent in the quarter.
The broad measure of Australia's external position - the current account – improved in the June quarter. The current account deficit narrowed by $3696 million to $7419 million in the June quarter. The balance of goods and services surplus rose from $2747 million to $5599 million. But the net income deficit improved by $870 million.
In the June quarter, the current account deficit narrowed from 3.2 per cent to 2.1 per cent of GDP.
In the June quarter, exports of goods and services rose by 2.6 per cent. Goods fell 3 per cent with services up 0.2 per cent. Imports rose by 4.3 per cent in the quarter. The trade sector (exports less imports) will slice 0.5 percentage points from economic growth in the June quarter.
Export prices rose by 5.4 per cent in the June quarter (goods up 6.2 per cent, services up 1.2 per cent) but import prices were flat (goods up 0.5 per cent, services down 1.9 per cent).
The terms of trade (ratio of export prices to import prices) rose by 5.4 per cent to a record high of 122.6 in the June quarter.
Net foreign debt rose by $0.4 billion to $675 billion in the June quarter. New transactions added $1.3 billion, price changes added $6.2 billion, exchange rate changes subtracted $7.7 billion and other changes added $0.6 billion. Net foreign debt held steady at 49.4 per cent of GDP.
What is the importance of the economic data?
Housing Finance data is produced monthly by the Bureau of Statistics and shows commitments by lenders, such as banks, to provide finance for housing purposes. The lending figures relate to those looking to buy or build homes to live in as well as those seeking to buy or build homes for investment purposes. Generally, people get their finance organised first, so the figures are regarded as a leading indicator on the housing market.
The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth. Trade has been a drag on economic growth over the past four years with a lack of productive capacity holding back exports while rising incomes have boosted imports.
What are the implications for interest rates and investors?
Interest rates are on hold. That is without question. All the data over the past month portrays an economy that has lost momentum. The terms of trade may be at record highs, but in the suburbs that doesn’t pay the bills or get people out to the shopping malls, car yards or real estate agents.
Over the past eight months, it is clear that conditions in the housing sector have been soft. Buyers have been holding off on purchases in all areas. Loans for the construction of new dwellings – a key forward looking indicator of home building – is still down on a year ago. And loans to purchase newly established dwellings are still down a cumulative 16.8 per cent in the past eight months. Clearly it is too early to claim a revival in the fortunes of the housing sector and the sustained weakness in house prices is unlikely to turn around anytime soon.
The biggest risk in the current environment is that people will lose confidence and retreat further into their burrows. Australia can’t afford the ‘new conservatism’ taking hold in a major way.
The Reserve Bank has already acknowledged that the economy is softer than it had previously thought and the prospect of rate cuts cannot be ruled out if activity levels deteriorate further.
That’s Not a Landbank, It’s a Housing Glut
“PROPERTY speculators have locked up 46,220 empty homes in metropolitan Melbourne, the housing campaign group Earthsharing Australia says.
“In a documentary soon to be released, Real Estate 4 Ransom, the group says that 4.95 per cent of the city's potential housing stock is unoccupied, double the rental vacancy rate of 2.4 per cent published last week by the Real Estate Institute of Victoria.” – The Age
Personally, we don’t believe a word of it.
You know we’ve criticised property investors for their unwavering belief that property prices always go up. And even if they don’t go up, they’ll never fall.
But we don’t believe for one minute – not even one second – landlords are purposely leaving properties vacant.
Instead, it proves two things we’ve said all along…
House price indices hiding the housing bust
First, that Australian housing is experiencing the consequences of a price bubble.
And second, there isn’t a housing shortage.
Before we go into the details, it’s important to make one point. Do not, under any circumstances rely on house price indices to give an accurate gauge of house prices.
If you believe the indices you’d think house prices have had a steady decline… that Melbourne prices are only down about 1-3%... that Sydney prices have gone up a bit… and Perth prices are only down 6%.
The reality is far different. If you’ve kept your eye on the property market – as we have – you’ll know prices in many suburbs have fallen much further. And those who refuse to cut the price are, well, taking a price cut anyway.
How?
Because they’re paying more in interest charges.
You see this all the time. Folks hang out for the extra $20-30 thousand they believe their house is worth. But because it takes them an extra six months to sell the place, even if they get the asking price they’ve most likely paid more than 20 grand in extra interest repayments.
But more likely is after six months they work out they ain’t gonna get the asking price. So not only do they sell at a lower price… but they’ve just forked out an extra six months of interest to the bank.
That’s the real danger of using housing indices to gauge the market. It’s made sellers foolishly think they’ll get the same price their neighbour got when they sold two years ago – “House prices are flat...” or “House prices are only down 1%...”
Sorry home owners, house prices are in a hole… a deep hole.
Which is why, as we’ve said for the last few months, if you’re patient and you’re not over-extending yourself, there are some good value homes on the market right now. We won’t say they’re cheap. And we won’t say prices can’t fall further.
But as long as you’re not going into it with the old-fashioned belief that house prices double every seven years, you’re more likely to pay a sensible price. Because we mean it, house prices will not double over the next seven years.
If you’re lucky, your discounted purchase will be the same price as it is today. More likely it’ll be cheaper. So the attitude you need to take is that making mortgage payments will be similar to making rental payments. In other words, you’re paying a price for shelter.
And because shelter is a consumption item, that makes it a cost (liability)… and not an asset.
But let’s get back to today’s story in The Age – the idea that speculators are purposely leaving properties vacant.
Housing shortage doesn’t exist
It’s nonsense. They’re doing no such thing… or not intentionally anyway.
The high vacancy rate just shows there isn’t a housing shortage. Those properties are vacant because the landlord has an unrealistic idea of the price people will pay for shelter.
The vacancy rates and high rents are just a result of a housing bubble. Investors leverage up and pay any old price in the belief house prices double every seven years. But soon enough the investor figures out they’ve paid too much and can’t afford the mortgage.
Their only option is to charge high rents to offset some of the cost. And why wouldn’t they… there’s a housing and rental shortage… renters will surely pay any stupid price… they’re desperate… right? Turns out renters aren’t so desperate after all.
Because there is not a housing or rental shortage. This means renters can be choosy. And right now, they’re being choosy.
They don’t need to pay the inflated prices demanded by some landlords when they can shop around for a cheaper price somewhere else. And that means those high-rent properties remain vacant.
But that’s not all. It gets worse for the “hold-out” landlords…
Because there are so many landlords in Australia there’s zero chance of a landlord cartel forming. The landlords who wise up to the madness or aren’t as leveraged as the peak buyers can afford to drop their rents… or charge realistic market prices.
So at some point the super-leveraged landlords will have to give in. They’ll either sell at a loss or drop the rent to at least get some cash flow coming in… and then pray house prices go up again.
You see, land banking only works if asset values continue to rise… and if the rising value outpaces holding costs.
At this point in the housing market, land banking with leverage just isn’t profitable. Many landlords have already figured this out. And the rest will soon get the hang of it.
It’s like buying shares in a margin-lending account during a time when there’s no market growth. If the stock pays a dividend you’ll claw back some of the holding costs. But if it doesn’t pay a dividend then it’s the same as having an investment property without a tenant… it’s a loss maker.
Greater fools taking a bath
In short, it’s nothing more than an extension of the Greater Fool theory. The idea that it doesn’t matter how much you pay for something there will always be someone else who’ll buy it from you at a higher price.
Speculators who thought they could get rich flipping properties have taken a bath, holding stock that’s now fallen in value. And now speculators who thought they could charge enormous rents due to a so-called housing shortage and rental boom are taking the same bath – we hope the water’s clean!
Of course, it’s not all bad news for property investors. If you’ve got no or low leverage on the property you can take the hit or drop the rent to the market price easier than the over-leveraged landlords.
All up, we don’t know what point the lobby group mentioned in the report is trying to make. But it seems to us it’s just helping to prolong the housing shortage myth.
As we’ve said all along, it’s not the availability of housing that’s the problem. It’s the overblown expectations of investors and landlords who think they can charge any old rent and expect tenants to pay up.
Unfortunately for them, they’re learning a lesson the hard way.
Cheers.
Kris Sayce
Money Morning Australia
“In a documentary soon to be released, Real Estate 4 Ransom, the group says that 4.95 per cent of the city's potential housing stock is unoccupied, double the rental vacancy rate of 2.4 per cent published last week by the Real Estate Institute of Victoria.” – The Age
Personally, we don’t believe a word of it.
You know we’ve criticised property investors for their unwavering belief that property prices always go up. And even if they don’t go up, they’ll never fall.
But we don’t believe for one minute – not even one second – landlords are purposely leaving properties vacant.
Instead, it proves two things we’ve said all along…
House price indices hiding the housing bust
First, that Australian housing is experiencing the consequences of a price bubble.
And second, there isn’t a housing shortage.
Before we go into the details, it’s important to make one point. Do not, under any circumstances rely on house price indices to give an accurate gauge of house prices.
If you believe the indices you’d think house prices have had a steady decline… that Melbourne prices are only down about 1-3%... that Sydney prices have gone up a bit… and Perth prices are only down 6%.
The reality is far different. If you’ve kept your eye on the property market – as we have – you’ll know prices in many suburbs have fallen much further. And those who refuse to cut the price are, well, taking a price cut anyway.
How?
Because they’re paying more in interest charges.
You see this all the time. Folks hang out for the extra $20-30 thousand they believe their house is worth. But because it takes them an extra six months to sell the place, even if they get the asking price they’ve most likely paid more than 20 grand in extra interest repayments.
But more likely is after six months they work out they ain’t gonna get the asking price. So not only do they sell at a lower price… but they’ve just forked out an extra six months of interest to the bank.
That’s the real danger of using housing indices to gauge the market. It’s made sellers foolishly think they’ll get the same price their neighbour got when they sold two years ago – “House prices are flat...” or “House prices are only down 1%...”
Sorry home owners, house prices are in a hole… a deep hole.
Which is why, as we’ve said for the last few months, if you’re patient and you’re not over-extending yourself, there are some good value homes on the market right now. We won’t say they’re cheap. And we won’t say prices can’t fall further.
But as long as you’re not going into it with the old-fashioned belief that house prices double every seven years, you’re more likely to pay a sensible price. Because we mean it, house prices will not double over the next seven years.
If you’re lucky, your discounted purchase will be the same price as it is today. More likely it’ll be cheaper. So the attitude you need to take is that making mortgage payments will be similar to making rental payments. In other words, you’re paying a price for shelter.
And because shelter is a consumption item, that makes it a cost (liability)… and not an asset.
But let’s get back to today’s story in The Age – the idea that speculators are purposely leaving properties vacant.
Housing shortage doesn’t exist
It’s nonsense. They’re doing no such thing… or not intentionally anyway.
The high vacancy rate just shows there isn’t a housing shortage. Those properties are vacant because the landlord has an unrealistic idea of the price people will pay for shelter.
The vacancy rates and high rents are just a result of a housing bubble. Investors leverage up and pay any old price in the belief house prices double every seven years. But soon enough the investor figures out they’ve paid too much and can’t afford the mortgage.
Their only option is to charge high rents to offset some of the cost. And why wouldn’t they… there’s a housing and rental shortage… renters will surely pay any stupid price… they’re desperate… right? Turns out renters aren’t so desperate after all.
Because there is not a housing or rental shortage. This means renters can be choosy. And right now, they’re being choosy.
They don’t need to pay the inflated prices demanded by some landlords when they can shop around for a cheaper price somewhere else. And that means those high-rent properties remain vacant.
But that’s not all. It gets worse for the “hold-out” landlords…
Because there are so many landlords in Australia there’s zero chance of a landlord cartel forming. The landlords who wise up to the madness or aren’t as leveraged as the peak buyers can afford to drop their rents… or charge realistic market prices.
So at some point the super-leveraged landlords will have to give in. They’ll either sell at a loss or drop the rent to at least get some cash flow coming in… and then pray house prices go up again.
You see, land banking only works if asset values continue to rise… and if the rising value outpaces holding costs.
At this point in the housing market, land banking with leverage just isn’t profitable. Many landlords have already figured this out. And the rest will soon get the hang of it.
It’s like buying shares in a margin-lending account during a time when there’s no market growth. If the stock pays a dividend you’ll claw back some of the holding costs. But if it doesn’t pay a dividend then it’s the same as having an investment property without a tenant… it’s a loss maker.
Greater fools taking a bath
In short, it’s nothing more than an extension of the Greater Fool theory. The idea that it doesn’t matter how much you pay for something there will always be someone else who’ll buy it from you at a higher price.
Speculators who thought they could get rich flipping properties have taken a bath, holding stock that’s now fallen in value. And now speculators who thought they could charge enormous rents due to a so-called housing shortage and rental boom are taking the same bath – we hope the water’s clean!
Of course, it’s not all bad news for property investors. If you’ve got no or low leverage on the property you can take the hit or drop the rent to the market price easier than the over-leveraged landlords.
All up, we don’t know what point the lobby group mentioned in the report is trying to make. But it seems to us it’s just helping to prolong the housing shortage myth.
As we’ve said all along, it’s not the availability of housing that’s the problem. It’s the overblown expectations of investors and landlords who think they can charge any old rent and expect tenants to pay up.
Unfortunately for them, they’re learning a lesson the hard way.
Cheers.
Kris Sayce
Money Morning Australia
Real Estate Report - 11/07/11
Good news for borrowers, the Reserve Bank has left rates on hold at 4.75 per cent. The Governor says that growth in 2011, "is unlikely to be as strong as earlier forecast". Each quarter of a per cent interest rate rise adds another $60 to the monthly cost of the average Australian mortgage. With the official interest rate steady at 4.75 per cent, most mortgage holders are being charged a standard variable rate of 7.83 per cent by lenders.
Building approvals have hit a two year low. Dwelling approvals fell more than anticipated, with a 7.9 per cent fall in May. Approvals have now fallen 14.5 per cent this year. Building approval rates in Victoria and NSW fell significantly. Western Australia and South Australia posted modest gains. Weakness was concentrated in the volatile private sector units component falling just over 20 per cent – comprising of multi-unit apartment developments. The more stable seasonally adjusted estimate for private sector houses approved rose 0.7 per cent in May. Renovation approvals is trending higher at a 10 per cent annual pace, with Queensland activity after the floods a clear driver.
The Australian Industry Group Australian Performance of Construction Index in conjunction with the Housing Industry Association dropped 3.8 points in June to 35.8. It’s the thirteenth month in a row below the 50 threshold separating growth and contraction. HIA said potential interest rate rises and consumer caution have been subduing the market.
The Housing Industry Association’s report card has forecast a fall of 13 per cent in housing starts over the two year period from mid 2010 to mid 2012. On a more positive note the renovations segment of the housing market is forecast to grow 2.7 percent in the 2011 financial year.
Now to the Carbon Tax, HIA estimates it will increase the cost of the average new home by between $5000 and $6000 based on a $20 per tonne carbon price. More details to follow in the coming weeks.
Building approvals have hit a two year low. Dwelling approvals fell more than anticipated, with a 7.9 per cent fall in May. Approvals have now fallen 14.5 per cent this year. Building approval rates in Victoria and NSW fell significantly. Western Australia and South Australia posted modest gains. Weakness was concentrated in the volatile private sector units component falling just over 20 per cent – comprising of multi-unit apartment developments. The more stable seasonally adjusted estimate for private sector houses approved rose 0.7 per cent in May. Renovation approvals is trending higher at a 10 per cent annual pace, with Queensland activity after the floods a clear driver.
The Australian Industry Group Australian Performance of Construction Index in conjunction with the Housing Industry Association dropped 3.8 points in June to 35.8. It’s the thirteenth month in a row below the 50 threshold separating growth and contraction. HIA said potential interest rate rises and consumer caution have been subduing the market.
The Housing Industry Association’s report card has forecast a fall of 13 per cent in housing starts over the two year period from mid 2010 to mid 2012. On a more positive note the renovations segment of the housing market is forecast to grow 2.7 percent in the 2011 financial year.
Now to the Carbon Tax, HIA estimates it will increase the cost of the average new home by between $5000 and $6000 based on a $20 per tonne carbon price. More details to follow in the coming weeks.
Newsletter
Home sales lift
• New home sales rose by 4.3 per cent in March after rising by 0.6 per cent in February. Private sector house sales rose by 5.8 per cent in March while multi-unit sales dropped by 10 per cent. New home sales are still down 5.1 per cent on a year ago.
• The Performance of Services index rose by 5 points to 51.5 in April – marking the first expansion in the sector in six months. Key sub indices, sales and new orders contracted at a slower pace, while employment recorded its best reading in over six years.
• New home sales rose by 4.3 per cent in March after rising by 0.6 per cent in February. Private sector house sales rose by 5.8 per cent in March while multi-unit sales dropped by 10 per cent. New home sales are still down 5.1 per cent on a year ago.
• The Performance of Services index rose by 5 points to 51.5 in April – marking the first expansion in the sector in six months. Key sub indices, sales and new orders contracted at a slower pace, while employment recorded its best reading in over six years.
What does it all mean?
• All the data today points to an economy that seems to be attempting to recover from the rapid rate hikes of last year. The 4.3 per cent rise in new homes sales is a welcome sight given that activity levels have been subdued over the past year.
• Despite the pickup in home sales, the housing sector is in for a extended period of consolidation. Housing finance - a good indicator of future home sales - has come of the boil and property prices recorded its biggest quarterly fall in years over the March quarter. In addition new home sales are still down over 5 per cent on a year ago.
• Fundamentally, there are good reasons for home building to increase. The rental market is still tight and population growth is healthy. And with the labour market remaining strong, investor housing demand is likely to pickup pace in the second half of 2011.
• The services sector is growing for the first time in six months. However you cannot really read too much into what on face value looks like an encouraging result. Especially given that the service sector has been doing it tough over the past year and the latest improvement comes after a bout of serious weakness. In addition key sub indices like sales and forward orders are still contracting, albeit at a slower pace.
• Official interest rates have been on hold for six months and no doubt the lack of rate hikes is allowing businesses and consumers to get back to basics. However there are a couple of factors that will ensure activity remains relatively subdued in the near term, including a stronger currency, conservative buying behaviour of consumers and businesses and the added pressures on the household budget.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs and wages remain elevated but selling prices are only modestly rising. In fact the wages sub index of the service survey recorded its highest reading in almost three years. A further period of interest rate stability would clearly help the situation.
• The general perception is that food prices only go one way – and that’s up. But surprisingly almost 40 per cent of commonly purchased weekly retail items like grocery items, alcohol and petrol actually fell in price during the March quarter. And if it wasn’t for the floods and cyclone, the proportion of items falling in price would have been even higher. It certainly pays to look more closely at prices of the goods we buy, rather than to just take the advice of so-called “experts” that inflation is on the rise.
• The slide in car sales in April cannot be looked at on its own given the timing of Easter. This year Easter occurred super late compared with last year coupled with a five day long weekend. Unfortunately seasonal adjustment programs find it difficult to account for the “Easter effect”, so it may result in super-strong results in March followed by a weaker result in April. Clearly it will be a case of adding the two months together to find out what is happening. Overall CommSec estimates car sales fell by 1 per cent in seasonally adjusted terms in April.
• All the data today points to an economy that seems to be attempting to recover from the rapid rate hikes of last year. The 4.3 per cent rise in new homes sales is a welcome sight given that activity levels have been subdued over the past year.
• Despite the pickup in home sales, the housing sector is in for a extended period of consolidation. Housing finance - a good indicator of future home sales - has come of the boil and property prices recorded its biggest quarterly fall in years over the March quarter. In addition new home sales are still down over 5 per cent on a year ago.
• Fundamentally, there are good reasons for home building to increase. The rental market is still tight and population growth is healthy. And with the labour market remaining strong, investor housing demand is likely to pickup pace in the second half of 2011.
• The services sector is growing for the first time in six months. However you cannot really read too much into what on face value looks like an encouraging result. Especially given that the service sector has been doing it tough over the past year and the latest improvement comes after a bout of serious weakness. In addition key sub indices like sales and forward orders are still contracting, albeit at a slower pace.
• Official interest rates have been on hold for six months and no doubt the lack of rate hikes is allowing businesses and consumers to get back to basics. However there are a couple of factors that will ensure activity remains relatively subdued in the near term, including a stronger currency, conservative buying behaviour of consumers and businesses and the added pressures on the household budget.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Input costs and wages remain elevated but selling prices are only modestly rising. In fact the wages sub index of the service survey recorded its highest reading in almost three years. A further period of interest rate stability would clearly help the situation.
• The general perception is that food prices only go one way – and that’s up. But surprisingly almost 40 per cent of commonly purchased weekly retail items like grocery items, alcohol and petrol actually fell in price during the March quarter. And if it wasn’t for the floods and cyclone, the proportion of items falling in price would have been even higher. It certainly pays to look more closely at prices of the goods we buy, rather than to just take the advice of so-called “experts” that inflation is on the rise.
• The slide in car sales in April cannot be looked at on its own given the timing of Easter. This year Easter occurred super late compared with last year coupled with a five day long weekend. Unfortunately seasonal adjustment programs find it difficult to account for the “Easter effect”, so it may result in super-strong results in March followed by a weaker result in April. Clearly it will be a case of adding the two months together to find out what is happening. Overall CommSec estimates car sales fell by 1 per cent in seasonally adjusted terms in April.
What do the figures show?
Quarterly retail prices:
• The Bureau of Statistics has released average prices for 51 key consumer products for the March quarter, ranging from bananas to beer and even petrol. Using averages for the eight capital cities, CommSec has calculated that 32 of the 51 items rose in price during the quarter while the remaining 19 items actually became cheaper. The biggest price increase was by bananas (up 89.8 per cent), followed by oranges (up 19.3 per cent) and onions (up 12.5 per cent). At the other end of the scale, the price of milk fell by 14.5 per cent in the quarter, followed by baked beans (down 7.4 per cent) and tinned peaches (down 4.2 per cent).
• Other notable price changes: petrol (up 8.3 per cent), packaged beer (down 0.9 per cent), bread (down 1.1 per cent), T-bone steak (down 2.4 per cent), free range eggs (down 3.3 per cent).
Car sales
• The Federal Chamber of Automotive Industries reported that 74,214 new cars were sold in April, down 8.8 per cent on a year ago. Passenger car sales were 11.9 per cent lower than a year ago, 4WDs were down 5.6 per cent and “other vehicles” (trucks, utes etc) were down 3.6 per cent.
New home sales
• The Housing Industry Association reported that new home sales rose by 4.3 per cent in March after a 0.6 per cent rise in February. Private sector detached house sales rose by 5.8 per cent in March while multi-unit sales dropped by 10 per cent.
• Across the states detached new house sales increased by: 13.5 per cent in New South Wales, 11.1 per cent in Queensland, 3.6 per cent in Victoria, and 3.1 per cent in Western Australia. Sales fell by 6.4 per cent in South Australia
• The Housing Industry Association noted that “The volume of new home sales remains subdued, within which the stronger result for March is certainly a welcome outcome.”
Performance of Services
• The Performance of Services index rose by 5 points in April to 51.5, marking the first expansion in the sector in six months. The key 50.0 level separates expansion from contraction. Sales and new orders contracted at a slower pace, while employment recorded its best reading in over six years.
• Selling prices rose modestly while wages accelerated sharply with the sub index recording its highest reading in wages and selling prices were higher.
What is the importance of the economic data?
• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.
• The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia's largest 100 home builders.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.
Quarterly retail prices:
• The Bureau of Statistics has released average prices for 51 key consumer products for the March quarter, ranging from bananas to beer and even petrol. Using averages for the eight capital cities, CommSec has calculated that 32 of the 51 items rose in price during the quarter while the remaining 19 items actually became cheaper. The biggest price increase was by bananas (up 89.8 per cent), followed by oranges (up 19.3 per cent) and onions (up 12.5 per cent). At the other end of the scale, the price of milk fell by 14.5 per cent in the quarter, followed by baked beans (down 7.4 per cent) and tinned peaches (down 4.2 per cent).
• Other notable price changes: petrol (up 8.3 per cent), packaged beer (down 0.9 per cent), bread (down 1.1 per cent), T-bone steak (down 2.4 per cent), free range eggs (down 3.3 per cent).
Car sales
• The Federal Chamber of Automotive Industries reported that 74,214 new cars were sold in April, down 8.8 per cent on a year ago. Passenger car sales were 11.9 per cent lower than a year ago, 4WDs were down 5.6 per cent and “other vehicles” (trucks, utes etc) were down 3.6 per cent.
New home sales
• The Housing Industry Association reported that new home sales rose by 4.3 per cent in March after a 0.6 per cent rise in February. Private sector detached house sales rose by 5.8 per cent in March while multi-unit sales dropped by 10 per cent.
• Across the states detached new house sales increased by: 13.5 per cent in New South Wales, 11.1 per cent in Queensland, 3.6 per cent in Victoria, and 3.1 per cent in Western Australia. Sales fell by 6.4 per cent in South Australia
• The Housing Industry Association noted that “The volume of new home sales remains subdued, within which the stronger result for March is certainly a welcome outcome.”
Performance of Services
• The Performance of Services index rose by 5 points in April to 51.5, marking the first expansion in the sector in six months. The key 50.0 level separates expansion from contraction. Sales and new orders contracted at a slower pace, while employment recorded its best reading in over six years.
• Selling prices rose modestly while wages accelerated sharply with the sub index recording its highest reading in wages and selling prices were higher.
What is the importance of the economic data?
• The Federal Chamber of Automotive Industries release figures on new car sales at the start of each month. The data is useful in gauging consumer spending behaviour.
• The Housing Industry Association releases data on the sales of new homes each month. The HIA collects the data each month from a sample of Australia's largest 100 home builders.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.
What are the implications for interest rates and investors?
• Interest rates are already restrictive and the Reserve Bank would be best staying on the interest rate sidelines in the near term – especially given that inflation is well contained at present. Food inflation is an issue in other parts of the world however it is still well contained domestically. The floods in Queensland together with Cyclone Yasi have led to price rises for a select number of fruit and vegetable products, but prices have already started to fall.
• The cumulative rate hikes, hangover effect from the expiry of the first home buyer grant and appreciation in property prices has given potential home buyers a valid reason to be more circumspect about future purchases. However the rebuilding phase in flood ravaged towns is likely to support construction activity in the midterm.
• Interest rates are already restrictive and the Reserve Bank would be best staying on the interest rate sidelines in the near term – especially given that inflation is well contained at present. Food inflation is an issue in other parts of the world however it is still well contained domestically. The floods in Queensland together with Cyclone Yasi have led to price rises for a select number of fruit and vegetable products, but prices have already started to fall.
• The cumulative rate hikes, hangover effect from the expiry of the first home buyer grant and appreciation in property prices has given potential home buyers a valid reason to be more circumspect about future purchases. However the rebuilding phase in flood ravaged towns is likely to support construction activity in the midterm.
Source: Paidonexchange.com.au
Australia's fastest growing regions
Over the 12 months to June 2009 and in raw number terms the states which recorded the greatest growth in population were: New South Wales (119,534), Queensland (116,533), Victoria (116,250) and Western Australia (68,077).
In this week’s blog we take a look at the trends in regional population growth analyzing the 25 fastest growing Local Government Areas (LGA) of the country based on the total increase in population.
In Queensland the LGA’s tend to be larger (especially after recent amalgamations) and Queensland LGA’s occupy four of the top five positions of fastest growing areas. Six of the eight Queensland LGA’s are located in the south-east corner of the state and the remaining two are the large regional cities in North Queensland (Townsville and Cairns).
New South Wales recorded five regions within the top 25 fastest growing LGA’s, all of which were situated within the Sydney metro area and most were situated in the outskirts of the City in areas which are relatively affordable. The exception was the Sydney LGA which is recording strong population growth thanks to inner city densification.
Western Australia had three LGA’s on the list all of which were located in the outer precincts and can be broadly described as providing more affordable housing than areas close to the city.
Finally in the Australian Capital Territory the Unincorporated ACT LGA, which covers most of the Territory, was the nation’s 13th fastest growing LGA during the period.
The clear trend is that populations are tending to grow the most in the outer more affordable regions of our major population centres. It’s not really surprising given that these major regions have the largest amount of land available for greenfield development, the strongest job prospects and most abundant amenity. In saying this, poor infrastructure provision in these areas often makes travelling around the city difficult and time consuming
We would expect these trends to continue however, we feel it would be beneficial for Government’s to encourage population growth in areas outside of these regions to ease the strain on infrastructure which is already insufficient in the majority of these regions.
Related posts:
In this week’s blog we take a look at the trends in regional population growth analyzing the 25 fastest growing Local Government Areas (LGA) of the country based on the total increase in population.
Australia’s 25 fastest growing Local Government Areas
Source: rpdata.com, ABS
Victoria and Queensland each had eight LGA’s in the top 25. In Victoria all of the areas except for Greater Geelong where located within the Greater Melbourne metro area. All of the Melbourne LGA’s could be characterized as being on the outer fringes of the city and in locations which generally enjoy relatively affordable house prices. Of course greater Geelong, although being outside of Melbourne, is within commuting distance to the city and once more house prices in this region are relatively affordable compared to Inner Melbourne prices.In Queensland the LGA’s tend to be larger (especially after recent amalgamations) and Queensland LGA’s occupy four of the top five positions of fastest growing areas. Six of the eight Queensland LGA’s are located in the south-east corner of the state and the remaining two are the large regional cities in North Queensland (Townsville and Cairns).
New South Wales recorded five regions within the top 25 fastest growing LGA’s, all of which were situated within the Sydney metro area and most were situated in the outskirts of the City in areas which are relatively affordable. The exception was the Sydney LGA which is recording strong population growth thanks to inner city densification.
Western Australia had three LGA’s on the list all of which were located in the outer precincts and can be broadly described as providing more affordable housing than areas close to the city.
Finally in the Australian Capital Territory the Unincorporated ACT LGA, which covers most of the Territory, was the nation’s 13th fastest growing LGA during the period.
The clear trend is that populations are tending to grow the most in the outer more affordable regions of our major population centres. It’s not really surprising given that these major regions have the largest amount of land available for greenfield development, the strongest job prospects and most abundant amenity. In saying this, poor infrastructure provision in these areas often makes travelling around the city difficult and time consuming
We would expect these trends to continue however, we feel it would be beneficial for Government’s to encourage population growth in areas outside of these regions to ease the strain on infrastructure which is already insufficient in the majority of these regions.
Related posts:
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