Matusik Missive

I am showing my age but when I read about rapidly rising house prices, I ­think here we go again, more BS about a housing bubble.

In recent months house price rises have paralleled those that occurred in the late 1980s – the monthly rise of 2.8% in March was the strongest jump in house prices we have seen since October 1988 – and there are suggestions that house prices could rise by as much as 20% this year alone.

Whilst periods of rapid house price escalation essentially come down to the forces of supply and demand – albeit with varying quantities of exuberance – the precise details of these housing booms are not the same.

Past booms

In the late 1980s a credit boom helped lift housing demand.  Also, at that time, high and rising inflation – despite very high mortgage rates – helped reduced the real cost of mortgages, further lifting demand.  New housing supply was also tight.

In the late 1990s/early 2000s the mining boom and strong investor demand drove up prices.  Many regional towns overshot.  The changes made to the capital gains tax regime (and the introduction of FHOG) at the time poured petrol onto the fire.

In the mid-to late 2010s, overseas immigration was an important driver of rising house prices, particularly investment by residents born in China.  Favourable changes to FIRB rules plus numerous interest rate falls helped create a housing boom.  Again, investors drove demand and apartment construction soared.

The current boom

The current boom is somewhat different as owner residents, especially first home buyers, not investors are driving demand.

Monies that usually would have been spent on going out and travel, especially overseas trips, has now been focused on the home.  Given owner occupiers are the driving force, demand is strongest for detached houses and smaller infill products rather than high rise apartments.

The most recent stats suggest that owner-occupier loans made up more than three-quarters of all home loans approved.  There were more than 16,000 first-home buyer loans approved in February this year compared to about 7,000 during the same month 5 years ago.

First-home buyers have been assisted by various federal and state government initiatives plus the Bank of Mum and Dad.  Home-owning parents are helping their kids bridge deposit gaps.  It is ­estimated that the average value of such gifts/loans is now close to $90,000.

Covid also saw the implementation of the HomeBuilder incentive which – despite low population growth – brought forward the demand for new builds whilst exhausting new land supply.

Covid related travel restrictions has also placed a brake on the amount of resale stock usually on offer, with national listings currently down 17% on this time last year.

State of play

An increase in supply and/or a reduction in demand does mitigate price growth.

Some are now calling that house prices fall next year with the most common denominator being an increase in supply.

According to UBS some 40% of JobKeeper recipients own a home and their recent survey suggests that 70% these homeowners plan to sell their home in the next 12 months.  If this happens it would double the number of homes for sale which would take some heat out of the housing market.

Demand could also be cooled by tightening lending criteria or rising costs.

However, housing markets aren’t uniform because people have strong preferences about where they want to live and/or what type of home they want to live in.  Many desirable areas are effectively built out, short of the intrusion of high-rise and in-fill developments to which many residents object.  Many still prize detached housing over an attached dwelling. Releasing more land in the outer burbs doesn’t really affect the price of homes in the inner or middle-ring suburbs.  More downtown apartments rarely results in nearby house values falling.

In addition, once house prices have risen, there’s a serious policy dilemma for governments.  For those in the market, particularly recent purchasers, there’s a lot riding on prices not falling.  Plus, there are more home owners than ­potential purchasers or renters.

For this reason, neither the federal nor state governments are likely to introduce any policies, such as new housing taxes, that could push prices (or rents) down significantly.  This is especially the case in the lead up to a federal election.

For mine, New Zealand’s raft of new taxes on investors won’t be repeated here and they are likely to be withdrawn there soon too.  Paul Keating (late 1980s) Mark 2.

Moreover, I believe that the Australian government will lift housing demand as soon as possible by resuming immigration and its initial return is likely to be higher than recent intakes.

Past busts?

So, what actually happened back in 1988?

House prices rose by about 12% and then they rose by close to 24% in 1989, bringing the cumulative lift to more than 35% in two years.

And between 1990 and 1991 prices fell by around 10%, then they did stuff all for much of the 1990s.

The chart below suggests than past busts have really been slumps. 

For now, all signals suggest that national residential property prices are likely to keep rising for the rest of this year.

Forecasting further out is harder, except to say the longer the current exuberance is allowed to continue, the more likely we will see house prices fall next year.

More pertinently I believe that once this current boom runs its course, we are likely to see a long period of price stagnation.  I am thinking a decade not years.

Much is said about wage growth and the expectation that it will increase once unemployment falls.

Many dismal scientists have been claiming a return to half decent wage growth for yonks, yet it remains lost, allusive at best.

I have been writing for some time that wage growth is likely to remain low and many of the new jobs created are likely to be lower paying ones.

The fact that Uber is now Australia’s top employer – behind Coles and Woolworths – speaks volumes.

Also, the regions are likely to see more lower paying jobs in the future than the capital cities.

The reason for less wage growth is that unemployment remains persistently high and so does underemployment.  The underemployed want to work more hours.

The ABS measurements here are next to worthless.  Roy Morgan’s regular surveys paint a more realistic picture.

At present annual wage growth is higher than CPI.  Actually, it has been like that for some time.

Yet for many – most really – it doesn’t feel like we are getting ahead.  That is because many non-discretionary items are increasing in cost – think petrol, insurance, school supplies and fees, rates and utility bills – whilst many discretionary things such as cars, electrical goods, holidays for example are often getting cheaper.

And Lord help you if you enjoy a brew or two or pull on a durry.

So, wage growth, for mine, is very likely to remain lacklustre.  There are opportunities in this predicament .  My master class sessions outline what they are and how best to implement them.

Two charts and a table follow and these help support my thesis.

Table 1: Past + forecast wage growth by income level across Australia

Twice a year – at Easter and Christmas – I share a list of books which I think are worth reading/listening to plus some music that I have recently enjoyed.

I am from the mixed tape era, so my musical tastes are what my adult children, call ‘old fart tunes’.  So often I am sharing a musical back catalogue rather than something or someone new.

Anyway, here are my Easter 2021 suggestions.  Back to normal programming next week.

Three charts this week.

Some comments

Chart 1 shows that falling interest rates do help instigate house price growth.  And as one might expect, rising interest rates halt price growth.  Also, of interest (pun intended) the cash rate has fallen from 17.5% to 0.10% since the start and end of this chart!

Chart 2 is the yield curve, which shows the difference between the cost of long term and short term money.  It is a good predictor of the future direction of interest rates.  The chart suggests that interest rates are likely to rise.

Chart 3 outlines Australia’s annual change in CPI inflation by quarter.  The overall trend is down.  And if you compare chart 2 with chart 3 – other than a period in the mid-2000s – you will find that a rising yield curve is inflationary.

My synopsis

The macroprudential regulations are very loose at present.  This coupled with record low interest rates plus HomeBuilder, are the reasons for the housing market’s current heat.

I expect that the financial rules will be tightened soon, followed by interest rate rises.  Several banks are already starting to lift their medium term rates.

A short period of inflation is very likely.  It is unlikely to coincide with meaningful wage growth.  The RBA may have to increase the cash rate, maybe several times and before 2024.

The timing of such things is increasingly political.  No financial austerity is likely to be applied until after a federal election.  If it was just up to the economic tea leaves, we would probably be going to the federal polls this calendar year and my call would be in early to mid-October.  But other parliamentary pressures most likely mean that the Liberal Party will run its full term.

How well APRA and the RBA manage the current housing market’s heat over the next 12 months will determine if we have a boom/bust or boom/slump property cycle.

And for mine the longer we delay the financial stick the more certain a boom/bust cycle becomes.

I have posted several missives in recent months about regional population growth.

These communiques claimed that the move from the capital cities to regional locales due to Covid-19 is a short-term occurrence and are even overstated when you have a closer look.

It seems that others share that view too, with some calling the current trend a “sugar hit to the regions”.

A colleague has also suggested that the real reason why the regions have seen an increase in net internal migration over the last 12 months is because people who would normally have moved to the capital cities are (for now) staying put.

Interesting.  And the ABS statistics suggest that this is true.

Net internal migration to the regions (as defined by the ABS as those areas outside of their definitions for the capital cities) was 36,500 last year, which was up 14,000 or 62% on the year before.

Yet net migration is worked out by comparing those that move into an area against those that leave the same place during the same time frame.

Charts 1 and 2 below outline what is really happening across regional Australia.

Chart 1 shows a few things.

Firstly, that the overall level of arrivals to, and departures from, regional Australia has fallen over the last 12 months.  This is because there are very few overseas migrants arriving in Australia at present.  This impacts both the capital cities and regional Australia.

Secondly it shows that there has been little change in the number of people moving from the capital cities to the regions, whilst there has been a big increase in the number of regional residents who haven’t moved to the bigger smokes.

Chart 2 shows that this trend increased during 2020 as certain Australian States implemented increasingly draconian covid-related lockdowns and other restrictions.

End note

Some 70% of Australians live in the six main cities.

I think that is will not change because of the pandemic.

In short, the capital cities are where the majority of the jobs and services that people want are located.

Many regional residents have put their move to the capital cities on hold last year, and as a result, I believe we will see a big snapback to positive net migration to the capitals (and their surrounding conurbations) once the covid vaccines roll out and travel-related restrictions cease.

Unless major monies are spent on regional infrastructure and this quantum rivals the amounts being spent in the capitals, any population movement to regional Australia will be modest at best.

And the decision makers must think that too.

Ask yourself, if we were truly going to see a regional resurgence, then why is almost all the existing, and proposed, infrastructure projects focused on the major capitals and mainly in the inner city areas within those cities.

Regional Australia will remain exactly that, provincial at best.

Westpac has joined the growing ranks predicting big increases in dwelling values.

Westpac call is that dwelling values are expected to lift by 20% over the next two years (calendar 2021 and 2020) with annual growth split somewhat evenly between the next two years.

We stated last year that 2021 looked like it is shaping up to be a sweet spot for residential property.

Short-term outlook

Over the short-term dwelling values are influenced by the balance between supply and demand.

Low interest rates – with the RBA repeating that they will stay at their current ultra-low official setting over the next couple of years – and recently relaxed home loan assessment criteria have helped lift demand.

This was best illustrated to me by a recent email from a colleague.

“We spent some time yesterday with a mortgage broker and asked him why he thought the market was so hot.  He summarised it as follows:

• A heap of the banks withdrew finance to weak clients when covid hit.
• People who withdrew super mid last year to use it as their ‘deposit’ couldn’t as it wasn’t seen as genuine savings.  But the banks now accept it – with some low level caveats – as part of a home loan down payment.
• In addition, the credit assessment criteria have been dramatically reduced and this lessens even further from 31st March.
• The banks used to use a 7% to 8% interest rate setting to assess borrower’s serviceability up until mid-last year.  Now they use the actual borrowing rate plus a 2% buffer, therefore for most new borrowers it is now set between 4% and 5%.

A household’s income needs now to only be $70,000 pa compared to $110,000 pa to afford a $450,000 house.”

In addition, JobKeeper has also helped stop a fall in demand, whilst HomeBuilder has brought demand forward.

Some 90,000 Australians have received the $15,000 to $25,000 HomeBuilder subsidy to buy, build or renovated a home since March last year.

On the flipside – influenced considerably by covid restrictions – supply is tight.

For example, house sales across the Brisbane region have increased by 4% over the last 12 months, but the supply of houses for sale across the same area have dropped by 16% over the same time period.

And as recently discussed, investment dwelling additions have been falling over recent years, resulting in declining rental vacancy rates.  For now.

The media echo chamber has added further demand momentum, headlining positive property media releases, in part to help boost reader traffic to their real estate digital advertising portals.

As a result, buyers are clamouring to get into the market, evident by recent weekend auction clearance rates of over 90%.

This might be good news for those households that own their home, either outright or with a mortgage.  However, it may not be so good for those trying to get into the housing market.

It also has a negative impact on ‘change-over’ owner-resident households and in particular those looking to downsize.  It is much harder to buy and sell, well, in a rising market than in a market which is flat or even falling.

Medium to long term outlook

But for mine this sweet spot won’t last.

Yes, the circumstances seem to be aligning well for 2021 and although interest rates are likely to remain low by historical comparison – however, I do think they will rise and sooner than many think – there are other factors that might cause people to wonder if dwelling prices are likely to rise as much as has been forecast.

These factors include:

• persistent high unemployment and underemployment, which according to Roy Morgan – best Aussie poll on these statistics – is a combined 21.7%!
• the collapse of immigration, the guesswork restart date and ongoing debate about the level of future intakes,
• a pending plunge in the birth rate as people generally don’t have kids when their confidence is low and financial future is uncertain,
• potential overbuilding (due mostly to HomeBuilder),
• likely increases in dwellings listed for sale as people often put their home on the market when they think they will get a high price and a quick sale,
• rising costs, including a lift in the mandatory superannuation contribution to 10% in July this year, and
• limited wage growth.

This is not the recipe for a price boom.

And taking the long view, limited wage growth is the big brake on substantiable dwelling price growth.

There is a close, long-term relationship – causation not correlation – between wage growth and dwelling value increases in Australia.

Chart 1 shows that wage growth downunder is a long way from supporting dwelling price growth.

Furthermore, table 1 outlines what Westpac’s current price forecasts actually look like when it comes to increases in median dwelling values.

I cannot see how future first home buyers will be able to service such high dwellings prices given low wage growth.  Borrowing the difference only has a limited shelf life.

End note

The share of 25 to 34 year olds who own their home (or have a mortgage) has fallen from 61% in the early-1980s to be closer to 39% these days.

Our ratio of dwelling prices to household income was one of the highest in the world.  That was when the ratio was around 4.

But the recent lending criteria has lifted this ratio to 6.5 on new home loans.  That makes it a world beater.

And if this headline figure persists, it has housing bust written all over it.

Part 4 of our stuff worth knowing posts.

This week we cover detached house sales.

Three tables follow.

Some observations

Tables 1 and 2 outline the number of detached houses and median values across the eight capital cities and other top 20 major urban spaces in Australia.

Market size is important.  Too often real estate conversations are focused on price and, more often than not, the movement in price.  Not enough is said about sale volumes.

We have been hearing of late that regional towns are experiencing a real estate boom.

When I read about such stuff, my first reaction is to think how big a particular place is – in terms of sales – and then compare that market size with a place I know better, such as a mainland capital.  This helps me better visualise what is actually being said.

Revisiting table 2 outlines that many of our major regions are quite small when it comes to annual house sales and it doesn’t take much of an increase in sales to feel like an area is ‘booming’.

It pays to understand market size when it comes to buying, as it will be important when it comes to selling.

To that end, table 3 outlines the size of the capital city’s housing markets by price group.

Whilst there is a lot more to moving to a particular area that just the cost of housing, table 3 shows why the smaller capitals have increasing appeal.  The same applies to many regional markets too.

So, when it comes to market size, I think it is important to understand both the quantum of relevant dwelling sales and also how many sales take place in your price range.

Tables 1 and 2 also outline recent movement in sales volumes and median values.

Some areas have seen a decline in sales but increases in median values.  That might seem illogical, but one of the key rudiments of real estate is to know both demand (sales) and supply.  Sales might be falling but if the supply has contracted more, then prices can still rise.

Of course, if sales are increasing and supply is falling, there is a greater likelihood of prices increasing.  But more on that next week.

 

There are several cross currents running through the Australian rental market at present.  My inbox is filling up with ‘please explain’ rental focused emails.

Some are confused as to why vacancy rates are falling in many places, yet population growth has dropped, sometimes markedly.

Others don’t see how rents can be rising when unemployment and under-employment remains high.

Many investors appear worried about getting their back rent paid post the rental moratorium.  Ditto when it comes to the level of future weekly rents once JobKeeper is wound up.  Both supports are set to expire in late March this year.

It also doesn’t help when the same national newspaper – and in the same weekend edition – holds two conflicting rental market articles, one spruiking that large rental increases lie ahead, whilst (for mine) the more trusted commentator suggesting the big challenge facing residential property investors in getting a half decent rental return.

So, this post I will try and unpack some of this rental stuff.

A table and two charts follow.

My comments 

Table 1 shows that there has been a marked decline in new rental digs across Queensland.  This is more noticeable in regional Queensland than the more urban south east corner of the state.  Many other areas across Australia face similar circumstances.

Whereas there has been some shift in population movements over the last 12 months – revisit last week’s post here – the demand for new rental housing remains high across many parts of Australia and in particular in Queensland.

Our work suggests that Queensland needs an annual rental build rate in the order of 4% per annum.  This rental addition rate is closer to 5% for SEQld and near 3% in regional Queensland locales.

Table 1 shows that the recent rental builds rates are way below these benchmarks.

As a result, rental vacancy rates have been falling for some time.

Chart 1 shows that asking rents are rising across metropolitan Brisbane.  At first glance it would appear that the falling vacancy rate is the main reason why.  Yet past trends suggest that there must be other factors in play.

We have found that vacancy rate movements in concert with changes in average weekly earnings helps largely explain weekly rental movements across Australia.

Chart 2 shows the close relationship between the annual change in weekly rent and wage growth.

So, rents rise when the vacancy rate is tight (and falling) and when weekly wages are growing.

One interesting finding is that private sector wages are rising rapidly at present.

Chart 2 shows this trend for Queensland, but a review of the ABS data, shows that this is taking place across the country.

Another surprise is that public sector wage growth is lacklustre at present (lifting by just 1.9%) against the private sector’s most recent 6.3% annual lift.

JobKeeper must be the main influence on the strong private sector income lift.

And if so, this helps explain why that there has been little real complaint about the frequent snap state-based lockdowns; why confidence remains comparatively high and why current household consumption doesn’t match the level of high underemployment.

It will be interesting to see if this complacency lasts past March.

Surely not.

Outlook

To me there are too many unknowns to forecast – with any real confidence – what is likely to take place in the rental space over the next couple of years.

Except to say that the removal of JobKeeper is likely to see wage growth fall back to it lacklustre longer term trend.  This will impact on how much tenants can pay in rent.

There is little doubt that HomeBuilder has brought forward new housing supply.  This is particularly the case when it comes to suburban detached housing.  What is unknown, at present, is how much of this new supply is being built for tenants.  I do suspect it is less than 30%.  So, it’s impact on new rental supply is likely to be limited.

When it comes to the demand side of things, when will overseas migrants return to our population mix and at what volumes?

Another unknown is how many renters, who took advantage of the rental moratorium, will pay back what they owe.  And if they don’t (or can’t) will landlords give them the boot?  If kicked out, where will these folks then live?

There is little doubt that the recent slowdown in rental supply, as shown in table 1, is allowing some landlords to lift rents.  This will continue until local rental supply increases and/or wage growth subsides.

But for the life of me – given the overall state of the ‘real’ economy and especially how it is affecting those without financial assets (i.e., many, if not most, renters) – I cannot see rapid lifts in weekly rents.

End note

So, if was going to have a stab at it – with my hand on my heart – I would say that landlords face a safer future if they hold dwellings that can hold multiple tenants.

Tenants, for mine, will be forced to share.  They will gravitate to those digs that best accommodate this type of occupancy.

This has been my thesis for some time and a deep dive into the rental data when preparing this post hasn’t changed my mind.  In fact, it has reinforced it.

Upon reflection, I must admit my end note is said with some confidence.

It is worth adding some clarity to the regional population growth bumf that has been doing the rounds in recent weeks.

Two charts and two tables follow.

 

My comments 

Chart 1 shows two lines.  The grey line displays net annual internal population movement away from the combined eight Australian capital city statistical divisions to ‘regional’ Australia according to the most recent ABS data.

The trouble with this official release is that much of this ‘regional’ population growth – revisit the grey line in chart 1 – actually takes places in the urban edges of our capital cities.

Think Lake Macquarie, Newcastle and Wollongong around Sydney.  Ballart, Bendigo and Geelong near Melbourne and the Gold Coast, Sunshine Coast and Toowoomba neighbouring Brisbane.

My red line in chart 1 factors in these outer urban conurbations.

The ABS suggest that some 36,500 people moved out of our capital cities to regional locations over the last 12 months, yet my working advocates that only 12,500 people – some 65% less – actually moved to true regional locales such Dubbo, Armidale, Mackay or Townsville last year.

Most of the regional movement, again, has been to the outer edges of our capital cities.

Table 1 highlights this trend for Queensland.

Many of these outer urban areas are within commuting distance of our capitals and they hold much of the affordable vacant land supplies too.

HomeBuilder – on top of the numerous state government first home buyer boosts orientated towards new builds – has helped drive this migration.

Chart 2 shows the that first home buyers now account for 40% of all home loans to new builds, compared to a 30% share of all home loans for established housing.

Given there is no capital gains tax on your principal place of residence in Oz, it makes sense (well to me anyway) that first home buyers purchase older digs -renovate, personalise and then resell in the future – rather than buy a new property, which often has little short to medium term capital upside.

But the plethora of government grants has obviously made new digs very attractive.

For now.

For mine the government largesse targeting first home buyers has had more influence on the recent increase in ‘regional’ population growth than any covid-related lifestyle rethink.

Once HomeBuilder expires, I believe we will see a marked reduction in regional population growth.

Also, one of the challenges facing regional Australia is that much of its population gains are older people.  Young people are still attracted to our capital cities.  See table 2. 

If regional Australia is going to advance in terms of its population and economic footprint it will need to attract young, entrepreneurial peeps.

Whilst there has been some improvement in the space – revisit table 2 – the jury, for mine, is still out.

Here are my three tables of base case numbers regarding future housing demand by lifecycle segmentation.

Table 1 outlines my segmentation of the Australian population by lifecycle age groups.

Table 2 shows the size of the Australian population by lifecycle segment for June 2020 and what is estimated to happen in mid 2025.

The actual population count might be less in 2025 – due to current restrictions on overseas travel and hence net overseas migration  – but the distribution of population by age group in 2025 is unlikely to change that much from the current forecast.

Table 3 shows the annual population growth by lifecycle segment over the next five years the average household size by lifecycle segment (as at 2019) and an estimated annual need for new dwellings by each lifecycle group between 2020 and 2025.

Sadly, whilst some aren’t, most children are obviously housed with adults, so their numbers (as shown in table 2) are encompassed in the other lifecycle segments.

Again, the actual volumes might be lower – due to Covid again – by the annual housing demand distribution as shown in table 3 isn’t likely to change that much.

Putting Covid’s current impact aside  – however, I do, think that assuming vaccines work etc., the present federal government will boost overseas migration to backfill any population intake shortfall experienced in 2020 to 2021 – there is an underlying need to build about 142,500 new dwellings across Australia each year between 2020 and 2025.

And over the next five years, much of Australia’s new housing demand is very likely to take place across three lifecycle segments being – retirees, families and first home buyers.  Revisit table 3.

It is little wonder that HomeBuilder has hit the mark.