tip off

Only a matter of time before housing prices fall

Increased lending among owner-occupiers and investors is of little surprise given historically low rates. But this growth is unsustainable so long as first home buyers are priced out of the market.

Loan approvals for both owner-occupiers and investors rose in November, but buying a property remains unobtainable for most prospective first-home buyers. The current situation is largely unsustainable, and it is only a matter of time before house prices begin to fall.

The value of loan approvals for owner-occupiers excluding refinancing activity rose by 1.5% in November, beating expectations, to be 18.5% higher over the year. For investors, loan approvals also rose by 1.5% in November, following two consecutive months of 7% growth, to be 35% higher over the year.

housing loans chart

By comparison, the value of loan approvals for first-home buyers continues to trend downwards. So far the benefits associated with historically low lending rates have avoided first-home buyers. A mixture of high investor activity, rising prices and labour market uncertainty has left few prospective first-home buyers willing to take on big risks.

It is difficult to see that situation changing in the near term, and two things must change before first-home buyer activity picks up: better labour market prospects and lower prices.

Greater first-home buyer activity will require a pick-up in labour market conditions. Younger workers will need to feel greater certainty surrounding their job prospects, as well as career mobility, before they are willing to take on big risks.

But in all likelihood, the labour market will continue to deteriorate in 2014 before improving next year. I certainly don’t expect widespread job losses, but the declining participation rate masks the fact that Australia’s labour market hasn’t been this weak in over a decade.

In addition, prices are simply too high right now for many young people looking to enter the market. Young buyers would have to have rocks in their head to leverage up in the current climate, particularly given the limits on fixed lending and eventual exposure to variable rates.

I’m firmly of the belief that a lack of first-home buyer activity will ensure that price growth will slow sometime soon and possibly in 2014. So conditions could improve for first-home buyers, but for now it has never been more difficult for first-home buyers to purchase a property.

On a trend basis, growth in the number of loan approvals to owner-occupiers appears to be slowing in some states. Approvals in Western Australia and South Australia have practically stalled over the past six months.

House prices growth in Adelaide has been anaemic at best throughout 2013 and based on this data growth should be fairly soft for some time yet. Price growth has been much stronger in Perth, but owner-occupier activity suggests that growth there may slow fairly soon.

owner occupier lending

Owner-occupier activity has picked up significantly in New South Wales, but as a market that state continues to be driven by investor activity. Today’s ABS release does not have a breakdown on investor activity for each state, but that data will be publicly released on Wednesday.

Lending activity has picked up significantly over 2013, but many lenders continue to deleverage, taking advantage of low variable interest rates to pay down more of their loan than required. Loans outstanding to owner-occupiers have increased by 4.4% over the year to November; for investors, growth is at 6.7%. Clearly new activity is running at a much hotter pace.

Loan balances outstanding will continue to rise in 2014, particularly if new activity remains strong. But at least for now, the level of deleveraging and conservative behaviour from many households provides some insight into why the Reserve Bank does not appear particularly concerned about lending activity at the minute.

The pick-up in lending activity is exactly what you would expect to see given the historically low lending rates offered to buyers and investors. But how sustainable will this be?

Eventually owner-occupier activity will slow, as there are only so many people interested in upgrading or downgrading their existing property and the market will be left with investors speculating among themselves.

Unless first-home buyers begin to enter the market, then this latest housing boom will prove to be fairly short lived. It is hardly the panacea that many are hoping for as the mining sector slows — not that the housing market was ever going to solve the economy’s problems. For the housing market, something will break. I’d put my money on investors losing their nerve before first-home buyers lose their patience.

*This article was originally published at Business Spectator

13
  • 1
    Salamander
    Posted Tuesday, 14 January 2014 at 2:35 pm | Permalink

    The Chinese investors are here, and there’s nothing you can do about it. We will be a nation of renters. Forget “first home buyers” - gone the way of the dodo.

  • 2
    Salamander
    Posted Tuesday, 14 January 2014 at 2:39 pm | Permalink

    Forgot to say - unless people want to move to the Regions that is - asap as it will soon be too late to buy anything nice there as well.

  • 3
    Salamander
    Posted Tuesday, 14 January 2014 at 3:16 pm | Permalink

    And another thing. In a country of 23 million, we haven’t a clue what 1.3 billion means - not the foggiest. “Quite a few” of these folks have joined the middle classes. The wealthier are exploring their options including fantastic Australia - whose general populace is clueless, complacent and oblivious about the demographic revolution starting to descend upon us. Our currently rich and powerful don’t care about potential consequences because they are in the same boat. The rest of us who aren’t, are being distracted by the beat-up of beating up boat people.

    The point of this rant is merely the potential volume of newly cashed-up purchasers who have recently discovered a great place to invest, if not to live - and safe haven insurance no doubt.

    The average Aussie hasn’t a clue. And is not meant to have. Who cares what happens to us? By the time we wake up….

  • 4
    Kevin Herbert
    Posted Tuesday, 14 January 2014 at 3:43 pm | Permalink

    Callam Pickering: you say “….but buying a property remains unobtainable for most prospective first-home buyers”.

    Not so in reality. There are tens of thousands of available properties available today for Sydney metrolpoitan first home buyers, but they don’t want them ‘cos they don’t suit their self image or whatever. This evidenced by figures provided by the Real Estate Institute of NSW.

    This has been the case for decades.

  • 5
    Salamander
    Posted Tuesday, 14 January 2014 at 6:57 pm | Permalink

    Kevin Herbert: Maybe it’s because it’s 2+ hours’ drive from their workplace.

  • 6
    Anon
    Posted Tuesday, 14 January 2014 at 9:55 pm | Permalink

    As someone in Gen Y I don’t expect to own a property anymore. Callam Pickering is spot on about the price of housing being too high a multiple of average wages (Macrobusiness puts it at 6-9, historically it was 3* wages). The fact that my generation will mostly not be enjoying the job security and increasing wages of the previous generations means mega debt is not an option either.

    Better to focus on introducing longer term leases with big fines for landlords engaging in predatory behaviour and excessive rent increases. Maybe we could get the government back in the business of building affordable and social housing with services nearby… Oh I forgot, that would be contrary to the short-term economic rationalist thinking that got us here in the first place!

  • 7
    Hamis Hill
    Posted Wednesday, 15 January 2014 at 8:53 am | Permalink

    Cashed up Chinese buyers are not stupid, if domestic circumstances do not support a continuation in the growth of the wealth of Howard’s “aspirationals”, then why shouldn’t they just wait until “housing prices fall” as the article suggests.
    Wall to Wall conservatives in Australia have already committed to austerity and a newly elected federal version of these state governments with the same slash and burn objective for the economy will be further reducing the market for housing more than their state colleagues already have done.
    By blythely ignoring the causes of the GFC, and aided by a near media monopoly of their closest foreign supporter to demolish the government which spent to keep the local banks afloat, then, the lessons arrogantly unlearned, an “inevitable Abbott Recession” is on the books.
    Ironically the 1891 depression in Australia caused by land speculation, for all the disruption removed a large burden debt from colonial Australia, and without this impediment and within ten years Australians at federation had established the highest standard of living on the planet.
    The banks, one trick pony myopes that they are, do not care whether entire generations of young Australians rent to pay off other peoples’ mortgages, the banks get the money either way.

  • 8
    Roy Inglis
    Posted Wednesday, 15 January 2014 at 9:05 am | Permalink

    Conservative governments constant refrain is that Australian wages are globally uncompetitive; read high. We can bet that they will put downward pressure on them. Government is withdrawing support from some high employment sectors and enterprises, eg manufacturing while keeping it in place for others eg mining, even when the ‘others’ hardly needs it.

    Business (BCA) wants the government to import more skilled migrants rather than train up Australians, read train relatively younger Australians. We can expect the current Federal government to be receptive to business.

    The tax regime which is now increasingly including self managed super, keeps house prices artificially high and out of reach of significant numbers of first home buyers by massively subsidising the cost of homes for investors. A practice that also denies much needed funds to more productive / employment rich areas of our economy.

    New housing is often miles away from employment in ‘burb’s with little of no public transport meaning residents there have to rely on cars when fuel prices are high and getting higher, using arterial roads that are at or over capacity. The current conservative federal and state govt’s response is more cars, roads and car parks.

    Conservative governments and most private housing investors who are on average more conservative voting and a much older age group than 1st home buyers, are willfully blind to the combined effects of all this. Labor has proved to be all but blind to this too, except for the public transport aspect and there their responses are between weak and rhetorical.

    However, first home buyers and younger people generally are not blind. They are voting with their wallets.

    The inter-generational injustice is palpable to all but the willfully deaf and blind. There are so many Australians in that state that many people and institutions share a form of socioeconomic denialism.

    Until the major political parties look objectively at the sacred cow of residential housing investment, nothing much will change. Given Australian society and politics the likelihood of anything happening soon and I expect in my lifetime (I’m mid 50’s)is vanishingly small.

  • 9
    Hamis Hill
    Posted Wednesday, 15 January 2014 at 9:07 am | Permalink

    Generations yet to come in Australia, may look back and applaud their liberation from crippling mortgage debt by Abbott’s deliberately “engineered” recession.
    With Mortgage debt standing at $1.75 Trillion and interest rates “Too Low” according to his Treasurer, the interest rate demands on this private debt are set to cripple the economy.
    Abbott’s clear intentions to send the economy over the edge with mass sackings in the Public and private sectors, will fullfil the demands of his early religious education and smash the worship of Mammon in Australia.
    Pope Francis and Cardinal Pell will approve.
    Abbott is no Liberal, “by their actions shall ye know them”.
    PS, the above is a satire, Abbott and his friends are not intelligent enough to plan and execute anything so complex.
    Merely the agents of a “Higher” authority given to work in mysterious ways to perform the “miracle” of freeing Australia from the grip of “Mammon”.

  • 10
    Dr Shorthair
    Posted Wednesday, 15 January 2014 at 10:04 am | Permalink

    @Anon
    Yes - in Europe 5-year leases are not uncommon.
    In Europe and US it is not uncommon for tenants to make minor capital improvements to properties (e.g. installing built-in furniture and appliances, painting and decorating) because they have security or other expectations of long-term stability. Generally everyone’s a winner in these situations.

  • 11
    drsmithy
    Posted Wednesday, 15 January 2014 at 9:22 pm | Permalink

    Cashed up Chinese buyers are not stupid, if domestic circumstances do not support a continuation in the growth of the wealth of Howard’s “aspirationals”, then why shouldn’t they just wait until “housing prices fall” as the article suggests.
    Because cashed up Chinese buyers are trying to get their cash out of China and into hard assets in countries with more liberal economies.

    If said assets devalue a bit later, that’s relatively unimportant.

  • 12
    drsmithy
    Posted Wednesday, 15 January 2014 at 9:28 pm | Permalink

    Forgot to say - unless people want to move to the Regions that is - asap as it will soon be too late to buy anything nice there as well.

    Nup, all the regions are ridiculously overpriced as well in the context of local incomes, and have been for a decade or more.

  • 13
    Hamis Hill
    Posted Tuesday, 21 January 2014 at 11:24 pm | Permalink

    Unfortunately home ownership is an emotional subject, too closely tied up in the determination of one’s “identity” in Australia, for anyone to consider rational arguments on the subject.
    Hence the denial that anything could ever go wrong, and that Housing mortgage derived GFC could have a late onset in Australia.
    The “sheep” will be stampeding soon enough, come the Inevitable Abbott Recession, and prices will fall.
    Then the vultures will be in for their pick.

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