Goldilocks Housing

It seems that the RBA is saying that we have just enough houses to prevent a price collapse, and not too few houses to prevent runaway prices. Does this make us Goldilocks?

Home prices have dropped by as much as 20% in the US and UK since the beginning of the global financial crisis, compounding its effect on those economies. In Australia, residential real estate has dipped only 3% in 2008, aided by a short supply of homes.

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28 Responses

  1. This is as bad as the burning of crops in the Depression in order to keep prices high by higher demand.

    Instead of letting the market stabilise, we’re keeping it unstable for the benefit of a few (& to the detriment of the rest of us). The only people that benefit from unrealistically high house prices are the banks / finance firms needing their value to underwrite their other loans.

  2. Of interest is: http://www.theage.com.au/national/negative-gearing-on-the-way-out-20090414-a69c.html

    There was a better summary than this, but be blowed if I can find it.

    Anyway..my best guess is that negative gearing is a goner in the forthcoming budget. Yoo Hoo..John McP where are you???

  3. October 2001………….Unemployment is 7.1% (according to the RBA)

    December 2003……….Unemployment is 5.7% (according to the RBA)

    Sydney had just passed finished or was finishing it’s greatest property price increase cycle in its history.

    So much for the supposed Unemployment Rate/House Price correlation

    Plus we do not have non recourse lending in Australia. So people cant just give the keys back if it all gets too hard.

  4. But, but, but, Walrus….

    Have you forgotten…? You’re still better off (according to the rodent) cause your assets are worth more (or something like that)..

    See, ya silly fella you…

  5. Wave wave to Walrus. It’s at the cusp isn’t it, me thinks.

    And what will be the result of the end of negative gearing? Will it mean the end of ‘investment properties’ or will it mean the beginning of affordable properties?

  6. Well if they get rid of negative gearing then they will need to get rid of it on shares as well.

    Otherwise even a dumb chartered accountant like me can see how to maintain interest deductability via different tax structures.

  7. Walrus..I don’t much understand this, however I read that people looking at investment properties were now looking at positive gearing rather than negative gearing due to low interest rates.

  8. Walrus, I think they can get rid of negative gearing in property and not shares based on a “productive” definition. I’d like to see tax deductions on investment properties disappear.

  9. Soo Walrus and James, how do we encourage investment properties? Or do we even need to do this?

  10. “Soo Walrus and James, how do we encourage investment properties? Or do we even need to do this?”

    Bugger em’

    Let Gen Y and X live in tents for a while………….!

  11. “I think they can get rid of negative gearing in property and not shares based on a “productive” definition.”

    Therefore James I think I can look forward to paying out another $700 odd on a tax seminar titled ” The Ins and Outs of Division 10,018 of the Tax Act”…… followed by a workshop titled “How to Convince Your Clients That You Really are Worth an Extra $15,000 per annum”.

  12. I don’t know that we necessarily need to encourage rental properties. To the extent that they are required, they can still be held by super funds etc. They are not a productive asset. I’d like to see the tax advantages for investment properties, at least insofar as homes are concerned, reduced, or at least applied to first home buyers to make things a bit fair. I’m shooting my mouth off here and haven’t researched it, but I think best if interest payments on housing loans didn’t attract tax relief at all, and houses were brought back to a more realistic value.

  13. Sounds fair enough Walrus..the only problem re Gen X and Y and: Bugger em’

    Let Gen Y and X live in tents for a while………….!

    Is that their tents will be in our backyards.

  14. From the Daily Reckoning:

    Luci Ellis, the head of the RBA’s financial stability department, said that lending standards never delved too low into subprime territory in Australia to lead to a mortgage lending bubble.

    –In comments she delivered in Melbourne, she added that the inability of Australians to deduct the interest on their mortgage from taxes gave them a financial buffer against falling prices. She said that Aussies tended to pay off their mortgages more quickly because of this, whereas in America, the interest deduction presumably encourages people to maintain high balances on their mortgage.

    –And what defence of bubblicious Aussie house prices would be complete without trotting out that old canard, the housing supply gap! “Unlike in the United States,” Ms. Ellis said, “housing supply [in Australia] had not boomed in the same way for the past five years. There simply has not been an overhang of supply built up that would subsequently weigh on prices.”

    –We’ll get to the supply bogey in a moment. But we’re certain Ms. Ellis knows that the supply of homes is just one part of the pricing equation. The other part is, of course, demand. And the demand for housing is clearly influenced by the price of money (mortgage rates plus the first home buyer grants). Everywhere else in the world, plunging interest rates led to a huge mortgage lending boom that inflated house prices at historic multiples of household income.

    –Nowhere else in the world, in fact, has housing become as expensive as it is today in Australia, when measured against household income. Two things make this possible. First is the availability of mortgage financing to lever up and get on the property ladder. Second, and more importantly, is the deep seated belief-encouraged and repeated by those in government and banking and real estate-that property prices always go up.

    –The Great Australian Property Price Crash is coming people. You can’t have a depression in credit and expect inflated housing values to magically levitate. The latest figures on housing and commercial finance show a few things. They show that first-home buyers are propping up the market while investors flee (as was the case in the U.S. in 2006). And they show that bank-lending to the private sector (both fixed loans and revolving credit) is retrenching.

    –But what about the great supply deficit? Ms. Ellis cites a report by the National Housing Supply Council. This “State of Supply” report is prepared by a committee of insiders from the building, banking, and real estate industries. You’d naturally expect them to conclude that the supply gap is large and growing.

    –Yet this is not exactly what they’ve done. They’ve confessed that their estimates of housing demand are based on statistical models. To quote directly, “The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market.”

    –And you thought we were joking about the homeless. We’ve always said if there was really a supply problem, you’d see more homeless people. The estimate the Council comes up with for the gap assumes, we assume, that the homeless are homeless because there aren’t enough houses. This is nonsense. Studies show that a fair portion of the homeless choose to be homeless, or would be homeless regardless of historically low mortgage rates.

    –But that point aside, low rental vacancy rates are also cited as evidence of a gap. This is nonsense too. Couldn’t this also be the fact that so many Australians live in capital cities? And so many of them want to live in the same place? It’s not that there aren’t places to live. It’s that everyone wants to live in the same place, which violates the laws of physics, of social propriety, and also drives up rents).

    –In other words, maybe the two factors the Council cites in fabricating a housing gap have other, better explanations that a fictional shortage of housing. But maybe that narrative doesn’t suit the needs of people who make money selling houses.

    –Ah! A caveat arrives on cue!

    –“The Council acknowledges the crudeness of this [housing supply gap] estimate and also points out that there were some 830,000 vacant dwellings in Australia at the time of the 2006 Census. The Council has assumed that most of these were probably second homes, homes in the process of sale or homes awaiting redevelopment and that there is likely to be limited capacity for absorbing growth in underlying demand within the present level of housing supply.”

    –Baffling. Or just deliberate chicanery?

    –There are 830,000 vacant dwellings. But that, according to the Council, is not enough to meet the housing supply gap of just 85,000 dwellings? Math was never our strong suit. But this smells fishy.

    –Could it be that property investors, let’s say boomers sitting on property as a retirement income, are not prepared to sell those investments at these prices? There’s no urgency, after all. Do they expect to sell these properties to pay for their retirement? Or are they just taking advantage of the tax benefits of negative gearing?

    –Who knows, dear reader? But we’d humbly suggest there is no housing supply gap at all. You could bring some of those 830,000 vacant dwellings on the market by changing the negative gearing laws. And the elimination of the first home buyers grant would prevent so much future demand from being “brought forward” merely to prop up values for existing homeowners who want to sell now to the sucker first home buyers.

  15. Allo allo John..’round about time that you showed up.

  16. Sorry Min, been extremely busy.

  17. “………………–There are 830,000 vacant dwellings. But that, according to the Council, is not enough to meet the housing supply gap of just 85,000 dwellings? Math was never our strong suit. But this smells fishy………………”

    Oh I do wish people would actually use ABS data correctly and not just use it to push their own particular barrow.

    Or at least qualify the statement to some degree !

    “Vacant Dwellings” includes caravan parks, retirement homes, holiday homes (usually along the coastal fringes which are typically unoccupied), and apartments under construction which are not yet available for habitation but have reached “practical completion”. Practical completion is a building term used when a building is almost ready for handover to the client.

    So 830,000 is corect if you dont mind living in a caravan……………I’d prefer a tent !

  18. Min

    Remarkably little has changed in my overall view:

    Costello reforms help Australia weather financial storm
    http://blogs.watoday.com.au/business/juliebishop/2008/10/07/costelloreform.html?page=5#comments
    October 07, 2008

    Julie Bishop blogs exclusively for BusinessDay
    * John McPhilbin
    * October 07, 2008
    * 09:12 AM

    On ‘All points West’ today’s question is: Is Australia’s economic miracle a mirage?

    My answer is simple yet my explanation more detailed.

    Mirage! was my answer and to quote Michael West:

    “The shape of the world economy has changed in the last 18 years. China has boomed.

    Although Australia’s GDP growth has historically tracked the US, this time we are in a particularly fortunate position of having a mining boom (although commodity prices have begun to come off sharply). And Government debt is not an issue.

    That said, Australia like the US is a current account deficit country (currently 6.2% of GDP) which means our banking system borrows from the rest of the world to support our lavish lifestyle.

    No longer can this country rely on a debt-funded spending spree to fuel a recovery. This is bad news for both the banks [business] and the consumer.”

    I know Howard and Costello laid claim to being the masters of the economy and interest rates but that is simply no longer a viable claim, and it never really was. They were simply riding a favourable economic wind.

    They were also front and center when it came to cheering Australian who took advantage of artificially low interest rates by taking on boatloads of debt. Nor did they monitor the lending practices of the financial sector, in spite, in spite of the obvious lending lunacy that was going on.

    Our banks assure us that we are in a stronger position than the US to cope with any fallout, I tend to be more skeptical. Our banks have surely been aided in earning record profits off the back of complex and risky debt arrangements with other lending institutions, businesses, and individuals in recent years? This has been a global issue, not just one relating to the US alone.

    Rewind back twelve months and I can still hear Howard repeating the same dangerous mantra “interest rates are lower and people can borrow more.”

    Howard said the heavier debt burden reflected rising affluence.

    “It is the case that people are buying ever more expensive houses, and they are doing that because of a number of factors,” the Prime Minister said. “One of them is that interest rates are lower and people can borrow more.”

    Yes, our hero was pushing a dangerous mantra indeed. In his opinion, it seemed as though a new era had arrived under his leadership.

    He then went on to say: “Debt levels are rising, but we are choosing to use the debt more productively to buy assets that traditionally rise in value, like shares and property.”

    At around the same time the Reserve Bank’s figures on household finances showed that assets were rising faster than debt (in spite of many Australian’s carrying record levels of debt). Households, they claimed had assets, including housing, superannuation and other investments, that are equal to eight times their annual income.

    Mark Davis, author of The Land of Plenty writes:

    “Australia’s ‘age of prosperity’, as Peter Costello calls it in his memoirs, has been underwritten by the mining boom (even as manufactured exports stagnated during his tenure) and massive increases in household debt (now more than $1 trillion – about the same as the annual national output), even as the government has wound down its own debt. The national debt has in effect been privatised while, at the same time, risk has been shifted away from government and business onto the shoulders of ordinary people, in the shape of long working hours, casualisation, and the sort of uncertainty that is written in the fact that Australians take the least holidays of any western nation.”

    It just doesn’t get anymore succinct and to the point than that. And it was the Howard Government that have left us in this precarious position.

    In fact it was reported just recently that our “economy is even more vulnerable to an economic downturn than the struggling US, leaving us facing the spectre of soaring unemployment, falling house prices and a long-drawn out economic slump.

    Experts say the only way to head off a crisis is to quickly cut interest rates and improve household finances decisively.

    The bleak picture is painted by economists who point to a series of data showing how we compare to the US.

    Australia has some of the most expensive property in the world, relative to incomes, according to the Demographia International Housing Affordability Survey.

    It says the median Australian house price is 6.3 times median household income, higher than the US, Canada, New Zealand, Ireland and Britain. A median Sydney property will cost nine times the average Sydney income.

    Australia also has more debt per household than the US, with Australians owing 177 per cent of household income in mortgage and other debts compared to 138 per cent in the US.

    This is coupled with the fact Australians save an average of 0.5 per cent of their income compared to 2.6 per cent in the US.”

  19. John McPhilbin, on April 15th, 2009 at 5:26 pm Said:
    Sorry Min, been extremely busy.

    Well that’s all very good and well John..but you were on kitchen duties 2 weeks ago and the dishes are still sitting in the sink.

  20. Walrus

    “Vacant Dwellings” includes caravan parks, retirement homes, holiday homes (usually along the coastal fringes which are typically unoccupied), and apartments under construction which are not yet available for habitation but have reached “practical completion”. Practical completion is a building term used when a building is almost ready for handover to the client.

    So 830,000 is corect if you dont mind living in a caravan……………I’d prefer a tent !

    Somewhat overstated, I am with you on that count. One way or another housing and rents have to fall into line with economic reality. As it is, all that’s happening is the bubble is being prolonged.

  21. Min, on April 15th, 2009 at 3:51 pm

    One might suspect that when it comes to the use of forceful language for intergenerational warfare in the grande, inflationary Ponzi scheme that is housing, who gets the house and who gets the tent is not that clear-cut outside the existing customary paradigm; and at many points throughout history and in many places yet, that understanding holds. 😉

  22. “As it is, all that’s happening is the bubble is being prolonged………”

    Not so much a bubble bursting………just slightly deflating

    Minimal falls in market $450,000 to $800,000 which is the bulk of the 2nd Home buyers.

    Upto 10% maybe in the $0 to $450,000 or 1st Home Buyers.

    Much larger falls in the $1,000,000 to Sydney Harbour View bracket.

    A replay of the 1991 to 1992 market

  23. Legion, on April 15th, 2009 at 5:47 pm Said

    Ah Legion’s joining in.

    So Legion………….. bearing in mind the way you structure your incredibly “lucid” comments………………..how’s the business of writing product warranties holding up these days ?

  24. With apologies because I do have to choof, but re: –There are 830,000 vacant dwellings. But that, according to the Council, is not enough to meet the housing supply gap of just 85,000 dwellings? Math was never our strong suit. But this smells fishy.

    Which Council was that??? Apologies if I missed it.

    And double apologies, I will give above a much better read in the morning.

  25. Legion..well said and as clear as mud. And hugs back to you too.

  26. ‘Granny flat’ might make it clearer. 😉

  27. (An effective under-supply of housing with high barriers to entry, or even just otherwise in an ageing society, means that familial housing dynamics aren’t necessarily benign when it comes to houses and tents, and young and older).

  28. Catching up..ya mean that the oldies might be all living in our backyards..eeeeekkkk!!!

    Remember the one when someone came up with the you-beaut idea that all oldies with properties over the value of $1M should be made to sell up. Then you have the stay-at-home young’uns, now at home until their late 20’s. Coming to a backyard near yoooo.

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