Who's to Blame for Australia's Expensive Property?

This is an article I published on my site yesterday. I thought it may be of interest here.

I hope @Bayview is pleased that I don't specifically think investors are to blame

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Picture a science lab with a square metal table in the centre. On top of the table lies an intricate wooden maze. The maze itself is completely enclosed. In the middle of the maze, at the end of the one way walled passage, is a block of cheese. In a small cage not far from the maze is a rat, who hasn't been fed for a day and whose nose is going haywire smelling the nearby cheese. The three researchers (who were responsible for building the maze) are standing nearby, one of them removes the rodent from the cage and places it into the maze, soon after which the rat finds it's way to the cheese and consumes it.

I would liken this scenario to the Australian property market, where the researchers represent the three levels of government (federal, state and local), the maze walls are policies they've introduced, cheese symbolises investment properties and for the purpose of this exercise the rat is us, investors (though it could also represent other home buyers who are also herded by government policy).

Now you may think human investors are smarter than a rat, but history shows us that time and time again we will rush toward the cheese (investment returns) often foregoing rational thought in order to do so. Just take the recent bubble and crash in the Chinese stock market (Shanghai Stock Exchange Composite Index), which was largely driven by retail investors and fuelled by margin lending.


Chart via Bloomberg: http://www.bloomberg.com/quote/SHCOMP:IND

If you spoke to the rat, told it not to eat the cheese from the maze, you are about as likely to receive a positive response as if you told investors (as a group, there are some investors who do act rationally as individuals) to only bid the price of an asset to a sensible valuation before stopping.

Historically (at least since the 1960's) home ownership rates have been fairly stable at around 70%, but this has since declined slightly to 68% in the 2011 ABS census and recent investor lending statistics indicate that it's probably getting worse with investor finance overtaking that of owner occupiers (lacking the balance of historical ratios).


Chart via DFA: http://www.digitalfinanceanalytics....or-may-investment-property-lending-still-hot/

The argument over whether Australian property is in a bubble is beside the point, as Former Treasury secretary Martin Parkinson said, "Do we have a bubble? I think that's the wrong question to be asking. The real question is why are house prices so high?"

There's no denying that Australian property is expensive, so who do we hold accountable?

I hold no animosity toward investors who buy property. Sure there are landlords who do the wrong thing from time to time, but as a group they are just acting in unison because it makes sense to them, in an effort to better their personal situation and largely due to the policies implemented by government. Blaming them for making home prices expensive is a bit like getting angry at a rat for navigating the maze and eating the cheese. The stage has been set, barriers and incentives have been put in place for investors to take advantage of the situation, why wouldn’t we expect them to do so?

The invisible influence of government policy, at least much less obvious than solid walls, is controlling almost every aspect of the property market, on both the supply and demand sides.

On the demand side they influence the cost of servicing a mortgage using the Reserve Bank of Australia (RBA) Cash Rate Target, regulate bank lending through the Australian Prudential Regulation Authority (APRA), encourage specific segments of the market to participate in transactions by using incentives (such as the First Home Owners & Downsizing Grants) and set the rules that allow foreign investors to buy our homes.

Tax policy can also contribute to demand, a strong rise in property prices followed the introduction of the 50 per cent capital gains tax discount (having held an asset for 12 months) suggests it was an inflection point for an increase in investor interest in property, also illustrated by the flood of investor finance that followed the change in 2000.


Chart via Macro Business: http://www.macrobusiness.com.au/2015/07/grattan-debunks-property-lobbys-negative-gearing-lies/

Negative gearing, whilst also available for other assets, further exacerbates demand for property, making it cheaper to service the negative cash flow of a mortgage, allowing investors to pay higher prices, buy sooner than they may have otherwise and carry a larger portfolio of properties.

It’s not only the demand side that government policy affects, supply too is impacted as government controls what land is available to build on, the building types that are allowed on that land, they set the fees and taxes associated with building, as well as on the sale of a newly constructed home and ensure the undertaking meets strict standards and a lengthy application process, all of which can contribute to increasing the cost of and deter bringing new supply to market.

On top of policies they implemented prior, since the Global Finance Crisis (GFC) the government has also intervened at times in ways that have both indirectly and directly boosted the property market. Examples include guarantees that were introduced to protect our banks (e.g. wholesale funding and deposits), the RBA taking on tranches of mortgage backed securities to support lending and the introduction of a temporary First Home Owners Boost which according to Treasury Executive Minutes, “was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”

I've seen investors who've benefited from this generous environment complain that no changes should be made to the status quo, the "free market", the suggestion of which is laughable.

The government can and should act to reduce speculative demand and increase supply (if warranted) in the Australian property market, with a view to lower prices and improving affordability. Even the Liberal Party of Australia's Federal Constitution in Part II (Objectives, section n) says:

"...in which family life is seen as fundamental to the well-being of society, and in which every family is enabled to live in and preferably to own a comfortable home at reasonable cost, and with adequate community amenities."

Not that this objective is embraced by senior members of the Liberal Party such as Prime Minister (Tony Abbott) or Treasurer (Joe Hockey). Joe Hockey recently said “If housing was unaffordable in Sydney no one would be buying it, but people are still purchasing housing,” and Tony Abbott welcomed rising prices, clearly not seeing the contradiction with affordability, "I want housing to be affordable but nevertheless, I also want house prices to be modestly increasing." Neither seem to have a solid grasp of what constitutes 'reasonable cost'.

If you want someone to blame for Australia's expensive property, turn your eye away from the property investor / speculator, they are just another rat in the same maze as the rest of us. It's government policy at fault and that is what needs to change. With change of policy will come a change in investor behaviour.

 

Bullion you write for MB?

 

Good article BB.

I think its a mix of all parties

1. Properties provide a great vehicle that is almost risk free given its history in Aus
2. Tax advantages
3. Leverage advantages - its easy to get credit to buy a house, try getting a loan for a business
4. Limited supply - Yes it is true for existing stock close to cities
5. The leverage put on income - you can borrow stupid amounts of relatively low income.
6. Low interest rates
7. Negative gearing
8. Foreign buyers


When I have had an opportunity to speak to economists and reserve bank governors that they have their head in the sand about property. This is especially more so in Australia and NZ. Property investment is not really a productive asset, true you can build a house and that creates an industry but it isn't sustainable in terms of service or manufacturing business per say.

I find it sad when factories are torn down to only have high rise apartments go up. I mean its great to have new accommodation, but every has to work and earn an income. Where are the jobs ?

 

I write for my own site, but MB sometimes republish (with my permission).

 

nice I like reading MB and glad to see you wrote this good stuff. If you could pm your site that would be great add it to my list of readings.

 

Google 2340 ...

It's been going for a while

Cliff

 

yeah sorry I always thought he was part of the MB crew.

 

This reminds me of a great Jim Rohn quote:

"There are plenty of people busying themselves analysing at the bottom the roots of the trees to see how it grows...while others are simply just picking off the luscious fruits at the top".

 

Good quote @Leo2413. What I write and my opinion on government policy won't have an impact on my buying property in Adelaide when I think it makes sense to do so.

Any further thoughts on the article? Do you have any views on whether government should be allowed to grow a tree so high that many people can't pick the fruit from the top?

 

I think your probably right that if government policy changes drastically in a few areas, then it can have a significant impact on property prices. Look at Singapore, literally over night the government changed its LVR policy to something like 60%? (I may be wrong just from memory) but it had a significant impact on property prices.

Personally I don't see anything like that happening in Australia. And even if it did, I have no choice but to work around it. Invest and have a chance of a decent financial retirement or don't invest and struggle big time later on. For me there is no choice. Have to invest.

 

trees grow, hobo! it's the nature of what they have evolved to do.

complaining that some people can't reach the fruit while others build ladders is just short sighted, IMO.

that said - why would you be buying in Adelaide? unless some submarines or cars or extraordinary service like a solar array etc come to town, i can't see a bright future medium / long term....

 

Aaron the tree quote is a metaphor, and in my opinion, for what it represents, I see it all the time in society around me. just my opinion.

 

my response is also a metaphor.

 

OK mate. We just view it differently.

 

Nice article. I’m currently living in Adelaide but after I finish my studies I’ll most probably need to move to Sydney because Adelaide has barely any jobs in my field. It’s pretty depressing watching rents and prices skyrocket in Sydney when you’re on the ‘have not’ side of the fence. Hopefully I can just spend the least amount of rent possible by living out in the Campbelltown region for a few years until I have enough experience to relocate back to Adelaide.

I also have an IP in Adelaide so I understand the investor side with expecting a good yield and reasonable capital growth so I don’t blame property investors. Like you said it’s mainly up to the Government to dictate policies and determine what sort of society they want to create. If the Government suddenly changed the policies and gave market incentives NOT to invest in property I would take my money and leverage/invest in managed funds instead.

 

I'm fairly sure @Aaron Sice is agreeing with u...

 

I'm mixed on this issue personally. I do think prices are too high in this country and it's not a good thing for the country. Ultimately am enormous amount of capital (and debt) is tied up in completely unproductive assets. I also think the attractive nature of property investing in this country has also meant it's the automatic choice for a lot of people instead of something riskier that potentially would actually add a lot more to the economy, ie it leads to a lot of lazy capital lying around.

That is also the reflected across the board, eg look at the risk appetites for asian banks when it comes to lending for businesses vs here, here its property first, everything else after and as much as I love property that's bad.

That being said though none of us make the rules so we might as well make hay while the sun shines!

 

Well written and articulated article!

The above quoted line probably needs another article, as that is one of the major factors in my view.

 

oops my bad. apologies @Aaron Sice I'm thick sometimes mate!

 

Agree 100%.