The housing slowdown

By Colin Lee
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Owning a home may not be part of the Great Australian Dream. And here’s why

Australians attach great significance to residential real estate—owning one’s home, living the dream. It is the country’s largest asset class, valued at over AUD 7 trillion. It tugs at our heart strings, defining the Great Australian Dream.

Housing affordability has deteriorated over the past 15 years. The cost of buying a house is 7.2 times the annual income of a typical household, up from 4.2 times in 2002.

In September 2017, 12 young CPAs (Certified Public Accountants) in Sydney and Melbourne (CPA Changemakers) developed a series of recommendations to address this issue. Their discussions were based on data and insights from Peter Munckton (Chief Economist at Bank of Queensland), Greg Dickason (Chief Technology Officer at CoreLogic) and Andy Gooden (Chief Operating Officer of Little Real Estate).

With domestic and global economic growth momentum improving, financial markets are projecting a modest rise in interest rates over the next 12-18 months, says Mr Munckton. “However, whether any rate hike takes place will depend upon a variety of factors such as the unemployment and inflation outlook,” he adds.

He explains that while income growth has been modest in recent years, strong job growth over the past year is a positive sign for the economy. Some regional economies, such as in New South Wales in Victoria, have done better than others, but the benefits of economic growth are starting to broaden out through the wider economy. “Most forecasters predict further moderate economic growth in 2018, which bodes well for household incomes,” says Mr Munckton.

According to Mr Munckton, a key factor driving housing demand is population growth, which grew 3.75 million between 2006 and 2016, representing an average annual growth rate of 1.7%. He believes population growth in future will depend on factors such as Australia’s relative economic performance and immigration policy.

In terms of housing supply, Mr Munckton says until recently, housing demand outweighed supply. “Now, the stock of housing is catching up, with demand driven by significant residential building (notably multi-storey units) in recent years. This might be playing a role in the recent slowing of growth in housing prices,” he adds.

Key barriers to housing affordability—getting into the market

Key barriers vary from location to location. In Sydney and Melbourne, the CPA Changemakers identified the high cost of getting in as the primary hurdle. The cost includes saving for a deposit and stamp duty—a progressive tax; the more a property costs, the high the percentage of stamp duty to be paid.

Lenders Mortgage Insurance (LMI) can be another barrier to affordability. LMI is insurance cover for the lender (eg the bank). It is generally applied to loan amounts more than 80% of a property’s value, further increasing the cost of buying a home. The costs vary from lender to lender depending on factors like the nature of the property and the loan package, and is on average 1-5% of the loan amount, depending on the loan-to-value ratio.

High entry and exit costs influence how long people stay in a property before selling up and moving again. CoreLogic data shows that the average duration of ownership for residential property has been on the increase over the past decade.

In 2006, the hold period across the capital cities combined was 6.8 years for houses and 6.2 years for units. Today, that’s 10.9 years and 9 years respectively.

Costs associated with the sale of a home can deter people from trading up. According to realestate.com.au, the three main costs are conveyancing, marketing and agents’ fees and commissions. Depending on the location, conveyancing can cost up to $1,300 and marketing can add up to around $8,000. Agent fees vary but is generally around 2-3%.

What are the regulators doing?

The Federal Government: The 2017 federal budget included many policies aimed at addressing housing supply and demand and development. Downsizers were given incentives—Australians aged 65 and older can now move up to $300,000 of their house sale proceeds into superannuation.

The new First Home Super Savers Scheme was introduced for first home buyers to boost their deposit by salary sacrificing up to $15,000 per annum to their super fund.

State Governments: State governments also play a role in shaping the housing affordability issue. The New South Wales and Victoria governments abolished stamp duty from 1st July 2017 for first home buyers purchasing a home with a dutiable value of up to $650,000 and $600,000 respectively.

State governments also establish and police building standards, regulations and codes that can affect the cost of building new homes or renovating existing ones.

The Australian Prudential Regulation Authority (APRA): APRA is an independent statutory authority established in 1998 to regulate the practices of financial institutions like banks, building societies, credit unions and insurers.

In March 2017, APRA announced that interest-only loans must be restricted to 30% of new residential mortgage loans, after investment lending grew to more than 50% of the nation’s loan book.

Homeownership—is it really worth it?

Homeownership in Australia has declined over the past decade, from 68.1% of all households in 2006 to 65.4% in 2016. It remains central to the Great Australian Dream and is widely viewed as an expression of success and a source of financial security.

By comparison, Switzerland has one of the lowest home ownership rates in the developed world—around 43.4%. This is largely due to government housing policies like rent control and taxation of imputed rents.

Greg Dickason, Head of Global Technology at CoreLogic, says that soaring house prices are changing cultural perceptions of home ownership. “In 1986, almost 60% of 25-34 year-olds owned their homes,” he says. “Now, that number is around 45%. As property ownership becomes a long-term reality, we’ll see the Great Australian Dream take on a whole new meaning.”

Can we solve the housing affordability problem? There is no quick fix to this complex problem but measures can be taken to address it.

While exploring the homeownership challenge, the CPA Changemakers identified a number of strategies which they grouped into three key areas:

1. Personal

Part of the solution lies in greater personal education on the property market—what compromises can be made, what their personal risk profiles are, what they can really afford and their entry strategies.

2. Policy

What further role can governments, both federal and state, and regulators play in improving accessibility to homeownership?

3. Innovation

The CPA Changemakers explored new approaches to property investment that may open the market to more buyers. They also considered how policymakers can provide some solutions:

  • Build infrastructure and employment in regional areas. Improved transport connections and job creation may make it more feasible and attractive for people to live outside urban areas.
  • Extend the First Homebuyers Grant (FHOG) currently available for purchase of owner-occupied properties. Extending it to investors could address one of the key barriers—high entry costs.
  • Review building codes. Dwellings such as granny flats could become a source of affordable housing. Regulations around their construction vary from state to state. In Victoria for example, building a granny flat requires proof that the future occupant is a dependent such as a disabled elderly parent or teenager. The dwelling must also be removed if the person dies or moves out. A review of existing codes and allowing fast turnaround on building approvals would improve housing supply in the market.

Busting the myths

Many myths surround the housing affordability issue. The CPA Changemakers examined three common misconceptions:

Myth 1: Foreign investors are buying up property.

Property purchases by foreign investors are regulated by the Foreign Investment Review Board (FIRB). Non-residents can only buy new or off-the-plan properties. People who reside here for more than 12 months can buy one existing property but they must live in it and they have to sell it when their visa expires.

According to the FIRB annual report, foreign investment in residential property amounted to $13.5 billion for the 2015-2016 year—just 4.4% of the $303.8 billion in total transactions.

Myth 2: Investors own multiple properties.

Multiple property ownership by investors is less common than what media stories suggest. “Less than 8% of Australians own an investment property,” says Andy Gooden, Chief Operating Officer at Little Real Estate. “Around 18% of those own two investment properties and only 2% own four.”

Myth 3: Negative gearing is driving up prices.

Negative gearing allows property investors to claim a tax deduction for the amount of loss their property incurs. It only plays a minimal role in housing affordability—as a tax benefit mainly for high income earners and not an investment strategy. Less than 13% of Australian taxpayers were negatively gearing their investments in 2014-15.

 

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