There is an unease in large parts of the residential property market. Such an unease normally triggers a fall in prices.
Deloitte Access Economics’ Chris Richardson picked up the danger signals in the economic statistics, so warned first-home buyers that now might be a bad time to buy. He was roundly criticised. I pick up similar danger signals in parts of the industry itself because rarely has a vital industry for the nation been attacked on so many fronts.
And down in budget preparation land they are planning new attacks with the aim of making it easier for first-home buyers. Scott Morrison, be careful what you wish for.
Let’s step back and look at the current volley of attacks.
- Chinese and other Asian foreign investors want to buy but they get no help from local Australian banks because they can’t prove their income in China to our banks. At the same time, China is making it almost impossible for money directed to Australian housing to legally leave the country. The Chinese who bought apartments “off the plan” two or three years ago are forced to find dubious ways of getting money out of China and/or pay the high interest rates required by the rapidly growing unofficial and unregulated finance system. There is a massive Chinese investor funding problem in Melbourne and a lesser one in Brisbane
- Chinese are re-entering the “off the plan” market with great gusto in the belief that their government will change the rules and/or there will be a reversal in Australian banking attitudes. If we do manage to get through the Melbourne small apartment oversupply problem we are laying the foundations for another and deeper crisis if the current Chinese funding rules do not change.
- In the “second-hand” dwelling market, for the most part, Chinese investors do not participate because it is illegal without FIRB approval. However there is clearly buying by local Chinese who have some sort of agreement with their relatives/ friends in China. But the Australian government is cracking down on these arrangements.
- The “second-hand” market is largely made up of locals who are pushing up the prices in many areas of Sydney and Melbourne. While there is the normal high activity in house swapping and many first-home buyers in outer suburbs, the biggest force in the market for both apartments and houses is investors.
The local investors include high-income medical professionals but also the likes of teachers, police and trades people like plumbers. Thanks to bad government in Canberra there is uncertainty about superannuation and people see negatively geared dwellings as a more reliable retirement vehicle. (We will not debate the rights and wrongs of this strategy in this commentary.)
There is no doubt the investor demand was also boosted by incentivised bank staff who pushed interest-only loans to customers with the vigour we now see in electricity marketing.
A friend of mine two years ago bought one investment apartment but was under pressure from his big four bank salesman to buy five interest-only dwellings. This was not an isolated instance so housing loans to investors are dominated by interest-only loans.
But now that whole process is being put in reverse. Banks are severely restricting interest-only loans as part of a major clampdown on investor loans as required by the regulators. Interest rates on investor loans are being increased and residential rate loans are being edged up. And so the forces that drove the “second-hand” market higher are being reversed with some savagery. And at the same time, about every regulator is warning of a bubble.
- Outside the public service wages are not rising, which exposes risk to the one-third of Australian borrowers who have not built up a repayment buffer, or are less than one month ahead on their home loan repayments. These borrowers are very exposed to an economic downturn or rise in interest rates. That “one-third” number comes from the Reserve Bank and shows how vulnerable the current situation is to any further blows in the budget.
- There are signs that in Sydney and Melbourne the squeeze on land for development is being eased, particularly in Sydney. The major developer in Sydney, Meriton, has announced that it plans to lift production because long-delayed permits are finally being issued.
With all these forces being lined up, dwelling prices should fall. They are being held up by the rising populations in Melbourne and Sydney; the rush of foreign students and tourists and problems developers are having organising finance.
In addition, many believe that the ALP is highly likely to win the next election and with that will come negative gearing clamps. They are making the investments before it’s too late. Rents in most areas are not falling. Those forces will probably stop a significant fall unless there is a major adverse global event or the budget attacks too hard. And if there is a significant fall the whole Australian economy will be affected, so multiplying the fall.
My fear is that the regulators are using weapons to curb the boom that have not been used in a long time. There is risk of overshooting.
I know Morrison wants to give first-home buyers the chance to access superannuation in a limited way. In this market, it’s the wrong move. But at the right time, in my view, it’s a good idea to reduce long-term pension costs. Morrison should keep the weapon in the back pocket just in case the current campaign overshoots and sends prices down.
By Robert Gottliebsen