Welcome to Finance and Fury. Today – will be looking at the potential outcomes for property market from here.

  1. How the effects of the Government responses to Corona may affect the property market – there are many things in play – prices in the property market complex system – so many unknowns – but based around some possible outcomes – we can look at the flow on effects – but no way to be sure to the levels these may materialise

To start with – have to look at the Basics of property – where we were at prior to the government imposed economic decline

  1. In Australia – the characteristic of our property market prices being high come down to urbanisation, interest rates and regulations
    1. Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population)
      1. Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space
      2. But more importantly – it is the Borrowed funds by the population – household debt to GDP
        1. In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be
        2. With the interest rate drops recently – the affordability of debt would have gone up – assuming income also continued on the same trajectory – but with the government restricting occupations and business – incomes may struggle to growth and many people will be left unemployed
      3. Regulations – aims which increases the incentive for higher urbanisation – Supply side –
        1. How – Town planning – the restriction of supply of available developments – but more recently – reducing peoples ability to go to a property to buy this at an auction – but real estate agents have adapted to online auctions –
        2. Thing that will keep out property prices slightly higher on the Supply Side – limited government release of new land (reducing supply) – government restrictions on the use of land
          1. Local Government – Very constricted land supply and extremely onerous planning approval processes
          2. Beginning in the introduction by local councils of upfront infrastructure levies in the early 2000s
  • State Government – Unusually high stamp duties – under the Constitution have control of environmental and land use issues
    1. 1980s – started progressively implementing more rigid planning laws that regulated the use of land
    2. 1990s – further concentration and increase on restricting greenfield development in favour of “urban densification”, or infill development – Land rationing through banning development in all but designated areas = extreme land price inflation
  1. There is good evidence to suggest that the price of a new unit of housing is the ultimate anchor of all housing in an area, so when planning laws that implemented land rationing severely drove up the cost of new homes, all other homes followed suit
    1. To date – there is no restrictions placed on construction sites – projects still going ahead –
  2. Federal – Legislation for the entities which determine lending, etc – GST, APRA, ASIC – financial framework
  1. Historically – Australian house prices rose in correlation relative to average wage earning – up until 1996
    1. June 2014 – IMF reported that house prices in several developed countries are “well above the historical averages” and that Australia had the third highest house price-to-income ratio in the world. 
    2. 2016 – OECD – reported that Australia’s housing boom could end in ‘dramatic and destabilising’ real estate hard landing
  2. Historically – prior to the banking regulations changes and a massively declining interest rate environment – The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI – 100 years
    1. From 1990s – prices have risen faster resulting in an elevated price to income ratio -all capital cities strong increases in property prices – Sydney and Melbourne been the largest – rising 105% and 93.5% respectively since 2009
    2. coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP – clearly shows unsustainable growth in property – driven by ever higher debt levels fuelled by the RBA – cutting rates beginning in 2011
  3. Today – property prices 7 to 10 times equivalent of average full time earnings – up from three in the 1990-90s
    1. The property market was technically in a bubble prior to the government shut downs – but if average full-time earnings go down -if interest rates are also going down and banks are giving holidays on repayments for the short term – prices wont likely drop in the short term – or between now and close to the end of the year

 

Where may property prices go from here – have the demand and supply sides – but will probably take months to materialise

Demand side – important to look at the individual under home ownership – but also the investor landscape –

  1. Employment – ability to afford repayments – with the lower interest rates – affordability was okay – but the Treasury thinks that unemployment will rise to 10%- sees an extra 700,000 to 800,000 people unemployed
    1. this could create a negative feedback loop that further weakened the already-vulnerable economy – and bursts the property bubble –
    2. The flow on effects of lowering incomes – first – if people don’t have jobs – means less income = decision on spending – people will cur any economic spending to make mortgage repayments first – but it comes back to the threshold of people who cant make either – no discretionary spending which hurts consumption as part of GDP – but also mortgage/debt repayment which then hurts property prices if this increases the supply of property available through defaults –
  2. Higher levels of Debt – which to date has been fuelled by lowering interest rates – But the high levels of household debt leaves the property market venerable –
    1. High household debt leaves workers more vulnerable – over the next few months – the situation could be worse than expected because of high household debt – the higher levels of debt amplify the risks of unemployment
      1. Australia’s total debt to household income is at a record high of 186.5%
      2. If unemployment gets up to the 10% – expect mortgage stress may rise and increase downward pressure on prices
    2. The areas worst hit by mortgage stress would be those exposed to the areas of government restrictions to work – areas like tourism, hospitality workers, or service workers – but the number of these who own homes is unknown – most of the younger workers are likely renting –

Supply Side –

  1. First – let’s look at the transaction methods of properties – what makes property liquid – Auctions/sales – but this has been made hard – This is the method most properties are sold in Syd and Melb –
    1. Think about shares – anyone can jump online and click sell – or buy – so makes shares very liquid –
    2. But to sell property – comes down to individuals being able to visit the property to consider their buying prospects – I don’t think anyone (unless they have endless amounts of money) would buy somewhere without being able to enter it – buying property for most is an emotional decision
    3. Therefore – the restriction on auctions or the limitation on in person visits to properties might work in property favour – if people can sell on mass and there is a lot of people willing to buy – prices might not drop – think of shares – if markets basic transaction ability is frozen then no shares can be sold – hence price losses can be limited – but all of this is short term –
    4. Looking at the numbers – About 40% of the country’s real estate auctions were withdrawn over the weekend –due to the stricter social-distancing measures being enforced by the Government – slowed down property market activity – as there is now a ban on auction gatherings and open homes -forced agents to instead undertake online auctions and private sales mostly negotiated by phone – but again – the uptake of these will be limited
  2. But the real issue comes back to affordability for owner occupied properties – and investment returns from investment properties
    1. Owner occupied – might be taking a hit if the number of Australians struggling to repay their mortgages lifts to higher levels over the next few months as people are laid off – but the government Job Keeper and Job Seeker payments may help to supplement this side of the property price conundrum –
      1. In addition – those most in financial distress can claim the bank holidays – to pay slightly more later when the holiday is over – One economist warned that Australia could see unemployment reach about 10 per cent and house prices drop 20 per cent.
      2. Summary of what might happen – first – look at the Outcome from – 1994 to 2019
        1. Brisbane – Median house price $126k to $550k. Borrowed $101k at 9%, today $419k at 5%
        2. Annual repayments $13k to $31k – 20% to 31% of median incomes in servicing – even though record low rates – repayments overall are higher due to larger principal components of repayments
  • Based on trend – median house price would be half of prices today prices remained correlated to wage growth
  1. Even with lower rates, we spend way more on servicing a mortgage – so if the population loses the disposable income – can even afford the principal repayments
  1. Flow on effects – diversion/misallocation of resources – excessive lending to the residential housing sector at the expense of businesses – lead to “a banking system which allocated capital away from the most productive areas of the economy — business — is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end, bad for us
    1. This has the effect of slowing the recovery – less jobs when the shut downs end – less private companies that exist
  2. What is happening – Have record low interest rates – Individual side – things are that bad – but investor side is worse – break dese each down
  1. One Major problem for property may lie on the investor side of supply – Investor – this may be the first thing to be squeezed
    1. About 25% of Australian properties are investment properties – this is the portion of the market which is the rental market
    2. Freezes on rents – if cashflow of these properties dries up – and people cant make repayments out of their own cashflow – then the sales of these properties might be around the corner –
    3. Legislation – Illegal AirBnb – There are around 346,581 AirBNB listings in Australia – makes up around 4% of the property market – now made illegal –
      1. AirBnB was very profitable for the short term listing environment – due to it being illegal now – they will have to go towards long term listing for rentals – which can push down rentals on average – making investment property income yields even worse than they are due to the high property prices
    4. Interest rates low – but do the investors in the market have enough surplus cashflow to maintain repayments on loans if no income is being received – but if not owner occupied – can get the bank holidays – so may have to sell – but

 

Hard to say how severe the house price decline may be –

  1. A lot of it comes down to how long governments intend to restrict the economy – implementing their quarantine and containment efforts which are the things that will carry a hefty economic impact long term
  2. Trouble is – once a recession has been triggered – it can go on for a very long time – and the worst can drag on for years
    1. Even it the government eased restrictions today – the flow on effects may take 6 to 18 months to begin to recover
  3. The property market is a complex system – like the share market – so these government policies are making things too early to predict the longer term effects on property prices –

What has been keeping prices higher – Credit availability and affordability and concentration/urbanisation

  1. greater availability of credit due to financial deregulation and lower rates
    1. Debt growth averaged 15% per annum compounding (1998–2015). During the same period national economic growth was less than 3% with debt stripped out – low interest rates since 2008 allowed for the increasing borrowing capacity fuelling growth
      1. The influence of interest rates and banking policy on property prices is evident –
      2. Coupled with financial deregulation – led to greater availability of credit and a variety of financial products and options
  • RBA has maintained a low cash interest rate policy – reduced the cost of financing property purchase
    1. easy availability of interest-only loans has made investment borrowing more profitable – increasing incentive
    2. But interest rates are almost zero – so the upside of this is essentially gone
  1. Previously Allowed for expansion of bigger properties and became easier and cheaper to borrow more money – bidding war from rampart auction markets – but now that is illegal – the upside for property seems to be done with
  1. What was Good news for property prices – currently density of property supply, and was the high population growth through the immigration levels and also of overseas investment/property purchases –
    1. Prior to Corona – government restrictions put into place – there were additional restrictions placed on foreign buyers –
    2. But now – if people can immigrate to Australia for a time period – the question is how will this affect property? Well – given our low national replacement – not great in the longer term –
  2. Potential outcomes – do vary –
  3. In the best-case scenario, capital cities could see house price declines of about 5%
  4. In the worst-case scenario, prices could fall about 20% – 30%

All comes down to the level of unemployment – how long government restrictions on the free market continue – and how cash strapped invertors become over the next few months

  1. Probably start with Investors having to sell off properties – but regulations may stop this occurring – due to rental protections
  2. Even long term property’s upside may be limited for economic factors – interest rates bottoming out may be the biggest one
  3. Do another episode in a few weeks on property again as more information becomes apparent at the moment – a lot of guess work

No way to tell exactly – but regardless – property will likely take a hit – to the size of prices declines – who knows – be more or less suburb dependent – if already massively overvalued with larger available supply – not a good sign – but for some suburbs – may not be as drastic

 

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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