Welcome to Finance and Fury, the Furious Friday edition. Today we have a pretty good episode! (I find this interesting at least, so I hope you do too) – We’re talking about the Australia Property market, specifically the property bubble.
- How monetary policy has affected house prices over the last decades
- Most people my age born in the 80s to 90s, even 2000s have only seen property go up
- This makes it seem like a safe bet – so I want to look at this and the reasons for the meteoric rise, then look deep into whether or not we’re in a bubble.
- Just quickly before I get started, speaking about property (or lack thereof) I’m participating in the upcoming Vinnies CEO Sleepout to raise funds for the homelessness problem in Australia.
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Over the last couple of episodes we have covered a lot about property and monetary policy – because a lot has been happening!
- Just in the past 12 months
- ASIC end of 2018 updated consumer credit rules and set the requirement for banks to look at people’s actual expenses when assessing lending
- APRA with removal of 7% benchmark for assessing serviceability on home loans – lowering to 6% or so, and potentially lower as rates drop
- RBA – we saw RBA drop rates to historical lows this week – 1.25%
- Foreign buyers’ restrictions as well
- All had either positive or negative effects on demand, but nothing about supply. And this is the major issue in our property bubble problems.
- Prices are set from two points of supply and demand
- Supply is available purchases – people selling their house, or new houses on the market.
- Demand is much more complicated as it comes back to a number of factors
- Incomes/demographics – working age population, immigration, concentration around employment/ where people want to live.
- Availability and cost of credit – if you can borrow a lot, and at low cost it increases demand
- We have had a lot of demand but little supply increase to meet the growing demand
Where we have come from: Property market history
If you’ve been listening for a while you will have heard me touch on a few of these points
- Reasons for property prices increases – Demand side – rates and availability of credit
- Below 6% until 1971 – the Brenton woods system was abandoned and our interest rate rose to 13.75% in 1983
- AUD floated in 1983 and rates kept rising. Up to 17% by 1991. Then, there was a drop to 9%, before going up a bit to 10% in 1993
- By 1997 rates had dropped to hit 6.7%, which is more than a 10% drop in less than 6 years
- We can see how the market responded to this (price reaction) by looking at the property price history from 1997 on wards (sky high!)
- To break it down, in 1973, median house prices across Australia’s capital cities looked something like this:
- But, back in 1973, the average weekly wage was $111.80 (accounting for both full and part-time workers)
- Today, a full-time worker makes on average $1,453.90 weekly (before tax)
- Our wage growth and median income growth has helped to fuel the demand for property
- Side note on income growth; Taken as an average, not individual. If we measure the individual it’s much more than 2% p.a. (changing jobs, or don’t ever receive a promotion etc)
- Inflation matters! So, we need to compare real values, in today’s dollars and normalise for inflation.
- In 1971 the median house price was $190k in today’s dollars, by 1991 the median price was $260k – that’s real growth of 1.6% p.a. approx. over 20 years.
- In 1997 the median price was about $300k, by 2017 the median price was $700k – in real terms 4.3%p.a.
Every step of the way there has been an interest rate reduction in the price boom
- Level of affordability can vary cyclically. House-price to income data suggest a structural affordability problem in Australia over the past 20 years.
- Average wages going up since 1997
- There’s also been growing concern about the low levels of first-home buyers entering the market in recent years.
- Also, the demand for bigger buildings also went up which creates a problem – cheap money incentivises people to spend more than they would otherwise – for renovations etc
- But most of the price of residential property in Australia reflects the value of land, rather than the cost of construction or the value of buildings.
- 3% p.a. increased from improvements since 1990
- 6% p.a. increase from land value since 1990
- This is another problem – Australia has an abundance of land, there is a limited supply of well-located land, particularly close to the centre of our major cities
- Lots of apartments went up into the city to stimulate supply of housing without releasing land – but Australians overwhelmingly want to eventually live in a house with a backyard (80% estimated demand over the long term)
- With limited demand for apartments beyond foreign investors, large property price drops have been seen from the reduction of prices in units/apartments, due to oversupply without foreign investors
We’re seeing a correction. The current drop in prices to date has been big compared to historical drops.
It’s now one of the largest on record in Australia, only surpassed by a handful of periods in the late 1800s and the first half of the 20th century
- Estimates regarding net housing wealth (the value of homes minus mortgage debt) has fallen 12% in real terms from the record peak seen at the end of 2017 – mostly in Sydney
- NAB have predicted that this decline in housing wealth is the second-largest on record in the past half century, only surpassed by the 13% drop seen in the early 1990s, when Australia last fell into recession.
- GDP growth is slowing, so is inflation, with both less than 2%. This deceleration reflects weaker household spending, which is the largest part of the economy at around 55%.
- Spending slowdown will keep Australian economic growth slow in the years ahead – but this doesn’t necessarily mean recession
- Spending is related to wealth psychology – The Wealth Effect – you feel rich, so you are more likely to spend more. A decline in house prices with no offset from household income increases will result in reduced spending
- Capital Economics said the downturn could see total housing wealth decline by $800 billion over the next few years
- This decline in housing wealth would likely drag on household spending, counteracting a continued improvement in Australian labour market conditions.
- The likelihood of continued sluggish economic growth, will eventually see unemployment start to drift higher as hiring levels slow, making it harder for the RBA to lift underlying inflation back to within its 2-3% target
- So, they will be forced to drop rates even further and hoping that it isn’t just digging the hole deeper with the money markets. There’s a predicted 1 to 2 more rate-cuts likely in the future.
How do we get ourselves out of this hole?
- Housing-market activity will continue to decline as affordable housing falls, joblessness increases and consumer confidence wavers.
- How to solve the problem? – requires good governance
- Require local councils to rezone – Federal Government to implement policy aimed at spreading out population
- Tax zones – People move where work is – companies get lower taxes to move and they will move – then employees go there, especially if they have lower taxes
- But it isn’t likely – the Government knows that if our property prices drop, we are screwed
- Australian wealth and economic success rests on the back of the property market now – sadly due to Gov fiscal policy, and also Monetary policy
- What you can do – remember, set appropriate price limits, don’t get into too much debt, have enough equity in the property to survive declines in property value.
- We’ll talk about investing overseas in the next episode – looking at share market and how it responds to these sort of events
- Diversification is important