Tick-Tock goes the housing market time bomb

Housing A confluence of building approvals, housing price and population figures this week are likely to all point in one direction: the failure of housing policy in key markets to keep pace with the nation’s needs.

And there’s no sign of that changing. In just three weeks, the Australian Bureau of Statistics population clock will quietly tick over the 22,500,000 mark. On Wednesday the March quarter ABS demographic release is likely to show population growth continuing to ease from last year’s peak (the one beaten up by the Coalition during the election campaign) but is still decidedly strong.

The Federal Treasury’s Red Book briefing to the new government spelt out that strong population growth was probably inescapable, but added that it “is not necessarily unsustainable … it need not adversely affect the environment, the liveability of cities, infrastructure and service delivery", so long as governments planned well.

Well there’s not much sign of that. Federal and state housing policies have demonstrably failed but there’s no meaningful change. Tax treatment is a no-go area, infrastructure investment to make the most of what we have is lagging, social housing experiments are pretty much just that, experiments, and co-ordination of the three levels of government remains a rare exception rather than a rule.

The scariest story in yesterday’s press was the Sun Herald property watch column by SQM Research managing director, Louis Christopher. He was specifically addressing the Sydney market but this has plenty of relevance elsewhere:

“SQM’s vacancy rate series also reveals a tight rental market with only some slack at the very affluent end of the market place. Vacancy rates are at 1.3 per cent and ever tighter in Sydney’s west at a dire 0.7 per cent. And from what I can see there are no significant increases in new housing developments in the next two years for the local market.

“This is scary stuff and means only one thing for rents. Our forecast is for a Sydney-wide average rise of 5-7 per cent a year for at least the next two years. The west could record an even higher growth rate of 8 per cent-plus.”

Rent rises of that order encourage renters to try to buy – but if the new stock isn’t there, it increases price pressure that attracts Reserve Bank attention. While the RBA believes we don’t have a housing bubble, it has no interest in allowing one to develop. Having railed without apparent effect about the importance of increasing housing supply, Governor Glenn Stevens is left with the unpalatable task of heading off housing inflation with his blunt instrument while facing the bigger challenge of the terms of trade wealth surge.

Some real estate markets around the nation – most notably the Gold Coast’s many empty units – may be wobbly, but the Sydney and Melbourne influence remains strong.

The day after its demographics release, the ABS will publish its August building approvals numbers. No-one’s expecting much. While there have been signs the big banks are a little more open to business, property developers generally continue to be persona non grata.

APRA continues to monitor banks’ exposure to property very closely and I’m hearing stories of the big four starting to be more ruthless in clearing out their problem loans in the sector. They’re looking to quit loans that were sharply written down over the past two years. Catch-22 is hard at work though – buyers are scarce as the banks won’t provide the credit to enable them to buy.

The whole process is delaying the increase in housing supply the nation needs to avoid affordability worsening and to gradually wean us off expectations of ever-rising residential real estate. Our spend on dwellings as a proportion of GDP has been more or less flat for the past six years – and an increasing share of the spend has been on extending existing houses, rather than building new ones.

With our population growth, that is not sustainable. The RBA has told us as much a number of times. And now the clock is ticking.

Michael Pascoe is a Business Day contributing editor. Source: www.smh.com.au

AFL rematch causes planning chaos

MCG Weddings, home auctions and retail outlets could be the losers from this weekend’s AFL grand final as the rematch throws event scheduling into chaos.

Around 585 Victorian auctions were originally listed for the post-final weekend, but that number could dwindle this week as vendors struggle with jitters amid the prospect of facing off against the first grand final replay since 1977.

Real Estate Institute of Victoria spokesman Robert Larocca said only about 50 auctions were scheduled from 2.30pm (AEST) onwards, but decisions on whether more than 500 auctions should go ahead would be made individually.

"We’ll find out as the week goes on how many (auctions) are shifted or moved," he told AAP.

"There’s no doubt that agents are saying that they are very concerned going up live against the grand final."

Melbourne shopping malls are also likely to be deserted for the second consecutive weekend as millions tune into broadcasts of the St Kilda-Collingwood clash.

Australian Retailers Association executive director Russell Zimmerman said while cafes, restaurants and bars could benefit from the rematch, clothing retailers could suffer.

"It’s a time when retailers find things go a bit quiet," he said.

Fans buying grand final tickets or organising catering for parties and barbecues would also be spending money that might otherwise be splurged on retail, Mr Zimmerman said.

The replay would also cause upheaval for weddings scheduled for Saturday, International College of Celebrancy principal Dally Messenger said.

"There will be heaps of people postponing weddings, there will be lots of people unwillingly going to weddings that they can’t dodge," the celebrant told AAP.

"It really sends the whole wedding world into chaos."

Mr Messenger said while people often avoided planning weddings on grand final day, "the week after, that’s when they open the gates".

The rescheduled game has prompted organisers of the musical Hairspray, set to open in Melbourne this Saturday night, to push back its red carpet arrivals event by one hour to 8pm.

The Spring Racing Carnival launch which was scheduled for this Wednesday at the MCG has been pushed back one week to allow for grand final preparations.

Port Phillip Council has confirmed it will again screen the big game at O’Donnell Gardens next to Luna Park, where a large crowd gathered to cheer the Saints to its stunning draw with the Magpies last Saturday.

However, the Sidney Myer Music Bowl, which hosted thousands of Collingwood fans, will be unavailable as it is taken over by the Parklife music festival.

Story by Michelle Draper Sydney Morning Herald

How high will rates go?

interestratedebate Glenn Stevens was out last week sounding loud alarm bells about where interest rates are headed. It seems that as the economy belts full steam ahead into what Stevens has termed the biggest resources boom since the late 19th Century, interest rates are only headed one way, and that is up.

Of course, that is unless Australia is hit by global shocks that put the brakes on our growth, but Stevens isn’t assuming that is going to happen anytime soon.

Stevens know parts of Australia are already hurting, particularly those dependent on tourism, to whom the soaring Australian dollar has done no favours. Unfortunately though, Stevens has only got one stick, and he’s prepared to use it. Even Stevens admits interest rates are a blunt instrument when it comes to keeping the economy in check. It inflicts pain across Australia, even though much of the boom is happening in the west.

It certainly will start to put mortgage holders under pressure. The Real Estate Institute of Australia says we are now heading towards the average mortgaged up household across the nation devoting 35 per cent of their income to meeting loan repayments.

In NSW, mortgage holders are already spending 38 per cent of their income on loan repayments. To put that in perspective, that’s about what people across the nation were contributing to their mortgages back in the late ’80s when interest rates peaked at more than 17 per cent.

Many people were under that same pressure before the GFC hit, as can be seen in this chart, which shows house prices growth and the percentage of income people have been using to pay their mortgage over the last decade.

David Airey, president of the Real Estate Institute of Australia, says most people can comfortably manage paying 30 per cent of their income for housing, and after that things can start to get a little tight. Obviously that depends on how you spend the rest of your money, but throw a couple of kids into the mix, and the budget starts to stretch a bit thin. Airey predicts that if interest rates climb higher, pain will start set in for mortgage holders.

So what do rises mean for you? If you have a variable mortgage, you are most likely to be paying about 7 per cent to your lender. On an average 30-year $373,000 loan, that would be costing you $2482 in monthly repayments.

There’s talk of five rate rises to come from one expert, Paul Bloxham, who recently left a job with the RBA to become the chief economist at bank HSBC. Bloxham has predicted the official cash rate could hit 5.75 per cent next year, and that there will definitely be at least one 0.25 per cent increase before Christmas. The Commonwealth Bank is talking of official rates of 6 per cent, and Westpac is betting on about 5.25 per cent.

Of course, the official cash rate is way below what you pay to your lender. So if your bank was to pass the first predicted rise on in full, you’d see your variable rate jump to from 7 per cent to 7.25 per cent before Santa arrives. That would make your monthly repayment $2545, $63 more than you are paying now.

Is Bloxham is right and are there five rate rises are headed our way? Five rises would spike your rate to 8.25 per cent and on the average new mortgage, your monthly repayments would jump to $2482, $320 more than you are forking out now. Over a year that comes to $3840.

There is always the chance that banks can increase their rates by more than the Reserve Bank does, and at least two big banks are rumoured to be considering this next time around. So you might need to factor in a bit more.

In terms of what you would be paying out of your income onto your loan, this is what could happen to the average mortgage holder at various interest rate scenarios, making some assumptions about wages growth and house price growth.

Rates rises are dependant on the economy zooming along, and there is the chance that it could go the other way. But general consensus among economists seems to be we are headed for growth.

Some people will be asking themselves is it time to fix? Fixed interest rates have been falling for the past couple of months, but are now edging back up. Australia’s largest independently owned mortgage broker, Mortgage Choice, says in the past fortnight, three lenders on its panel increased rates on one or more of their fixed rate products. The company’s weekly interest rate averages for its panel of 24 residential lenders showed a rise in the three-year fixed rate, albeit a small one, to 7.37 per cent from 7.33 per cent. Three years is the most popular fixed term.

The average one-year fixed rate also rose, from 7.02 per cent to 7.03 per cent, while the five-year fixed rate was steady at 7.81 per cent.

Mortgage Choice spokeswoman Kristy Sheppard says this compares to an average basic variable rate of 7.07 per cent and standard variable rate of 7.36 per cent.

Sheppard says choosing between a fixed and a variable home loan is a decision that must be made according to individual financial circumstances, lifestyle and future needs. There are pros and cons to each. Sometimes borrowers hedge their bets by splitting the loan between the two options.

So what to do now? The best thing is to start paying more off your mortgage. See whether your budget can cope with up to five increases, and then you’ll know how you would fare if that prediction does eventuate. Of course, you’ll also pay your mortgage off faster by jumping in with extra repayments now, and build yourself a buffer should your financial circumstances suddenly change.

Source: www.domain.com.au

Carolyn Boyd is a property journalist and keen follower of Australia’s housing market.

Interest from overseas is up Down Under

Real-Estate-Investment IT’S no secret overseas investors have identified Australia as a growth region when it comes to buying property.

The funds are coming in not only to buy direct assets but also via investing in Australian real estate investment trusts, which are now more focused on the local property market than at any time in the past three years.

Jones Lang LaSalle research on global capital flows confirms Australia’s attraction to investors led it to be ranked seventh in the world as a destination for cross-border investment for the first half of 2010.

The report says cross-border investment in Australia increased more than five-fold, at $US1.8 billion, compared with $US319 million at the same time last year. The research reveals Britain has been the most popular destination for cross-border investment so far in 2010, with $US7 billion invested, while Germany replaces the US as the second most popular destination.

The US was in third place (from second in the first half of 2009), despite a doubling in transactions in the American market from $US2.2 billion to $US4.3 billion.

The director of international investments at Jones Lang LaSalle in Australia, Simon Storry, said the country’s ranking confirmed the view that Australia remained a destination of choice for foreign investment.

”We expect Australia to continue to be on the radar of foreign investors for the remainder of this year,” Mr Storry said.

”Commercial real estate in Australia has offered solid and stable returns and an attractive environment for investors seeking stability in their globally diverse portfolios.”

The Jones Lang LaSalle research reveals a near-doubling of global commercial real estate transactions in the first half of 2010, compared with the same period a year ago.

According to the report, total global commercial real estate investment was $US132 billion for the first half of 2010, compared with $US76 billion in the previous corresponding period and, after reaching a low of 31 per cent of total volumes in the first half of 2009, cross-border activity was back above 40 per cent, a trend set to continue.

Mr Storry said this reflected a general market pick-up, a return to the globalisation of real estate investment and a search for value by investors.

Carolyn Cummins Sydney Morning Herald

Bumper listings hints at a buyers’ market

Bumper house listings Sydney’s yo-yoing auction clearance rate slipped to 57 per cent amid the bumper 588 weekend listings. There had been a 61 per cent success rate the previous weekend.

Clearance rates have averaged 67 per cent so far this year, the weakest weekend result being 51 per cent in early July.

The easing success rates, combined with the high number of properties on the market, has prompted suggestions that better buying conditions were on the way.

”It’s moving towards a buyers’ market, but I wouldn’t say it was there quite yet,” said John Edwards, chief executive of the real estate monitor Residex. ”Clearance rates consistently below 60 per cent is a buyer’s market.”

It was the second busiest Saturday this year – falling short of the super Saturday in March when 70 per cent of the 680 vendors sold their houses and units at auction.

Given school holidays and the grand final, there are just 170 auctions scheduled next weekend.

The weekend’s highest sale was a three-level, cliff-top Vaucluse house which sold pre-auction for $4.3 million. The six-bedroom house last traded at $4.1 million in 2007, reflecting a subdued 1.3 per cent annual growth.

Another Vaucluse house, a modernist house designed by Tobias Partners, was passed in at $6.7 million. It was initially listed early last year with $8.5 million-plus hopes. The three-bedroom, four-bathroom house was built in 2007 after the 696 square metre block cost $2.75 million in 2005.

In 2007 a neighbouring residence sold for $8.5 million, and although that house was new at the time, keen observers of Vaucluse real estate thought the latest offering was superior in design and finish.

Figures from Residex show Sydney’s price growth fell last month by 1.45 per cent to a $658,500 median house price.

Sydney unit prices also fell 1.16 per cent in the month to a $468,000 median. However, country NSW’s median house price rose 1.88 per cent to $342,500, according to the Residex data.

The Labor government’s agreement with independent MPs could help with property values in regional Australia, Mr Edwards said.

The government’s pledge to invest in building affordable homes in regional cities and to spend on infrastructure could be one of the most significant policy shifts of modern times, he said.

”Just the development of 15,000 new homes in regional Australia suggests a capital outlay in the order of $3.7 billion. I have for a long time suggested that the only way to solve the unaffordability crisis in our capital cities is to create growth in our regional areas and in turn encourage a good percentage of our city dwellers to relocate to a better lifestyle. This process will by its very nature reduce the capital growth rate in our most unaffordable capital cities but it will in the longer term be beneficial for society and ensure there is no housing bust that is so often suggested by many.

”It will cause a better balance between capital growth and rental returns in the future.

”This is because cities will have tighter rental markets with higher rental costs due to lower investor activity because of dwelling cost and expected lower capital growth rates.”

Story by Jonathan Chancellor Sydney Morning Herald

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