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Housing policy is the elephant in the room this election period: Peter Chittenden

When earlier this month the interest rate cut by the RBA was announced, both major parties engaged in a rush to comment.

We are now being told on almost every front that rates are now at historically low levels. We then saw the majority of banks also moving fast to pass on the rate cut to their customers and as we know from past experience this is not always the case.

Clearly this indicates that over the past six months the dynamics of the residential property market have shifted.

However in spite of the rate cut induced publicity spree last week, have you noticed that unlike previous elections, at least to-date, there is an absence of any sort of clear-cut housing policy being debated or promoted by either of the big political parties?

Should this be a fact that we should be concerned about?

Back in January one of the points that I suggested would have a key impact on the market in 2013, was the emerging low interest rate environment.

As official interest rates might possibly head to 2% in 2014, the flow impact to the housing market is bound to have a material and possibly dramatic consequence.

For this reason alone there is I think a compelling case to look much more closely at housing policy as we approach election day. And for reasons I will return to, this includes the question of a possible adjustment to the rates and application of the GST.

In looking at the big picture I am not going to attempt in any way to suggest where policy could head, but I am keen to share some key facts as to why housing should not be relegated too far down the list of policy priorities.

The first point to consider is the fact that our population continues to grow while supply remains stubbornly low.

Australia’s annual growth rate currently sits around 1.8% while the world average is a much more modest 1.1%.

As already highlighted, supply is lagging and according to the Urban Taskforce the shortfall is as much as 50% of what is required.

According to the UTF just over 43 homes are being built for every 10,000 people and at 15,000 homes a year that’s half of what we need and looking at population growth they might just be on the numbers.

Faced with this reality at state government policy level we are seeing attempts to release more land, which is having some impact in Melbourne and Sydney and at the same time average lot sizes are being driven down.

But we are seeing strong demand, which in Sydney in particular is seeing new land release snapped up, and land prices continue to rise as estates sell-out.

The pressure on supply is even spilling over into the public housing sector where both NSW and Queensland are applying pressure to their tenants.  

NSW for example is talking about a sort of ‘bedroom tax’, or a surcharge on those with homes with un-used bedrooms. This must be a clear message that housing policy even at the most basic level is under extreme stress.

 


So supply is under pressure, as it has been for years, but demand is on the increase.

Across many parts of Sydney for example auction clearance rates are above 70% and in some areas beyond 80%.

The trend is not universal but in the main where clearance rates are low this appears to be mainly in fringe areas and some holiday areas where spring and summer could see the rates go up.

Following upon very low interest rates there are some suggestions that a housing bubble might be building as low rates bring more buyers and investors into the market.

First time buyers are still a little reluctant, but as rents continue to rise, this might soon change if the gap between rents and mortgagee payments continues to grow.

Assuming an average mortgage of $308,000 current weekly repayments could be as low as $412 while renting a similar property would attract a rent of $500 per week.

It also appears that investors are, as you would expect, reacting to lower deposit rates, and soon even lower rates. Three years ago a fixed term deposit rate above 6% was common – not so today.

Investors are active and they have been driving much of the demand for new apartment product, they are also seeing house and apartment price growth. They are also getting good rental yields and good rental growth.

It remains to be seen if more renters become first-home buyers and as a result, potentially further house price rises as these groups compete for available stock as more interest rate cuts encourage both.

Leaving aside the possible hustle and bustle of the market, there is also the reality that population demographics are shifting and here again there is reason to suggest that a policy void is not a good thing.

We have a growing population and with a median age of 36 years, a young population with a mini baby boom and as such, a period of peak demand for housing.

From the last census we also see that median incomes are on the rise and now sit around $87,516 pa, between 2006 and 2011 that’s an increase of 20% but over the period rents have increased by 49%. House prices have gone up 49.2% and apartments 22.1%.

We are also seeing other demographic shifts with 15.9% of households now home to single parents and of those, females account for 82.4% and males 17.6%.

These figures serve to highlight that housing policy needs to keep pace with social change as well.

This highlights the need for better housing policy linked to infrastructure and suggests that the current election has not made a strong enough connection between the two apart from some road announcements.

Simply suggesting that 30-something buyers are simply too fussy is not in any way a real debate.

In Project Agenda there has been frequent comment on an urgent need to better fund infrastructure.  Many of the industry leaders have suggested that a move away from the burden of stamp duty could in part come from a higher rate of GST.

Now even if only on the margins and possibly not until 2016 the GST debate is part of a policy setting that will impact the housing market.

So as we look for housing policy to take its turn in the election spotlight, let’s just remind ourselves that there is now GST applied to existing homes.

But a GST of $45,000 is locked away inside the price for a new $500,000 home and that would increase to $56,250 if the rate went to 12.5% and this policy in fact makes new homes less affordable and possibly is a key factor helping to keep a lid on supply.

I think that for all of these reasons and many more, that the elephant in the room needs to be acknowledged as the election moves forward.


Peter Chittenden is managing director for residential of Colliers International.


Peter Chittenden

Peter Chittenden

Peter Chittenden is managing director for residential of Colliers International.

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