Australian Housing, alert but not alarmed

Property is Australia’s favourite asset class. It’s how most of us have dragged ourselves up the so-called wealth ladder and the family home remains the store of a large percentage of most Australians wealth. But property is like any other asset and market. It has its ups and it has its downs and at the moment it looks set for a period of downs.

In the same way as the GFC induced equity swoon changed many Australian superannuation investors perceptions of how equity markets worked and that their super could go down in value so, it seems, in coming years the price action of housing may change the perception of property as an investment as well.

this is not necessarily the bad outcome that many paint it because property, like any other asset class, regardless of the atmospherics will always offer opportunities to the astute investor who does their homework, understands the market and is patient. But it does cycle like any other market as well.  

For the moment however, and probably the next few years, we are faced with a cyclical down turn within a structurally underpinned market. this will see a pause in price appreciation, likely falls, while incomes and affordability catch up to price moves over the past couple of years.

I’m doing a talk next week for the Property Council of Australia in Newcastle where we are looking at the lingering impact of the GFC on the global economy and markets and what that means for the local economy and property prices here in Australia.

I won’t run the full speech here yet but I will load the Powerpoint presentation up next Friday afternoon once I have done the talk.

But, what I wanted to talk about today was the article by ANZ’s Chief Executive of its Australian division, Phil Chronican, in today’s Sydney Morning Herald.  

Chronican warns that people’s views of housing has been coloured by the recent history of price appreciation. He says

There is no doubt the capital gains made by most people in the property market over the past 15 to 20 years has created an unsustainable perception of housing as an attractive investment vehicle.

Now skeptics will wonder why Phil is doing this but I would argue that senior bankers should give warnings from time to time on things. They may not have done it in the recent past but if they truly care about their customers, which I’m sure they do, then they should give warnings where they see fit. Remember Henry Kaye? If bankers had of warned against him he would have got shut down sooner.

As a behavioural economics/finance guy I couldn’t agree more with Chronican’s point about the colouring of opinion. The point he makes  is analogous to the point I made above about the equity swoon of the GFC shocking naive investors  about the volatility of equities (I don’t mean this rudely – just people who aren’t as focussed or understand markets as well as those of us who do it everyday). The 1982-2000 period was great, but it was and is bookended by long periods where equity prices were down often and essentially went nowhere between 1965-1982 and then since 2000 equities are sideways to down globally.

The main point of Chronican’s article seems to be to say that prices aren’t going up in a hurry but they won’t crash either. We’ve done our own research here at Lighthouse and while we agree there won’t be a crash the evidence of relationships between things like demand for credit and housing and the recent fall in demand for credit suggest prices are likely to fall somewhat before stabilising. And stabilise they will because Australia’s House prices are faced with cyclical headwinds but continues to have strong structural underpinnings.

But back to Chronican’s main thrust of the argument and really good advice

What does this mean for home buyers? They need to ask, is this where I want to live? Will I be happy with it for seven to 10 years? Can I afford it? If there were no capital gains would I still be happy to buy it rather than rent?

For investors it means they need to assess questions such as, is the yield sensible? What sort of capital gain do I need to achieve to make sense of the investment after costs? 

Amen to that. We strongly believe there is a consumption element to home ownership, you have to live somewhere or you’d have to pay rent somewhere else. So if you buy a house, pay a price you can easily afford and are happy to stay there then the movements in price up or down don’t matter that much to your standard of living if you keep paying your mortgage. Some of which is imputed rent, the rest is to pay off the loan. I’ve never thought my house is worth what we paid but that’s what we can afford and where my family is happy so that’s where we live – for me its a consumption good.

And for investors he is essentially saying re-learn the old lessons. Not every property is a good investment and “location, location, location” is back.

Chronican also makes the case for more Government action to address affordability. We couldn’t agree more. Our own view is that the last 20 years of government dis-intermediation from the housing, and many other markets, has left a surfeit of demand in a zone where only they can address affordability. This excess demand is below the market clearing price in many capital cities and thus needs government help to get into the market. Not first home owner grant style arrangement which just drive prices up but genuine assistance easing into the market. When I was a boy my side of the street was private homes and the other side was Housing Commission – what ever happened to that?

Chronican’s message is an important one. The housing bubble debate is largely fueled by offshore interests who don’t understand the structural strengths of the Australian markets or by locals who voraciously decry the lack of affordability and over investment. The reality is that like all markets this one faces headwinds from debt, probable interest rate rises and, in truth, prices that probably skipped away to far in 2009, and will adjust through time. But like the Gold Coast in the 1990’s prices are likely to go flat to down for many years to come not crash.

From a Macroeconomic point of view we’d argue that this, along with the current Australian debt burden, has serious implications for the domestic economy and the rate of growth. We’ll post on the relationship between house prices and domestic activity next week. Thank goodness we’ll have mining to balance things out for the next few years.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

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