Young Australians pinning their hopes on a collapse in house prices should be careful what they wish for.
For them at least, it may soon be an exciting time to be an Australian. Cracks are emerging in the redoubtable property market. Price growth is faltering. The waves of new houses, apartments and investor home loans conjured up by rock-bottom interest rates have started to recede. Around 28,000 apartments were completed in Sydney and Melbourne in each of 2014 and 2015 — this year and next there’ll be 44,000, at the same time immigration is slowing.
“The busting of the apartment bubble is imminent: thousands of off-the-plan investors will soon be confronted with a market replete with surplus apartments,” says Bob Birrell, a Monash University researcher. This week he accused the government of “monumental insensitivity to the social catastrophe” of Australia’s housing market, citing median Sydney house prices above $1 million.
It might indeed be a social problem — the Reserve Bank has recently pointed to a “pronounced decline” in home ownership rates among 25 to 44 year olds; the 2011 census revealed the number of people per dwelling (2.61) has crept up for the first time in generations — but the housing market has been an economic blessing, underpinning employment and spending as the rest of the world gives Australians a huge pay cut.
“We’re going through the most serious recession in 80 years if we look at real income,” says Bob Gregory, professor of economics at Australian National University. “The mining boom was a gift that has now been taken away,” he adds. Over the past two years the commodity prices that matter to Australia, and the flow of mining investment itself, have fallen 40 per cent.
“A few years ago we were exporting a piece of coal to get back two shirts, now we’re getting back something much closer to one shirt,” Gregory says, explaining how GDP — which measures output without factoring in what the rest of the world is willing to pay for it — is a poor measure of Australians’ real incomes. Indeed, after around 20 years of steady expansion, real income per person in Australia has steadily gone backwards since 2010. The dollar has dropped 25 per cent since late 2013 against the US dollar.
Incomes might be falling, but economic activity — which propels employment — has proved surprisingly resilient. “The economy is successfully rebalancing following the mining investment boom,” declared Reserve Bank Deputy Governor Phil Lowe, in optimistic remarks earlier this week in Adelaide.
GDP growth bounced back to an impressive 3 per cent last year — Australia’s 24th year of expansion — lifting the country’s annual economic output above $1.6 trillion for the first time. Jobs growth has accelerated; business and household services added another 500,000 jobs in the last two years alone.
“The effect of low interest rates is most clearly evident in residential construction…. [where] strong growth is having positive spillovers to other parts of the economy,” Lowe added.
Of the 19 industries the Australian Bureau of Statistics tracks for the national accounts, real estate services was the standout last year, expanding 13.1 per cent, or more than four times as fast as the economy. Financial services, fuelled mainly by ballooning home lending, grew 5.2 per cent, coming third. The productive but increasingly jobless export machine that is mining came second, growing 5.6 per cent.
While spending on home building surged 10 per cent, the value of non-dwelling construction (such as new factories, public and private infrastructure) tanked more than 14 per cent.
News of the growth spurt had economists lauding households’ resilient consumption, which rose almost 1 per cent in the three months leading up to Christmas.
But rising wealth, or at least the perception of it, is responsible. The value of Australia’s dwellings, or more accurately the land underneath them, has surged $900 billion for a total of $5.6 trillion in the past two years alone. Housing assets make up 55 per cent of Australian households’ assets, compared to less than 19 per cent for superannuation. Net wealth per Australian is almost back to its pre-GFC peak.
Yes, housing debt has surged; but as a share of assets it has actually fallen from than 30 per cent to 28 per cent in the past few years (still double the level of 20 years ago, though).
The other, related, crutch is mortgage lending. Since the end of 2013 the economy has been awash with extra money courtesy of extra borrowing. The stock of banks’ home loans has jumped by $200bn to more than $1.4 trillion since then, funds that property sellers have inevitably used to buy other houses, apartments or spend.
“If the appetite for mortgage debt wanes, it will remove a crucial prop to the economy, one that helps explain how Australian economic growth has continued at a such a rate despite massive declines in resource investment,” says Birrell.
Income growth certainly can’t explain the spending binge. Wages are rising barely more than 2 per cent, according to an ABS survey, which is a 17 year low. Tax office data bear this out too. The average total incomes in the 2014 financial year of the two most common jobs for men (storeman and truck driver) and women (registered nurse and general clerk), collectively around 450,000 taxpayers, rose by 0.8 per cent compared with 2013.
Collapsing house prices would almost certainly tip Australia into recession (arbitrarily defined as six months of shrinking economic output). The beneficial impacts of rising house prices on confidence, home building, and consumer spending would dissipate, with seemingly little to replace it. When house prices plunged 30 per cent or more in NSW and Victoria in the 1890s and 1930s — the biggest such reversals in our history — the result was bank collapses and mass unemployment.
Thankfully, for all the recent talk of a housing bubble, prices are unlikely to plunge. Potential buyers can hope for a gradual decline at best.
For a start, Australian housing is more affordable than it was even a few years ago, despite dramatic price increases in Sydney and Melbourne. Successive cuts in interest rates have seen interest payments as a share of household debt (which is overwhelmingly mortgages) tumble from 13.4 per cent in 2008 to 8.4 per cent. This is why RBA economist Peter Tulip last year suggested Australian housing could be as much as 30 per cent undervalued.
Moreover, interest rates can and probably will fall further. Central banks in Europe and Japan are continually debasing their currencies while the curiosity of negative interest rates spreads. Such policies will ultimately boost the Australian dollar unless the Reserve Bank heads down the same path.
Here, the authorities still have two percentage points of monetary ammunition up their sleeve to fire up lending and house prices, should they flounder. In Britain, where official interest rates are zero, mortgages are available for 1.99 per cent, around half the level in Australia.
Meanwhile, Australia’s unusual combination of a 50 per cent capital gains tax discount and longstanding negative gearing provisions will keep tempting investors into the housing market. Since 1999 the number of people with investment properties running at a loss has doubled to 1.26 million. Unless Labor wins the next election, that trend is unlikely to change.
If lower interest rates proved ineffective to bolster prices, taxpayers can always be dragooned. In 2009 Kevin Rudd’s government tripled the first home buyers grant to $21,000 to ensure prices wouldn’t fall. Who knows what a Turnbull government would do in a similar situation?
“There are a million people more in Australia than 3.5 years ago and in 3 years there’ll be a million more,” renowned retailer Gerry Harvey told The Australian this week, dismissing the pervading gloom about our economy.
Harvey hints at the biggest weapon the government has against a house price collapse: global demand to invest and live in Australia is practically insatiable. “We have a tremendous base of natural resources, a talented, diverse and growing workforce, a stable political and legal system, a highly regarded university system, and we are well placed to benefit from the increasing demand for services from Asia,” said Lowe.
Indeed, Canberra will be able to pull the immigration lever, which is becoming more potent as Asia’s middle class grows in size and seeks to diversify its assets and safeguard its growing wealth. Falling demand from Australians can be plugged by relaxing foreign investment and immigration criteria. Already, Asia-based investors make up to half of the buyers in large apartment developments in Sydney and Melbourne.
While the rate of net overseas migration is down almost a third from more than 300,000-plus people a year during the previous Labor government, such levels could easily be attained again. And on the investment side, the still small-scale Significant and Premium Investor Programs — whereby foreigners can obtain residency in Australia by investing more than $5 million — could easily be expanded.
While the housing market appears safe from collapse, selling houses to foreigners is not a particularly dignified or sustainable path to prosperity. “The longer term challenge is to lift our living standards through finding new things to do and better ways of doing what we currently do,” Lowe concluded in his speech. For that to happen state and federal governments will have to prosecute the difficult structural reforms — tax, federation, infrastructure — that neither side of politics appears willing to broach.