Credit Availability IS Australia’s House Prices

Credit Availability IS Australia’s House Prices

 

A good piece in as far as it goes, pointing out the sclerosis endemic in the banking industry.

The problem it does not address is that in a market built on capital returns as opposed to rental returns, if there are no more solid rising prices, the ponzi ends, and people flee the market. Once a market reverses, what stops it?

Falls lead to selling etc.

 

I was lucky to have been able to borrow 15+ times my income(as did many others) in the past to invest and make some cash during a massive upswing in house prices. To restrict people to 6 times income will not only put a cap on prices, in my view it's going to destroy asset values in high end markets, which has to trickle throughout other markets/price points.

 

Take the Perth market as an example. The Perth market boomed then reversed. It may be bottoming out now. A number of factors stop a market from falling. One is that people just hold off from selling. There are always buyers in any market so those that hold of from selling do a bit to restrict supply, which in turn does a bit to mitigate house price falls. Another factor is pent up demand from the boom which translates to people buying once prices fall far enough. In my circle of acquaintances nearly everyone has been looking to buy in the last few years. I reckon 80% of those have bought in the last 24 months. Think of prices as having a ceiling and a floor. The price floor is what eventually stops a market falling further.

Out of interest, I have a couple of mates who have been looking to buy into the Bedford/Bayswater market for a number of years and I was looking to buy into this market myself. Even with Perth property prices falling significantly, bargains in this area never emerged. There were far better bargains next door in Inglewood and Mt Lawley, although at a higher price point.

 

There will always be demand for property, but what the mechanics of the demand are, determine how much there is at price points.
Price floor and Price Ceiling today are determined by availability of credit.
The price floor as you mentioned can keep getting lower if the availability of credit keeps getting restricted, alternatively, the price floor can rise as the ease of getting credit is easier.
We have had easy availability of credit and historically low IR's, which makes me wonder, the price ceiling is fixed for the moment, but the floor has plenty of room to move, just an increase in IR's of 100bp would see it lowered.

 

Maybe in Perth prices could still ease and maybe they won't. We will see.

Something to consider is that, for many of the buyers I referred to in my post, the purchase over the past 24 months was their first purchase, or they sold and purchased again. These are people with good incomes, good deposit (they have been saving since the boom) and no debt. The credit squeeze does not affect these people in the same way that it affects investors with multiple properties who have maxed out there borrowing capacity. It makes a difference.

 

Property market analysis by someone who hasn’t been able to get into the market himself??

However, when banks tighten things, it becomes increasingly hard for investors to buy in Sydney as their borrowing limits shrink. Most of the reduced money they can borrow then goes to smaller markets until the time Sydney becomes relatively affordable again.

 

The system in sense is self correcting.
If not byself, by government interventions through regulators or Federal reserves of the world.

Capital gain is no different here to investing in classic cars or paintings or other non income producing assets.

 

"House prices are not driven by the demand and supply of housing and population growth. Maybe on a 20-year time frame they are."
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They are not, maybe they are. Who knows? Not our friend Mr Mott.

If credit is the sole determinant of house prices, why have Perth property prices fallen dramatically over the past 10 years during an unprecedented credit bubble, with record low interest rates and the easiest lending ever (until APRA stepped in)?

A: lack of demand despite our friend Mr Mott claiming house prices are not driven by supply and demand, probably, maybe.

 

I think that people (including Mr Mott) are getting their knickers in a twist over demand.

In economic terms, demand means a desire to acquire an asset, along with the means to pay for it.

For example, I might want a harbour side house in Sydney, but I'm tens of millions short of being able to afford one. Therefore I don't contribute to demand, so don't affect prices.

Most people buy houses with mortgages. The amount of credit has just been cut back. Therefore demand has fallen off, and I'd expect prices to follow.

 

Exactly!

Why does it always have to be one or the other with these people? For house prices to increase you need:

1) people with willingness and ability to take on additional credit

2) credit to be available

You can't have one without the other and see prices increasing.

For example, Perth. There is credit available but there has not been enough people both willing and able to take on additional credit - prices fall.

In Sydney and Melbourne now, credit is tightening and markets are softening. People might be willing and able to take on credit but if the credit is not available then prices fall.

It's not one or the other. It is both. Always both.

 

Hi Perthguy,

I totally agree that most people make the mistake of conflating "demand" and "desire". These are not the same, and the free market economics of the 20th century made this point well. Anyone who has been shopping with my wife knows that desire is infinite, but this is not demand.

The one gap in the analysis above that makes residential real estate slightly different, is that real estate isn't really an investment market in entirety. Only about 30% of real estate is investable.

So the economic difference between real estate and other investments, is that if credit goes down, real estate demand doesn't disappear - it just shifts from demand to purchase property, to demand to rent property.

Property is both shelter and accommodation, and therefore we are either renting or buying. And when regulators suppress acquisition demand, they are therefore stimulating rental demand. The demand shifts rather than disappears, which the analysis above tends to assume.

This re-weighting of yields is how real estate markets self stabilise in situations where populations are growing.

Kind regards,

 

We shall see...but what I believe will occur is that prices will plateau or correct whilever we operate under strict DIR's.
New entrants ( post APRA) will reach them quickly, and previous entrants ( pre APRA) will collide with them as their pre regulation finances meet post regulation credit assessment and in many cases find a lack of "compatibility" ie computer will say NO. ( P&I cliff)

As this continues( and it will unless the regulatory changes are reversed) yielding properties will start becoming more sought after and therefore more valuable. May take several years, but assets generating higher yields will begin to be more valued than assets generating (non existent or very slow ) growth under the new credit arrangements , simply because of the benefits they offer to debt reduction and to holding power .

 

“House prices are not driven by the demand and supply of housing and population growth. Maybe on a 20-year time frame they are. House prices are determined by the demand and supply of credit availability".


They stole my line....

I've been saying exactly this for many many many years.....

#aheadofthecurvesinceWAYbeforeAPRA

 

"Home prices are a function of income and the leverage applied"

Dr Michael Burry:

 

I have to say I think that kind of illustrates the potential problem. The classic car market, art and antiques are famed for constant boom and bust.

Only Australia and to a lesser extent Canada, have built through tax law, property markets where capital gains have become the objective. So either you believe housing utility is no longer tied to wages, and can literally go to billions, or you have to have the inevitable reset.

Maybe Australia has reinvented the whole idea of domestic property markets, and is teaching the rest of the world a thing or two. Perhaps Europe, the cradle of our modern world has been getting things wrong for the past thousand years.

I worry that in a country where the political mandate only lasts three years, no one has the courage to deal with potential problems,........... until they deal with themselves.

 

@Herbert
Why are you under the impression Australia is the only place where tax incentives are given to property

I believe tax incentives in the USA pale what we have in Australia.

Australia has some of the most brutal taxes against property owners and developers

Local government taxes
State taxes
Federal taxes

Alot of countries simply don't tax property any where near what we do and in so don't need to provide some discounts off them.

I feel your opinion lacks the understanding of world wide property taxation rules and further understanding of why property in Australia was in such high demand

 

Ok, .....lets just sit back then and see where this ends.

You are correct, other countries have various ways of dealing with property taxes.

However, Australia is the ONLY country that has negative gearing that is not ring fenced, and has been exploited to the degree it has.

Certainly all other countries I have been involved with, or know of, rental returns have been the main metric.

In the 80's I borrowed at 8%, rents were 10-12% etc etc etc. Thats normal, I have had a bit of experience in property markets around the world.

In my humble view neither negative gearing, nor a market based on ever increasing capital gains, are sustainable. This increasingly seems to be the view of government. Whilst they are benefiting from stamp duty, the cost in NG is becoming a real burden.

 

Do you mind if I ask some questions.?


So you believe it is negative gearing that has caused our property market now to run away?

Can we look at it as a business.

When you make a profit you pay tax. When you make a loss you offset the tax and loss.

So is your issue with a loss on property is being offset by profit of a wage?

Do you process a loss on a property business to only be limited to this business?


Im just trying to understand better.

Or are you against people buying assets for capital gains. Speculation.


I would say over many years overseas investors don't just invest in Australia due to capital gains.

I know of many who buy in Australia for a safe place to park money they don't care if they don't make money but due to instability in their own market move money here.


Could it be the record number of Permanente migrants that have moved here? need a place to live that had an impact. 200,000+ per year.

Could it be all these and man many more factors other than just negative gearing.

My question is what percentage is actually negative gearing having an effect on the market.


PS in the 80s Australia wasn't really a nice place to live per se. It was not known to the world its universities didn't appeal to overseas students.

I got here in 90 and there was no such thing as a nice café. Black Stump was the epitome of fine dining.

Things have changed Australia is becoming a world country.

 

It is not well known that Australia is not the only country that has negative gearing although I believe New Zealand has abolished it now.

So far the argument seems to run along the lines that negative gearing pushes up house prices. Since Australia is the only country to have negative gearing (according to the narrative) then Australia should be the only country with a housing affordability crisis?

But it's not a local problem, it's a global problem

The global urban housing affordability crisis

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