The Australian Business Review
4 April 2017
Over the Christmas break two groups of people made the same decision—-that Australian housing was one of the best places in the world to invest.
And the rest is history.
Housing prices are exploding once again, including a five per cent rise in Sydney in the last three months.
The regulators, including APRA, ASIC and the Reserve Bank, are trying to curb the boom via the banking system but are using clumsy and dangerous mechanisms. More of that later.
The two groups that made the same decision are Australians wanting to save for retirement and overseas/local Chinese.
It’s worth recalling that back in October 2016 Treasurer Scott Morrison boldly declared:
“While the majority of Australians live in a home that is either owned or being purchased by their household, for each new generation this aspiration is proving more and more difficult to realise.
“That is why housing affordability will be an important policy focus of the Turnbull government in this parliamentary term. And it is important we get it right.”
Oh, Scott, those words will come back to bite. As we now realise, a month later in November 2016 Morrison poured kerosene all over the housing market. All that was required was a match to reignite the boom.
Traditionally Australians have chosen between two ways of saving for retirement in a tax effective way — superannuation contributions or borrowing to buy dwellings and deducting the interest against salary or other income — so called “negative gearing”.
The government changed the superannuation rules in November to limit contributions and increase superannuation uncertainty. In the lead-up to the superannuation changes Australians had already begun switching to the other traditional retirement option — negative gearing.
By November it was all systems go and the market was given an extra nudge by foolish asset test pension changes that made it crazy for those in certain asset brackets to downsize their house and encouraged them to spend their money on cruises.
Both the superannuation and asset test measures will help the bottom line in the next couple of budgets but will boost the deficit in later years. Simply bad government.
Igniting the Morrison negative gearing kerosene just required a few good weeks of house price rises.
And so in February I revealed just how powerful the negative gearers had become in the apartment market.
At that stage the Chinese seemed still dormant, having reduced buying in 2016. But later in February it became clear that the game dramatically changed and the Chinese came rushing back, partly sparked by the fact that Australia had become the number one education market for Chinese thanks to Donald Trump’s election and British visa restrictions.
In addition, the Chinese believe their currency restrictions will be lifted in the next two years so again began buying apartments off the plan. I revealed the education and Chinese property reversal developments in early March.
These two developments do not change the fundamental forces that are underpinning the boom—the combination of low interest rates and close to unlimited credit from banks; high population growth in Sydney and Melbourne and a shortage of supply mainly created by state and local governments.
The regulators are taking unprecedented steps to curb the bank contribution to the boom via restrictions on investor loan growth, higher interest rates and curbs on interest-only loans.
But the Morrison superannuation kerosene is still fuelling the boom. And it’s made worse by the fact that the opinion polls say that the current government will not be re-elected. The ALP will change the negative gearing rules so those saving for retirement are “getting set” before it’s too late.
There is grave risk that the lending restrictions being imposed by the regulators will backfire because they are also affecting developers and so reducing supply.
But the biggest supply constraint remains state and local governments, who seem to have a vested interested in keeping prices rising because it helps revenue.
But history tells us that when levels of debt get very high and prices become uneconomic when related to income levels that in time there will be a trigger that busts the market.
That could come at any time, but the most likely predictable time is when the negative gearing rules are changed.
And of course the Coalition sees the fear of a big fall in house prices as their chance to win the election despite the current opinion polls.
That raises all sorts of questions I will leave for another day.