I want to highlight a few key charts from the research note. The first is a comparison of prices to rents, showing a massive increase above the long run average since 2000 (I believe this figure is price divided by annual gross rent divided by 100). One could call on interest rates as an explanation, but mortgage interest rates have actually been increasing over much of that period.
The next chart is one that compares the share of household debt by income level. One of the RBA’s claims has been that Australia’s housing market is stable because most debt is held by high income earners - ...our assessment is that the increase in debt has broadly been concentrated in the hands of those generally more able to service it. This is identical the the US situation in 2007.
The next interesting chart shows the degree of speculation embodied in market prices for housing. There was a strong change around 2000 where losses being made by property began to increase. This is not attributed to rising costs, but to rising prises. Gross rents and costs follow a very stable trend, while interest costs, due to higher prices, lead to the current extremes of negative gearing losses. Minack highlights the boom in number of negatively geared property owners, further supporting Leith van Onselen's findings on negative gearing - negative gearing cost the Government around $2.6 billion in foregone tax revenue in 2007/08, meaning that average Australians are massively subsidising property investors.
Nice summary Cameron. Minack's research supports the contention that Australia's housing bubble has been caused by two key factors: easy credit and investor speculation.
ReplyDeleteOn the first factor, credit growth will be constrained going foward, preventing significant further capital appreciation. Australian households are already heavily indebted and will be unable to increase their borrowings much more. In addition, the lenders will find it increasingly difficult to expand their funding bases, which should also prevent further credit expansion.
On the second factor, according to the 2007/08 ATO Taxation Statistics (the most recent available information), there were 1.2 million investors holding negatively geared properties. It is likely that many of these investors will look to sell their loss-making housing investments once they realise that there is little prospect of continued capital growth. This investor-effect will be compounded by the pending retirement of the baby boomers. Once they enter retirement, they will no longer be able to negatively gear, thereby removing one of the key incentives for property investment. And since rental yields are pathetically low (around 3% after costs), it is highly likely that the boomers will dump their investment properties en masse in order to access funds for their retirement. The retirement of the baby boomers alone could crash the housing market. That's if a China slowdown or a credit crunch doesn't burst our bubble first.
Cam, what is the purpose of this post? You have highlighted an MS research report which agrees with your personal opinion regarding the residential property bubble. We know from your previous posts that you expect either a large drop or prolonged stagnation in prices.
ReplyDeleteCould you expand on what the economic impacts that either of your predicted outcomes would cause? And I'd be interested in your opinion on how you would recommend either scenario or their impacts should be managed with appropriate government policy initiatives?
The report had quite a bit of information, and since it is subscriber only, I thought some of the content might be of interest to readers.
ReplyDeleteAs far as a government response, it should be clear that economic impact from our house price declines will mirror those of the US - declining demand (due to debt repayment), and unemployment (especially in the construction industry).
The policy response, to ensure stability during this time should focus on replacing private debt with public debt. In an ideal world, where governments could responsibly control the printing press, I would argue that government would not even need to incur debt to spend (in the spirit of modern monetary theory).
But this is the real, not ideal, world.
The Federal government response to the credit crisis was, in my opinion, fairly well designed to address the two major problems of declining demand and unemployment in the construction sector. The basic idea is to keep money circulating even while household are trying to repay debt.
The following are some policy ideas:
- invest in new infrastructure to soak up construction labour (NBN? Urban light rail/underground? Or some combination of projects that wouldn't typically be provided by the private sector and should improve future productivity)
- invest in retraining/education targeted at mid-career workforce
- reduce income taxes, to be replaced by phased in land and resources tax (resulting in a short term tax reprieve and better long run tax system)
- remove the FHOG
- phase out negative gearing (so losses can only be claimed against future income from the property)
These are just off the cuff, so any thoughts are welcome. I might put some more thought into it and write a future post on creating a smooth transition.
The policy response, to ensure a stability during this time should focus on replacing private debt with public debt. In an ideal world, where governments could responsibly control the printing press, I would argue that government would not even need to incur debt to spend (in the spirit of modern monetary theory).
But this is the real, not ideal, world.
The following are some policy ideas:
- invest in new infrastructure to soak up construction labour (NBN? Urban light rail/underground? Or some combination of projects that wouldn't typically be provided by the private sector and should improve future productivity)
- invest in retraining/education targeted at mid-career workforce
- reduce income taxes, to be replaced by phased in land amd resources tax (this is to keep money circulating in the short term, and to rebalance the tax system towards the broadest base in the long term)
Surely the whole problem is that apart from mineral exports, Australia doesn't actually produce anything of any merit- other than construction- we don’t even have a ship yard!
ReplyDeleteThis is a fundamental flaw in the economy, as everyone other than primary producers just shuffles stuff.
We hoped to become a super-industrial service economy, and that hasn't worked.
Stimulating non productive, and now proven worthless sectors (primarily construction) is not going to do jot.
What are we doing to create productive employment for all the dumb kids in our society who can never hope to achieve a degree, and are very unattractive to global requirements, given peasants in China and India can do the same grunt work for nix.
Gaoling them is not the answer, as that is just another expensive non productive service (growing incredibly though it is) and until we stimulate the right sectors that actually produce something real, everything else we do is simply fiscal masturbation!
A good start would be to close down Adelaide, the centre of fiscal masturbation that is a draw on our national economy - turn it into a retirement home aka Florida.
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ReplyDeleteproperty investment funds