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Macro Housing Conditions

  The long-term outlook for the
   Australian housing market
Overview of Australian housing market
                           โ€ข House prices in
                             Australia
                             experienced a
                             decade of strong
                             growth that was
                             not matched by
                             growth in
                             underlying
                             fundamentals.
Overview of Australian housing market
                           โ€ข Australian
                             housing has
                             become
                             increasingly
                             expensive
                             relative to
                             household
                             incomes.
Overview of Australian housing market
                           โ€ข Mortgage burden
                             has risen despite
                             the sharp
                             reduction in
                             mortgage rates.
                           โ€ข Aggregate
                             mortgage
                             payments ~50%
                             higher today
                             than in 1989,
                             when mortgage
                             rates = 17%.
Overview of Australian housing market
                           โ€ข In 2011, a typical
                             household with a
                             mortgages spent
                             34% of its
                             income on
                             mortgage
                             payments, up
                             from 26% in
                             2001, an increase
                             of 32%.
Overview of Australian housing market
                           โ€ข Rental burden
                             has also risen,
                             particularly in
                             the five years to
                             2011.
Overview of Australian housing market
                           โ€ข But mortgage
                             payments rose
                             by more than
                             rents in the
                             decade to 2011.
International comparisons
                     โ€ข Australian
                       housing is
                       relatively
                       expensive
                       internationally.
International comparisons
                     โ€ข Australian
                       housing is
                       relatively
                       expensive
                       internationally.
Itโ€™s all in the land
                       โ€ข Virtually all of
                         the growth in
                         housing values
                         has come from
                         land price
                         appreciation,
                         with land prices
                         roughly doubling
                         relative to GDP
                         since the late-
                         1980s.
Itโ€™s all in the land




โ€ข Land price appreciation has occurred across all markets, with
  Victorian values the most expensive at 2.8 times GSP as at June 2011.
Itโ€™s all in the land




โ€ข Australian vacant residential land has become prohibitively
  expensive, with all markets experiencing rapid price appreciation.
How did we get here?
                       โ€ข The ratio of
                         Australian
                         mortgage debt
                         to GDP rose
                         four-fold since
                         1990,
                         following
                         deregulation
                         of the financial
                         sector.
How did we get here?
                  โ€ข Reflecting the
                    boom in mortgage
                    credit, annual
                    housing finance
                    commitments rose
                    from around 5% of
                    GDP in mid-1980s
                    to a peak of 22%
                    in 2003. They have
                    since fallen back
                    to 13% of GDP.
How did we get here?




โ€ข The share of loans channelled into housing has increased from 24% of total loans in
  1990 to 59% currently.
โ€ข The rapid expansion of mortgage debt and housing values has been funded, to a
  large extent, by heavy offshore borrowings by Australiaโ€™s banks and is represented
  by a massive expansion in bank assets (mainly mortgages) relative to GDP.
How did we get here?




โ€ข The Finance & Insurance industries have grown more than twice as fast as
  the rest of the economy since the mid-1980s, when financial markets were
  deregulated.
โ€ข Finance & Insuranceโ€™s share of GDP has more than doubled to nearly 10%.
How did we get here?




โ€ข Strongly rising commodity prices have played a major role in increasing
  housing values since-2004, via their positive impact on incomes. The
  commodity price boom came along just as mortgage growth began to
  decline, enabling house prices to remain โ€œstronger for longerโ€.
How did we get here?




โ€ข The Australian Treasury estimates that 50% of Australiaโ€™s income
  growth over the 2000s came from the one-off terms-of-trade
  (commodity price) boom, whereas McKinsey estimates that 90% of
  Australian income growth since 2005 came from the mining boom.
How did we get here?




โ€ข The number of property investors has surged, from 696,000 in 1990 to 1.75
  million in 2010. Nearly 60% of investors are baby boomers.
โ€ข Two-thirds of investors were negatively geared in 2010, losing on average
  $2,750 per year, or a total of -$4.8 billion. Three quarters of negatively
  geared investors earned less than $80,000.
How did we get here?




โ€ข Australiaโ€™s rigid urban planning system has ensured that the
  increased demand has manifested in rising prices rather than
  increased dwelling construction.
Risks to the outlook




โ€ข Australiaโ€™s terms-of-trade (commodity prices), peaked in 2011 and are now
  falling, which will drag on incomes and employment going forward.
โ€ข Australiaโ€™s population is also ageing, with the working age population set to
  shrink in relative terms from now on, reducing the economyโ€™s potential
  growth rate and demand for housing.
Risks to the outlook




โ€ข Prices of iron ore โ€“ Australiaโ€™s biggest export โ€“ have collapsed on lower steel
  demand from China.
โ€ข Spot iron ore prices are down over -50% since peak and by more than-30% since
  the beginning of July. Australiaโ€™s terms-of-trade will be hit hard, subtracting from
  personal incomes. Further mining investments are also likely to be cancelled.
Risks to the outlook




โ€ข The outlook for Australiaโ€™s terms-of-trade and mining investment is not good.
โ€ข Chinaโ€™s massive stimulus in the wake of the GFC has built-up too much excess
  capacity.
โ€ข China is, therefore, unlikely to embark on another fixed asset construction boom,
  meaning that demand for Australia iron ore will remain tepid.
Risks to the outlook




โ€ข How low can iron ore prices go? The recent boom in iron ore prices was
  extreme and saw prices rise nearly ten-fold in real terms over the past
  decade.
โ€ข There appears to still be significant potential downside as slowing demand
  from China meets rising global supplies.
Risks to the outlook
                  โ€ข Population aged
                    65+ is projected to
                    explode over the
                    next two decades.
                  โ€ข Baby Boomers will
                    need to sell-down
                    their property
                    holdings to fund
                    their retirements.
                  โ€ข The need to sell
                    will be greatest for
                    those whom are
                    negatively-geared.
Risks to the outlook




โ€ข In 2010, the BIS forecast that the ageing of Australiaโ€™s population
  would reduce real house prices by around 30% over the next 40
  years, compared with what would occur under โ€˜neutralโ€™
  demographics (i.e. a steady age structure).
Risks to the outlook




โ€ข Housing credit growth is falling, hitting fresh 35-year lows in July on
  both a quarterly and annual basis.
โ€ข The number of owner-occupied housing finance commitments also
  remains weak, tracking -11% below the five-year moving average.
How could it have been prevented?
โ€ข Macro-prudential controls on lending would have
  muted the credit cycle, for example:
  โ€ข Maximum limits on loan-to-value ratios (e.g. maximum
    85% LVR).
  โ€ข Tighter mortgage serviceability requirements, such as:
     โ€ข Loan repayments cannot consume more than 40% of after-tax
       household income; or
     โ€ข Loan repayments cannot exceed 130% of market rent on
       property.
How could it have been prevented?
โ€ข Free-up supply-side bottlenecks:
  โ€ข Implement more permissive urban planning:
     โ€ข Create a presumption in favour of sustainable development
     โ€ข Speed-up development approval times
     โ€ข Eliminate artificial barriers to development, e.g. UGBs,
       restrictive zoning, etc
     โ€ข Reduce up-front development/infrastructure charges in
       favour of long-term bond financing, recovered from property
       owners over decades
     โ€ข Fund infrastructure properly via infrastructure bonds
How could it have been prevented?




โ€ข Empirical evidence from the US and elsewhere shows that markets
  with responsive land-use regulations have more affordable
  housing markets and experience less price volatility, as changes in
  demand manifest more in new construction rather than prices.
How could it have been prevented?




โ€ข Abolish negative gearing or restrict it to new builds
  only. It costs taxpayers in excess of $4 billion per year,
  inflates demand and does not add to housing supply.
How could it have been prevented?
โ€ข Abolish transaction taxes โ€“ stamp duties and CGT โ€“ in favour of a
  broad-based land values tax (LVT).
โ€ข Benefits of LVT include:
   โ€ข Discourages speculation โ€“ prevents land-banking and increases
     competition in the land market.
   โ€ข Encourages more efficient land use โ€“ increases density in order to avoid
     paying tax. Governments are also more likely to be pro-development in
     order to increase taxpayer base.
   โ€ข Governments are more likely to support infrastructure provision as cost
     can be recovered via higher land values.
   โ€ข Difficult tax to avoid and administratively simple โ€“ land ownership is
     well documented.
   โ€ข Fairer โ€“ those with largest land holdings pay most tax.

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Macro housing conditions - the long-term outlook for the Australian housing market

  • 1. Macro Housing Conditions The long-term outlook for the Australian housing market
  • 2. Overview of Australian housing market โ€ข House prices in Australia experienced a decade of strong growth that was not matched by growth in underlying fundamentals.
  • 3. Overview of Australian housing market โ€ข Australian housing has become increasingly expensive relative to household incomes.
  • 4. Overview of Australian housing market โ€ข Mortgage burden has risen despite the sharp reduction in mortgage rates. โ€ข Aggregate mortgage payments ~50% higher today than in 1989, when mortgage rates = 17%.
  • 5. Overview of Australian housing market โ€ข In 2011, a typical household with a mortgages spent 34% of its income on mortgage payments, up from 26% in 2001, an increase of 32%.
  • 6. Overview of Australian housing market โ€ข Rental burden has also risen, particularly in the five years to 2011.
  • 7. Overview of Australian housing market โ€ข But mortgage payments rose by more than rents in the decade to 2011.
  • 8. International comparisons โ€ข Australian housing is relatively expensive internationally.
  • 9. International comparisons โ€ข Australian housing is relatively expensive internationally.
  • 10. Itโ€™s all in the land โ€ข Virtually all of the growth in housing values has come from land price appreciation, with land prices roughly doubling relative to GDP since the late- 1980s.
  • 11. Itโ€™s all in the land โ€ข Land price appreciation has occurred across all markets, with Victorian values the most expensive at 2.8 times GSP as at June 2011.
  • 12. Itโ€™s all in the land โ€ข Australian vacant residential land has become prohibitively expensive, with all markets experiencing rapid price appreciation.
  • 13. How did we get here? โ€ข The ratio of Australian mortgage debt to GDP rose four-fold since 1990, following deregulation of the financial sector.
  • 14. How did we get here? โ€ข Reflecting the boom in mortgage credit, annual housing finance commitments rose from around 5% of GDP in mid-1980s to a peak of 22% in 2003. They have since fallen back to 13% of GDP.
  • 15. How did we get here? โ€ข The share of loans channelled into housing has increased from 24% of total loans in 1990 to 59% currently. โ€ข The rapid expansion of mortgage debt and housing values has been funded, to a large extent, by heavy offshore borrowings by Australiaโ€™s banks and is represented by a massive expansion in bank assets (mainly mortgages) relative to GDP.
  • 16. How did we get here? โ€ข The Finance & Insurance industries have grown more than twice as fast as the rest of the economy since the mid-1980s, when financial markets were deregulated. โ€ข Finance & Insuranceโ€™s share of GDP has more than doubled to nearly 10%.
  • 17. How did we get here? โ€ข Strongly rising commodity prices have played a major role in increasing housing values since-2004, via their positive impact on incomes. The commodity price boom came along just as mortgage growth began to decline, enabling house prices to remain โ€œstronger for longerโ€.
  • 18. How did we get here? โ€ข The Australian Treasury estimates that 50% of Australiaโ€™s income growth over the 2000s came from the one-off terms-of-trade (commodity price) boom, whereas McKinsey estimates that 90% of Australian income growth since 2005 came from the mining boom.
  • 19. How did we get here? โ€ข The number of property investors has surged, from 696,000 in 1990 to 1.75 million in 2010. Nearly 60% of investors are baby boomers. โ€ข Two-thirds of investors were negatively geared in 2010, losing on average $2,750 per year, or a total of -$4.8 billion. Three quarters of negatively geared investors earned less than $80,000.
  • 20. How did we get here? โ€ข Australiaโ€™s rigid urban planning system has ensured that the increased demand has manifested in rising prices rather than increased dwelling construction.
  • 21. Risks to the outlook โ€ข Australiaโ€™s terms-of-trade (commodity prices), peaked in 2011 and are now falling, which will drag on incomes and employment going forward. โ€ข Australiaโ€™s population is also ageing, with the working age population set to shrink in relative terms from now on, reducing the economyโ€™s potential growth rate and demand for housing.
  • 22. Risks to the outlook โ€ข Prices of iron ore โ€“ Australiaโ€™s biggest export โ€“ have collapsed on lower steel demand from China. โ€ข Spot iron ore prices are down over -50% since peak and by more than-30% since the beginning of July. Australiaโ€™s terms-of-trade will be hit hard, subtracting from personal incomes. Further mining investments are also likely to be cancelled.
  • 23. Risks to the outlook โ€ข The outlook for Australiaโ€™s terms-of-trade and mining investment is not good. โ€ข Chinaโ€™s massive stimulus in the wake of the GFC has built-up too much excess capacity. โ€ข China is, therefore, unlikely to embark on another fixed asset construction boom, meaning that demand for Australia iron ore will remain tepid.
  • 24. Risks to the outlook โ€ข How low can iron ore prices go? The recent boom in iron ore prices was extreme and saw prices rise nearly ten-fold in real terms over the past decade. โ€ข There appears to still be significant potential downside as slowing demand from China meets rising global supplies.
  • 25. Risks to the outlook โ€ข Population aged 65+ is projected to explode over the next two decades. โ€ข Baby Boomers will need to sell-down their property holdings to fund their retirements. โ€ข The need to sell will be greatest for those whom are negatively-geared.
  • 26. Risks to the outlook โ€ข In 2010, the BIS forecast that the ageing of Australiaโ€™s population would reduce real house prices by around 30% over the next 40 years, compared with what would occur under โ€˜neutralโ€™ demographics (i.e. a steady age structure).
  • 27. Risks to the outlook โ€ข Housing credit growth is falling, hitting fresh 35-year lows in July on both a quarterly and annual basis. โ€ข The number of owner-occupied housing finance commitments also remains weak, tracking -11% below the five-year moving average.
  • 28. How could it have been prevented? โ€ข Macro-prudential controls on lending would have muted the credit cycle, for example: โ€ข Maximum limits on loan-to-value ratios (e.g. maximum 85% LVR). โ€ข Tighter mortgage serviceability requirements, such as: โ€ข Loan repayments cannot consume more than 40% of after-tax household income; or โ€ข Loan repayments cannot exceed 130% of market rent on property.
  • 29. How could it have been prevented? โ€ข Free-up supply-side bottlenecks: โ€ข Implement more permissive urban planning: โ€ข Create a presumption in favour of sustainable development โ€ข Speed-up development approval times โ€ข Eliminate artificial barriers to development, e.g. UGBs, restrictive zoning, etc โ€ข Reduce up-front development/infrastructure charges in favour of long-term bond financing, recovered from property owners over decades โ€ข Fund infrastructure properly via infrastructure bonds
  • 30. How could it have been prevented? โ€ข Empirical evidence from the US and elsewhere shows that markets with responsive land-use regulations have more affordable housing markets and experience less price volatility, as changes in demand manifest more in new construction rather than prices.
  • 31. How could it have been prevented? โ€ข Abolish negative gearing or restrict it to new builds only. It costs taxpayers in excess of $4 billion per year, inflates demand and does not add to housing supply.
  • 32. How could it have been prevented? โ€ข Abolish transaction taxes โ€“ stamp duties and CGT โ€“ in favour of a broad-based land values tax (LVT). โ€ข Benefits of LVT include: โ€ข Discourages speculation โ€“ prevents land-banking and increases competition in the land market. โ€ข Encourages more efficient land use โ€“ increases density in order to avoid paying tax. Governments are also more likely to be pro-development in order to increase taxpayer base. โ€ข Governments are more likely to support infrastructure provision as cost can be recovered via higher land values. โ€ข Difficult tax to avoid and administratively simple โ€“ land ownership is well documented. โ€ข Fairer โ€“ those with largest land holdings pay most tax.