HIA dispels the doom

The Housing Industry Association (HIA) Economics Group has released a note on where it sees dwelling prices heading for 2012.

Strangely for an economic review the language appears very defensive and subjective, e.g “slice and dice”, “no bloodbath”, “bleating”, “yacking”, and “peddle” whilst the all too familiar words like “softening” and “price moderation” are dragged out to replace the “F” word wherever possible.

Past the terminology, the analysis draws upon the broad consensus rationale for why dwelling prices are “underpinned by strong fundamentals” combined with the “its different here” meme, particularly when “doomsayers” compare the US experience:

  • Australian mortgages are “full recourse” (as they are in a majority of US states)
  • Australian banks have maintained very high lending standards (which is why mortgage debt to GDP is higher than the US)
  • Australia has a housing shortage due to underlying demand (which also existed in California et al)
  • Lending for existing properties has been trending up (but remains at 30 year lows)

….and so on, and as regular readers of MacroBusiness no doubt know, all of these points have been carefully scrutinised and revealed for what they are, particularly by The Unconventional Economist (who is back fully on deck this Monday)

But a final point about rental yields increasing was puzzling (emphasis added):

Vacancy rates remain low in all the capital cities, with Perth, Canberra, Darwin and Sydney incredibly tight, causing the growth in rents to outstrip general inflation.

Accordingly, rental yields continue to grow and with interest rates on the way down this means that the attractiveness of purchasing a property, either to get out of the rental market, or as an investment, is on the rise.

Whilst vacancy rates are indeed low, the note failed to mentioned they are rising:

Skipping to the last sentence, which makes some sense and states that rental yields are indeed improving, and at a gross level are just below what a saver can get on a term deposit. Although borrowing costs remain well above this figure, so a reliance on sustained capital growth is a given, unless you have a substantial deposit (or equity mate):

Of course, unmentioned by the HIA Economics Group is why rental yields have risen – because the denominator, dwelling prices, had fallen. Confusing the causation of low vacancy rates (which are rising) with the correlation of a rise in yields is combined with the exclusion of mentioning that dwelling prices actually fell over 7% in 2011, adjusted for inflation.

So why increased prices for 2012?

The bottom line is that a lack of rental properties, cheaper borrowing costs and relatively healthy employment levels are likely to combine to push up housing demand, rents and dwelling prices in 2012.

Apart from the record stock on the market:

Yet borrowing costs have fallen in line with dwelling price falls:

And that while unemployment (as measured by the ABS) is at a “low” 5%, is ticking up:

Its a sound thesis; so to hedge the call, HIA contends that both fiscal and monetary policy will come to the rescue of the property market if the “sound fundamentals” turn sour:

Indeed, the RBA understands that we need to tap into this policy capacity now – and hopefully the Federal Government will soon be on board also.

Unfortunately, this consensus view, which provides the hedge to any calls for price stability or indeed growth, is grounded more in hope than reality. The RBA can indeed cut rates and continue the easing cycle, and the median forecast is for a further 50 basis points or half a percent cut throughout 2012, taking the real cash rate perilously low to zero:

But are the banks, under increasing pressure of higher funding costs and a desperate need to maintain their profitability (and their dividends) actually able to pass these rate cuts on? Tomorrow’s independent announcement by ANZ of their own interest rate direction will likely be a harbinger for things to come.

Further as I outlined late last year, the Federal Government is required to maintain its path to a surplus, as soon as possible, which effectively precludes ANY stimulus repeat of early 2009 (e.g FHB Boost):

Either the government returns to surplus and maintains the fiscal austerity, hence keeping the net level of public debt low, or the rating’s agencies will reassess the “stable” outlook with all the implications that has for our banking sector and of course, the housing market, unemployment and the broader economy.

House Prices – Jan 2012

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  1. Nice review. The market ‘boomsters’ ( I guess that the opposite of us gloomy realists?) have had a bit of a free run over the Chrissy break; what with no real news etc. So it’s good to get our compass back.

  2. Yeah that was a strange read. The way it was written was almost that of a child sulking because it didn’t get its own way this year.

  3. Love your mention of their use of subject (particularly, emotive) language. These guys seriously abuse the English language. My favourite: in no dictionary but the one owned by HiA can “modest” mean a change of less than “neglible”:

    Since our August note, we’ve seen a negligible softening in prices in August, September and October, followed by the modest improvement in November.

    So, “neglible” (supposed to mean something so small it can be ignored) is a fall of -0.4% to -0.6% MoM, whilst “modest” (which may be small but surely can’t be ignored) is a rise of 0.1%. Funny how those falls can be ignored, but not the tiny rise (which, going by the past few months, will be revised down to 0 anyway).

    And like any good lobby group, for the HIA no other parts of the economy exist but theirs. If you listen to the HIA, the RBA cut rates to stimulate the housing industry, and the government will come out all guns blazing to save the housing industry. Because to do otherwise will surely end life on earth.

    • Oh, sigh. Woeful spelling on my part. I meant, of course, “subjective” (not subject) and “negligible” (not neglible) and “HIA” (not HiA), amongst others.

  4. The HIA is an industry body committed to the continued building of houses, you can’t expect them to advise on the side of caution when discussing the housing market. They want Aussies to build, build, build! I’m already gobsmacked at the locations of some estates on Melbourne’s fringes, particularly in the outer east. Someone was telling me the other day that Drouin (Gippsland) is where a lot of huge estates are being constructed now because it avoids the potential urban services charge first mooted by Labor three years ago. It’s a really long way from anywhere however, unless you work in Moe but there is a frequent train service to Dandenong I guess.

    On a related subject did anyone see Today Tonight earlier this week (search: Buying up the USA to see it) where they were telling people what easy money there is for Aussies buying houses in Florida and Nevada? There were people who were making money promoting housing to Aussie investors and one bloke in particular who was advertising huge returns on rental property in Florida. The glaring omission was: If it’s that easy then why aren’t the Americans doing it themselves?

    • I didn’t see the article on Today Tonight but did they mention the recent ASIC warnings about the promotion of US housing in Australia?

    • “The glaring omission was: If it’s that easy then why aren’t the Americans doing it themselves?”

      Because they have been burned and are not stupid. America has lost its fade of property investing to the hilt. Australia hasnt.

    • Jumping jack flash

      Many Americans that haven’t been burned and have been living under a rock with their eyes shut so want to buy despite a falling market, are ineligible to act on any good opportunities because they’re over-indebted, unemployed, or don’t meet the criteria.

      So to pass the time while nobody is borrowing, a lot of the banks are growing business by buying up other banks with the aim of becoming too big to fail.

      And if you were a bank, wouldn’t you want to join that exclusive club of too big to fail banks, where you get as much free money as you like regardless of the terrible business decisions you made that landed you in trouble?

      It must be great!

      • We saw that only this week, Jack, with the car industry. Ford wants $30+ million to keep building cars nobody wants? No problem. Holden are next in line for tens of millions of taxpayer dollars. A whole industry on the dole.

        Ford in particular will probably leave anyway because nobody buys Falcons any more except the taxi industry. You really have to question why taxpayers have to continue to support large multinationals to make cars that nobody wants to buy in this country anyway.

    • ” The glaring omission was: If it’s that easy then why aren’t the Americans doing it themselves?”

      Bubbles tend to overshoot then undershoot.

      Just as Americans had overly exuberant expectations in 2004/5 maybe they have overly pessimistic expectations now? Certainly there are lots of location in the US where property looks like a good investment.

      • The example they used in “Today Tonight” was a house in Florida that could be bought for $50,000 and rented (apparently) for $500 a week. I’m really sceptical about those figures… how do you know you can actually get $500 a week for a $50,000 house? If it’s really only fifty grand then why don’t tenants buy it themselves at those prices? I’ve heard that a lot of people have been burnt buying houses in areas that are basically ‘un-rentable’ neighbourhoods, particularly Georgia and Florida.

  5. Seriously though the area I live in Sydney the rents have been steadily rising…. median rent on a 2 bed unit now costs 525 p.w. Median rental based on Housing NSW (http://www.housing.nsw.gov.au), CAGR for the past 21 years has been 5.2%

    I just can’t understand how people can bid-up rents so much…..You will need to earn pre-tax $32K p.a. just to pay annual rent of $27,300.

    Extremely frustrating!

    • And then employers have the cheek to complain that they can’t get cleaners, taxi drivers, shop assistants etc etc. No ordinary person can afford to rent where the jobs actually are in Sydney so people have these stupidly long commutes to add to the expense of everyday living in that already expensive and overpriced city…

  6. With all the global economic uncertainty and job insecurity at present Im wondering who is going to lock themselves in for a 30 year mortgage by buying a vastly overpriced unit or house knowing there is little chance of a capital gain (at least in the short to medium term) and a fair chance of financially ruining yourself?

      • Mining BoganMEMBER

        Eh? Positive gearing?

        I’ve lived in Australia my whole life and never heard of it.

        Ride into town on a unicorn does it?

        • Another odd comment, been a few of those lately. I don’t know how you managed to understand the sentence MB.

          I think he may mean cash flow positive, in theory it is possible however in our Australian reality almost impossible until the property is fully paid off.

          • You certainly can get positive geared properties…an example: a 3/4 bedroom house in a suburb close to a major university. Renting out to students at individual rates say rather than a family – this increases your yield. And also there are other examples where you can find bargains from distressed sellers. I am sure more will come on the market in 2012.

          • Perhaps Pat is thinking that if prices DO fall significantly in a couple of years, a house may be purchased at a price which means that the rental income is greater than the loan repayments?

          • Mining BoganMEMBER


            Okay, It was a cynical comment about the nation’s obsession with negative gearing. Enough already.

            *Packs up clown suit and goes home*

          • I actually quite liked your humour MB. I thought it an apt reaction. I’m unfortunately a bit dry.

            Pat those are rather specific and limited examples that most people do not have access to and rarely exist.

            From my experience, prices near Universities have skyrocketed and the ability of students to pay high rents has decreased. On campus there are always flyers bemoaning the fact that students can’t afford anymore to live near USYD.

          • 3/4 bedroom house in a suburb close to a major university. Renting out to students at individual rates say rather than a family.
            I have seen a quite a number of news articles on how international students are exploited – pack em in like sardines and charge extortionate rent. No wonder student numbers are coming down.
            So in other words, you need to become a slum lord in order to have positive gearing! No Thanks, I don’t need the bad karma. Besides, I don’t think this is a sustainable business model, given the falling student numbers.

          • You don’t need to be a slum lord a few mining towns offer returns that can be over the costs incurred.
            e.g. Moranbah

        • You have to be careful with renting out to multiple students, as you may be classified as a Rooming House – which falls under different legislation (state by state) than a normal tenancy agreement.

  7. Steven Spadijer

    “Australian mortgages are full recourse…”

    Does anyone ACTUALLY know which precise provision of the Bankruptcy Act (or other state legislation) declares Australia mortgages to be “full recourse”?

    My understanding is that this is not always the case, although generally when you default the bank repossesses the property and sell it and any outstanding costs are paid by you (or your liquidated assets following a sequestration order on creditors’ petition). Sometimes the property fully discharges the debt. Other times, assuming, say, my mortgage is $700 000, the price of the home when sold is $695 000 – meaning one’s owes $5000 (plus advertising costs and legal fees).* But that is hardly a reason that property prices will not collapse – if anything, it will simply precipitate more insolvencies as you would declare personal bankruptcy (through a debtors petition) and wipe the slate clean (the latter course of action seems entirely plausible).

    What is other people’s understanding of the law in this area?

    * At present a creditors petition requires a minimum of $5000 in order to obtain judgement.

  8. HIA: “At present, dwelling prices are rising, steady, falling, and dropping quite sharply” zzzzzzzzzzzzzzzzzzzzz

  9. Bogan – don’t be put off, please keep the humour / sarcasm coming.

    The obsession with NG is quite incredible. Why would anyone want to have to pay more tax?! On additional income, no less!! Getting a bigger tax return by spending more of the money in your pocket is the only way to go!!

  10. Terrific! Rents are going up, and we are all supposed to cheer about it. Maybe this could become a political slogan:
    Vote for Smith because … “Rents will always be higher under a Smith government than under a Jones government.”
    (…two wolves and a sheep, indeed…)

  11. Can someone explain to me what the “Real Cash Rate” is compared to the Cash Rate?

    Thank you in advance!

    • The nominal cash rate is unadjusted for inflation. So at 4.25% nominal and CPI (not inflation per se, but the measure used) at 3.5%, the real cash rate is currently 0.75%

      If the cash rate is cut another 50 basis points (or 0.5%) and inflation stays the same, the real cash rate becomes 0.25% – almost zero.

      This is the reason behind the consensus bullishness around house prices to stay flat or go up slightly and for lending to come back, since wage growth is about 3-4%, the cost of borrowing is falling.

  12. I think people being displaced due to rented property being sold increased demand and had something to do with rents going up. As number of sales is dropping demand for rental property could ease.

  13. Jumping jack flash

    As sad as it makes me, I believe the Government will sacrifice their push for surplus at the expense of propping up the housing “market” and hence the banks.

    I expect another round of stimulus this year if there is even a slight chance the banks could become distressed.

    If they are pushing the surplus to win favour with the rating agencies – ultimately to prove they can prop the banks up with the surplus cash as stimulus or bailouts if they get into trouble – and the banks fail in the meantime due to lack of bailouts or stimulus, what advantage have they gained?

    Our Government is now a puppet of the banking industry. They confirmed this relationship with the (implicit/explicit) guarrantees, and validating the 4 pillars as too big to fail.

  14. having read spruiker-nomics sites before I came here, all this is sham and puffery. Such economists prostitute themselves to their organisations and their words are shallow when not backed by the statistics they should know how to read. These bodies should be up for misrepresentation, except the politicians are beholden to business and blind sided by its flawa, destroy any public oversight.