Flipping a thing of the past

By Leith van Onselen

As noted previously, the Budgets of Australia’s state governments are suffering badly from a sharp drop in stamp duty receipts on housing transfers, which in 2011-12 are expected to be -20% below the levels of 2007-08 (see below chart).

In addition to lower housing prices, a key driver behind the fall in stamp duty receipts is the sharp slowing of housing turnover, which in 2011 was running some -50% below 2007 levels and around half that recorded in the early-2000s (see below chart).

Now, RP Data has released new research confirming that the rate of dwelling turnover in Australia has tanked, with home owners now staying put for nine years on average, up from an average of 7.6 years in 2000:

Since the middle of the last decade, the average hold period of homes has continually increased as affordability barriers and high exit costs result in owners holding on to their properties rather than buying new ones.

The average hold period is calculated simply as the difference between the most recent date of sale compared to the previous date of sale. When we quote this figure, we determine an average based on all of the homes sold over the past year.

Across Australia, the average hold period for a house is recorded at 9.0 years and at 7.7 years for a unit. The average hold period has continued to increase over the past year. At the same time last year the hold period was recorded at 8.5 years for houses and 7.4 years for units. The average hold period for houses and units was fairly static until late 2005 and actually declined during the 2001-04 property boom, but it has since consistently increased.

At an individual capital city level, Melbourne houses and units have had the longest average hold period over the past year at 10.4 years and 8.3 years respectively. Sydney has the second highest average hold period. Given that Sydney and Melbourne are the most populous capital cities and also two of the most expensive, it is no surprise to see that they also have the longest length of tenure. It appears that home owners are increasingly likely to keep their current properties rather than upgrade due to the significant cost.

The trend towards longer tenure is evident across each capital city market, all of which are showing an increase in the average hold period of both houses and units over the past year. As the table shows, the average hold period across each capital is much higher than it was five years ago and substantially higher than they were in 2000.

The fact that housing turnover is falling is a worrying development for the housing market, as it suggests that it will takelonger to clear the huge backlog of homes currently for sale which, according to RP Data, is running some 50% above ‘normal’ levels:

The situation appears particularly dire in Melbourne, where the holding period is the highest in the nation and, according to SQM Research, there has been a huge increase in the number of homes for sale:

According to RP Data’s Cameron Kusher, the longer holding periods are likely to adversely affect those areas of the economy reliant on housing turnover, but positively impact the home renovation market:

The fact that the average hold period has been increasing as homes got more expensive and the rate of capital gain slowed along with the ongoing decline in sales activity has ramifications for the market and its participants such as:

  • There is less stamp duty collected by local and state governments because of fewer sales transactions.
  • There is less commission available for real estate agents and mortgage brokers.
  • There is less new business for financial institutions; as a result they have to compete more heavily in the refinance space.
  • Many families are likely to be living in homes which don’t appropriately meet their needs.
  • The data suggests that, instead of moving, people are looking to renovate their current homes.

Kusher also believes that holding periods are likely to increase in the future:

We anticipate that the average hold period will continue to increase over the coming years as private sector demand for credit growth remains below historic levels, sales volumes remain below their peaks and affordability barriers mean that people choose to upgrade their current home rather than upgrade to a new one.

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Unconventional Economist
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  1. Brace yourselves for a spike in stamp duty receipts over the next few months, as the indoctrinated (ultimately, wrongly) see ‘ the bottom’…

  2. cheers UE. i wonder how many flippers have been caught mid-flip, unable to sell who are now bleeding cashflow? quite a few i would think.

  3. Note that the 2011-12 Stamp Dtty receipts are a forecast which might end up a bit lower. Next year will be very interesting, especially if the world economy continues to deteriorate. Definitely no budget surplus then.

    • The Patrician

      Leith, do you know when the 2011-2012 SD receipts forecast was calculated and when the actual 2011-2012 SD receipts data will be available?

  4. There must be some state govts (and central bankers) getting very twitchy over this data.

    Good riddance to the specuvesters.

    • MsSolarFelineAU

      “There must be some state govts (and central bankers) getting very twitchy over this data.”

      Ohhh, the poor dears.

  5. UE with this it would be interesting to see the number of distressed mortgages in Melbourne. Whatever it is I’m guessing it’s on the rise.

    • From a mortgagee perspective my mortgagee alert on Domain is running a 5 fold increase over 18 months ago. I’m also confident there are many not identified as such and some being held back by banks.

  6. MsSolarFelineAU

    There are less people willing to be sucked in to the Property Ponzi-Scheme.

    But, if Stamp Duty is abolished (and our tax system is overhauled to something more efficient – I’ve posted this before) there will be greater mobility of people, and people can move to where jobs are etc, etc, etc.

    Property is falling slowly, and this borne out in the Statistics.

  7. tsport100MEMBER

    Sure, if your charts start in 2000 it looks like the market has stalled but I don’t know if I would describe dwelling turnover in Australia having RETURNED to 1991 ‘pre-bubble’ levels as “tanked”.

    Surely that is the ‘normal’ level before adding 1) State and Federal Gov FHB retail incentives 2) Federal Gov RMBS funding for sub-prime loans and speculators.

    • dumb_non_economist

      Maybe so, but as far as high turnover helping to pump up the market you’d have to see it as having “tanked.”

  8. I’m sure that the lack of any meaningful indexation in stamp duty rates has made the property market much less liquid. A lot more properties fall into the 4% to 5% band for stamp duty now. Include sales costs and other expenses and it probably costs around 7% to 8% of the value of the new house to move. For a $2m house the changeover expense would be about $150K. Twenty years ago the same house probably only attracted 2% stamp duty.

    It tilts the renovate v sell argument more heavily to renovate. After all you can fund quite a lot of renovations with that sort of money.

    It makes sense to hold longer to amortise the transaction costs over a longer time period. So part of what we are seeing is, I think, a simple response to a substantial price rise.

    I’m not sure of the elasticity of demand here but it may make sense to cut stamp duty rates to encourage turnover and increase total revenue.

    • OK doger got that. And this would lead to greatest price changes at the upper levels where householders are not trading up and those at the top trade out in retirement etc.

      So price movement will be at the top and perhaps at the bottom to begin with and is why the bottom end is holding up fairly well thus far.

      Also it is possible that the increase in housing stock on the market will screen some price changes as the eyes are picked in a way that cannot be gauged by the RP hedonic methodology. ie a recent 50K makeover sells and ex renter sits, but all other RP measures remain equal.

  9. systems_and_limits

    Leith – a picky little correction:

    “…up from an average of 7.6 years in 2000”

    Shouldn’t that be 6.6 years?

    (Under National dwelling turnover rate graph)

    The constant flow of properties onto the sale market versus the drop in transactions looks like an unsustainable situation – to return to equilibrium, further changes will be required. Either an increase in housing sales, or a drop in the rate at which houses are coming onto the market – and I’m pretty sure that either will involve price dynamics. It’s going to be interesting to watch how all this plays out – it’s not too often that one gets to observe a real economic scenario with dynamics of this magnitude.

    Great reporting, thankyou!

  10. Iron HorseMEMBER

    In the first bar graph depicting receipts the anlaysis identifies that
    ‘…the Budgets of Australia’s state governments are suffering badly from a sharp drop in stamp duty receipts on housing transfers, which in 2011-12 are expected to be -20% below the levels of 2007-08 (see below chart).’

    Even though this forecast is 20% below peak levels it is also worth noting that the 2011/12 forecast is approximately the average revenue over the period of the data shown.

  11. Iron HorseMEMBER

    One of the main reasons, if not the main reason, investors buy property is for capital growth. If growth is not apparent investors will look elsewhere to where they perceive they wil generate better growth and/or returns.

    Regardless if property markets continue to meander along, deteriorate slowly or slump it is most likely this is the new paradigm for teh foreseeable future….

    • Mining BoganMEMBER

      You’re assuming negative gearers are investors.

      I would choose a different word.

  12. Just a thought, but does anybody else think this may be another factor reducing our productivity growth. If people feel locked in to where they live by high transaction costs, or just plain being unable to afford a different location, wouldn’t this mean they are less likely to follow up new job opportunities in a new location, or they end up wasting more time commuting to a more distant workplace?