Residex sees property momentum

By Leith van Onselen

From Residex’s founder, John Edwards, comes the below positive assessment of the Australian housing market:

A new optimism is starting to pervade the media, which should be creating a feeling of confidence about the future. Preliminary numbers for February are indicating that the housing market is finally starting to move forward and last Tuesday (7 March) the US Stock Market achieved something many would not have thought possible 12 months ago; the Dow Jones soared to a record closing high, breaking through levels last seen in 2007.

I have said numerous times in the last year that housing markets were ready for growth pending market sentiment improving. I think that time is now arriving as sentiment should improve significantly provided no shocks come out of Europe, and in particular Italy. It is time to dust off our housing investment skills and go out and see what we can find. From here, it is likely that there will be more competition for property and fewer bargains…

If the events of the past few years have taught us anything, it is that even when a market crashes, if you can afford to hold your property and not sell, you will achieve what you anticipated in the longer term. Those who have lost out following the GFC are the ones who were excessively leveraged and forced to sell into a nonexistent market. People who had the capacity to hold have received acceptable dividends or rental returns, and now have an asset that is in all probability worth more than it was pre-GFC.

Those who invested in housing have probably not achieved anticipated long term yields; however, it is likely that they have achieved, or will soon achieve the normal long term return. The normal long term return is usually 1.5% real growth (a rate excluding inflation) plus a rental yield that is acceptable, which is also likely to be approaching lending rates which is the normal longer term trend. Overall, an acceptable outcome has been achieved. From here we are going to see some real positive gearing opportunities.

For housing values to increase significantly there has to be demand. This is driven by people who want to buy a home and having the capacity to do just that. The desire for ownership is natural given the security of tenure it provides. Hence, there are two basic issues that allow people to have the capacity to purchase a property:

  1. The availability of funds from banks.
  2. Their capacity to repay the loan.

In essence, banks are willing lenders but have been a little more conservative in recent times. Therefore, any restriction on the population’s ability to bid on property from this angle is probably minimal and not sufficient to substantially reduce buying activity.

Clearly, if there is a major impediment it is the capacity of people to make home loan repayments. Basic housing affordability may be the issue; however, if people cannot purchase a property then they rent, which bids up rental yields.

Affordability has been improving in recent times as house prices adjusted and interest rates decreased. It is likely that the position will improve even further as more interest rate cuts are anticipated from the RBA and/or the Banks lowering rates as a consequence of borrowing costs reducing. Both scenarios are likely but the magnitude of RBA rate reductions will be impacted on by the actions of the Banks.

When considering affordability, I prefer to think of it in terms of the percentage of after tax household income it takes to make mortgage repayments. Equally, it is important to consider the amount of funds remaining after such payments are made. Leaving a household with less than $900 per week after making loan repayments probably means buying a property is not worth the effort when compared to the better lifestyle available from renting.

Table 1 presents the calculated affordability for each capital city. The figures are based on the median house price and a home loan interest rate of 5.65%. It assumes an 80% loan and an average tax rate of 17.2% for the family.

Table 1

It is clear that all houses are basically affordable, except in Sydney. Melbourne is at the lower end of affordability and in reality, with the exception of Canberra, affordability in most markets is marginal.

While housing markets should now move forward, they are likely to have a greater tendency to provide moderate growth rather than quick gains. However, at this level of moderate affordability people will be driven to lower cost properties and rentals.

In the event of a further 50 basis points reduction in interest rates, the position will be improved; however, not significantly enough to send housing markets into a period of exceptional growth. In Sydney, this rate of reduction would add about $50 a week to a borrower’s available cash position after tax.

I leave you with a question to ponder – given the position Canberra is in, should we all be immediately moving to buy an investment property there?

[email protected]


  1. These moving goalposts are making me dizzy.

    1. Expected real returns are 1.5% on home prices. File that away for when boom time extrapolations start up again.

    2. Home purchase affordability isn’t the combination of price/income ratios, price/rent ratios, and monthly payment/income ratios. No, affordability is achieved when the median purchaser has a $100K downpayment, and still has $900/week to spend on living. Why $900? I don’t know. It’s almost $200 less/week than is recommended for a comfortable retirement (

    Who is the target market for residex publications? Is there really more room for influence as ‘statistical cheerleaders’ than as an honest broker of information?

  2. It is the job of every salesman to sell their product ( with enthusiasm ideally!) regardless of their view of the product. Even salesmen who instinctively know that their company is going broke, sell their products with the same message. ‘Hand’ & ‘feeds you’ comes to mind…..

  3. He lost me on the very first line..

    A new optimism is starting to pervade the media, which should be creating a feeling of confidence about the future.


    • Had you read on, you’d have come to the bit that’s going to knacker many people in our property markets “If the events of the past few years have taught us anything, it is that even when a market crashes, if you can afford to hold your property and not sell, you will achieve what you anticipated in the longer term.” That’s what many current Japanese property holders are waiting for, I guess. It’s too late for those Irish, Spanish, Greek, and American ex-owners who got foreclosed as time ate away at their other megre assets.

      • GunnamattaMEMBER

        Well lets assume

        …..that Credit Suisse were right last year (Dec) when they suggested that 1 in 3 mortgages were being serviced on an interest only basis.

        ….that the mining investment phase tails off as was indicated in this thread yesterday, and is fairly observable in 2H this year.

        …..that, as HnH noted in that thread, there isnt the credit about for a real jump in prices from where we are, with deposits growing about 7%.

        …..that private debt to disposable income hasnt been reduced significantly from circa 145%

        ….that the ‘Non-Mining’ part of the Australian economy, which is currently in recession remains subdued – with two parties arguing austerity at a budget level, a load of state governments dealing with reduced stamp duty transfers, a globally exposed sector that remains woefully uncompetitive, and an AUD remaining nailed to the roof.

        I would assume that market ‘crashes’ (although possibly melodramatic) would be a useful conceptual point for many market participants to know about.

        I would also assume that the ‘new optimism’ starting to ‘pervade the media’ and ‘should be creating a feeling of confidence about the future’ is about the same as the ‘new optimism’ felt by some members of the Wehrmacht who happened to think they were in with a chance of getting out of Stalingrad on a relief plane circa 60 years ago.

      • GunnamattaMEMBER

        100% right mate – sorry lost track of what year I am in. or how to count. or whatever

      • I would also assume that the ‘new optimism’ starting to ‘pervade the media’ and ‘should be creating a feeling of confidence about the future’

        It can also be similar to the optimism of Hermann Göring when he said no enemy bomber can ever reach the Ruhr 😉

      • Janet, house prices are rising in the US, and the other nations that you mentioned bear zero resemblance to our economy.

      • Prices may indeed be rising in the uSA, Peter, but from where? From 0% down to 40% down, depending on where one looks. From 40% down a 10% ‘recovery’ still leave us down 34% ! “Recovery’ is such a comparative word, isn’t it? And as for “..other nations that you mentioned bear zero resemblance to our economy..”, did we say that when things were rosy? Or did we say “Look! The Spanish property market is going gang-busters, just like ours…” or sentiments, similar….

      • GunnamattaMEMBER

        The housing markets of the US, Eire, Spain and Greece have all had a massive selloff at some point over the last five years – well beyond Australias ice cube out of the freezer melt.

        In some parts of the US prices are genuinely cheap, and far more affordable than the vast bulk of real estate here.

        The other thing to note as is noted elsewhere here today is that the very thing which has kept the fig leaf over Australias private debt, economy, unemployment and (therefore) real estate markets – mining investment – comes right off the boil as of about 4 – 5 months time.

      • Peter, I´m guessing that you have chosen the US as the more relevant country to compare Australia against because of the striking similarities: 1)The properties there have more than halved since the GFC, just like in Australia.
        2)Private debt in the states has been significantly reduced from 127 to 112%, just like Australia.
        3)It is a country of 300 million people, with major technological and manufacturing strengths, just like Australia.
        4)It has THE currency, just like Australia.

      • You may have Irish friends like I do, Peter. In which case your will know, that regardless of any comparisons that can or can’t be drawn between our various economies, one things is widely certain. NO ONE SAW IT COMING! My friends had no idea in 2005 that their property value was about to, over, halve, regardless of the lunatic murmuring on the fringes of the internet. I’d suggest similar complacency exists here. Maybe more guardedly, but the ‘property always goes up mantra is alive and well eg: “…even when a market crashes, if you can afford to hold your property and not sell, you will achieve what you anticipated in the longer term.”

      • JasonMNan – No, none of those reasons. Out of the examples that Janet gave, the USA is the only one which has a similar monetary structure. The crash in the USA driven by counterparty risk, a credit freeze, caused by toxic lending to people who had no right to borrow, was not mirrored here, or at least not to anywhere near the same degree. If it had been similar here, it would be quite apparent after 5 years.

        Comparing us to the USA has some relevance as far as our structure goes, but comparing us to the struggling members of the EUZone has very little relevance. They can’t control their currency or interest rates. Spain and Ireland also had some massive overbuilding issues, whilst we still have a shortage. Greece was verging on “failed state” status with a rise in popularity of a Nazi style political called “the Golden Dawn”
        The list of differences goes on.

      • Can’t you see what you are saying,Peter?! “…whilst we still have a shortage..” That’s EXACTLY what the Irish said as well! Why do you think they ended up over-building? And what are we trying to do to fill the mining void? Build, build, build….We may not have been like Ireland in the past, but we have all the prerequisites to be so in the very near future.

      • Peter, you bring up that old furphy again and again.

        The US mortgage market is still barely functioning only because of extraordinary government support via the FHA and the Fed $40 billion/month “cash for trash mortgages” QE program.

        I know you think QE will run forever..

        But even if we accept that base case, the diminishing effects from QE on asset markets are well known by now. It’ll take bigger and bigger QE intervention to lift the asset markets by smaller and smaller amounts .. and a mere hint of a rumour of QE withdrawal to trigger a stampede towards the exits.

      • WTF! Are you for real?? What has mortgage apps got anything to do with what I have said above about QE and FHA?

        You are conflating the demand/asset side news with the dysfunctional supply/liability story that I posted above.

        Anyway, you are looking at a tiny data point that stretches across all of 3 [email protected]#@#ing weeks AND even that includes refinancing!!

        You need to improve your googling skills to hunt for good news.

      • The refinance share of total mortgage activity was unchanged from the previous week at 77 percent of applications.

        Bernanke is buying $40 billion a month into this, and a lousy 23% of the apps are new mortgage mugs!! Sorry, but your link is an own goal, Peter.

      • The US bears litte resemblence peter because their yields were never as bad as ours, even at the peak of their bubble – and they also have much lower rates. Surely the biggest factor in a sensible investment decision is whether the reasonably forseeable income derived from the asset justifiies the price you pay???

      • Peter. The line “We are not (fill the space with latest property crash country)” has been uttered by all the countries Janet mentioned and more. In the end controlling your currency cannot alter fundamentals (Argentina anyone) and Australia is head and shoulders above the rest in pushing every possible measure of over-indebtness there is. Had there been a significant correction in the market or an improvement in the fundamentals (like in the US) I would entertain the idea of a moderate property recovery but this has not happened. In fact quite the contrary. So Residex and other pied pipers can toot their flutes until they go blue in the face, this mouse is not buying it.

      • Argentina tied its currency to the $USD in the previous financial crisis, so they voluntarily gave control away.

        Their GDP is erratic and their political situation emotional.

        I haven’t really looked at the current problems in Argentina, but the large swings in production can’t be helping.

        I don’t see those issues in Australia.

        You guys are looking at a fairly healthy man and thinking “what if he had a multitude of nasty diseases”

        But he doesn’t, and he is leading a fairly healthy lifestyle, unlike the drunks you point to.

      • Close to the highest levels of household debt and house prices in the world is a sign of a healthy economy?

        You’re looking at a man who seems healthy on the outside but whose appendix is just about to explode.

      • AB – private debt is high because public debt is low, as opposed to Japan where the reverse applies.

      • Peter. The Ley de Convertibilidad was used to control hyperinflation and for that purpose it worked pretty well. The problem is that it artificially strengthened the currency, making imported goods cheaper and exporting more difficult. Argentinians felt a lot wealthier but it destroyed the competitiveness of the country. Australia, in a way, has given away, albeit unwillingly (?), the control of its currency.

        Maybe you can´t see the same problems in Australia because facing the prospect of a “correction” is too painful to contemplate?

      • Peter
        Why did house prices fall when our economy was in such good shape and interest rates fell to historical lows? What caused the decline?

      • You can only win if you can afford to stay in the game and the rules allow you to.

        That is what brings many simple casino systems undone. Not being able to stand the cumulative losses and table limits preventing you from doubling down.

        Markets can stay irrational longer than you can stay solvent.

  4. ‘Dust off our housing investment skills and go and see what we can find’. What a vile and sickening thing to say – let’s reword with the true meaning and outcome:

    “It’s time for those with access to cheap credit, usually because they already own their own home, to go and try and rentseek in residential property (and speculate) at the expense of the next generation and the most vulnerable in our society, whilst adding no meaningful innovation or industry to our country or economy.”

  5. It always strikes me that these types of article typically contain no analysis, no acknowledgement of trends, and no relationship to reality. Just a reference to current data, a hypothesis about future growth based on nothing, and often a hypothetical case study.

    Essentially they think they are right because nothing has happened yet to prove them wrong.

    Compare this to Philip Soos’ recent article.

    • Probably due to the fact that the average retarded Australian only picks up on the key words and phrases…

      “Never been a better time to buy”
      “Strong Economy”
      “Here its different”
      “Prices rising”

  6. With the RBA standing by the housing patient and applying the high voltage Debt Defibrillator (aka low interest rates) for an extended period the fact that the housing market is only just staggering to its feet tells you all you need to know.

    Increasing resort to adrenaline shots (aka foreign investors – how many houses can be numbered 888 in a single street?.

    Increasingly calls for blood transfusions from the SMSF.

    And the RBA have made it clear that they are prepared to crank the voltage higher and higher if necessary.

    The patient is sick and diseased and requires radical surgery but that doesn’t mean it can’t stagger on for a good while longer.

    After all in most parts of Sydney it has been fumbling along the wards for about a decade.

    • Increasing resort to adrenaline shots (aka foreign investors – how many houses can be numbered 888 in a single street?

      The recent trend of more migrants coming from China, India and other Asian countries compared to more traditional sources like UK and NZ has also increased this crazy “buy now or you’re stupid” kind of mentality in the society.

      As you may understand most people from Asia countries, especially from China and India, are long suffering from lack of personal space syndrome. The Chinese cannot own big homes in big cities due to the high price and residency rule. Both countries surely have too many population compared to land mass plus with financial repression in China, the culture of real property investment, is the only game they know and surely they will bring it to Australia when they moved here.

      So, not only the amount of immigration that is used to prop-up the broken property market but I think the composition of the coming migrants is so much more important.

      • Hang on, I thought it was the special characteristics of the Anglosphere (but particularly Australians) who had an attachment to property? Now I’m confused, are you saying the Asians love property more than the Anglo peoples?

      • The Anglo Sax people may love their property but still not blindly.

        The Asian attitude towards real property is not only emotional attachment, it is more like cultural inheritance due to so many years living in poverty and suffering from hundred years of feudalism and modern time financial repression.

  7. we have a new perverse relationship in the world. basically, when the economy is strong, rates are higher, which forces asset prices down due to massive debt loads, which makes the economy weak, which pushes interest rates lower, which result in renewed strength in debt driven asset prices, which result in a temporary return to economic growth which is ultimately constrained by the debt loads as interest rates rise to a peaklower than previous cycle before the negative effect of the rate rise pushes the economy down requiring even lower rates to push up asset prices again which then results in rate rises to a lower high etc etc etc etc
    or in other words ZIRP. It kills us all (except the banks) and the best you can do is choose the lesser of 2 evils. Frankly i dont know what that is. If your parents reward you for eating sweets and punish you for eating greens, what would you choose (especially when they are going to raid your college fund to pay for your sweet eating siblings dental bill)!! The system is screwed and you have to work with it.

  8. So in Sydney if you’re buying a house, mortgage payments consume about 49% of household disposable incomes. In Melbourne, the proportion is about 42%.

    We know from the national accounts this week that real per capita disposable incomes are falling. So, on the face of it, mortgage payments as a share of income have already been climbing even though the property market has been static.

    Yet the property market is ready to climb?

    Sure, there are always buyers in the market. But in general they lack the capacity to bid prices up. Buying property is an absolutely enormous and very long term commitment these days. It makes very little sense for buyers to make such a commitment even bigger, and, thereby make their lives more difficult for even longer.

  9. Wow, either these income figures are massively overinflated or I am underpaid. I don’t know that many people/households in Brisbane who make $94,000 before tax.

      • Maybe you are rude or insensitive or both. Maybe you should spend more time on your interpersonal skills and less time handing out advice to other posters.

    • drsmithyMEMBER

      Wow, either these income figures are massively overinflated or I am underpaid. I don’t know that many people/households in Brisbane who make $94,000 before tax.

      Median individual income nationwide is something like $50k.

      $94k for median _household_ income in Brisbane doesn’t sound outrageous. A couple of “typical” people (teachers, nurses, office workers, etc) living in the same house would hit that level.

      • Thank you drsmity, yes, by household it does makes sense.

        Most of my friends and I are single and earn around the $75-80k mark and so I tend to look at things from a single persons perpective.

        And thank you for being more polite in your reply than mondo007.

      • Yeah . . . I think the mods might have taken a nap.
        Can’t see how mondo007 comment adds anything but insult to the commentary.

      • Well arq using his experience to debate the article. I am just critiquing his argument, if he didn’t mention himself I wouldn’t

  10. Idle Wanderer

    The country closest to Australia is none of the above – in my opinion it is Canada. Like Australia Canada is dependant on raw materials exports, mostly to China, with a heavy exposure also to hot Chinese money coming the other way into real estate. Relatively prudent, well regulated banking system. Low interest rates at present. Very high rates of personal indebtedness.

    So what IS happening in Canada? In most cities the RE market rolled over about last March. Just substitute Melbourne for Toronto and Sydney for Vancouver and the immediate future is laid out in the Canadian experience.

    This blog about the Vancouver RE bubble just gets longer the more you read, but if you read about 100 pages back to March 2012, you’ll see a lot of it is very familiar, starting from “We are not in a bubble”, becoming “it’s a slow deflation” to “OMG prices just crashed”

    And if you are curious to see what individual Vancouver prices are looking like right now during a bubble pop, then read this:

    • Correct. In demographic terms, very similar indeed and going through our demographic grey in parallel.

    • Not querying whether and to what extent Canada is going through a property downturn…but people should be aware of the cultural differences between Canadians and Australians when talking about their cities.

      In Sydney for example, we tend to lump in everything from Coogee down south to Berowra up north, and then going out west-ish we include Parramatta, Penrith (and more).

      In Canada, they have a much tighter definition of (say) Vancouver. Looking at the links – and particularly the last link with individual properties – you can see that all the properties listed are in a very tight geographic region.

      The properties in North and West Vancouver are the “rich” areas close to ski fields and perhaps equivalent to Sydney’s northern beach suburbs like Manly.

      The other properties are very close to the Vancouver equivalent of Sydney’s CBD – so more like suburbs such as Paddington or Crows Nest.

      Looking at them from a Sydney property perspective, Vancouver properties all look remarkably good value for money (which is not to say they are from a Vancouverite perspective).

      • Fair observations BM.
        One interesting thing about bubbles popping is that there is evidence [more than anecdotal] to suggest that price declines happen from the outside in, the reverse of booms, where prices increase first in inner ring suburbs then ripple outwards. Prices in Whistler ‘popped’ right after the Winter Olympics in 2010, about the same time as they popped in places like Squamish, Kelowna and Vancouver Island [= NSW Central Coast].
        Surrey, approximately the equivalent of Sydney’s Hills District, and other middle ring areas reversed next.
        Now that the air is leaking out of the inner ring of Vancouver City suburbs, it is merely confirmation that the bust is well underway and will probably continue to ripple inwards for some time.
        As far as I can detect, nobody rang a bell to announce the beginning of this phenomenon. Unemployment in BC is 6.3%, below the national average of 7% but just starting to rise. Interest rates are lower in Canada – variable home loan rate very close to 4.0%. The main event that seems roughly coincident was the central bank tightening lending standards in mid-2012. Over there, the concern is all about trying to limit the amount of personal indebtedness. Over here, the Reserve Bank appears to be acting to keep the RE market inflated.
        The other major difference between Canada and Australia is that the RE lobby has a much greater media presence and influence here. As Mr Edwards says [above] “A new optimism is starting to pervade the media, which should be creating a feeling of confidence about the future”. Hmm, now where does that come from, and can spruiking hold back the outgoing tide forever?