HIA pimps FHBs in new negative gearing defence

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By Leith van Onselen

The Housing Industry Association (HIA) has today released a research report, entitled First Home Buyers: The Big Picture, which appears to be yet another thinly veiled attempt to thwart reforms to negative gearing:

Concerns about First Home Buyer (FHB) participation in the home purchase market have surfaced repeatedly in the media over the past year…

Commentary around the low FHB share has typically invoked the narrative that younger buyers are being ‘squeezed out’ of the market by investors with deeper pockets…

Low FHB shares have also been attributed to changes in FHB grant regimes in many states…

In a recovering market, more seasoned buyers like investors and non-FHBs are likely to be the fastest to respond to the improved conditions. FHBs are a little more risk averse, and will be less comfortable about entering the market at first. This means that their share of the market will temporarily flag as the market negotiates its turning point. Over time, we can expect FHB activity to gradually increase as the market recovery becomes more established…

The low share of the owner occupier mortgage market accounted for by FHBs is a temporary phenomenon, and reflects a unique mix of factors. These include:  A substantial amount of FHB demand was dragged forward due to improved grant incentives and concessions during and following the GFC:

  • The proportion of Australia’s population in the key FHB age group was in long term decline up until quite recently;
  • Labour market conditions are currently having a disproportionately detrimental effect on FHB participation in the market;
  • Increasing numbers of first homes are purchased as investment properties, and do not show up as FHB purchases;
  • More significant parental support and increased numbers of inheritances are facilitating mortgage-free FHB purchases;

FHBs are much slower to enter the improving market than non-FHBs and investors – their market share has temporarily dipped as a result.

Over time, we expect FHB activity in the market to increase. This is for the following reasons:

  • The share of population in the 25 to 35 year age group is starting to increase again;
  • FHB confidence will grow as the housing market recovery becomes more consolidated;
  • The eventual improvement in labour market conditions will facilitate greater FHB market participation; and
  • Strong price growth will lead to the accumulation of home equity – allowing increased parental support for home purchase by FHBs.

The public commentary around FHB market participation has frequently focused on introducing policy measures to dissuade investor activity in the market. Such measures distract from the fact that the housing supply response to strong population growth over the past decade has been insufficient. The most likely impact of imposing penalties on investors is that fewer homes will be built. Fewer investors in the market will force the rental market to tighten and hurt the disposable incomes of households in that area of the market.

Accordingly, the real challenge will be for policymakers to ensure that the recovery of FHB activity over the coming years will be met with a strong supply of affordable housing. Australia has the fastest growing population of any major developed economy and it is vital that policy allows for the provision of an adequate dwelling stock for a population undergoing such strong increase. Policy measures with respect to FHBs, however well intentioned, must ultimately be judged on their ability to support stronger flows of new dwelling supply and their effectiveness in promoting improved housing affordability for ordinary households.

While I wholeheartedly agree with the HIA’s argument on supply, which is a no-brainer, its claims on property investment do not pass the laugh test.

ABS housing finance data shows clearly that FHBs are being crowded-out by investors, particularly in Sydney and to a lesser extent Melbourne, where the investor share of total mortgages (excluding refinancings) has hit record highs (see below charts).

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While there are question marks over the veracity of the ABS’ FHB data, which shows mortgage demand near all time lows, the rising investor shares are beyond doubt.

Moreover, the HIA’s claim that “fewer investors in the market will force the rental market to tighten and hurt the disposable incomes of households in that area of the market” is propaganda aimed at preventing changes to negative gearing rules.

As already explained this morning, Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – almost 95% – buy pre-existing dwellings, not newly built dwellings, and that the proportion of investors buying new dwellings has fallen spectacularly since negative gearing was re-introduced in September 1987 (see next chart).

ScreenHunter_1946 Apr. 04 09.34

Moreover, the amount of investor funds going into new housing has barely shifted in 25 years, whereas investment in pre-existing dwellings has skyrocketed:

ScreenHunter_1947 Apr. 04 09.34

Since investors primarily purchase pre-existing dwellings, negative gearing in its current form simply substitutes homes for sale into homes for let. Accordingly, the policy has done little to boost the overall supply of housing or improve rental supply or rental affordability.

In the event that negative gearing was wound-back and a proportion of investment properties were sold, who does the HIA think they would be sold to? That’s right, renters (or other investors that would rent them out). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged.

As for the HIA’s suggestion that rents will rise, hurting the disposable incomes of renters, the below chart plots the Australian Bureau of Statistics (ABS) rental series from 1972, with the period where negative gearing losses were last quarantined (i.e between June 1985 and September 1987) shown in red. As you can see, there was nothing spectacular about this period, with much higher rental growth recorded in earlier periods when negative gearing was in place:

ScreenHunter_32 Oct. 22 07.40

Similarly, if we deflate the above series by CPI, in order to remove the effects of inflation, we again see that rental growth over the period when negative gearing was last quarantined was nothing special, with periods of higher rental growth recorded both prior to and subsequently:

ScreenHunter_33 Oct. 22 07.42

 

It sure is getting tiresome continually debunking the HIA on negative gearing (also here, here, and here). But as long as the HIA continues to spout the same falsehoods, I will continue to pull out the same rebuttals (and charts), no matter how repetitive it becomes.

What is particularly odd in all this is why the HIA doesn’t support targeting negative gearing at new builds? After all, such a policy would stimulate construction and benefit its homebuilder members. I can only speculate that the HIA cares more about protecting the value of its member’s land banks, rather than actually boosting construction.

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www.twitter.com/Leithvo

 

Comments

  1. “..increased numbers of inheritances are facilitating mortgage-free FHB purchases;”

    It’s NOT a housing crisis.
    It’s a rich dead uncle lead housing recovery!

    • Indeed according to HIA we don’t have a shortage of affordable housing we have a shortage of incredibly wealthy relatives ready to kick the bucket.

      It is an absolute joke that HIA can get away with this crap even though it clearly goes against the interests of most of their members. If I was paying my dues to this mob I would want their jobs and an enquiry for clearly acting to the detriment of the interests of members.

  2. interested party

    “It sure is getting tiresome continually debunking the HIA on negative gearing”

    You do realize that you are taking on a lobby group, don’t you?

    • They are lobbying against their own stated interest in support of an unstated interest.

  3. “It sure is getting tiresome continually debunking the HIA on negative gearing (also here, here, and here). But as long as the HIA continues to spout the same falsehoods, I will continue to pull out the same rebuttals (and charts), no matter how repetitive it becomes.”

    fight the good fight Leith

  4. And for all you fools who think that strong price rises make it harder for FHBs to enter the market, you’ve met your match in the perverted genius who came up with this:

    “Strong price growth will lead to the accumulation of home equity – allowing increased parental support for home purchase by FHBs.”

    How can you argue with logic like that?

    I assume that strong negative price growth would make it harder for FHBs to enter the market because their parents would have less equity to support them with?

    • It doesn’t actually make sense. If home prices rise, they require more equity from the parent’s house.. so it’s a dog chasing it’s tail. It’s both flawed logic and clear evidence that they mean harm.

      I can’t help but think these people just laugh among themselves in the office as they write this while slapping the back of the latest colleague who bought a NG IP.

  5. Hugh Pavletich

    Adam Smith had all this figured out over 200 years ago …

    What have we learnt since ? …

    When are the people and politicians going to wake up ? …

    http://www.adamsmith.org/quotes

    …and the distortion of trade

    People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.

    The Wealth Of Nations, Book IV Chapter VIII, p. 145, para. c27.

    Hugh Pavletich
    http://www.PerformanceUrbanPlanning.org

    • When are the people and politicians going to wake up ?

      When someone puts a bullet in the responsible minster(s) head.

      You keep attempting to frame ignorance by the vested parties, that this is an accident.

      This isn’t an accident, this is by design, and the payoff of an unearned motza outweighs the burden of deleting 50 harshly worded emails.

      When the burden starts to outweigh the reward, then they will change the game. No reward is worthy if you’re not alive to enjoy it.

      • Rusty Penny … The democratic process must always be respected.

        That’s a motherhood statement, not an argument.

        So the question is why?

        The democratic process has failed the young and poor.

        Those in charge fear their mortality more than those with nothing to lose. The latter should leverage that power.

      • Lets obey the democratic process and vote on rp suggestion.

        Yea from me.

        Where’s my big long wall?

  6. “Reserve Bank of Australia (RBA) data clearly shows that the overwhelming majority of investors – almost 95% – buy pre-existing dwellings, not newly built dwellings”
    I suspect this statement is based on a misreading of the data. The data distinguishes between loans for construction and loans for “existing dwellings”. A loan for construction is a loan made to finance, by way of progress payments, the construction of a dwelling. Investment loans for “existing dwellings” are loans for the purchase of a dwelling for rental or resale. Many of what we would think of loans for new dwellings would be classified as loans for “existing dwellings”. For example, if you buy an apartment off the plan you don’t get a loan for construction. You don’t even need to take the loan until the apartment is completed if you use a deposit bond.
    I think this explains why the above quoted statement and your charts don’t seem to accord with the observed heavy presence of investors among buyers of new apartments. And it results in an erroneous prediction that restriction of NG would have minimal impact on the supply of new housing.

    • That’s a good point and something that I hadn’t thought of. I will note, however, that for owner-occupiers, construction loans outnumber “purchase of new dwellings” loans 2:1 [similar data for investors does not exist]. So the story is unlikely to be that much different – i.e. investors are overwhelmingly purchasing pre-existing dwellings.

      The trends in the above charts are also clear, don’t you think? The shift away from construction loans has been severe.

      • I suspect contruction loans are more common for owner occupiers than for investors (just a guess but typically greenfield developments include many buyers of blocks that plan to subsequently build a dwelling to live in).

        I think investors would have driven a lot of the new apartment developments that would be showing up as investor loans for “existing dwellings”.

    • No Pat 20 that isn’t the way it works. Every loan has the security classified as either new, existing, refinance, or equity release.

      An OTP will still be classified as an new property, that’s not a data issue. What is a data issue is FTB’s who are being missed en masse in Qld, NSW, and Vic where the FHOG for existing homes has been cancelled.

      • Peter
        What makes you so sure a loan for an OTP purchase would be reflected in the data as a loan for construction of a new dwelling?

      • @ Pat20
        It’s an ABS requirement that certain data is collected on every loan written by ADI;s and other mainstream lenders. The data collected is the occupation of every borrower, and the loan type which must note whether the security is an existing construction or a new construction.

        I would be critical of the industry/occupation system of categorization, but whoever compiled the categorization system on the loan types did a fine job.

        A loan does not need progress payments to be classified as a loan for a new building.

        That data is very good. I would have a lot of confidence in it.

      • Peter
        I don’t claim to be an expert on this data. The ABS defines a loan for construction in relation to an owner occupied dwelling as one “made to individuals to finance, by way of progress payments” the construction of such a dwelling. I’m not sure why it would be different for investors.

  7. From HIA’s website

    Our extensive membership program supports residential builders, trade contractors, developers, design professionals, kitchen and bathroom specialists, manufacturers and suppliers.

    I don’t see FHBs, Real estate agents or investors of second hand homes in that list…

    So I believe the HIA has been hijacked.. and is now advocating against their member’s interest.

  8. In case you were wondering whether there was any sense at all in this housing crisis – the policy of the HIA is against doing anything that might pop the bubble because housing is easily affordable for those who have inherited it. All you plebs without rich parents – take note; you are second-class citizens who clearly don’t deserve to ever own a home… all hail the bubble!

    • Not inheriting anything and inferring its a character, or even genetic fault, is the essence of class warfare.

      Unearned distribution to me, at the expense of you, because you’re not worthy.