It’s been a long wait for campaigners for reform to Australia’s absurdly generous property regime, but it’s worth listing just how far we have come in the past year. The major changes have included:
- the Murray Inquiry, as well as the Abbott Government and APRA implementation of it, which raised capital charges on mortgage banks and will work to re-allocate credit away from housing at the margin in the years ahead;
- APRA’s macroprudential tools which have capped investor lending growth at 10% per annum and proven to be even more successful than that. It is a precedent that establishes the use of such tools for policy fine-tuning in the future and we may well have seen the last investor bubble in Australian property;
- the new foreign investment rules into established property came into force two months ago and will hit the illegal Chinese bid materially, not least because Chinese authorities are doing much the same at their end. Importantly, the policing of the new regime has shifted from the hapless FIRB to the iron fist of the ATO;
- real interest rate rises have transpired as bank margins were squeezed by regulatory tightening and now funding costs have sky-rocketed. It is MB’s judgement that this will get much worse before it gets better and the banks will be forced to raise rates again, or at least hold back a material portion of rate cuts;
- finally, we now have negative gearing reform almost baked-in, either complete or partial, which is set to be the central debate in the election. The discussion itself over the next six months can only (surely) result in potential buyers holding off to see which way it goes given it will very likely lower demand for existing property and trigger price falls to some degree (the alternative of a rush to buy seems pretty irrational to me).
Add to that a slowing economy as the mining, car assembly and residential construction capex cliffs converge, as well as the growing global shock around the Mining GFC. We’ll see more rate cuts to soften those blows, and perhaps the Pavlovian response of speculators will kick in, but even they would have to be taking pause at this point.
To sum it all up, you could be forgiven for yelling “Don’t Buy Now!”
So when should you buy if you want to? It obviously depends upon where you are. Generally speaking my working assumptions are as follows:
- house prices are going to correct before we see any more material capital growth;
- it will probably begin over the next year and how deep will depend upon how severe is the Mining GFC;
- when falls threaten to hit aggregate demand, fiscal authorities will resort once more to the first home owners grant;
- it will work to raise prices for its duration but not as well as last time because immigration will keep slowing, foreign buyers will be shut out, and lending standards will be high as banks are hit by greater losses emanating from a troubled economy than transpired in the GFC;
- after FHOG passes, house prices will resume falling for a long period – some nominal, some real – as the Australian economy continues its post-mining boom adjustment via rising non-mining tradables.
Thus based on the top down view I would not be buying as an investment unless some local outlook overwhelms the broader picture. If it’s a home you’re thinking of then you might want to time your entry as markets either ease or tumble over the next 18 months. Throw out some low ball bids, there’s no hurry.
