Will the affordability issues of today shake up the longstanding dynamics of property ownership in Australia?
Are we facing a real estate bubble?
The short answer, I believe, is no. The longer answer is that outside or Melbourne or Sydney, we’re certainly nowhere near a bubble status. Melbourne and Sydney have obviously grown significantly over the last period – Sydney over the last four or five years and Melbourne the last three or four. The fundamentals are so strong in those cities and that’s why we’ve seen prices continue to rise. I think we’re in a position now where in Sydney, the income to price ratios are high, almost at nine now which is very, very high and that’s going to have to put some brakes on the market at some point. However, the problem with both cities is that the supply levels are so low that prices continue to move as the population grows and the demographics change.
We know in Melbourne, where if you believe what you’ve read everywhere, there’s an oversupply problem, but the vacancy rates are at 1.7 per cent and the auction clearance rates over the last few weeks have been over 80 per cent which are extremely high so that’s how we know there’s certainly not an oversupply but a lack of supply. A bubble means it’s going to burst and I don’t think we’re in a position where there’s any kind of market that will burst. However, in saying that, we’re certainly at a point where prices in Melbourne and Sydney need to slow down. We fully support the macroprudential controls that are coming in, anything we can do to take out risky lending, especially when you’re at the top of the market, you really want to make sure that the top people that are buying, are buying comfortably and not taking any risky lending.
Are we in serious unaffordable territory?
There is absolutely no doubt that Sydney is in an unaffordable territory, I don’t think Melbourne is there yet, probably the inner south-eastern suburbs maybe but as a whole not yet. When you talk about affordability in a city, it’s only unaffordable for those that aren’t in the property market. So if you’ve owned a $1 million property in Sydney and you went to buy a $1.5 million property, there’s a good chance you’ve got some equity in the first property so you’re not borrowing the full amount so as prices move forward, as long as you’re in the market, you benefit from that growth and if you upgrade, you’re not spending the full amount so it’s not unaffordable for second, third, fourth and fifth home buyers.
The problem we’ve got in these two cities, especially in Sydney, is that it is near on impossible for a first home owner to enter the marketplace because the prices have moved so significantly. That is the affordability issue that we’ve got and that’s what we’re seeing more and more with investors coming out. In the last quarter of last year, we did some analysis and this has never happened before in our business but almost 20 per cent of our buyers were what we would call rentvestors – people that rented where they lived and purchased an investment property, and that tells you a little bit about sort of what’s happening in Melbourne and Sydney, especially for first home buyers.
What are the barriers to first-time home owners?
Affordability of course. We’re talking about the Australian marketplace but really it’s just Melbourne and Sydney that have got these issues. If you went to talk to a first-time home owner in Adelaide or in Perth at the moment, it’s probably a very different story to someone who lives in Bondi, Sydney. But the technical barriers for first-time home buyers is that the cost of living increase, and it is increasing and there is no doubt that it is more expensive now for young Australians to live than it used to be. But I also think the mindset and lifestyle of a first-time buyer has changed as well. I put myself in that boat 10 to 15 years ago where I found it really hard to save a deposit as well because I wanted all the trappings of a lifestyle that we want to live as young Australians.
In previous generations, the population tended to be a bit more frugal when they were buying a property, and bought in areas they could afford. Right now, we want to live in lifestyle locations and that’s not only because we’re being spoilt but also because there’s a lot more congestion on the roads, and we want to be next to high-paying jobs, next to lifestyle centres, so I think there’s a change to how we want to live our day to day lives and I think that’s why first-time home owners are more than ever more willing to trade that space for place. They’re now looking for location rather than dwelling types. They’re saying to themselves, “Well, I want to live in a certain area, I can’t afford a house in that area, what can I afford?”, rather than “I want a house, where can I afford a house?” I think from that perspective where there being a lot easier to sort of guide in terms of what they want to buy and what area but more importantly now more than ever, first home owners are turning to investment to areas they can afford rather than owner-occupied properties and renting in areas they want to live.
Is a generational attitude change to blame?
I don’t think they are spoilt or anything like that. I think our cities have changed. To buy a house in Melbourne and Sydney, you would have to go quite a long way out of the CBD and to travel into the city everyday might not be suitable or may not give the quality of life that they want. So it’s completely understandable that they want to live closer to their workplace and I don’t think they’re spoilt in doing that. It just means that they have to change their attitude to buying that property. Maybe the first property is not the one they live in and is an investment.
What are your thoughts on fiscal reforms such as abolishing negative gearing or allowing superannuation to be used?
I think we need to think about these things and open up a discussion. The superannuation question is a bit dangerous obviously with the pension and the tax base increasing rapidly, so I think superannuation is going to be very important moving forward especially for the younger Australians.
I don’t think changing negative gearing will benefit first time home owners as much as people may think. Right now, we know that with 1.7 per cent vacancy rates in Victoria, there are not enough rental properties and we’re probably talking about a city that’s got more supply than Sydney for instance. I think negative gearing would reduce the amount of rental properties. Now, over time, over a 10- or 20-year period, potentially that might mean property prices have dropped because more people buy but in the short term especially, we saw that in 1987 where it does affect the cost of living and affordability of rental, and I don’t think that’s a good factor.
I think the most sensible discussion around changing negative gearing has been maybe limiting it to new properties only. Negative gearing has an effect not only on property prices but has an effect on other areas too. The construction industry has 9 per cent of total employment in Australia and apartment building, and house building is a significant part of that. If we slowed down construction, it’s not only going to reduce properties in the market but also going to affect employment.
Can you predict the affordability cycle? Will it get worse?
Short term, I think it will get worse. In the next 12 months or so, I don’t see it letting up in terms of property prices in the two major cities. However, I don’t think we’re in an especially special marketplace that we haven’t seen before. Sydney has probably run a couple of years above what it normally does in terms of its cycle but I don’t think we’re in an amazing place where prices are moving so rapidly that we’ve never seen them at this level before.
If we go back to the Sydney marketplace where we had six or seven years of stagnant growth, I think affordability will come back to some kind of normalcy, whatever that means in this market. But I certainly don’t think affordability is going to move north and continue to rise and be worse off. Maybe in the short term, but over the medium term I fully believe the markets will take care of themselves. The macroprudential controls will help but even without those, the markets will take care of themselves a lot of the time and affordability will come back in line with some sort of normalcy.
Demand from foreign buyers is considered fairly inelastic. How will this affect local property ownership?
I think we’ve gone a little bit too hard on the foreign ownership rule especially in Melbourne with the 7 per cent stamp duty. I think there’s a misconception of foreign owners pushing up prices across the country and I disagree with that wholeheartedly. I think they buy in very different locations to what the average Australian buys in and they’re helping us build the infrastructure that we’re going to need in 20 or 30 years’ time when our population in Melbourne and Sydney grows rapidly to almost double. We’re going to need the high-rise developments in and around the CBD that no real Australian wants to buy. We’re seeing very little local buyers are buying into these big CBD projects. They’re building the infrastructure that we need going forward. I think we need to be a bit more open to foreign investors in Australia. I don’t subscribe to the fact that they’re competing against Australians in any way in those property markets.
What are your thoughts on other city markets outside of Sydney and Melbourne?
In terms of Australia at the moment, you look at the fundamentals and Sydney and Melbourne are moving forward quite strongly and probably Brisbane as well but we’ve been saying this for two years. The Australian populous has changed and what drives our economy has changed, although we’re still driven by resource and that’s still a massive part of our growth as a country but now the country is more driven towards knowledge work and service jobs and those jobs are in Melbourne, Sydney and Brisbane predominantly, with Brisbane more around the tourist side of the service sector. That’s where I think the growth will continue.
Marketplaces like Adelaide which has very low growth over the last seven or eight years, I don’t see them moving too far forward because the fundamentals don’t point towards them doing that. I think KPMG demographics said that they’re going to have 400,000 new people in Adelaide between now and 2050, so very low population growth projected for that city. And if you’ve got low population growth, property prices fundamentally can’t move too fast.
You look at cities like Perth and Darwin and I think those cities really need to look at themselves and see if they can reinvent themselves. The resources boom has slowed now but of course there are still plenty of jobs in resources there but they are not creating a lot new jobs, in fact it’s going backwards. I think they probably will reinvent themselves in one way or another, maybe towards tourism or something like that. I don’t subscribe to that theory that just because the market is at the bottom, you should buy in it. I think those markets really need to show us that they’ve got some factor to move growth forward and not just the fact that they are at a low point in the market.
Bill Nikolouzakis, director, Nyko Property
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