Posts Tagged‘interest rates’

Want Cheaper Housing? Hope For Global Turmoil.

One thing that always gets me riled up is when people bitch to me about the housing prices in Australia. I’ve said in the past that yes, for an average single income earner, the median is unaffordable but I’ve long been of the stance that that situation is far from typical. What I feel is that Australians looking at the property market today are suffering more from a crisis of desire more than anything else, wanting to stay in the same level of housing that their parents had without the decades of living in the mortgage belt that preceded it. For the whiners out there however there might be a saving grace that’ll let them get into the house that they want, so long as they can keep their jobs through it.

So the reserve bank decided to drop rates by 25 basis points on Tuesday, confusing a lot of people as inflation was hovering around the Reserve Banks target rate of around 3%. It was the first time that the rates had dropped since April 2009 back when the fallout from the GFC was still causing problems. The decision seemed t0 be based around the fact that despite good economic figures Australian families were still struggling with mortgage payments and as such a drop in rates was seen as being more beneficial than keeping them on hold again. Taking a step back however I believe that they’re attempting to soften the blow of a potential upcoming crisis.

I am, of course, talking about Greece and the potential for a repeat of the events we saw with the GFC.

Rewind back a month or so and everything was starting to look better for Europe with Germany approving the rescue package albeit with some rather harsh provisions in order to make sure Greece didn’t do the same thing again. However just recently Greece has decided to put the rescue package measures to a referendum putting the future of the financial situation in Europe in the hands of the Greek people. Since there’s been rather hot and heavy opposition to the austerity measures that they’ve tried to implement in the past it’s understandable why everyone in the Eurozone is concerned about what might happen. Indeed with the way the markets reacted it’s seems like everyone thinks it’ll fall flat on its face.

But how, pray tell, does this affect property prices in Australia?

Well for the past year or so prices for Australian property have been declining slowly, on the order of single figure percentage points. Primarily this is because of many people coming out of the honeymoon period they had when they secured a massive mortgage during the GFC at spectacularly low rates, many below 5%. Once the pressure was back on with more sane interest rates many chose to sell up and this has lead to a downward pressure on the Australian housing market. It’s still not enough on its own to make property affordable though, for that we also need cheaper mortgages.

Markets are fun little beasts and are, for the most part, driven by irrational thought processes and fear. You’ll notice that during the GFC Australia remained relatively unscathed yet we still had as much panic as if we were going to go down with the rest of them. Indeed there was supposed to be a tightening of credit during this as well but many banks aggressively dropped their rates in order to draw people in. The fallout from the Greece’s financial problems is a very similar trigger to that of the GFC, enough so that if those measures don’t pass you can almost guarantee that interest rates will fall through the floor again as everyone tries to withdraw from the markets and the desire for credit dries up. Of course this will also mean that companies will use this as an excuse (both legitimately and illegitimately) to start downsizing again, pushing the unemployment rate back up.

For a financial sociopath like myself it’s like being a kind in a candy store as I’ll have my pick of the loans and properties available. However it’s not a situation that everyone can take advantage of, indeed only a select few (although not just the 1%) will be able to. However if you’ve got a decent deposit up and have been waiting for “just the right time” to get into the market then holding off for another couple months or so whilst this disaster unfolds could prove beneficial for you, especially if you take the banks current fixed term mortgage rates as any indication of where the market is heading.

Affordability, Statistics and the Australian Housing Market.

Before I get into what could be a slightly ranty post about the Australian property market I feel it’s prudent to mention that I’m an owner-occupier, investor and would be regarded as being particularly well off when compared to the average Australian. Thus my views may be somewhat skewed by the fact that I have a vested interest in the property market. However I believe that there’s a lot of disinformation out there about housing prices and what constitutes “affordable” property, especially when the entire market is boiled down to single figures. What I intend to show you is that whilst Australian property is more than likely above fair value this does not preclude the average Australian family from owning their own home, nor are first home buyers priced completely out of the market.

There’s been a report circulating recently from NATSEM that says we’ll need a decade of flat housing prices in order for them to come back to affordable levels. This sparked quite the reaction in the media, strangely lacking any direct finger pointing that usually accompanies issues like this. There’s no question that the last decade has seen some extremely wild growth in the Australian property market and for years people have been predicting the ultimate downfall of the Australian housing market. The Global Financial Crisis was supposed to be the trigger that sent property prices tumbling but it had the opposite effect, with extremely low interest rates pulling many into the market and increasing demand significantly. Now that the pressure is back on with interest rates at their pre-GFC levels the question of affordable housing is a hot topic, but it’s not all bad news for those chasing the Australian dream.

For starters let’s dive into the (thankfully unbiased) figures from the NATSEM report. On the surface it looks bad for Australia with the median¹ house price being a whopping 7.3 times that of the median income, 50% higher than what it was back in 2001. However whilst I believe using the median as the measure is by far more intellectually honest than other measures it does hide some important information from the reader. Although the median Australian house price might be $417,000 that also means that 50% of all Australian houses are valued somewhere below that particular line. For first home buyers this means that they shouldn’t be shooting to buy a house at the median price since there is an ample amount of stock available at a much cheaper price bracket. The houses above the median then are usually more suited to those looking to upgrade and not those trying to break into the market.

For interest’s sake I’ve done some calculations based on some typical scenarios. The first is a median income earner attempting to buy a median house with a typical interest rate:

  • Income: $57,000 /year, $3,823.33 / month after tax.
  • Home loan: $396,150 ($417,000 house price, 5% deposit, 7.1% interest, principal and interest) =  $2,662.25 / month
  • Repayment as percentage of total income: 69.63%
In this situation I am in agreement with NATSEM that this is completely unaffordable. I believe that this is a pretty atypical situation however as a single person buying (or financing) a house should definitely not be shooting for a median property, opting instead for the lower end of the spectrum with smaller town houses or apartments. However a more typical scenario would be a young, childless couple (I’ll stick with median incomes) looking for their first home, shooting for the lower end so they can break into the market. Taking these factors into consideration we get:
  • Income: $114,000 /year, $7,646.66 / month after tax.
  • Home loan: $356,535 ($375,000 house price, 5% deposit, 7.1% interest, principal and interest) = $2,396.03 / month
  • Repayment as a percentage of total income: 31.33%
In this situation it’s starting to look a lot better with the percentage of total income spent on housing much closer to the 30% of total income that the banks usually use when determining loan size. The above scenario isn’t too far from the situation I was in when I purchased my first house back in 2007 and whilst it wasn’t the easiest thing in the world to do (it was helped a lot by renting out the spare rooms) it was definitely possible. This doesn’t disprove the point that Australian house prices are unaffordable for median, single income earners however but even in 2001 it would’ve been a struggle.

Since the media hasn’t played the blame game yet I thought I’d throw my hat into the ring on this one. Investors who are negative gearing would be an easy target with this one and they’re usually the first to get blame for high housing prices. However in Australia the vast majority of property, to the tune of 68.90%, is owner-occupied (I.E. people who own it live in it). The remaining 31.10% is investors but the vast majority of investors only own 2 properties, their home and another investment. It then seems infeasible for investors to be solely responsible for housing price gains when the vast majority of property is in the hands of owner-occupiers or one time investors. The price rises logically then come from the majority, but how are they doing so?

Simply put it’s people leveraging the equity in their own homes in order to upgrade to a bigger, better home whilst keeping the loan repayments at a similar level. The initial 2001 – 2004 boom meant that many had enough equity to upgrade and many did so over the years. Of course being rational actors they attempted to maximize their sale price in order to reduce the loan on the next property and this put an upward pressure on housing prices, both on the low (the one they were selling) and high (the one they were buying) end of the market. The interest rate scare of 2007-2008 put enough pressure on people to curtail this behaviour for a while, but the GFC dashed those high rates and the upgrades began again in earnest.

I’ve long been of the opinion that there will never be a house price crash, instead I foresee a long time of stagnant or small negative growth whilst wages catch up to bridge the affordability gap. The simple fact is that prices can only drop significantly if people are forced to sell and although many first home buyers who bought in during the lowest interest rates are feeling the pressure now they form only a small part of the market, not enough to trigger a price collapse and most will simply delay selling until conditions improve.

It is unfortunate that the Australian dream is out of reach for a median single income earner, but many factors point towards housing becoming more affordable for them in future. The government could do a much better job of incentivizing the construction of low cost housing as current market conditions favour bigger, higher cost houses. Additional land releases and incentives for desirable, low cost housing would also go a long way to putting a downward pressure on house prices. It’s not a problem that can be fixed overnight either and we’ll need long lasting reforms in order to keep housing affordable, lest the prices rise and the cycle start all over again.

¹The median in statistics refers to the value in which 50% of the total data set is above that value and 50% is below it. It’s much more resilient to use this figure when you have outliers on either side of the equation which in the case of Australian property and wage figures there are many. Using the average would then be less representative of the real world.

Budget 2010: The Good, The Bad and The Overblown.

Ah budget time, it’s always an interesting time of year as you get to see what the government has planned for the coming year and the rhetoric spin machines go into overdrive as both sides of parliament start duking it out over every talking point they can find. For me it usually entails a couple hours of good analysis of the changes so I can see if there’s any new measures that I’m able to exploit or if my particular industry might see some changes to encourage or discourage growth. Still it’s no secret that the whole thing is a rather dry affair (I skipped out on a friend’s invitation to have budget drinks at a local pub, even alcohol can’t make the delivery interesting) and I’ll forgive you if you tune out now, but if you read on I promise to make it worth your while 🙂

Rather than link you to a veritable tsunami of articles that analyze the various ins and outs of the budget I’ll just give you a link directly to a quick overview to the whole thing direct from the horse’s mouth. On the surface there’s really nothing amazing about it, no crazy reforms or highly controversial schemes that haven’t already been duked out in front of the public over the past few weeks. Most criticisms I’ve heard of the budget thus far focus on the government’s ability to follow through on the plans, citing past broken promises (ignoring the fact that it wasn’t Labor which caused them to fall through) and making accusations that it all hinges on things that haven’t yet passed parliament. Most of these accusations can be traced right back to Liberal party rhetoric and frankly, whilst they may have raised a couple points that need discussion, I’m starting to get tired of all their talk (more on that later).

One of the biggest things to come out of this budget is the so called Resource Super Profits Tax. In essence it’s the Australian governments attempt to get a bigger slice of the current resource boom that Australia is experience on the back of the heavy demand stemming mostly from China. Initially I was appalled at the idea as it felt a lot like a grab at a profitable industry just to boost the coffers to put the budget back in surplus sooner (which honestly doesn’t matter as much as the Liberals will have you believe). I mean what would happen if we had an IT boom in Australia? Would we then be subject to a super profit tax because we suddenly became desirable for hosting services (which is quite possible if the NBN goes ahead)? Diving deeper however it appears that this idea actually came direct from the mining giants themselves, hoping to seek a simpler system rather than the complicated arrangement they currently have. My sentiments echo that of Martin’s post I just linked; the belly aching we’re seeing from mining companies lobbyists is a disagreement over price more than it is them actually being hurt by this new tax.

An interesting development is the government’s idea of implementing a pre-fill or standard deduction option to the current tax return system. Basically this allows about 25% of all Australians to be able to claim a standard flat fee from the government (to the tune of $500, increasing to $1000 in 2013) without having to go through the hassle of filling out a full tax return. It’s a good idea, one of the few that the government is implementing from the Henry Review, and is very similar to many systems that are implemented in other countries. The main saving comes from the estimated 8.5 hours that every tax paying Australian spends doing their taxes every year, totalling a whopping 100 million hours spent collectively (not including the back end processing that the ATO has to do as well). For someone like me who has a rather complicated tax arrangement it’s really of no benefit but for those 6 million+ Australians it will help I’m really glad to see a measure like this go through, although I’m sure accountants Australia wide are none too happy with it.

Two major areas of funding are infrastructure and renewable energy. Whilst the infrastructure spending is mostly just a continuation of the spending that has been going on for a couple years the resources allocated to renewable energy and a skilled workforce are welcome changes. For renewables (full disclosure: my dad is the teacher of renewable energy at the Belconnen TAFE and I share his passion for it) there’s really nothing to lose in researching such technology. Whilst most are still in their infancy we’re on the cusp of having some real significant breakthroughs and Australia is well positioned to take advantage of them. Really with our vast amounts of unarable land and swaths of coastline we’re an idea place for wind and solar (both photovoltaic and thermal) and with such strong opposition to other clean forms of energy (read:nuclear, despite us having about 40% of the world’s uranium in our soil) renewables are the way to go, and I’m going to keenly watch all developments in this space.

There are some benefits that also speak to me personally, like the reduction in company tax rate and instant asset write off for small businesses. As someone who’s just about to lash out into the cruel world of being a technology start up any benefit I can get my hands on will be gladly taken and made use of. All the bits of technology I require to get my projects underway neatly fit under that $5000 limit for instant deduction, hopefully softening the blow somewhat to my own personal finances whilst I attempt to get my business off the ground. Whilst these changes are the ones that hinge on the super tax going through I’d still bet on it being passed, albeit in a different form to what it is now.

Now that I’ve gotten that all out of the way I’d like to take some time to launch a load flame laden bloggery right at the Liberal party. For the past 5 months the Labor government has been under constant attack from the Liberal party who have been taking every shot they possibly can whilst failing to deliver anything substantial of their own. To be honest I had expected as much as after the leadership spill saw Howard’s attack dog Tony Abbott take the opposition leader’s crown. Whilst I can appreciate that criticism of any policy is required to make sure it is robust I’ve heard little to no arguments that can be rightly substantiated with hard facts. That usually wouldn’t be a problem but it seems that the constant barrage of vitriol from the Liberal party is starting to have a dramatic effect on the Labor government’s approval rating with the populace at large, and that’s worrying for a couple reasons.

It’s no secret that I’m liberal (little l there folks) with a slight bent for libertarian went it suits me, so you should probably take this all with a little bit of conservative salt. The current rhetoric from the Liberal party is hinging on old ideals that Labor can’t be trusted with money (they always spend it~¹) and that the Liberals are the best to handle the economy (they always run a surplus and interest rates are always lower~). However if you do even a small amount of research you’ll see that traditionally the Labor government has been in power when the world economy at large is suffering. Keynesian economics advocates government deficit spending in time of a recession and it has been proven time and time again that this either softens the blow or stop a recession from happening entirely. Liberal rhetoric would have you believe that if the government did nothing we would’ve been fine regardless which shows a reckless disregard for the facts and decades of research into the matter. The interest rate line is dragged out time and time again, but isn’t it strange that the last year has seen interest rates lower than that of the previous governments entire time in office? That would be the line I’d tow if I wasn’t so blind to the fact that interest rates are subject to external pressures that are not under any Australian government’s control. The sooner this myth and the fear that comes with it dies the better.

Then there’s the idea that the Liberal government would do better than Labor at the helm of this country. Right now nothing could be further from the truth as whilst the party has managed to stabilize itself for the past 5 months it has spent most of that time being cynical whilst doing little other work. You’ve got an ultra-conservative at the helm, one climate change denier (he is a NOT SKEPTIC) in the front bench (with one recently leaving) and none that seem to harbor any respect for fact and rational thought, although I fully admit this could be far more due to party politics and such issues being dealt with behind closed doors. Currently it seems that the public perception is that they’re not sure about the Rudd government but they have yet to seriously consider the alternative: an Abbott government. Pressing a few not-so-politically inclined friends on the matter shows that they’d rather not have the latter, but hadn’t considered opposing Rudd meant getting Abbott as PM.

The budgets are always a big talking point for both parties and even more so in an election year. The Rudd government has delivered a sensible budget that aims to continue the economic growth that it managed to sustain throughout a global recession and keep Australia being the economic power that it has become. The rhetoric from the Liberal government should be analyzed and then discarded for the rubbish that it is and hopefully the Australian public sees that the current government is doing the right thing by us all and the alternative is a much darker Australia for us all.

¹FYI a tilde at the end of a sentence on the Internet typically indicates a sarcastic, flirty or playful remark.