This week I’m picking up with the second part of my look back over the events of 2018 and making some comparisons with what predictions were made this time last year. But looking back with the full benefit of hindsight.

This time last year I suggested a list of ‘big-picture’ issues that included; technology, affordability including built-to-rent, every aspect of finance, tax policy, planning delays and the cost of infrastructure and all combined an expected shift in values.

This week I’ll explore some of the critical factors that surround finance; affordability, access to finance, taxation policy and prices or more exactly how all of these areas are impacting residential property prices.

Affordability

During 2018 housing affordability turned into a full-blown social and political issue with every institution, think-tank, community group, commentator and every level of government all in a rush to suggest ways affordability could be improved. However, despite record levels of construction and historically-low interest big gains in affordability have proved to be illusionary.

One result from this debate was painting off-shore buyers and investors as two of the main reasons affordability had failed to improve. These were apparently two groups of buyers who were directly in competition with first-time buyers looking for affordable homes, and both groups became the ‘bad-guys’ of the residential market.

Australian property ‘severely unaffordable’, Sydney crowned ‘second least affordable market’ – was one very typical headline from January 2018 when in an international survey (14th Annual Demographia International Housing Affordability Survey) Sydney was ranked ‘second worst’, with house prices almost 13 times higher than the median household income. At the time, Sydney was only beaten by Hong Kong, where property prices were about 20 times higher than household incomes.

Both State and Federal Governments continue to focus on housing affordability with the aim of both increasing supply and seeing prices fall, but not fall to the detriment of existing owners however, there-in lies the problem for without a strong national housing policy affordability will remain a tricky for buyers and those renting.

There have been various studies into housing affordability and most point to some form of direct or in-direct, long-term and structural government intervention. The absence of a national policy shows a disastrous lack of leadership and a focus on soft-targets like off-shore buyers and investors is no solution.

Highlighting this as a problem during 2018 required no great foresight and a possible solution would need to address; a clear definition of affordability, encourage partnerships between state and local government, investors and non-profit and developers to meet firm reliable targets and base these on available (and not so much future) infrastructure capacity.

Also at every level of the housing market establish what development sites are available in particular crown-land, and a move from only speculative apartment development that also includes more affordable build-to-rent options.

Zoning is also a key issue that came in for some criticism this year, with the suggestion to mandate the provision of a percentage of new housing developments affordable to low-income households and very low-income households.

Other measures have also included additional taxes on luxury housing, vacant properties and off-shore buyers that could help fund affordable housing.

However, the use of tax policy is a hard-edged discriminatory policy. While a single national agency that is only focused on all aspect of affordable housing delivery is a sensible option. Such a policy could help all housing providers to take advantage of affordability opportunities.

With the New Year only a little more than a month away the reality is that despite some prices falling, a marked improvement in affordability has not materialised and that’s despite price falls of 7.4% for Sydney and 4.7% for Melbourne.

This suggests that the reality is that without a national policy, with affordability as its main focus, structural change will not occur without hitting other sectors of the market, and I would suggest unfairly.

Access to Finance

This time last year I did suggest that access to finance would become a structural issue in the market, and that was before the Banking Royal Commission became an everyday reality.

Today in the housing market we are facing a credit squeeze and this is obvious from the daily feedback I receive from dozens of projects spread across Australia. There are buyers in the market, buyers who on the surface look well-qualified to purchase but, their finances are not being approved.

Why?

March 2018, the RBA commented that Nationwide housing prices had little changed over the past six months, with prices having recorded falls in some areas. This was however, a general trend that had first started to appear in August 2017.

The RBA also observed that in the eastern capital cities, a considerable additional supply of apartments will be due for completion over the next couple of years. This jump in supply would possibly lead to prices moderating, which they have.

However, these measured comments did not hide the fact that the RBA saw high and rising household indebtedness as a problem. APRA then introduced a number of supervisory measures that lead to a tighter credit outlook for homebuyers that become tougher and more targeted as 2018 progressed

In the Bank’s November statement, we can see evidence of a further tightening and banks restricting investor credit and making owner-occupier loans much harder to qualify for.

These policy changes had directly started to cool the market with according to the RBA conditions (prices) in the Sydney and Melbourne easing (falling) and nationwide residential rents also falling.

Also in November, the Bank noted that loans to owner-occupiers had eased but remained robust, while demand by investors slowed. The RBA appeared to also be happy that the dynamics of the housing market had changed, a lot which they have, and to a low level of activity not seen for many years.

The combined action of the major banks and APRA policies mean that credit conditions are very tighter. By contrast and almost in contradiction mortgage rates remain low, although there is some competition among the banks for borrowers with a very high credit quality.

However, even those with a good credit history may have to sell an existing property to move and slow sales of existing are hampering them also. Finance has become the central, almost the only issue in the market now we need to see if the combination of policies will see a gentle re-alignment of the market or a bumpy landing.

Taxation Policy

Taxation policy or the lack of policy was something that I highlighted last year and today the focus has shifted not from a lack of policy, but to a debate focused around negative gearing and capital gains taxes.

The lack of detailed policy and tax reform at the federal level may well be to blame for this. The vacuum created has allowed the current debate to flourish creating an unsettled environment.

This is a policy that needs to be settled property, as buyers of all kinds hate uncertainty. Negative Gearing is at times argued on economic or social grounds. Opponents suggest that it pushes up property prices and encourages speculative investment but, how is that different to any other form of investment and begs the question why single-out property?

The tax concession is estimated to cost the Commonwealth Government $4 billion a year. There are several proposals that have surfaced during 2018.

One proposal limits the concession to new developments and existing investments would be grandfathered. Both ideas could increase prices for new developments with a rush to buy established properties before the cut-off date. While the impact on rents is complex, less supply as suggested could be off-set as more people become owner-occupiers.

Policy think tank the Grattan Institute is recommending the concession be scrapped with no grandfathering arrangements. However, they don’t recommend axing the CGT concession, but calls for it to be cut from 50% to 25%. They also say property prices would edge down only slightly, by an estimated 2%, but that first home buyers would benefit.

If negative gearing was to be modified there could be a flow-on effect for renters, as investors look to generated positive rental income, naturally leading to higher rents or far less supply.

Once again, the problem is speculative. Negative gearing and limiting or removing CGT discounts might take some heat out of the housing market, they aren’t the only factors that make up house prices.

It’s uncertain house prices would fall significantly without negative gearing in place and we need to take account of the possible impact of slowing supply and continued population growth. Again, we have a negative policy debate.

Residential Prices & Value

Coming into 2018 there was evidence that prices would moderate. The level of new supply was going to be a key factor however, the lack of finance and clear housing policies have aggravated this trend, we have also seen stagnate wage growth and that’s despite strong employment.

Prices have moderated, the combination of factors would have been impossible to see 12 months ago and they now include; doubts over tax policy, the demise of off-shore investors, the fall in investor numbers, more finished supply coming onto the market, finance under a cloud and a possible credit crunch and the impact of the Banking Royal Commission.

Summing up:

During 2018 market concerns have focused on finance and a national housing policy and tax policy void. To be a success new developments will need to connect with all of the buyer expectations of quality, location and value. And also navigate a difficult set of financial constraints. 

My final posts for 2018 will be courageous and take a look into what the future might hold for residential property markets in 2019.