Perth the collateral damage as house prices rise on the east coast


market watch by IPP

 

A house in my street sold at auction last week. Nothing unusual except for the price paid on what, to be blunt, is a small squat brick residence that you would be lucky to swing a cat-and-a-half around.

For $717,000 a couple bought a house with an aggressive set of bids that stunned many first-time buyers who had been assured the place would go for about $600,000.

This is not Sydney. This is suburban Canberra where the biggest traffic threat on some days are the roos that bound out of the sliver of bush that winds its way from a nearby hill.

But it is an illustration of a threat that is growing on the east coast, that could leave Perth as collateral damage, and set Australia on a collision course with a fiscal reckoning none of us will enjoy.

Over the past seven years the median house price in Sydney has climbed about 70 per cent. Values have jumped close to 20 per cent in the past year alone (with the rate of growth not far behind in Melbourne).

Living in Perth it might be hard to understand the whole “housing affordability” debate that is front page news over east and which will feature prominently in the May Budget.

But because Sydney and Melbourne dominate the nation’s economy, the impact of the two cities is hard to avoid. Especially for the Reserve Bank and the Federal Government.

And the runaway trains that are the Sydney and Melbourne property markets have both the Government and the RBA worried.

In terms of housing affordability, everywhere is struggling.

Work by CoreLogic senior research analyst Cameron Kusher gives you some perspective of what’s gone on over a very short period of time.

In 2011 a little over 21 per cent of Sydney’s suburbs had a median house price under $400,000. By last year this had fallen to just 1.2 per cent.

In Melbourne, the proportion had slipped to 12.2 per cent from almost 29 per cent

Here in Perth — and this is despite a flatlining overall market — the median house price is under $400,000 in 15.5 per cent of suburbs. Five years ago it was 31.1 per cent.

In Canberra and Darwin there are no suburbs with a median price under $400,000.

This sort of lift has the Government in a tither. More and more people who can’t afford to buy a house (especially with wages growing at less than 2 per cent per annum) are angry people. And angry voters.

Then there’s the issue that is keeping the RBA awake at night.

So much of this growth is being driven by investors who are pushing up prices using money mostly borrowed from our four big banks.

Such is the lift in investment borrowing, and in house prices, the Reserve used the minutes of its most recent meeting to mention the growing risk in some property markets.

You thought the mining boom that WA enjoyed for a decade was big. It’s nothing compared to the housing boom much of the country is in.

Put it this way. The economy’s dependence on the housing market — particularly that of Sydney and Melbourne — to overall GDP is now greater than it was when the mining construction boom was driving the nation.

Where once the economy was tied to the fortunes of iron ore prices and LNG construction, now it is anchored to a bunch of investors sticking their hands up at Saturday morning auctions.

JP Morgan economist Sally Auld recently put it this way.

“Absent any acceleration in economic activity in the rest of the country, this leaves Australia’s growth outlook somewhat vulnerable to the fortunes of the Sydney and Melbourne housing markets,” she said. And then there is another problem.

If ever there is a clarion call of danger of this addiction to housing it was contained in a report compiled by the Australian Institute of Superannuation Trustees by one of the nation’s best and most thoughtful economists, Saul Eslake.

His report notes that home ownership rates started edging down in the early 1980s.

But the acceleration since the 1990s, when financial deregulation intersected with the advent of non-bank lenders in the property sector, is nothing short of startling.

Among people aged under 54 the rate of home ownership has dropped by between eight and 13.5 percentage points over 20 years. Historically it’s a dramatic deterioration, the likes of which we have never seen before.

That’s ownership.

According to Eslake, 88 per cent of “homeowners” aged between 35 and 44 had an outstanding mortgage debt. That is a 21 percentage point lift since the mid-1990s.

At the other end of the age scale, two decades ago less than 4 per cent of people of retirement age owed money on their mortgage.

Now it’s one in 10.

Eslake’s research then delivered its killer blow.

With more and more people going into retirement with a sizeable mortgage, they will need to eat into their superannuation nest eggs to cover that debt.

And by doing so, they’ll have less to retire on. In many cases, they’ll have to take at least a part age pension.

You remember the idea behind superannuation? To give people enough money in retirement that they don’t need to call on the pension.

To be blunt, there’s a slow building tsunami of people who are going to reach their 60s not fully owning their home because they’ve had to spend so much buying the house.

Think it through.

If more and more people are having to survive on the age pension, and for longer (as our lifespans continue to improve), that means a bigger proportion of the Federal Budget is going to be taken up by pension payments. And to pay for that? Higher taxes.

It begs the question — has a combination of governments, policy change, homebuyers and banks sown the seeds for the end of Australia’s unbelievable economic run?

At least the mining boom was linked to real economic growth.

The housing boom in Sydney and Melbourne is more a speculators’ delight that is hurting ordinary people who can’t own a home or are forced to the extremities of two already sprawling cities.

Like the new couple in my street, let’s hope someone has done a pest examination to ensure the whole thing doesn’t fall down.

Source/

Monday, 27 March 2017 9:46AM

https://thewest.com.au/opinion/shane-wright/perth-the-collateral-damage-as-house-prices-rise-on-the-east-coast-ng-b88424616z

Contact Us

Indo-Pacific Property Level One‚ 45 Stirling Highway‚
Nedlands WA 6009, Australia
Phone: +61 8 6382 1600 admin@indo-pacificproperty.com.au