We are experiencing many warnings of housing bubbles, crazy house prices and other alarms. However, people ignore them and continue to buy dwellings, so prices either keep rising or don’t fall in any significant way.
And so what needs to happen in the economy to cause dwelling prices to fall significantly is an event that would and cause joy to first home buyers (unless they are hit by the cause of the price fall) and teeth-gnashing by those who recently bought dwellings and took out big mortgages.
I have assembled ten events that would cause a significant dwelling price drop. I emphasise that the list is not exhaustive and I am not predicting that any of the events will take place, but they provide danger signals for those operating in the housing market.
Here are my ten events.
1) The first and most dangerous event for the Australian housing market is a halt to the rising population.
Infrastructure Australia predicts Sydney’s population will reach 6.1 million in 2031 -- a rise of 1.2 million on 2015 or 80,000 people a year. In Melbourne the population curve is steeper.
Infrastructure Australia says Melbourne’s 2031 population will be six million -- a rise of 1.5 million on 2015 or an increase of 100,000 people a year (Australians will be squeezed by the housing supply shortage, May 25).
Those population increases will force both cities to lift their home building rates to satisfy demand. Other capitals are set to experience similar but not as dramatic population increases.
But if populations do not rise by anything like the Infrastructure Australia estimates, then there will be dwelling surpluses, particularly in Melbourne, which will cause dwelling prices to fall.
2) Chinese are buying 80 per cent of the apartments being built in inner Sydney and an even higher proportion in Melbourne’s CBD. Australian Chinese residents often link with friends and associates in China and Malaysia to buy existing dwellings. If for any reason this buying stops, then values will fall in Sydney and Melbourne and, to a lesser extent, Brisbane. The two most likely causes are governments’ actions (state or federal) that make Asian investors feel unwelcome or events at home that require the money tap to be turned off.
3) A few decades ago, the Japanese were buying tourism properties in the same way as Chinese currently buy dwellings. Then, as a result of the economic crisis in Japan, they first stopped buying and then became sellers. If ever events in China or Malaysia become like Japan and force Chinese investors in Australian property to sell, we will see an enormous fall in property values. State and federal governments, while playing politics, could take actions that trigger or force an exodus, albeit that is less likely.
4) Negatively geared investors are joining the Chinese and pushing up the prices of existing dwellings. Given the uncertainty in superannuation, negative gearing is not about to stop. But the ALP is considering limiting negative gearing to new dwellings (that’s not where the money is currently going) and adjusting capital gains tax rates. If they do, it will remove many buyers from the existing housing market and will put pressure on values, but it would boost the home building industry.
5) If councils or state governments made gaining approvals much easier and/or took away many of their building rules that boost costs, it would greatly increase the supply of lower cost apartments and houses. That would cause prices to fall, which is not in the interests of either state governments or councils because they are hooked on the revenues high dwelling values bring. Accordingly, it is most unlikely to happen (The conspiracy to boost house prices, June 10).
6) Like councils and state governments, banks have a vested interest in keeping dwelling prices at least stabilised and hopefully rising. If they imposed severe lending clamps on lending to investors and residential buyers, it would slash prices. Again, it is not in their interests to do that.
7) A severe recession either in one state or more likely the entire country would boost unemployment and cause many to default on their mortgages. (A small technical recession would not have that effect). This is what happened in many Australian housing markets in the '90s. Expensive houses fell by up to 50 per cent. An Australian recession is most likely to be brought on by events overseas.
8) Higher interest rates. At the moment that does not seem likely, but rising Australian bond yields are a sign that we may be looking at the start of a new trend. Australian banks rely on overseas markets for about a third of their funding, so higher interest rates overseas could play a role in higher Australian interest rates.
9) Changes in the pension rules, which currently encourage pensioners to hang onto their dwellings rather than down size. If these rules were changed in time, many dwellings would come onto the market. There are a lot of baby boomers with inadequate superannuation that are looking to access the value in their home by selling them, but can’t do so because of the pension rules.
10) If superannuation funds are stopped from buying investment dwellings, it will have a marginal, immediate effect, but over time as more and more super funds go for dwellings, cessation of that concession could be an important driver of lower values.