When an observer (such as the central bank) stands back from the breathless reporting of house prices and auction results (some figures from RP Data are now updated on a weekly basis), long-term trends come into focus.
It was these trends that Dr Luci Ellis, the head of the financial stability department at the Reserve Bank of Australia, focused on during more than two hours of grilling by the House economics committee in Sydney yesterday.
In a clear warning that echoed her boss Glenn Stevens’ remark that prices in Sydney have gone “crazy”, Ellis said home-owners should expect some period of falling house prices as the property market adjusts after a long period of rapid price growth.
And that should form part of the calculations of investors who are piling into the market.
She said nominal price growth would be slower than in the period of rapid house price appreciation over the 15 years to 2005 when financial liberalisation and a transition to low inflation and low rates environment fuelled dramatic gains in the housing market.
“It then stands to reason, if housing prices are cycling around a lower average, you are more likely to have periods where housing prices fall in an absolute sense,” Ellis told the inquiry into home ownership.
Sydney has already had three such episodes since 2003, “so people do have to bear in mind that risk”, she warned owners and investors.
Indeed, there have been times when house prices actually fell across the board: in 2004, in 2009 after the global financial crisis, and in 2011.
Ellis cautioned that is reasonable to expect “more periods” in which prices fall slightly, and that would produce a different environment for the amount of risk investors were willing to take on.
However, the senior Reserve Bank official played down a question about the possible economic impact of a large-scale exit of investors from the market, saying investors would be reluctant to crystalise a loss and would only engage in a fire sale if they were forced to.
Regardless of whether a bubble exists in Sydney prices, speculative investment has driven a surge in house prices in Sydney and Melbourne, with investors now accounting for 52.5 per cent of new lending (An excess of faith in bricks and mortar, August 6).
Ellis not only acknowledged the housing market has become “unusually concentrated” on investor activity, but their increased equity and borrowing capacity was likely pushing out other prospective buyers.
In its submission to the inquiry, the central bank argued there is a case for reviewing negative gearing and the capital gains tax concession because they are driving too much speculation. The central bank’s view has been echoed by many senior business leaders including the head of the government’s audit commission and the chairman of the Financial System Inquiry.
Ellis declined to make specific recommendations on tax changes, but did focus more on CGT than negative gearing and said the tax system was worthy of a “holistic review”.
Perhaps surprisingly for owner-occupiers who have considered moving house but baulked at the costs, Ellis did not dwell on the high stamp duty rates that are currently shoring up the state finances of Victoria and New South Wales.
Instead, she noted that transaction costs in other countries are also considerable, such as realtor fees in the US which can be up to 5 or 6 per cent of the property price compared with around 2 per cent for agents’ fees here. She suggested such costs form a welcome disincentive to flipping property for quick profits, which can destabilise the market.
Much has been made of the impact of rising house prices on first home buyer affordability, but Ellis suggested demographic factors have dominated the decisions of 20 and 30-somethings to buy property. People are choosing to marry or settle down later in life, thus delaying the two-income model of saving for a house deposit, and making their first purchase later than their parents did.
First home buyers might also be less willing to settle for the modest first homes their parents bought as an entry to the property market. Ellis recalled her parents’ first home was on an unmade road and had a septic tank. The services were promised to come later.
Now house-and-land packages marketed to first home buyers promise multiple bathrooms, up to four bedrooms and a media room, albeit on a smaller block of land. It’s hard to imagine any city dwellers these days willing to forgo basic amenities in their first home.