The Big Picture

With election campaigns occupying the media, it’s little wonder that real estate agents are asking how proposed taxes and Government initiatives could shape this industry. Tim Lawless draws on data to answer these questions from proactive agents.

Which cities do you expect to skyrocket (in terms of house prices) over the next 12 to 18 months?

It’s doubtful we will see any cities with sky rocketing value growth. The capital gains in the broader market place over the last 12 months have surprised on the up side. It stands to reason that with interest rates at higher levels, a strong likelihood of further increases in rates over the next 12 months, and Government stimulus having been wound back that the real estate market will move into a more moderate growth cycle.

In saying that, there are likely to be some regions that outperform. These are likely to be areas that are influenced by jobs creation in the resources sector (although these regions can be very speculative, particularly with the added uncertainty of the Super Profits Tax) and premium markets which are much less sensitive to interest rate rises and affordability pressures.

The government recently did a back flip on its foreign investment laws. How important is foreign investment to the Australian economy?

At a time when there is a large amount of speculation about the affects of foreign buying in the Australian residential market it has come to light that there is no real way of measuring the extent of foreign ownership. This is due to inadequate collection and administration of foreign property purchases by the Foreign Investment Review Board. It is probably fair to say that as a percentage of all transactions, foreign investment is a very small component of the Australian residential market. That’s from the macro perspective, but from a micro perspective there are likely to be some markets, particularly high end suburbs, where the impact of foreign buying has distorted prices to the detriment of domestic buyers. It has also been more difficult for local buyers to compete with foreign purchasers due to the fact that in most overseas countries interest rates are sitting at much lower levels than those available from Australian banks.

Going forward, what is important is that effective rules and regulations are put in place to protect Australian property markets from overseas investors who use Australian purchases for purposes that provide no real benefit to the domestic economy such as land banking or passive investment where there is never any intention to rent the property. Equally important is that foreign investment purchases are more closely monitored and administered to provide an accurate account of how many properties are being purchased, at what value and in which locations. This administration component is where the system has really failed and leaves the industry and decision makers with no evidence about the extent of foreign buying in Australia.

Do you think first home buyer grants an effective way of helping people get into their first home?

We saw last year that the Federal Government’s First Home Owners Grant boost was very effective in luring buyers to the market, culminating in the greatest number of first home buyers on record. However, we are firmly of the belief that the lowest interest rates in 49 years coupled with a significant fall in the gap between annual rental costs and annual costs of a home loan also added to the appeal. However, it is undeniable that the First Home Owners Grant has helped buyers get into their first home since its introduction in 2000.

What do you think should be done to tackle housing affordability?

In my opinion affordability issues arise due to the ongoing lack of new supply (particularly new supply at prices people can afford), a lack of infrastructure spending to make those affordable areas more appealing and the fact that Australia’s population is so centralised. New supply can be addressed through a reduction in government fees and charges on development, this would help to increase supply and as supply increases, the pressure on prices through lack of supply would likely also ease.

Infrastructure spending is critical – it’s all well and good to provide affordable land but most people work in the inner city and if they have no way of travelling to their jobs, nowhere to buy groceries, nowhere to eat, nowhere to send their kids to school, it’s going to be a hard sell to get people to move into an area. The centralised population also contributes to making property (capital city property in particular) unaffordable. Almost 61 per cent of Australians live in the country’s five largest cities (Sydney, Melbourne, Brisbane, Perth and Adelaide). In the USA, for example, the five largest cities in that country (New York, Los Angeles, Chicago, Houston and Phoenix) account for approximately 6.2 per cent of the total USA population. With mass centralisation, the demand and supply of jobs outside of the capital city is limited and the demand for housing, particularly at a time when population growth is so strong, also is very strong. With an insufficient number of houses this creates upwards price pressures in capital city markets.

Obviously a greater supply of housing and more infrastructure would be a good start but de-centralisation should probably also be considered. Whilst Melbourne does a better job than most capital cities, in most instances Governments are simply unable to supply the necessary services to cater to such a large population in capital cities. Therefore we should look at decentralisation, in particular of Government Departments in order to encourage jobs in regional areas. This would likely in-turn encourage population movement to these areas where affordability issues are not as great as they are in capital cities and people on moderate incomes can afford to own homes. With people moving to these regions, other business would probably be attracted to these regions as overheads would be lower and, no doubt, essential services and amenities would soon follow although many of these services would already be available in these areas in some shape or form.

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Tim Lawless

Tim Lawless is the Research Director at CoreLogic Asia Pacific. Tim has been in the Australian housing market industry for more than 20 years with a focus on research.