An oft-repeated mantra has been doing the rounds for the last few years – it usually goes something like:
“Negative gearing has restricted supply – greedy market speculators, Baby Boomers and Asian/Chinese buyers are bidding up the price of existing properties at the expense of our young.”
Or words to that effect – often emotive ones.
Residential construction to take off
What is presented as the damning evidence tends to include charts of the ratio of building approvals to the resident population, or the ratio of new properties to established properties acquired by investors.
Unfortunately these are misleading measures.
Mathematics dictates that the ratio of building approvals to population will natutally decline as the Aussie population increases towards 25 million and beyond.
And as the number of established dwellings in Australia ticks past 9.5 million, then so too will the ratio of new investment properties purchased to established dwellings decline.
While there is inarguably more than a kernel of truth in the notion that investor demand has driven prices higher, there are problems with the arguments put forth regarding constrained supply:
(i) as prices have risen many more residential projects have now become viable – and building approvals have in turn breached the highest level ever recorded;
(ii) 2015 and 2016 are likely to be record years for Australian dwelling construction;
(iii) the supply created by owner-occupier demand alone has been massively inadequate; and
(iv) a huge bulk of the new supply of properties is investment housing.
While the balance of loans is clearly skewed heavily towards investors at the present time, the upside is that this is also set to pump a record supply of housing.
The ABS released its Housing Finance data for the month of November 2014 yesterday.
Let’s take a look in four short parts.
Part 1 – Total value of housing finance breaks records
November 2014 saw more than $29 billion of housing finance reported.
Over the last three months of data more than $87 billion of loans have been written, which is easily the greatest quarterly value of housing finance we have ever seen in Australia.
On a seasonally adjusted basis the $29 billion written in November was a 1 percent decline on the October figure.
Naturally, therefore, the “Housing Finance Falls!” headlines almost wrote themselves.
A cooling market? Hmm, if you say so.
A glance at the data reveals that monthly housing finance has only breached $29 billion three times in history – and those three occasions were the last three months of data.
The rolling annual data, of course, continues to smash new heights by the month, and while that trend continues, expect dwelling prices to rise.
The value of investor loans being written – at more than $11.7 billion in November alone – is extraordinarily high, comprising well over 40 percent of the total housing finance for the month and ripping upwards by another 13 percent over the past year.
We will analyse the investor data in more detail and at the state level when the figures are released tomorrow, but for today let’s consider the owner-occupier figures.
Owner-occupier dwelling commitments are more mixed – refinancing ($5.5 billion) has soared by more than 18 percent but new owner-occupier loans ($11.8 billion) have softened.
One thing we can say is that the number of owner-occupier loans being written seems to have hit a plateau.
Part 2 – State by State
Much of the housing market is being driven by investor activity at present, and as such it is the inner suburban locations and property types favoured by investors which have been really thriving, such as in Sydney.
Which states are benefitting from rising owner-occupier demand?
Well, not many of them!
Owner-occupier demand is flat or declining in South Australia – where demand peaked way back in May 2013 – and also in Victoria, Western Australia, Tasmania and the Northern Territory.
Meanwhile the Australian Capital Territory is set to follow suit as the Canberra labour force is curtailed, although the ACT has only recorded one month of declining housing finance to date.
The below chart shows that the strongest demand for homeowner loans is to be found in New South Wales and Queensland.
In terms of the value of loans written for owner-occupiers, the story looks more promising, but in reality the charts for homebuyer demand are looking peaky outside New South Wales and Queensland.
Sydney, Brisbane and perhaps Hobart are set to record solid house price gains in 2015.
Our chart packs for Melbourne, Adelaide and Perth suggest relatively speaking flatter markets, while Darwin and Canberra now appear to be particularly fragile.
The monthly owner-occupier figures for Queensland since January 2011 show the gradually increasing strength of the sunshine state.
It is my belief that many market commentators will be wrong-footed by the state level housing finance data this year, particularly in the mining states.
No doubt the rapidly shrinking figures tumbling out of resources markets such as Gladstone and many of the Queensland coal mining towns and regions will act as a significant drag at the state level, leaving the data series appearing unremarkable in aggregate.
However this will act to mask rising demand from both homeowners and investors in Brisbane.
Part 3 – Who is buying new?
Back to the conundrum of who is creating new supply?
Well, it has not really been owner-occupier demand.
The figures show that the Australian population increased by nearly 400,000 persons in 2013, yet owner-occupier loans for new builds were utterly dismal by comparison – totalling fewer than 34,000 finance commitments for new dwellings, while owner-occupier construction finance loans totalled fewer than 65,000.
When the year-end data rolls around the numbers for new dwelling commitments will be little better for 2014.
The inconvenient truth is that without demand from investors – and particularly offshore buyers – the flow of new dwelling supply would collapse.
Could owner occupier demand alone get us up to 200,000 dwelling starts per annum?
Not a chance.
The strongest years for new dwelling commitments were 1976 and 1977, but even then rolling annual new dwelling commitments never breached 42,000.
The fact is the market needs both investors and owner-occupiers to purchase the new stock, or else dwelling supply is well and truly stuffed.
The value of new dwellings purchased surged nicely from 2012 forth, but now looks to have peaked.
To underscore the point, the below chart shows just how few new properties are purchased or constructed by owner-occupiers compared to established properties bought.
The happier news is that the number of properties being constructed is picking up in response to low interest rates, with owner-occupiers on track to see ~75,000 construction loans written in 2015, a marked increase.
There has been an 8 percent year-on-year increase in loans for dwelling construction, which is great news, particularly as residential construction has such a strong multiplier effect on economic activity.
Part 4 – Renovations
The total value of renovations has ticked only marginally higher, tracking at about a 4 percent increase from a year ago.
“Alterations and additions” remain strong in New South Wales, but elsewhere…meh.
Not much of a contribution to GDP growth to be found in this chart!
November 2014 was another huge month for housing finance with more than $29 billion in loans written for only the third time – with all three of those occasions being in the last three months of data.
Renovation activity remains moribund, but construction loans are breaking new record highs which bodes well for increased economic activity in 2015.
The standout market performer in 2015 is likely to be Sydney, with momentum now steadily building in Brisbane.
I’ll analyse where investors are buying in more detail when the data is released on Wednesday.