~ Newsletters - Property Prices

Unemployment and House Prices

nospam@example.com (Dr Peach) — Tue, 28 Jul 2009 18:02:00 +1000

Australian house prices don't look to be going down soon, but different areas have different experiences in the years to come. If you're looking to buy a home, you're going to want to buy where growth will be stronger, and try to steer away from the places where it will be weaker.

There are a gazillion different reasons why prices in one suburb will perform differently to others, but today I want to talk about unemployment.

Australia may be fortunate compared to our peers during this crisis, but we're still resigned to the prospect of rising unemployment. It's also a sad truth that this unemployment will be felt in some places more than others. Some areas have more people in sectors that get knocked around in recessions, like manufacturing or retail or have residents with less skills to sell. They also can have more people in part time and casual work, and are easier for companies to let go. Some already have higher unemployment, meaning job seekers are less likely to find work through social networks when many of their peers have no work.

In places like this, house prices are likely to suffer relative to more fortunate suburbs with stable industries and access to employment. There may be forced sales as laid off workers cannot meet their repayments, which can drive prices down. Potential home buyers already in the area are less likely to want or be able to take out a mortgage without job security and potential buyers from outside the area will be worried by the lack of opportunities.

Of course, having volatile employment industries also means that these suburbs may have higher price rises in the good times, but many, if not most of us, prefer a little stability in our assets.

You may think it would be quite easy too see what suburbs will suffer and avoid buying property there. They'd be the same places with the same intractable problems going back decades. Places “everybody knows” are bad news. The story has more twists than that though.

Researchers at the Urban Research Program at Griffith University and the Centre of Full Employment and Equity at the University of Newcastle have created the Employment Vulnerability Index. This index looks at thousands of different suburbs across the capital cities and also regional centres. Using census data to determine the characteristics of the suburbs, it shows which unfortunate places are likely to bear the brunt of unemployment.

There are a few things to take home from this. We do see that suburbs like Cabramatta in Sydney, Dandenong South in Melbourne and Loganlea in Brisbane are “red alert” risk for job loss. These suburbs have been associated with disadvantage before and we can see why they are likely to suffer again. There are lower levels of post-secondary education, and thus skills to sell. They're also in the manufacturing regions of their cities as we can see by the higher than average proportion of people in those industries. The Bonds experience has already shown what can happen with these jobs. But areas that have experienced strong growth before the crisis are also at risk. This is even if they are educated (e.g Ettalong Beach in NSW) or haven't before experienced disadvantage (such as Epping in Mebourne and Morayfield in Brisbane). Besides manufacturing, industries like retail and construction are also at risk in a recession (which explains the Government stimulus towards these areas), and anyplace where a lot of these workers live is likely to see more unemployment and lower house prices.

It only takes a quick look at the maps to these how these at risk suburbs tend to cluster in bands in the outer suburbs.

Like I said earlier, there are a gazillion reasons why prices perform differently in different suburbs, and unemployment is just one. The location of inner city suburbs like Haymarket in Sydney or Melbourne probably means that the properties will remain attractive despite resident's potential to lose jobs. Nonetheless, employment risks are a very important factor to keep in mind when considering how your housing investment may perform in the future.

Property Price Hedonic Index

nospam@example.com (Dr Peach) — Thu, 18 Jun 2009 18:52:00 +1000

Well we all want to know; where are house prices heading? As some wag once said, predictions are difficult, particularly about the future. But I’m starting to think of coming out from underneath my rock. I’ve always been a conservative property investor and so sold all my investment properties while prices were still rising. I didn’t make squillions – because I didn’t sell right at the top - but I got Peach going on the proceeds of my profits, so I’m not complaining. All the houses I bought starting in the mid 1990s made healthy profits.

I’ve been waiting out both the top of the boom and now the anxiety of the bust. But I’m starting to think the worst is over and if you choose your property well and you’re investing for the long term, it’s time to venture back in the market. Don’t expect super returns, but I’m hoping to make good solid returns by investing for the long term.

We’ve seen blood running in the streets in some overseas markets – like the U.S. and Spain and Ireland. Back home in Oz, we hit the top of the market sooner, and overall prices haven’t moved much in several years

Steve Keen, an unorthodox economist whom I respect, has been preaching doom and gloom for a long time now, but he looks like he'll need to lace up his hiking boots having lost his bet with a mate of mine Macquarie Bank economist Rory Robertson. Well, where have prices gone already this year? First we need an accurate measure. Until recently house price series were based on median prices. This meant that if more luxury houses were sold one month this could drive up the median price, even if those houses were actually being sold for less than they’d been bought. Likewise median prices might fall where flocks of first home buyers were buying cheaper places in the suburbs even if, in their ardour they were driving their prices up. The RP Data–Rismark Index avoids this by being a 'hedonic' index, which takes into account the features of the homes being sold, such as size and location, so different times and even different cities can be compared far more accurately. The Index for the first four months of this year showed prices rose by 2.8%. This has effectively wiped out the losses of last year. But what is behind this growth? If it's the extension to the First Home Buyer's Grant, could we be just staving off the decline with a mini-bubble? There are some good reasons to think not.

The RBA has had a great deal of space to reduce interest rates, and it has used it. As Rory Robertson points out, the rate cuts are worth $27000 over three years on a $300000 loan. That's a lot more than the $7000 boost, and a lot more than U.S. homebuyers received from much smaller cuts to rates by the US Federal Reserve – cuts that were not passed on by lenders as effectively as they were in Australia in any event. This has also emboldened buyers who were holding off whilst rates were rising. Importantly, the RBA had the advantage of seeing what happened overseas before it happened here, and had time to act. Property prices could fall if there simply isn't a need for the housing that exists. As Nouriel Roubini pointed out in the US, “When supply increases prices fall” and the US and Spain now have far more homes than families. The First Home Buyers Boost has probably created a pricing bubble in that end of the market while the recession and fears of unemployment will keep the market subdued, in Australia we have been under supplied with housing for several years and while the success of the first home buyers boost has taken some heat out of the rental market the long term outlook indicates strong rental demand. And for those who want to buy, our banks are well capitalised and still keen to lend money to all but the most highly geared borrowers. People are still wary and given the global machinations there seems good reason to be spooked! But there are powerful forces here keeping prices up. We may not be headed for another boom, but we don't look headed for a big bust. And the market is starting to respond in the way one would expect. The more than halving of the RBA’s cash rate, together with a feeling that at least in the financial markets the worst may be over, is starting to send property prices in a familiar direction. It might be time to get back on board.

I hope to have some exciting news for Peach clients interested in locating worthwhile investment property in the next few months. Until then, or at least until my next newsletter, best wishes to you and yours.

Will prices fall - that depends on where and when you purchase

nospam@example.com (Dr Peach) — Mon, 09 Apr 2007 16:44:00 +1000

I don’t know if you’ve noticed yet but starting just three or four years ago a New Zealand property developer has begun an international campaign that’s having quite an impact – and it’s something that you need to know about whether you just own your own home or you’re a property investor.

I ran into Hugh Paveletich – the New Zealand property developer in question – in my role as an economic consultant. After I expressed interest in a website he helped establish he put me on his ‘drip’, which is to say his e-mailing list. Rarely a day goes by without being ‘bcc’ed into an e-mail intended for the media and anyone else he can influence pretty much anywhere in the English speaking world – but particularly in the antipodes. I’ve since lunched with Hugh and his wife on one of his trips to Australia and he’s a nice fellow.

As Hugh looked at the New Zealand property market he thought how ridiculous it was that land cost so much when New Zealand had so much of it – per person that is (per sheep it’s a different story – but I digress!). Hugh got thinking about all those policies that go under the name of ‘smart growth’. They sound pretty well and good. Contain cities to certain limits so they don’t gobble up all the farms in the area in a massive urban sprawl. Increase density, limit spending on roads and increase spending on public transport so that it’s more viable. In fact when you look closely at these policies they come with heavy costs. I won’t go into detail on all of them here, but suffice it to say that I think Demographia has done us a service pointing to many of them.

Hugh and his partner in the US – Wendell Cox – produce figures on all the major cities in the English speaking world on their Demographia website and they recently released their third annual report into housing availability (and prices!) in the USA, the UK, Australia, New Zealand and Canada.

They argue that where house prices are high – like they are in our capital cities, they’re high not primarily because of increased demand for them, but because regulation – particularly the inadequate release of land for housing on our urban fringes – has starved the market of supply.

Australians might be surprised to learn that Sydney, Adelaide, Hobart. Perth and Melbourne made it onto Demographia’s list of least affordable cities. The report found that on average Australian houses cost 6.6 times annual household incomes. According to Demographia, anything more than 5.1 is ‘severely unaffordable.’

What lends striking credence to the Demographia view of the world is that cities of similar sizes have very different price levels and this is particularly where they regulate land differently. Take Austin Texas and Perth WA. Both cities are rapidly growing, and both have populations of 1.5 million. But whereas Perth’s multiple median has sharply risen over the past five years from 3.7 to 8.0, Austin’s multiple has actually fallen over past ten years from 3.3 to 3.1. This means houses in Austin are more affordable today than they were ten years ago.

The difference, Demographia contends, lies in Perth’s stringent land zoning regulations that monitor and restrain growth on the fringe. And the same conclusion is drawn for all 159 cities surveyed: ‘Where there is constraints on the supply of land for residential development housing inflation has occurred…Where there are no such constraints housing cost inflation has not occurred.’ Demographia’s answer to the crisis in housing affordability is to free up the regulations governing land release. When supply is balanced with demand, they argue, prices will fall.

Now if Demographia is correct, then all those first home buyers have something to get angry about – it’s politicians that are making that first home so difficult to buy – or at least its what politicians do which is regulate the release of land. And investors – well the Demographia message for them can be boiled down into one word – risk! If Demographia are right and they get their way and politicians ease up on land release on the outer fringe then maybe our house prices will start to fall from over 6 times average earnings back to around 3 where Demographia says they should be. But the consequences are scary: investors home owners will lose their shirt. Red ink from property investors will be running in the streets.

So what’s all this mean for your property investments – existing and future? Well like lots of other inputs into your thinking, this is just something to be kept in mind. The implications could be huge. But I doubt they’ll be all that great. I have little doubt that if Sydney or any of our capitals converted to Texas’s style of land tenure house prices would fall – perhaps a fair way. They don’t regulate land release on the fringe like we do. And they have fewer restrictions on redeveloping your block – about which more in a moment.

At least one right leaning think tank – the Institute of Public Affairs – has geared up for a campaign for greater deregulation of land use. They and the Housing Industry Association are sponsoring the Great Australian Dream campaign to secure greater land release. John Howard is jumping on the bandwagon but it’s not his area – it’s the states (strange how he never misses an opportunity to pass the buck to the states).

I expect all this activity will have some impact – indeed it already has in Victoria which has looked at ways of releasing more land notwithstanding its own previously announced plans to lock more of it up. But somehow I doubt that there’ll be a torrent of new land released. And Melbourne’s house prices are slowly heading up, not down.

Rory Robertson of Macquarie Bank thinks Demographia’s work is too one dimensional. He argues that Dermographia fails to factor in the significant and interactive roles played by low interest rates, negative gearing, the halving of the Capital Gains Tax, and immigration: ‘Record levels of immigration and population growth have been a key factor in putting upwards pressure on house prices’. In the past twenty years has seen immigration grow at a steady rate of 100, 0000, a year. That’s another million people who need houses.

Robertson points out that in its list of affordable cities all are North American cities, all were inland, and most had comparatively low populations. It is not news that most people would prefer to live in New York or Sydney rather than in Buffalo or Dubbo. The choice for Robertson is between ‘dull’ or ‘sexy’. Still I found Demographia’s comparisons between Austin and Perth and Houston and Sydney more pertinent. Yes, Perth and Sydney are on the water and so can’t expand as efficiently as inland cities – which can do it around all 360 degrees from the city centre. But can that really explain why Houston’s houses cost around 3 times annual earnings while Sydney’s are around three times that?

But will the release of land brings about a fall in inner city housing prices? Robertson doesn’t think so: ‘Releasing new housing land and building homes faster on our outer fringe is unlikely to produce significantly lower city average house process, ’ For ‘those who want to live in the inner city but can’t afford it shouldn’t hold their breath,’ land release is unlikely to be the quick fix they are waiting for.

And Demographia is pretty silent on what those real estate agents will tell you it’s all about – location location location. The divide is not just between desirable and less desirable cities, but within cities themselves. The desire to live closer to the centre is based on infrastructure as well as life style choices, but inner city aspirations, the lure of location, is also responsible for driving up prices. First home buyers often buy on the fringe and then when they became wealthier and/or become ‘empty nesters’, often ‘trade up’ to be nearer to the city. And as Robertson points out, any survey of median prices fails to distinguish between the value of inner city property and that on the fringe.

The American literature tells us that an important driving force of property prices is the difficulty of getting redevelopment permissions in inner city areas. This is an Achilles heel for Demographia. Because it is a political campaign as much as a research outfit, Demographia is keen to acquire allies in its fight. It seems supportive of the suburban lobby groups campaigning against redevelopment. Groups like Save-our-Suburbs often argue that they are resisting ‘forced densification,’ which occurs in the inner suburbs as part and parcel of the ‘smart growth’ philosophy. But a major force for densification (I’d guess it’s more important than any policy of ‘smart growth’) is increased demand for housing in inner city locations. The Save-our-Suburbs crew seem to me to be almost the antithesis of Demographia’s free market philosophy.

And they’ll be supporting all those restrictions on redeveloping your block if you own a house in Hamilton, or Double Bay or Toorak. So my expectation is that property prices of well located and serviced suburbs will continue to rise, and indeed that now is not a bad time to buy. But do keep an eye out for the issues that Demographia raises – both as a citizen and as someone who owns or is interested in real property. And watch out for land on the urban fringe. If you buy in, remember that some of it’s value comes from an ‘artificial scarcity’ which could be undermined with the onward march of free market ideas (where they’re convenient for their advocates that is).