2019: Residential Property – The Year Ahead – Part Three
Last week’s content was devoted to the complex impact that housing finance is today exerting on Australia’s residential property market. A fortnight earlier the lack of market confidence and battered buyer resilience were my starting points, and yesterday’s mid-day fog across coastal and inner-city Sydney was an interesting reminder of the ‘market-fog’ I suggested as characterizing market conditions.
Yesterday’s fog, given the weather conditions was not a complete surprise among experts, but it did spook the city, only to dissipate and clear later in the day. Time will tell if the same comparison rings true for local property markets by the end of 2019!
This week’s content, and the final post for this year, draws together a summary of perhaps the most complex set of market influences I’ve seen for more than a decade. All combined and making any sort of predictions for 2019 a fascinating task.
With such a lot of material to canvas I’ve settled on three sets of core topics; buyer motivation, big picture drivers and the physical market. To me this makes predications for 2019 a little more tangible and avoids too much theory which, I’ll leave to more hardheaded economists to debate.
I’m starting with buyers because they are after-all what the entire market is about, if we have no buyers we have no market, simple.
People buy a home or rent for a few core reasons including the fact that owning a home reinforces that idea of social and personal ‘success’. That success also counts when things go wrong, when people rely upon the security of home. That security is not diminished by a mortgage, as a majority of Australians with a home-loan give their repayments priority. These core motivations cross all generations including millennials.
Renting on the other hand is still seen as a stop-gap measure, although that is changing, but slowly. Longer residential leases and better-quality housing will be part of this change.
While none of these motivations may come as surprise, I find myself asking the question, in all of the talk and reaction to the banking sector have we lost sight of these basic motivations, and it’s worthwhile considering a hypothetical but realistic example.
A young couple looking to buy a home, both are working, but they plan to start a family, one parent will move to part-time employment, for a few years, they will also adjust their lifestyle for a while, if you like tightening their collective belts.
They are planning a future and buying their own home is part of that future. Surely how they get there, what changes they make, how much help they get from their own parents, is a plan and a judgement they can be trusted to make.
Right now, I think there’s far too much focus on ‘the smashed avocado theory’ and not enough on the core motivations that have always driven the housing market.
The Big Picture
For the first time in many years a handful of big picture factors are having a strong impact on the residential property market and I’d nominate; population growth, infrastructure and finance/tax reform.
Each of these topics are at a crucial point in Australia’s development, they are somewhat related, and they will all have a big impact on the housing market in 2019 and well beyond. They are already weighty issues in next year’s Federal and NSW elections.
Population growth is an emotional topic, but for all of the wrong reasons and it’s worth focusing on one fact that appeared as comment in a recent AFR editorial ‘it took one of Australia’s most sensible demographers, Peter McDonald, to spell out that a smaller intake of newcomers means a less vibrant economy.’
For many reasons we need population growth and generally governments support a bigger Australia. Sydney’s current problems with congestion and the entire city turning into a construction site, can be traced back to 2000 when the then Premier Bob Carr, put up the ‘house-full’ signs. It’s a mistake we should learn from and not repeat.
Infrastructure is unequivocally tied to population growth and when the two get out of synchronization and become miss-aligned we have trouble on our hands.
Infrastructure is vital to how our cities and towns; industries and economy operate. A lack of planning or a do-nothing approach should not be confused with or solved by narrow calls to reduce population. Quality infrastructure is vital to expand the housing market and allow areas to be developed where people want to live which, refers us back to buyer motivation.
At this time last year, I suggested that the poor delivery of infrastructure would become a key issue in 2018 and it has. In Victoria that government may have been re-elected on its related promise to improve infrastructure. While, in NSW the current government may be defeated because of poor execution and cost over-runs on the very same agenda.
These two contrasting outcomes show the perils of neglecting infrastructure and for the housing market that extends to build-to-rent housing as well as better roads and facilities to accommodate bigger urban populations.
Last week I discussed this topic in detail. Across 2019, finance will not so much be linked to interest rates, but to how soon the banks start to adopt reasonable lending standards and how home finance markets change and evolve, with interest rates at a 30 year plus low, it’s hard to see any further cuts having a big impact on demand.
While, it’s also hard to see the prospect of increased rates in 2019, even in 2020, home-buyers will still benefit from low rates however, further inflation of prices is not a prospect.
The bigger factor in 2019 will be tax policy and reform. There’s been almost endless debate for several years focused on negative gearing and capital gains concessions. And while, we appear closer to having a clearer policy from both the political parties, this is not the only policy issue impacting property markets.
Taxation policy also needs to cross into the broader issues of reform and that includes the various tax-takes from the property sector and the market distortions from state government stamp duty on property transactions. Planning red-tape and planning complexities and delays should also not escape attention.
Negative gearing is sometimes characterized as impacting housing affordability however, we are already seeing the market fix affordability.
Property investors among all classes of investors have been painted the baddies of the market.
It is however, rarely noted as one letter to the AFR recently pointed out, interest payable on loans is taxable income in the hands of the lenders and there are other revenue streams to government from property investors. These include land tax, local government rates and all of the expenses associated with a property that directly generates GST revenue.
And so, to 2019
The external factors around the market in 2019 are complex, I have only highlighted some key points which leads me to suggest the following will be key predictions for 2019:
- The housing market will take the full year to start to steady however, over-supplied areas will suffer well beyond 2019
- Housing finance will re-shape and new players will emerge, but perhaps not at current super-low rates
- The housing choices of baby-boomers will have a big impact on demand, product type and finances both directly and indirectly
- Tax reform will remain disruptive and painfully slow
- The demand for development sites will be driven by very competitive prices with most acquisitions staying ‘on-ice’ until 2021
- Housing affordability (for both buyers and renters) may well see government intervention, not only via infrastructure but more directly (labor have already announced such a policy direction)
- Product diversity will be key in driving new developments and equally across land, housing and apartment projects.
Let’s start with investors. Investors will return to the market in 2019 however, what we will see is pressure to build new projects that are not so much budget-driven but designed to satisfy the needs of long-term investors and long-term tenants.
Quality will be a basic requirement and the quick-flip of property will be far less a factor in the market, if at all.
The general level of competition between developments to attract buyers will see quality further improve, both in terms of scale of the built form but also in the level of internal amenity and quality.
As the unstoppable trend towards apartment living continues, driven more by families and right-size (down-size) buyers, smaller boutique developments will be in high demand.
Baby-boomers will be among people who have to trade their existing homes, even at lower prices, leaving behind larger homes for an easier lifestyle. In some cases. their existing homes will become development sites in this same cycle.
Pockets of opportunity will continue to be developed in close association with the completion of new infrastructure projects. Lifestyle will be key, and this factor will also see our cities continue to engage and attract Asian based buyers.
Many of the points bring me back to buyer motivation. All of the varied circumstances touched upon do not mean that prices will not rise again but, that will depend upon meeting the fundamentals which have always driven house prices; economic stability, population growth and household formation.
These are all factors we should not forget, forecasts and predictions, as I said three weeks ago are always fraught with danger, but that’s my best assessment for next year.