Australia's Housing Shortage: Is it just an urban myth?

I have been accepting as "fact" for 8 years that Australia has a housing shortage. But what if that was not the case. Would you still buy a home? Is that the question?
Investment Banker Mortgage Stanley recently released research that pointed to Australia actually having a glut of housing, rather than the much touted housing shortage we have all heard about that keeps growing like an evil magic pudding.
Admittedly, I have heard about this housing shortage since 2003 and wondered where all the tent cities were being erected in Australia to justify these claims.
Maybe we will see fake one's sprouting up all over Australia soon?

Housing Shortage, Fact or Myth:Australia goes from an estimated 228,000 housing shortfall to a 341,000 home glut in the time it takes to produce a report!

So how did we get this 569,000 housing turnaround in weeks?

There has to be a reason that house prices have not collapsed in the wake of the GFC.

The estimated 228,000-home shortfall, cited by everyone from the construction industry to economists at the major banks as evidence for why prices remain so high, may, in fact, be an excess of 341,000 homes, according to Morgan Stanley.

Whether the new figures are accurate will only become clear in time, as house prices either level off because real estate is scarce, or prices fall and attract more scrutiny about the fundamentals of the market.
But what if there are other reasons why home prices are staying high in the gloom. Here's a few.

1. Real estate is worth what someone else will pay you for it. People have not been willing to pay what many buyers want, but...
2. Real estate is also worth what you are prepared to let it go for if you are selling. When people have not been able to sell at the price they want or even need, they are hanging on to it.
3. If you have a job you can afford the mortgage till things come good. In Australia's case the job market never went bad, so people can hang onto property for longer.
4. If you hang onto to the old property, then real estate agents are not going to be happy, because you don't effect your sale, and you therefore can't buy the next home. This is exactly what is happening.
5. People are now hanging on to their homes longer and their mortgages longer.
6. From a generational point of view, people are living longer and staying in their homes for longer. And the Government assists this with carers and other services to help people stay out of nursing homes longer.

But the all-important nature of house price movements underscores a bigger issue: we simply don't know what impact elevated property prices have on other aspects of the economy because we don't have a long history of clean, robust and comparable data to rely on.
But I will give it a try here.

1. When you pay too much for a home, you have to hang onto it for longer or risk going underwater.
2. When you pay too much, your mortgage is bigger than it should be. That makes banks happy and rich and that means that you pay more of your income in mortgage repayments than you should be, for the next 30 years. That causes a thing called mortgage stress. As these things have happened then we can say people have paid too much for their homes in the recent past.
3. Are they still paying too much? That will be clear in 2 years time. If prices go down, then yes they are still paying too much today.

In Australia, there is no clear, undisputed authority of information in this area crucial to the economy.

In the US, the S and P Case-Schiller index, which measures changes in prices of the same properties over time, and that is only 25 years old. So where do investment gurus pull 100 year figures from?
The problem I have with any long range figures is that they only rate the homes that are still standing,and over 100 years maybe more than half the housing stock may be demolished. SO counting just the best ones that are left is a hardly a way to determine the appreciation of housing generally. Its taking a generalisation and making it specific. But what about the home that was bought, and later demolished. Surely its worthless. When these homes are included in the overall picture, actual returns are lower.

In Australia, Residex's repeat sales index goes back to 1991, in the middle of a Sydney house price correction on 17% pa interest rates just before the two-decade run-up in house prices began.

One thing for certain is that it is unwise to expect the "boom conditions" to persist indefinitely. That is a interesting term. I thought the boom finished in 2003 and we got ripples in 2006, and last hurrah in 2010?

In 2010, Reserve Bank governor Glenn Stevens appeared on breakfast TV to warn viewers it was a mistake to ''assume a riskless, easy, and guaranteed way to prosperity is just to leverage property''.
That advise I was giving out from 2005, but nobody wanted to listen back then. That's why home prices went too high. Are they still too high. Well RBA Governor Stevens says no, they are not.

Source; Mr Mortgage

Mortgage Interest Rates to Fall

Australia's mortgage interest rates are set to fall in February, with many experts predicting that further rate cuts may be expected later in the year.

Mortgage Rates are too high and have to come down.

I have been saying that Mortgage rates are too high ever since the RBA raised its official cash rate in November 2010. 

But then again I have also been saying that land prices are way too high, and have been for ten years, and this is the main reason why established homes are higher than they should be. So to lower housing prices, I guess that the RBA's intention may have been to quell demand for new home construction loans.
Whatever their reasoning high mortgage rates have lowered home building starts dramatically through 2011.

Why has housing demand disappeared?
So what happened to the pent up housing demand? Its seems to have evaporated.
I recall experts saying that there was a housing shortfall of 200,000 dwellings. Well nobody is saying that anymore.
And as we build less homes, house prices are falling, and home sales taking longer?
2012 is shaping up to be a time when home buyers can get real value for money, and home sellers are going to have to lower their house price expectations, yet again.
The bottom line is that the best time to buy a home is when everybody else is try to sell a home.

Home buyers Tip
So if you are considering buying a home in 2012, then take your time, and wait for a bargain in house price, location and quality.
Also, only consider buying a home with a long term view of home ownership. Longer than 5 years.
Whilst history tells us that the long term trend in house prices is up, in this housing market there may be a protracted period of prices flat-lining or trending lower. Protect your investment by shopping hard and negotiating on price.

Author: Rick Adlam, Mr Mortgage

Housing Market-Australia needs to reduce the cost of land for new homes to improve housing affordability

Is increasing land supply the real key to bring down house prices?

Australia's housing market is a key driver of the domestic Australian economy. This article attempts to shed light on the true cause of our high home prices and that over priced land is the the real cause of our our over priced homes.

The case for massive land development for new home construction

New homes not only provide work for hundreds of thousands of construction workers and tradies, they are the main customers of hardware, timber, roofing, and concrete industries.
Once a new home is built there is a flow on demand for cabinetry, curtains and blinds, kitchen equipment, stoves and appliances, furniture, tiles and carpets, landscaping and out door living, with patios, sheds, swimming pools and spas. Yes, its big business and it drives much of the big ticket retail spending in Australia.

This is the type of spending that has stopped in recent months, and the reasons are obvious, New home sales are down, especially in flood affected Queensland.

Is Housing Australia's biggest asset?

The housing market has a $4.2 trillion capitalised value

Housing construction is at a 12 month low, and that theretail sector is having the worst period in 20 twenty years, we can quickly see that the two powerhouses of Australia's domestic economy are connected, and that when new home sales fall, so does retailing.

In fact I would say that there is also a smaller connection with established home sales and retail sales of house hold items, simply because moving home creates new needs for home buyers that these retail sales satisfy.

The problem for Homeowners credit over supply is being reigned in.

In case you haven't noticed f you are a homeowner, expect to see your home values shrink. SInce the 1970's House prices have risen above inflation and income growth. The main driver was the baby boomers buying their first home, their second home and until recently, investment properties.

Many baby are now slowing down, and are cashing in to downsize, become grey nomads or retire. In the future these homeowners will move to retirement villages and nursing homes.

Average home prices in Australian capital cities fell 2.1 per cent in the March quarter, according to the Australian Bureau of Statistics.
This will continue as baby boomers leave the housing market, sell off their investment properties and hit the road as grey nomads. Their spending patterns will change dramatically once this occurs.

The impact of the GST on House Prices

The GST and first home owners grant was a major driver inflating house prices
The worst thing that the Howard Government did to house prices was the GST. Besides lifting house construction prices instantly, it also drove many older small builders out of building and into early retirement.

That was followed by the First Home Owners Grant, which added fuel to the home prices inflation fire.

Many people point to the First Home Owners Grant as the problem for raising house prices. They forget that this was brought in because of the GST to compensate the first home buyer for increases in the cost of building a home, brought on by the GST.
One or the other would have increased prices of all homes, The two together created a boom for real estate sales that rippled through the past decade. That caused the interest rate hikes we have to wear now.
When you consider that this was at the same time as the last wave of the baby boomer effect in 2002, a perfect storm for inflation was created. Now the new first home buyers have to pay for all of that, and many are not interested in homeownership. They have better things to do with half their take home pays.
After all, renting is cheaper, and you can invest the difference in a liquid investment, and with the recent figures of falling house prices and the Reserve Bank of Australia's  constant threats to raise interest rates, its easy to understand why new home buyers are being over cautious.

Land inflation the hidden cost of new homes, not construction costs

As I have been saying for some time, GST have increased new home costs, as have the increased requirements in building codes around Australia. But these have added little to the cost of a new home. The main cost increases have been due to land cost increases and Government charges on land development.The drivers for those increases ate the First Home Owners Grants at the same time of land development shortages and deliberate scarcity sales tactics by land developers.

In the year 2000 a block of land was around $70,000 [or less]. In 2010 the cheapest block on the Sunshine Coast was $294.000. Yet land was not supposed to have GST on it!If you leave things to the "free market" you will get ripped off.

Some say that Australian houses are ''overvalued'' and should be halved. I don't believe that homes in Australia are over value is nearly as high, or that house prices will fall much more than they have already. But they are too high right now.
But our house prices being the world's highest, does not make sense, given our abundance of land. Our home values are above that of Hong Kong. But we have abundant land and Hong Kong is a tiny island and has land scarcity. Can you see something wrong with this?

Housing demand is elastic. It depends on the home prices.

Can you remember when people were saying we were 200,000 home short of what we need?Well what happened to all those house buyers? They have evaporated
Some would argue that house affordability is driven by interest rates, others by supply and demand, others by incomes.
I believe that these are silly arguments. As we in Australia have abundant land on which to build, it does not make sense that land prices are too high and in short supply.

Government needs to step in and ensure Land is developed to exceed housing demand if it wants homes to be affordable.

We cannot expect private enterprise to fix this, because land developers benefit by high prices, and high prices are driven by scarcity, which they use to keep prices too high.
Also we can't expect builders to build homes before they have house buyers, with the purpose of lowering house prices. That would not make sense.
What is required is a Government plan to oversupply the residential housing land market, for sale at half the current prices and restrict the size of homes, rather than have covenants for ever larger homes.
This will boost home building, and mean that first home buyers will choose a new home over an established one, and this will reduce established home prices. So interest rates will have little effect and affordability will not be a limiter.
We are spending too much on homes and banks are getting the biggest benefit, because the proportion of our wages are been received by banks.

The solution to Housing Affordability and reviving the building industry is halving land prices.

The solution is to bring home prices down over the next 5 years, and the way to do that is to massively oversupply the amount of land available to build on at half the price currently offered. This policy would ensure that mortgage stress is a thing of the past and that housing affordability is never an issue for new home buyers.
Source: Mr Mortgage

Will house prices really go up 20% over the next 3 years?

House prices are predicted to grow between 9% and 20% over the next 3 years. Mr Mortgage disagrees. Here's why.

Experts are rarely good at predicting the future because their minds are full of facts from the past. I have a problem with future house price forecasts and it is this almost never materialises.

When you have someone who has a vested interest in the result [QBE is a house insurance player] then take house price forecasts with a grain of salt.

A QBE "survey" compiled by BIS Shrapnel says house prices will growth between 9 and 20 per cent in Australia's capital cities over the next three years. Really? So I guess that means that you should be paying 9% to 20% more for your insurance then? I see!

The biggest problems I see with House prices forecasting using median house prices

1. The median price is not an actual price. Any house price survey relies on the notion of the median price of a home. These are the homes that are sold.
2. There are two problems with this.
   1. Many homes sold are new, and therefore are usually better than an established home and worth more to buyers.
   2. Most established homes are dolled up prior to sale [paint jobs, renovations, staging and the like]. They are "pushed" and "promoted" and "marketed" to fetch a higher price. Even then many are not currently selling.

We need a segmentation of median house prices

At least if we got a segmentation of house sales [new apartments, new homes, established homes etc, I would be more comfortable believing these figures. That won't happen because the output is designed to deceive buyers and sellers to believinghouse prices are higher than they are.

Here's an example of how median house prices distort true values.

A new apartment block is released for sale with the penthouses at 2.2 million a piece, and apartments from $400,000.

One of the penthouses is sold, and two older units down the road sell for $220,000.

How median house prices are calculated

The median house price is $2.64 million divided by three. That gives a median unit price of $880,000! Whilst this may seem a silly example it is how median house prices are calculated.

Home buyers might begin to believe that the older units down the road are worth more than $220,000, and the $400,000 are worth more too.

Can you see why median house prices is not a good guide?

What about interest rates affecting housing prices?

Australia's housing market [some say housing bubble] has so far fared better than most parts of the US and the UK markets.

In the US for instance they have 30 year fixed interest rates retailing at under 5% pa., and they could go lower to help keep people in their homes, let alone prop up the housing market. No such luck here in Australia.

Australia's mortgage interest rates will rise over the next twelve months

We face a home mortgage interest rate in Australia of over 8% over the next 12 months.

Whilst the "experts say fix your mortgage interest rates now, that's fine if you are buying now or if you have a variable mortgage already. If you are buying in 12 months time that is not going to help you because I believe that rates will be as much as 1.25% higher than they are now.

Result? I see "median" house prices moderating, and home prices for Joe average softening over the next 12 months.

What Mr Mortgage believes.

Anytime is a good time to buy a house that is well priced and what you need to live in, and is affordable, if you intend to live there for more than 5 years. If not its better to rent and invest the savings and housing costs. If you are an investor, there are better places to park your money.

Australia's "Housing bubble" will not pop but lose some of its froth and just shrink to a less inflated size.

Lower returns for property investors, and more certain yields and easier picking elsewhere will keep investors out of the housing market, and moderate home values.

Future house prices will not be a mirror of our past. The RBA has it eye on house prices and the board will do what ever it takes to keep a lid on the housing market to ensure affordability for future home buyers.

The baby boomer influence has run its course in the general housing market, and as they move out of established housing this will take more heat out of house prices.

Author: Rick Adlam Mr Mortgage

How low will house prices go in 2009

Recovery in house prices in the UK will be a long way off.
This past year will go down in the UK as the one in which the housing market raced from boom to bust.
In the autumn of 2007 prices began to fall each month as the international banking crisis took hold.
With the mortgage supply drying up, house sales have now slumped by more than half, first-time buyers have increasingly been driven from the market and the construction industry has plunged head-long into recession.
Building sites have been mothballed, thousands of workers laid off, and millions of unsold bricks are now being stockpiled around the country. And if the surveys by the Halifax and the Nationwide are anything to go by, house prices will end this year between 15% and 20% lower than they started - easily the biggest annual slump on record. About £30,000 has already been knocked off the selling price of the average house in the past year, and people have stopped borrowing extra cash against the now deflating value of their homes. So what will 2009 bring? More of the same or the beginning of an upturn?
More falls to come A year ago many experts were predicting that prices would be flat this year or might even rise a bit. Those views were rapidly outstripped by events. Now most commentators believe that prices will continue falling well into 2009, indeed maybe for the whole of the year. "We will expect prices to continue to fall because of the economic conditions; you wouldn't expect the market to turnaround in those conditions", says the Nationwide's chief economist
Fionnuala Earley, referring to the growing recession. Her counterpart at the Halifax, Martin Ellis, echoes that view. "We are comfortable with the view that there will be a 20% fall over 2008 and 2009". So if prices fall 15% this year, will they drop by just 5% next year? "We don't want to be too specific about next year," he replies.
Both lenders in fact will publish their formal house price predictions, with more specific figures, in the next few weeks and so will the lenders' trade body the Council of Mortgage Lenders. It recently described making short term house price predictions in the current market as "futile". But CML spokesman Bernard Clarke says it will stick its head above the parapet again soon. "We are going to be publishing something before the year end but we are currently working on it," he says. "Prices are likely to keep falling, at least in the early part of the year." Recession The economic downturn is one obvious factor that might help to push prices lower.
The availability of money remains restricted - which is where the key lies
Jonathan Davis, a chartered financial planner at Armstrong Davis, and spokesman for housepricecrash.co.uk says next year reality will kick in, even more than in 2008. "Next year prices will fall by 15-20% because unemployment is kicking in, house repossessions will rise rapidly and houses will go through auctions at previously silly prices - and banks aren't lending," he predicts. After forecasting the end of the house price bubble for several years, his worst predictions now seem to be coming true. "By 2010 prices will be significantly lower than the peak in late summer 2007; if they fall 15% next year then that will take us to 68% of the high point - a 32% fall," he points out. The key factor in the slump so far has been the rapidity with which the mortgage tap has been turned off, as banks and building societies have found they simply have much less money to lend. The industry is keeping its fingers crossed that the government's attempts to bail out the banking system, along with cuts in interest rates, will eventually see more money flow to borrowers. "Things are very fluid - credit is still in very short supply; interest rates are coming down quite sharply; and Libor is also coming down," says Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics). "So the cost of borrowing is falling, but the availability of money remains restricted - which is where the key lies." "And in truth no-one knows when that will change," he adds. Higher sales? The possibility that the mortgage market may free up a bit is hinted at by the Nationwide. HOUSE PRICE Predictions for 2009
It has just raised a further £1.5bn to bolster its finances by selling bonds to international investors, backed by the government's recently launched guarantee scheme for lending institutions. Rics, which is also working on its formal forecasts for next year, points out that there are some indications that sales, if not prices, might pick up next year. "Looking at our surveys, transaction levels do seem to be close to a floor and buyer enquiries are picking up, which is very significant, so there are potential buyers out there" says Mr Rubinsohn. "Prices will slip in the first half of the year and maybe all next year as well, but sales may pick up over the course of 2009." An even more optimistic view comes from Ray Boulger of the mortgage brokers John Charcol who reckons that house prices will stabilise by the middle of 2009. "The significant cut in rates will have a stimulating effect because some will see this as an opportunity to buy," he says. "Prices will drift in 2009, with the rate of decline reducing, and for the year as a whole will be broadly unchanged with a fall of 4% in the first half and a recovery of a similar amount in the second half." "Human psychology and the desire to buy a property is out there," he believes. Insurmountable problem For the moment Mr Boulger is in a minority. The leading economic consultancy Capital Economics has long predicted a big fall in house prices which, in its view, had risen far too high to be sustainable. Its housing spokesman Ed Stansfield is not about to change his tune, and predicts more of the same in the next 12 months. "There is not much evidence that the mortgage market is freeing up so I think we will see another 15-20% off prices in the coming year, so a one-third fall will have happened in just two years, reflecting the deterioration of the economy in the past year," he says. "Potentially base rates coming down may spark a revival of buyer interest, but the scale of the problem is beyond the government and I don't really think there is anything it can do," he adds. What about those efforts by the government and the Bank of England to make life a bit easier for banks and their borrowers? "Whether sentiment can be turned round when the chancellor and the governor of the Bank of England are saying there is a recession on the way is debatable," he says, pointedly.