Property

PM’s $32b can’t fix housing without the private sector

The Albanese government will go to the next election with a worthy $32 billion worth of housing programs – and next to nothing to show for it.

Tenants will still be squeezed by high rents; mortgage holders will still be paying much more than they once hoped; and first home buyers will still face the daunting hurdles of high deposits and unaffordable repayments.

Which opens the way, either before the election, or in negotiations over a possible hung parliament afterwards, for popular but flawed silver bullet solutions.

The Coalition proposes to release super for home buyers; the Greens argue for a rent freeze; and many – most eloquently the Greens but also key crossbenchers and a strong cohort within Labor ranks – want changes to negative gearing and capital gains tax.

The debate over the taxation of housing has been revived by senators Jacqui Lambie and David Pocock, by Westpac chief economist Luci Ellis and, most recently, by the government’s National Housing Supply and Affordability Council in its inaugural State of the Housing System Report.

‘‘A gradual transition to a more consistent (tax) system across tenure types may contribute to a more equitable housing system,’’ the report says.

Today’s graphic, created from ABS data by Ray White Group chief economist Nerida Conisbee, shows how important private investors, supported by tax arrangements, are to Australia’s rental stock.

Changes over the next year will help housing markets before the election. A reduction in immigration, if it happens, would ease demand on rental markets.

Borrowers will benefit from the stage three tax cuts. Sameer Chopra, the head of research in the Pacific for real estate heavyweight CBRE, estimates that for a double-income family the July 1 tax change will provide another $110,000 in borrowing capacity.

And a dribble of housing openings will take place. In the past two months tenants have moved into 228 social accommodation homes in the Melbourne suburb of Prahran and into 130 affordable apartments in Sydney’s Macquarie Park, both part-funded by the Commonwealth’s Housing Australia and their respective state governments.

Nevertheless, the Albanese government approach, which is to increase supply, while correct, will not deliver enough homes to make a difference before the next election.

‘‘Housing affordability is expected to deteriorate further over the forecast horizon,’’ the State of the Housing System concludes.

Similarly, Treasury’s Budget Paper 1, which reported that dwelling investment declined in both 2022-23 and 2023-24, forecast no improvement in 2024-25.

‘‘Interest rates and elevated construction costs are weighing on the demand for new housing,’’ Treasury says.

The cycle will turn, with dwelling investment expected to jump by 6.5 per cent in 2025-26, but after the next election. ‘‘The government’s $32 billion housing plan will deliver the biggest investment in over a decade, enable construction of more homes, reduce red tape and planning hurdles, train the necessary workforce, and support Australians into home ownership and those in the rental market,’’ the budget paper says.

It’s a targeted suite of mostly supply-side programs, supported by many experts, and with a focus on the social and affordable housing sectors, which have been neglected for decades, and on the infrastructure and construction capacity needed to deliver new housing.

But it will take time.

Two of the landmark initiatives, the Housing Australia Future Fund Facility and the National Housing Accord Facility, which will eventually support the construction of 40,000 social and affordable homes, have been delayed in parliament, and the first tranche of funding – just finance approval, not even a start on construction – is not due to be announced until the September quarter.

Adding to the Albanese government’s challenge is a program, full of acronyms, like HAFFs, and NHAFs, which in my experience most lay people, and quite a few experts, simply don’t understand.

Eleven days before Treasurer Jim Chalmers handed down his third budget, the chairwoman of the National Housing Supply and Affordability Council, Susan Lloyd-Hurwitz, delivered the State of the Housing System Report.

Lloyd-Hurwitz says she is encouraged by the ‘‘concerted efforts’’ of the government and the ‘‘raft of reforms’’, particularly to planning, announced by states and territories.

Nevertheless, she says, the Albanese government is ‘‘unlikely’’ to meet its ‘‘suitably ambitious’’ housing target of 1.2 million new homes in the five years starting in July, ‘‘without further significant effort’’.

Lloyd-Hurwitz says ‘‘although this crisis is at its heart one about insufficient supply, there are many other contributing factors … (and) we should resist the temptation to see any one of these factors as the driving force’’.

She notes ‘‘the resumption of immigration at some pace, planning system weaknesses, rising interest rates, skill shortages, elevated construction company insolvencies, weak consumer confidence, cost inflation and low productivity in the construction sector’’.

The budget, to its credit, does not try for a silver bullet solution but does aim to address a number of those challenges.

Master Builders Australia chief executive Denita Wawn welcomes many of the budget initiatives but warns the industrial relations landscape continues to hold the industry back. She says the new industrial relations laws will cut almost 8000 jobs, and reduce new housing supply by 15,000 homes, over the next five years.

Damon Roast, the construction economist at cost management and advisory firm WT, backs the training initiatives to boost construction capacity – such as the 15,000 fee-free TAFE and VET places from January 2025 – but notes the additional trades will not be in place for several years.

‘‘On a three-year view, cost escalation in the building sector is set to increase around 5 per cent per annum across major capital cities,’’ he says.

The industry has welcomed the more than $5 billion in infrastructure funding, particularly for western Sydney and south-east Queensland.

Tom Forrest, the chief executive of developer lobby Urban Taskforce, calls the Albanese government’s commitment to funding the roads and water that underpin new housing a ‘‘Eureka moment’’.

‘‘The states need to build on this by removing, or reducing, a range of state government taxes and levies on new housing,’’ he says.

In particular, the NSW government needs to reconsider two new levies, the Sydney Water Development Servicing Plan and Housing and Productivity Contribution, which, on modelling by the Urban Development Institute of Australia, will add up to $80,000 to the cost of a new lot in western Sydney.

Those issues underline the housing challenge. All three tiers of government have much to do, but more than 90 per cent of the new homes needed will only happen if their development, construction and ownership is feasible for the private sector.

Robert Harley is a former property editor of The Australian Financial Review. He is at rob@rharley.com.au

PM’s $32b can’t fix housing without the private sector2024-05-17T16:44:18+10:00

The treasurer is telling a big fib

Treasurer Jim Chalmers stood in front of 600 guests at his post-budget speech in Parliament House yesterday and repeated a big budget fib.

This is not semantics or a small rounding error. The discrepancy is significant – worth tens and tens of billions of dollars in spending.

Chalmers claims he has successfully curtailed the growth in real (inflation adjusted) government spending to 1.4 per cent annually over six years. If he was actually achieving this spending restraint, Chalmers would deserve high praise.

This writer would be at the front of the line to shake the treasurer’s hand and would dedicate column inches to such fiscal discipline.

But the evidence of the Albanese government’s spending performance is very different, according to its own budget document. Real government payments (even discounting for the high inflation rate) are on track to be up 4.5 per cent in the year ending June 30.

Next year, real spending growth is forecast to be 3.6 per cent, before any election goodies and further ‘‘unavoidable’’ spending surprises. Labor’s track record so far is about triple the 1.4 per cent claim.

Chalmers uses two routes to get to his claimed 1.4 per cent average over six years.

First, he includes minus 4.9 per cent in 2022-23 – a cut in real spending due to the unwind of COVID-19 stimulus in the previous year.

Second, he is counting on projected weaker spending growth beyond 2025. This is unrealistic and will never be achieved because it allows for no future new spending, including for elections.

The budget projects real spending growth of 1.8 per cent in 2025-26, 0.8 per cent in 2026-27 and 2.4 per cent in 2027-28.

I called the treasurer out on this at a pre-budget press conference last week, and was prepared to let it slide if he stopped boasting about it.

But yesterday he brazenly stood up in the National Press Club speech and repeated it to a big, important crowd, saying Labor was ‘‘restricting real spending growth to an average of 1.4 per cent, compared to 4.1 per cent under our opponents’’.

The former Coalition government’s spending included $300 billion of pandemic stimulus. Labor supported this, and in some cases advocated for additional outlays.

Stripping that stimulus out, the Coalition’s pre-COVID-19 spending averaged 2.1 per cent real growth over seven years, according to economist Chris Richardson, similar to the 2 per cent real spending growth cap Chalmers’ old boss, former treasurer Wayne Swan, admirably set as one of his budget rules, before breaching it.

Chalmers has imposed no such spending rule.

As an aside, Chalmers is right that shadow treasurer Angus Taylor is being deceitful by criticising tens of billions of dollars of extra spending from the automatic indexation of welfare payments and pensions. This would occur under both sides of politics. Indexation is not a real spending increase.

Nevertheless, federal spending as a share of the economy is forecast to hit 26.6 per cent of GDP in 2025-26. Take out the pandemic years and this is the highest since the mid-1980s.

It’s higher than the Rudd government stimulus during the 2008-09 global financial crisis, and it’s due largely to cost blowouts on the National Disability Insurance Scheme and aged care under the former Coalition government and now Labor.

The only government that achieved sustained spending restraint was Labor’s Bob Hawke and Paul Keating in the late 1980s – three years of real spending going backwards by about $100 billion a year in today’s dollars.

Until there is any evidence of Chalmers and Finance Minister Katy Gallagher delivering on the claimed low spending growth, the treasurer should stop repeating the disingenuous claim.

The treasurer is telling a big fib2024-05-17T16:41:52+10:00

HOW TO BUY OVER THE BORDER

Property Investors from Sydney and Melbourne are increasingly looking further afield in the hunt for value. But how do you go about buying in an unfamiliar property market?

When looking to buy an investment property, Sydney homeowner Alex De Muelenaere didn’t consider buying in his own backyard. Instead, the 35-year-old CFO of emissions accounting business Pathzero looked north, recently settling on the purchase of his first investment property – in Brisbane.

De Muelenaere is among a new wave of Sydney and Melbourne investors eschewing their home states to invest further afield. He says strong interstate migration, the relative affordability of property and the capital growth tailwinds expected to accompany the 2032 Olympics were the key drawcards of the Queensland capital.

With a focus on capital growth over yield, he bought a four-bedroom, two-bathroom house in the coastal suburb of Thornlands, around 45 minutes south-east of the CBD, for $920,000, with the assistance of Brisbane buyer’s agent Colin Lee, founder and chief executive of Inspire Realty.

De Muelenaere says using Lee gave him local expertise in an unfamiliar market as well as ‘‘boots on the ground’’. As a result, he was aware the property was for sale before it was listed and was able to secure it – all without leaving Sydney.

With the median dwelling price in Sydney hitting $1.15 million in April and Melbourne’s investor appeal suffering under the weight of some of the highest property taxes in Australia, investors from Australia’s two biggest states are casting their eyes elsewhere.

Data from REA Group shows 23 per cent of all property inquiries on realestate.com.au came from interstate buyers in 2023, a figure that has been rising steadily recently after hitting a low of 11 per cent during the pandemic. South Australia and Queensland attracted the highest amount of interstate interest, with 29 per cent and 27 per cent of inquiries coming from interstate buyers, respectively, followed by Western Australia.

Lee says that more than 90 per cent of his clients looking to buy in Brisbane are from interstate. ‘‘The fact that Brisbane has been outperforming all capital cities bar Perth is a really good story,’’ he says. ‘‘There’s obviously a lot of talk around the Brisbane market having not only the Olympics, but the emergence of more employment because of that. Plus, there are a lot more migrants – not only interstate but international migrants moving to Queensland.’’

Likewise, Adelaide buyer’s agent Katherine Skinner, director of National Property Buyers, reports ‘‘a huge increase’’ in interstate investors over the past four years. She says the majority are from Melbourne or Sydney and have between $600,000 and $700,000 to spend. ‘‘The buy-in price is still reasonable, and the rental yields are still strong,’’ Skinner says of Adelaide’s property market. ‘‘Adelaide is seen as a market that grows year-on-year, and we don’t tend to have downturns. That said, we don’t historically see huge double-digit swings year-on-year either.’’

Real estate agent Linton Allen, from Perth’s Empire Property, has also observed a ‘‘noticeable uptick in interest from interstate investors, particularly from Sydney and Melbourne’’. Alongside its comparative affordability, Perth ‘‘offers robust rental yields, making it an attractive option for cash-flow-focused investors’’. Historically subject to the fortunes of the mining industry, the Perth real estate market is benefiting from government investment as part of the AUKUS submarine pact and Allen says the diversifying economy means there’s a ‘‘growing optimism around capital growth prospects’’.

Herron Todd White’s April Month in Review report suggests that both house and unit prices across Brisbane, Adelaide and Perth have further to rise.

Picking the right location in an unfamiliar market can be challenging. As with any property investment, the starting point should be the outcome an investor wants to achieve.

‘‘Investors should start with clear goals: are they seeking capital growth, rental yield, or a balance of both?’’ Allen says. Lee says another factor to consider is the buyer’s appetite for renovation to add value or whether they prefer a ‘‘set and forget’’ property. Skinner encourages her clients not to focus solely on rental yield because if they do, they ‘‘tend to sacrifice capital growth in many areas within South Australia’’.

Locations close to amenities with a high ratio of owner-occupiers to renters and below-average rental vacancies are a good place to start.

Lee’s top picks in Brisbane for investors with less than $1 million to spend are Flinders View, Shailer Park and Aspley. For those with a budget of more than $1 million, he tips Carindale, Wavell Heights or Balmoral.

In Adelaide, Skinner recommends Royal Park, Albert Park, Happy Valley and Aberfoyle Park for investors on smaller budgets and blue-chip suburbs such as Prospect, Norwood, Kensington or Unley for those with a budget of $1 million-plus.

In Perth, Allen says buyers will get more bang for their buck by heading inland away from the river or coast. He picks Hamilton Hill and Spearwood for investors with less than $1 million and Beaconsfield for those with bigger budgets.

Naturally, Skinner and Lee suggest that investors will find it easier to navigate an interstate property market and achieve a better result using an expert such as themselves. But using a buyer’s agent is also recommended by Allen, who sits on the other side of the transaction.

He says interstate investors in Perth should ‘‘100 per cent’’ use a buyer’s agent, unless they are expats or very familiar with the state. ‘‘WA stands for ‘wait awhile’ – it’s a big country town and if you’re not from here, it’s a bit of a different world.’’ Allen says a buyer’s agent can help to ‘‘navigate local regulations and nuances, and potentially get you access to off-market opportunities’’.

Lee says the value a buyer’s agent can provide is in the ‘‘art’’ of property buying, providing feedback about the street, neighbourhood and community, rather than the ‘‘science’’ or figures behind a property purchase.

In Skinner’s experience, around a quarter of her interstate investor clients have tried to buy in Adelaide themselves before turning to her for help. ‘‘They have quickly realised that the advertised prices do not equate to property values’’, a quirk of the Adelaide market that makes buying ‘‘very challenging’’ for the unfamiliar.

Variations in the sales process between different jurisdictions is a key risk that unassisted buyers also face, and yet another reason why tapping into local expertise can be useful.

For example, in Adelaide once an offer has been accepted and a property goes under contract, there is typically a cooling-off period of two business days, during which time buyers will get a building and pest inspection and have the sale contract reviewed, Skinner says. ‘‘Only after your cooling-off period has expired do you actually make your deposit payment. So it’s a very different process to other states, and it is one that many clients get a little bit confused by.’’ She adds that while 10 per cent may be the standard deposit, the amount paid is more often a figure agreed on by vendor and purchaser.

‘‘The purchase process in Perth shares similarities with other Australian cities but with local nuances,’’ Allen says. For example, while offers are often made subject to finance approval and a building inspection, there is no mandatory cooling-off period in Western Australia. ‘‘A lot of people from the eastern states say ‘we’ll pop an offer in’. Well, if your offer’s accepted, subject to finance, that’s it. We’re locked in. You can’t ring me four days later and say ‘oh, we’ve had more of a think about it, and it’s all too hard’,’’ he says.

In Brisbane, offers are usually made subject to a finance approval and building inspection period of 14 days, Lee says, with a nominal deposit of a few thousand dollars payable on the acceptance of an offer, followed by a more typical 5 per cent deposit amount when the offer becomes unconditional. ‘‘Sydney and Melbourne are quite different markets altogether. They’re way too hot for any seller to allow for a subject to finance and subject to building and pest offer. You’d have to typically do all of that prior.’’

Opinions are divided on whether it’s essential to visit the location where you’re considering buying. ‘‘Many investors purchase sight unseen, relying on comprehensive virtual tours, local contacts like real estate agents and buyer’s agents, and detailed building and pest inspections to make informed decisions,’’ Allen says.

But Lee cautions that it can be dangerous to rely upon photos or videos provided by the seller’s agent. ‘‘They work for the seller, so of course they are only going to sell the good bits.’’ He recommends his clients visit before making an offer on a property.

‘‘The majority [of our clients] would have never seen their investment,’’ Skinner says. While this is not problematic in the case of investors using a buyer’s agent, she adds that if a buyer doesn’t have someone on the ground who can inspect the property on their behalf, they could be opening themselves up to a huge amount of risk.

‘‘It’s astounding how many people will put offers in sight unseen and not get a building inspection either,’’ Skinner says. ‘‘We might look at the same house, and it would not even be something we would recommend to our clients because the photos are very different to what you’re seeing in person.’’

Once purchased, managing an interstate investment property needs on-the-ground support, Skinner says. ‘‘It would be a very dangerous game trying to manage from interstate yourself and not understanding the legislation here in South Australia in terms of tenancies.’’ Allen says a local property management company and a good handyman are essential. ‘‘Staying informed about local market conditions is crucial for long-distance investment success,’’ he adds.

Lee suggests investors get three rental appraisals on their property from local letting agents and ask them questions such as how much experience they have, how many properties they’re managing, what their fees are, how often they conduct inspections and how they assess prospective tenants. SI

HOW TO BUY OVER THE BORDER2024-05-07T08:43:59+10:00

Financial risk warning as more home owners struggle

Home loan hardship applications jumped ‘‘materially’’ in the past year, and the risk posed to the economy by stretched borrowers ‘‘warranted ongoing close attention’’, the regulatory group in charge of the financial system urged.

The Council of Financial Regulators said there was an increase in ‘‘the share of households who had fallen behind on loan payments’’ and that its members – the Reserve Bank, Treasury, banking regulator and market regulator – ‘‘expect some further increase in the period ahead’’.

Loan arrears advanced at their fastest for at least two years in January, from historically low levels.

‘‘Hardship applications had risen materially over the past year,’’ the council said in its quarterly statement issued yesterday. ‘‘Risks to the Australian financial system from lending to households warranted ongoing close attention but remain contained.’’

The council said the risk to broader financial stability hung on the outlook for inflation and unemployment.

‘‘Risks to household balance sheets, and in turn financial stability, would increase if inflation were to remain high for longer than anticipated or if labour market conditions deteriorate more than expected,’’ it said.

The jobless rate ticked up to 4.1 per cent in January, from 3.9 per cent in December.

The council said bank lending standards remained sound ‘‘despite the competitive lending environment’’, which is heating up again with a rise in below-the-line discounting.

Banks increased their provisioning for bad loans, last month’s profit updates revealed.

National Australia Bank, for example, said credit impairment costs rose 17 per cent to $193 million in the December quarter. Westpac announced a $189 million impairment charge for the first quarter, 47 per cent higher than the second half average.

Ninety-day arrears – the most at risk of default – rose 9 basis points to 0.95 per cent at Westpac in the October-December. At NAB, the number was steady at 0.75 per cent of its home lending book.

‘‘The last leg of this tightening cycle could prove to be the most challenging, as savings are depleted, unemployment rises, and higher interest rates continue,’’ S&P warned last month.

The council also said that, despite the challenging conditions in commercial real estate, the risks were contained ‘‘due to banks’ low exposures, conservative lending practices and the relatively strong financial positions of . . . owners’’.

Stress in overseas commercial real estate may, however, bleed into Australia because of the concentration of foreign ownership in the local sector, and the council said it would continue to monitor the situation.

It also stressed the importance of government and industry collaborating to ‘‘ensure the sustainable arrangements or cash distribution in Australia’’ as the only major distributor, Lindsay Fox’s Armaguard, warned it needs more funding to stay afloat.

Financial risk warning as more home owners struggle2024-03-13T16:47:09+11:00

NSW tops states with the highest rent increases

Surging rents fuelled by housing supply shortages have pushed rental affordability to its worst level in 17 years and will keep pressure on inflation for some time yet, a new report warns.

Lower-income households are being hit hardest by rising rents, and the poorest fifth – those earning $49,000 per year or less – would need to pay more than 25 per cent of their pre-tax income for any advertised rental, data company Proptrack said. It defines affordable rent as accounting for less than 25 per cent of a household’s pretax income.

The rate of rent increases was expected to remain high in an undersupplied housing market, making it even tougher for the Reserve Bank to bring inflation back to the middle of its target range, Proptrack senior economist Angus Moore said.

‘‘The rapid pace of rent growth we’re seeing has been adding to inflation, particularly since rents are quite a sizeable part of the CPI basket,’’ Mr Moore said. ‘‘Given that advertised rent growth has been quite strong, and tends to lead growth in average outstanding rents, we’re likely to continue to see rents making a solid contribution to inflation for a little while yet.’’

Rent inflation hit a decade high of 7.8 per cent last year and has remained above 7 per cent since, Australian Bureau of Statistics data show. This has meant rent’s proportion of the CPI basket grew 6.03 per cent in January, an increase of 28 basis points from the same time last year.

Rents surged 11.5 per cent in calendar year 2023 after growing 15.6 per cent in 2022, Proptrack data show. To start 2024, national median advertised rents have risen to $600 a week from just over $400 in 2020.

Rents at the most affordable end of the market have increased by 43 per cent in the past five years, compared to 30 per cent for the most expensive rentals. This equates to a 10th percentile rental going from $280 per week in 2018-19 to $400 today.

Mr Moore called for more rental support for low-income renters such as Commonwealth Rent Assistance, following similar calls from developers, think tanks and housing groups in recent months.

‘‘Without support, renting would be impossible for many of these households given their incomes,’’ he said.

Grattan Institute’s Brendan Coates in January urged the Albanese government to increase funding for the rent assistance scheme by 22 per cent, on top of a 15 per cent rise in last year’s budget.

It’s not just the poorest households struggling with affordability, as median-income households could only afford four out of 10 advertised rentals compared to being able to afford 60 per cent of listings three years ago.

NSW was the least affordable state for renters. Rental affordability has deteriorated significantly in NSW over the past three years and is at its lowest-ever level after median rents rose to $700 a week. As a result, a median-income NSW household can only afford to rent about three out of 10 properties advertised.

This was followed by Tasmania and Queensland. In Tasmania, a household earning median income for Tasmania – equivalent to approximately $79,000 per year – could only afford to rent one in five advertised rentals, the lowest share of any state.

Queensland rents, meanwhile, have surged 45 per cent in three years, leading to a median income household for the state – about $107,000 – only being able to afford three of 10 properties advertised across the state.

Victoria was the most affordable state when comparing rents to residents’ incomes, due to its rents declining the most during the pandemic lockdowns and more homes being built relative to other states. A median-income Victorian household can afford more than 50 per cent of listings.

NSW tops states with the highest rent increases2024-03-12T16:41:44+11:00

No quick fix for housing problems

If it wasn’t already very clear, yesterday’s big miss on building approvals is more evidence that the thorny problem of increased supply in the housing market won’t be solved anytime soon.

The latest data was so bad – the 1 per cent fall in January took building approvals to a 12-year low, and detached dwellings were down 9.9 per cent in a month – that it probably should be treated with a grain of salt; there seems to be a lot of seasonal noise in economic data at the moment.

Still, when we take yesterday’s numbers alongside last week’s residential construction data, which showed the pace of home building is slowing (from an annual rate of 11.4 per cent in the middle of last year to just 0.7 per cent in the December quarter) then the federal government’s hopes of building 1.2 million homes in five years already start to look distant.

And of course, with supply still weak and demand from population growth strong, it’s no surprise that house prices are gaining steam again. The latest CoreLogic house price data showed prices in February rose 0.6 per cent month-on-month, up from an average of 0.3 per cent in the previous three months. Auction clearance rates have been stronger in the past four weekends than in late December 2023 and Domain’s latest data showed a record low for the national rental vacancy rate.

HSBC’s local chief economist, Paul Bloxham, forecasts house price growth of 3 per cent to 6 per cent across the year, predicting the construction sector’s struggles will limit supply, strong employment will limit distressed sales and arrears, and the demand impulse from population growth won’t fade quickly.

But while the wealth effect from higher house prices – and indeed a local sharemarket that keeps eking out fresh records every few days – might warm the cockles of the hearts of Australian households, Bloxham wonders if there’s another side-effect we need to start considering: rising house prices and higher rents are not typically a recipe for RBA rate cuts.

He sees three key concerns.

First, renewed growth in house prices may be taken as a sign that the household sector is holding up reasonably well in the face of 13 official rate increases. This column would throw the rise in equity markets (which will flow through to higher retirement payouts and higher savings) as further evidence that financial conditions actually look pretty good. Clearly, the ‘‘average’’ experience across the economy masks some real pain out there among younger, more indebted households, but the RBA cannot set rates for this cohort alone.

Second, Bloxham says the RBA will be rightly wary that an undersupplied housing market will mean rents remain a strong contributor to inflation. Governor Michele Bullock has repeatedly raised concerns about the stickiness of services inflation, and rents are the key challenge here.

Third, Bloxham argues that the RBA may be wary of ‘‘pump-priming a housing market that is already heating up’’ by delivering rate cuts. ‘‘In short, there is some circularity in current events, as expectations for rate cuts may be fuelling a housing price rise, but, at the same time, the housing price upswing may be making those rate cuts less likely. Our central case is that rate cuts are unlikely in Australia in 2024.’’

We’ll get another piece of the rates puzzle tomorrow, when December quarter GDP data is released. Consensus is for growth of 0.3 per cent quarter-on-quarter and 1.5 per cent year-on-year, but economists unanimously raised the prospect of a negative reading after other economic data released yesterday showed a substantial drop in inventories across the economy.

With productivity stuck in low gear and the employment market still strong, weaker GDP growth is needed to bring down inflation. But Bloxham says the undersupply in the housing market is evidence that the economy is probably ‘‘still operating beyond its sustainable rate’’. And that may make it harder for the RBA to cut.

Another factor for the RBA to watch is the Federal Reserve’s view on rate cuts. Softer economic data out over the weekend has prompted traders to adjust their bets such that markets now expect the Fed will cut rates by 86 basis points in 2024, from 77 basis points last week. It’s worth noting that the year began with markets expecting 150 basis points of cuts.

Torsten Slok, chief economist at US private capital giant Apollo Global Management, now predicts no cuts in 2024, as strong consumer spending, strong investment by companies and a strong labour market keep inflation sticky. Clearly, financial markets see this as an extreme view. But if the Fed was to stay on hold, the RBA may be even more confident about following suit.

No quick fix for housing problems2024-03-08T16:19:46+11:00

Tax rise ‘last nail in the coffin’: agent

Property manager Carmen Littley says she has lost 52 investor clients since the Victorian government targeted landowners with extra levies in its budget last year, which she describes as the ‘‘final nail in the coffin’’ for many owners.

She warned that property investors leaving the market would further hit rental stock because owner-occupiers tend to have fewer people in a house than renters, which could potentially further increase asking rents.

Land tax increases piled up alongside the fastest interest rate rising cycle in a generation and local government rate rises, said the agent, who is based in the western suburb of Werribee.

‘‘There’s no incentive to invest in property in Victoria,’’ Ms Littley said. ‘‘Landlords have been targeted to pay off the state’s debt, so it’s a no-brainer. The land tax increases were the final nail in the coffin.’’

Victorian Treasurer Tim Pallas last year said the COVID-19 debt levy would hit ‘‘those most able to pay’’, extracting $4.7 billion from property investors over the next four years, along with $3.9 billion from businesses with payrolls above $10 million.

Landowners would pay an average of $1300 in extra land tax, although tax experts said the change equated to a $1675 increase on land worth $1 million. Family homes are exempt. Economic research organisation e61 released a report this year showing Melburnians face the highest stamp duty in Australia.

The tax slug, which hit 380,000 additional landowners, will raise $4.74 billion over the forward estimates by cutting the tax-free threshold for land tax from $300,000 to $50,000, imposing new yearly flat fees and increasing the rate of tax payable on properties over $300,000 by 0.1 percentage point.

One of Ms Littley’s clients, Marcel-line Parker, moved to sell her two-bedroom investment unit in Werribee this week after receiving a land tax bill for $975 on her property which had total taxable value of land of $112,000.

‘‘The land tax was the final blow. Just because you have an investment property, it doesn’t mean you’re loaded,’’ the office administration worker said.

‘‘The state government has us by the you-know-what. It’s not worth it.’’

Geoff White, a real estate agent for Barry Plant with a focus on apartments at Melbourne’s Docklands, estimated that half of investors selling out were doing so because of ‘‘unsustainable’’ costs including land taxes and owners’ corporation fees.

CoreLogic research director Tim Lawless said 31.7 per cent of new mortgages written in December in Victoria were for investors, which was below NSW at 40.7 per cent, and the national average of 36.2 per cent.

In addition to higher land taxes in Victoria, other cities such as Perth and Brisbane offered higher yield, better growth and lower buy-in prices for investors than Melbourne, he said.

‘‘There is absolutely a risk of flight from Victoria,’’ he said.

Property Investments Professionals of Australia director Richard Crabb said the industry body’s annual investor sentiment survey released in September showed Victoria was the least attractive state for investors in the nation. It also found that 25 per cent of respondents sold at least one investment property in Melbourne in the 12 months to August last year — the worst of any capital city.

Tax rise ‘last nail in the coffin’: agent2024-03-08T16:17:18+11:00

Record number of borrowers at risk of mortgage stress, report says

Borrowers in Western Australia are 20 per cent more likely to fall behind on their mortgages, according to S&P Global Ratings, which found home loan arrears rose in the December quarter and are likely to worsen.

While overall major bank arrears remain low – averaging 0.91 per cent of loans across the economy – the Reserve Bank’s 13 interest rate increases and its 4.35 per cent cash rate are starting to bite. Roy Morgan, in a separate report yesterday, found a record high 1.6 million people, or 31 per cent of borrowers, are at risk of mortgage stress.

‘‘The last leg of this tightening cycle could prove to be the most challenging, as savings are depleted, unemployment rises, and higher interest rates continue,’’ S&P Global Ratings said.

‘‘Financial prudence might no longer be enough for some households, leading to further increases in arrears in the months ahead.’’

At its interim results this month, Commonwealth Bank said it was supporting more than 7000 home loan customers in formal ‘‘hardship’’, including providing options to suspend mortgage repayments or to move to interest-only repayments.

That came as CEO Matt Comyn indicated that the first official rate cuts might not materialise until next year.

Borrowers who are not making repayments appear to be staying in their homes for longer than in past economic cycles, as banks seek to minimise the scrutiny that comes with calling in their loans, says Field Research director Stewart Oldfield.

In the biggest markets of NSW and Victoria, mortgage arrears are stable. In NSW, the proportion of borrowers more than 30 days late on repayments was 0.96 per cent in December from 0.94 per cent in July 2023 and 1.01 per cent in November.

But in WA, more borrowers are behind: 1.19 per cent are more than a month overdue, although this had improved from 1.50 per cent in July last year. The best performing state is Tasmania, at 0.48 per cent.

CBA this month said official rate rises were being unevenly felt, as savings were depleted faster for younger borrowers. Savings of customers aged between 25 and 34 were down 2.4 per cent year-on-year and for the 35 to 44 band, savings were 2.1 per cent lower. They rose for over 65s by 6.5 per cent.

Roy Morgan said the number of mortgage holders considered ‘‘at risk’’ of mortgage stress had surged to a record on the back of the Melbourne Cup Day rate rise in November. The 1.6 million at risk – defined as borrowers who allocate between 25 per cent and 45 per cent of their after-tax income to repayments – has increased by 802,000 since May 2022, when the RBA began tightening.

If the central bank raises rates by a further 0.25 percentage points next month, this will push a further 16,000 borrowers into the risky category, the group estimates.

The number of mortgage holders considered ‘‘extremely’’ at risk – allocating more than 45 per cent of their income – is now almost 1 million, or 19.8 per cent of borrowers. The average over the past decade is 14.3 per cent.

NABank last week said its quarterly cash earnings had dived by 16.9 per cent amid an economic slowdown, reflected in rising mortgage arrears and a $193 million impairment charge.

Record number of borrowers at risk of mortgage stress, report says2024-02-29T16:40:12+11:00

Suburbs where house prices fell $200k in three months

House prices in some of the country’s most desirable suburbs have slumped by as much as $207,000 in just three months, dragged down by the ongoing weakness in the upper end of the housing market, data from CoreLogic shows.

By contrast, house values in some of the middle-priced suburbs and those with low stock levels jumped by up to $315,000 over the same period.

CoreLogic research director Tim Lawless said the upper end of the housing markets in Sydney and Melbourne continued to weaken, while the middle to lower end stayed relatively resilient.

Over the past three months to January, the top 25 per cent of Sydney’s housing market by value has dropped by 0.2 per cent, extending its 0.1 per cent fall in the previous three months.

In comparison, the middle segment of the market posted a gain of 0.6 per cent, while the lower quartile rose by 0.2 per cent.

Similarly, in Melbourne, the upper end led the decline, with values falling by 0.5 per cent, while the lower end dipped by 0.4 per cent.

Mr Lawless said the more affordable end of the housing market could see faster growth once interest rates started falling.

‘‘Lower interest rates will have a broad-based benefit as it lifts borrowing capacity for everybody, so in that sense, it floats the entire housing market rather than just one individual area,’’ he said.

‘‘But I think we could see a more pronounced impact in some of those markets where households are more sensitive to interest rates, such as the middle to lower end of the marketplace.

‘‘We could see a real pickup in first home buyers taking advantage of the lower rates alongside a lot of the concessions or incentives that exist in the marketplace as well. I think a lot of people will also be trying to take advantage of the Sydney and Melbourne markets where prices have dropped below their recent record highs.’’

Sydney’s northern suburbs and upper north posted some of the largest declines in house values in the past three months.

Houses in Newport on the northern beaches tumbled by 7.3 per cent in value, slashing $207,474 from the median to $2.62 million. Narrabeen, Bayview and Bilgola Plateau also lost more than 5.3 per cent, or around $154,000. Lindfield, East Lindfield and East Killara on the upper north shore also recorded sharp quarterly declines in house values, falling by 5.5 per cent, 5.3 per cent and 4.8 per cent respectively. Their medians are now lower by around $176,000 on average.

In Melbourne, house prices across Brighton, Caulfield North, Malvern and Caulfield fell by at least 4 per cent, shedding up to $178,000 in median house value.

House prices in Brisbane’s inner-city suburbs Teneriffe, Alderley and Wooloowin fell by 1.8 per cent on average or up to a $61,900 drop in their median values.

By contrast, house values in some middle-priced and tightly held suburbs bucked the slowdown and posted healthy gains in the past three months.

In Sydney, Haberfield in the inner west clocked the largest increase of 6.8 per cent or a nearly $200,000 lift in the median to $3.08 million. Neutral Bay and Mosman on the lower north shore also notched up sharp quarterly increases of 6.5 per cent and 5.7 per cent respectively, adding $201,643 and $315,391, to their median house price respectively.

Sydney-based real estate agent Thomas McGlynn of BresicWhitney said buyers had become price conscious in the past three months.

‘‘We saw a real flight to value, that’s why we’re seeing good growth in some pockets of the inner west, where houses are still priced lower than their premium counterparts,’’ he said.

‘‘Some expensive suburbs such as Mosman simply have no stock, so buyers have to compete fiercely when a property comes on the market, pushing prices even higher.’’

In the regions, the towns where house prices plummeted the most in the past year have bounced back strongly in the past three months, according to CoreLogic. Richmond-Tweed towns Lismore Heights, North Lismore and Lismore logged at least 8 per cent house price gains.

House prices in Mortlake in regional Victoria and Leyburn in regional Queensland increased by 6.2 per cent and 8.1 per cent respectively.

‘‘The lift in house prices in those regions could be a sign that more buyers are taking advantage of the fact some of these areas have become a bit more affordable after their recent price declines,’’ Mr Lawless said.

Suburbs where house prices fell $200k in three months2024-02-05T15:33:24+11:00