Analysis
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If you've ever spoken to a real estate agent, you would know there are only two scenarios when it comes to Australian property.
When the market is running hot, you need to get in quick. And when it's cooling, it's an opportunity to grab a bargain. Either way, there's never been a better time to buy.
Right now, Australian property is running hot and cold.
After nearly six years of either spectacular or frightening gains — depending on whether you own a home — capital city real estate is in reverse, particularly in Melbourne and Sydney.
But the trend is far from universal. In fact, it's downright confusing.
High-end property has been hit hard while less expensive real estate continues to advance. And while the two major capitals are in decline, regional values are not only holding up, they're stacking on gains.
In the three months to the end of April, Sydney, Melbourne, Brisbane and Adelaide all clocked up declines with Hobart the only capital to continue the kind of boom time gains to which we've all become accustomed.
Not only that, units are now outperforming houses, despite the huge surge in supply across our major capitals. Clearly, there is still strong demand for the most affordable housing.
The reasons? Some analysts argue last year's crackdown by the banking regulator on investor loans, who mainly use interest-only finance to maximise the benefits of negative gearing, finally is having an impact.
But that doesn't really explain these trends. Tightening investor credit was supposed to take the heat out of the market, particularly at the lower end. Clearly, that's not happening, at least not yet.
Photo:
High-end property has been hit hard while less expensive real estate continues to advance. (CoreLogic)
The property nightmare scenario
There are only two things that keep senior Reserve Bank officials awake at night; China and Australian real estate.RBA boss Philip Lowe has become increasingly vocal about China's massive debt mountain and the dangers it poses for Australia should it implode.
But our housing market is equally as unnerving. Our major banks have a decidedly unhealthy exposure to domestic real estate, with up to 60 per cent of their total loans allocated to Australian mortgages.
After being burnt by big business in the 1987 stock market meltdown, they decided en masse that real estate was a safer option and poured trillions of dollars into home loans, which we consumers happily lapped up.
Having splurged so much on homes, our household debt, at just shy of 200 per cent of annual income, ranks among the world's highest. Hocked to the eyeballs, it's no wonder our household consumption is sluggish, retail sales are struggling and inflation is anaemic.
The problem is, if Australian real estate declines in any significant way, it will put a serious handbrake on the economy.
When the value of your major asset is going backwards, you're less inclined to spend and less likely to be given credit. That, in turn, weakens the domestic economy which eventually leads to higher unemployment, mortgage defaults and, potentially, a banking crisis.
It's a scenario no-one wants to even contemplate.
Why governments love real estate booms
It's not just the banks who have a vested interest in keeping the property bubble bouncing along.Every layer of government has become addicted to the great Australian dream, which in the past 40 years has transformed from owning your own patch of dirt to making a motza from property.
The Federal Government needs rising property prices to maintain a stable economy while state and local governments feed off the enormous fees and taxes it generates.
Since the latest boom began in late 2012, a boom deliberately orchestrated by the Reserve Bank to absorb construction workers leaving the mining industry as the resource investment boom wound down, state and local governments have seen property revenues rise by 65 per cent.
Infographic:
A bar graph shows the increase in taxation revenue from property
by state and local governments over the financial years.
(Supplied)
So the next time you hear a politician talk about the need for affordable housing, don't believe a word of it. None of them offer any serious solutions primarily because they know there are only two options, neither of which are palatable.
Either property prices need to collapse, which would only occur as part of an apocalyptic economic event, or wages need to take off which no major party is likely to endorse. Everything else is just window dressing.
Photo:
If Australian real estate declines in any significant way, it will put a serious handbrake on the economy. (ABC News: Angela Lavoipierre)
How governments pull the property lever
While some bears have been predicting a crash in Australian housing for decades, the chances have increased significantly in the past 18 months.Global interest rates are on the rise which eventually will feed through to Australia and could put a significant number of households under stress, leading to higher defaults and lower property prices. Then there's the clampdown on foreign ownership, particularly Chinese investors, who were skirting the law.
But the biggest concern has been supply. The building boom, particularly in the eastern capitals of Brisbane, Sydney and Melbourne has been unprecedented, much of it in high rise apartments.
Cranes dot the skies above our eastern capitals like never before. In fact, Sydney — which accounts for half the cranes across the nation — alone has the equivalent of 80 per cent of the cranes across all of North America.
Melbourne has a little less than half that of Sydney. In both cities, cranes for residential construction at last have begun to decline.
Instead there has been a dramatic pick-up in crane use for commercial and infrastructure use, as governments belatedly attempt to provide infrastructure to service the huge growth in population.
Therein lies the key as to why our property prices keep rising.
While our politicians bicker and argue about border control and handfuls of refugees, Australia quietly has run one of the biggest immigration programs of any developed nation.
Our population has been growing at around 1.6 per cent per annum, second only to New Zealand and well above the OECD average of 0.7 per cent.
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