A house or a home? Finding value in Australian residential
Transcript of A house or a home? Finding value in Australian residential
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A hous e or a home? F inding value in A us tralian res idential
propertyAnthony Street
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R eal hous e pric e index
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Real house price growth in Australia
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Is it a bubble?
• “If we think about property prices .... you wonder how they are going to be afforded because these prices are getting quite high” Glenn Stevens, RBA, (on Sunrise March 2010)
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Is it a bubble?
• “The price of housing typically trades about 3.5 times family income and in bubble it goes to 6 or 7.5. [Australia is] 7.5 times. . . which suggests you are twice the size that you should be” Jeremy Grantham, GMO, June 2010
Source: The Australian
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Is it a bubble?
• “Australian house prices are expensive on every value metric. They are expensive relative to history, and expensive relative to houses in comparable countries” Gerard Minack, Morgan Stanley, August 2010
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Is it a bubble?
• “The relationship between house prices and incomes in Australia is uncomfortably high versus the rest of the world .... By any normal set of measures, house prices in Australia are high” David Murray, Future Fund Chairman, March 2011
Source: The Australian
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Is it a bubble?
• “Taking into account geographic differences, the ratio of house prices to income in Australia is not that much different to most other comparable countries” CBA, September 2010
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Is it a bubble?
• “Australian housing affordability is not as stretched as some measures suggest .... House prices and affordability issues reflect a structural imbalance between supply and demand” Westpac, October 2010
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Is it a bubble?
• “...the major reason for [Australia’s higher house price to income ratio over the past 10 years] has been a structural (read permanent) reduction in interest rates” ANZ, May 2010
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Is it a bubble?
• “... the [house price to income] ratio ... is higher than it used to be, but it’s actually not exceptional by a global standard” Glenn Stevens, RBA, March 2011
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ABS House Price Index
Interpreting the R B A
Mar10: 18% growth
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ABS House Price Index
Interpreting the R B A
Mar11: Flat growthMar10: 18% growth
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What is the hous e pric e to inc ome ratio?• Median dwelling price to average income ratio
=> 4 to 4.5x
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What is the hous e pric e to inc ome ratio?• Median capital cityhouse price to median income ratio
=> 6 to 7x
012345678
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Median house price to median household income
Source: calculated using ABS data
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What is the hous e pric e to inc ome ratio?
•CBA’s view(from Australian Residential Housing investor presentation, Sept 2010)
House price to income
Sydney 6.2
Melbourne 5.7
Brisbane 4.7
San Francisco 7.0
Los Angeles 5.7
New York 7.0
Vancouver 9.3
Bristol-Bath 6.1
Auckland 6.7
Wellington 5.8Source: Demographia, UBS
Demographia
9.1
8.0
6.7
7.0
5.7
7.0
9.3
6.1
6.7
5.8
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What is the hous e pric e to inc ome ratio?
•CBA’s view House price to income
Australia 4.3
Canada 4.1
UK 5.6
US 3.3
Source: RP Data/CBA/ABS; UBS
Demographia
6.8
3.7
5.1
2.9
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S upply: every pic ture paints a s tory
150,000
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250,000
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375,000
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Dwelling starts versus population growth
Annual Dwelling Starts (LHS)Annual Population Growth (RHS)
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Dwelling starts versus population growth
Annual Dwelling Starts (LHS)Annual Population Growth (RHS)
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IMF takes the s ame approac h
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Real house prices and working age population
Real house price index (lhs)Working age population (millions, rhs)
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Real house prices and working age population
Real house price index (lhs)Working age population (millions, rhs)
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R ental growth
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Annual growth in residential rentsRental growth modest compared to price growth
Source: ABS
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Mortgage affordability
0%
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50%19
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Mortgage repayments as % of household income
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Dwelling s ize
Increased dwelling size accounts for small component of house price increases
Source: ABS
Average floor area of new dwellings
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Hous ehold debt
Households have used increasing levels of debt to fund house purchases
Source: RBA
0255075100125150
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101520253035
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%%
Housing debt
Housing debt to housing assets (LHS)Housing debt to disposable income (RHS)
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Unemployment and interes t rates
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%
Australian house prices compared to unemployment and mortgage rates
Real House Price Index (LHS)Unemployment Rate (RHS)Mortgage Rate (RHS)
“When you have ... a strong, ideally nearly perfect economy and generous money – you are nearly certain to have a bubble form”Jeremy Grantham
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R es idential property as an inves tment
• “Did you know that eight out of ten millionaires made their fortunes in real estate? ... actively investing in real estate projects is the best way to build wealth and help secure your financial future” Property developer
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R es idential property as an inves tment
• “Why you should invest in property .... Greater leverage on your money - banks lend up to 95% on property and only 60% on shares” Investment property consultants and finance brokers
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R es idential property as an inves tment
• “Housing Shortage Leaves High Demand for Rentals Invest Now!” Real Estate University
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R es idential property as an inves tment
• “If ... the resources story unwinds ... the RBA is likely to reduce interest rates ... The housing market is therefore a powerful hedge against Australia’s resources boom running off the rails.” Rismark, Feb 2011
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R es idential inves tment returns
•Current gross rental yields 4.1% (houses) to 4.9% (apartments)
•Net yield 2-3%• Investors (even ungeared) are betting on continued 5%pa+ house price growth
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R ental growth furphy
• If price growth falls to 3%pa, rent growth of 13%pa needed for geared taxpayer to break even after 10 years
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Ac tual inves tor experienc e
•83% of wage earners with an investment property reported an income loss (over 600,000 taxpayers)
•91% of these investors used gearing
Source: ATO 2007/08 tax statistics
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R ental inc ome gains by oc c upation
1. Investment income recipients 74% (42%)2. Superannuation funds 67% (50%)3. Property operators 57% (59%)5. Financial asset investing 56% (60%)6. Sheep, cattle and grain farming 53% (55%)7. Dairy farming 53% (56%)14. Mushroom and vegetable growing 48% (67%)27. Gambling activities 37% (76%).....
192. Salary & wage earners 17% (91%)0% 25% 50% 75% 100%Source: ATO 2007/08 tax statistics
Taxpayers reporting a rental gain, by occupation
% reporting rental gains
% using gearing
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Owner-oc c upiers : a hous e or a home?
•70% of dwellings owned by owner-occupiers
•Decision to buy not solely financial: “economics of happiness”
•Leads to an inefficient market from a purely investment perspective
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T he US experienc e
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Australian and US house prices since Dec '89
Australian house prices US house prices
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S trong labour market s upporting Aus tralian hous e pric es
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Une
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ate
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Australian and US unemployment rates
Australian Unemployment Rate US Unemployment Rate
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S ummary
• Interest rates and unemployment are key to Australian residential market
•These cyclical factors will far outweigh any structural issues, such as undersupply
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… one final quoteFrom Oct 2006 at peak of US housing market:“The U.S. housing market largely reflects a strong U.S. economy ... the U.S. housingmarket has never declined.” Ben Bernanke, Chairman US Federal Reserve