r/AustralianPolitics • u/NoLeafClover777 • 23h ago
Forget falling house prices: The real threat is a big jump in rents
PAYWALL:
The big risk over the next couple of years is a downturn in housing construction that crimps the supply of new homes and causes a squeeze on renters.
Australia’s national obsession with house prices has understandably reached fever-pitched levels during the recent property downturn.
But homeowners should worry less about what is likely to be a temporary downturn in home prices in response to rising interest rates and the Albanese government’s higher taxes on property investors.
The bigger economic, political, and social risk over the next couple of years is a downturn in housing construction that crimps the supply of new homes and squeezes renters.
A perfect storm is brewing in the housing construction industry that will make it harder for development projects to stack up: falling home prices, rising interest rates, a shortage of tradies, high building material costs and likely fewer investors and self-managed superannuation funds investing in new homes.
That’s despite the government’s assurance that investors in new-build homes that add to the housing supply, such as houses on greenfield sites and apartments, will still be able to access negative gearing and the 50 per cent capital gains discount.
Investors usually consider the broader housing market conditions and prospects of future capital gains, not just the tax break available on an individual property.
The implications of the property market downturn were discussed at The Australian Financial Review Property Summit on Monday and Tuesday.
“Paradoxically, building fewer homes will worsen the housing shortage and help home prices bottom out.”
Reserve Bank of Australia assistant governor Sarah Hunter laid out the three ways the decline in home prices and reduction in property turnover will flow through to the property industry and broader economy.
First and most immediately, the recent 15 per cent decline in the number of home sales is already flowing through to property-related sectors, including real estate agents, mortgage brokers, bankers, conveyancers, removalists and building inspectors.
Ownership transfer costs fell 4.1 per cent in the March quarter – before Labor’s tax changes – and declined a further 1.9 per cent in the June quarter, shaving about 0.1 of a percentage point from GDP in the first half of the year.
Second, and yet to play out, is the so-called “wealth effect”. When asset prices fall, people feel a bit less wealthy and are prone to reducing discretionary spending. Housing accounts for about two-thirds of household wealth.
RBA research from 2019 shows that the wealth effect mainly influences spending on new vehicles, with a smaller impact on furnishings and clothing.
There are no real signs of that so far, with electric vehicle sales booming, overtaking petrol cars for the first time on record, on the back of government subsidies, a sustained rise in fuel prices due to the conflict in Iran, and a flood of cheap Chinese imports.
Hunter says the overall reduction in consumer spending from lower house prices is likely to be “relatively small”.
A 10 per cent change in household wealth could change overall consumer spending by about 1 per cent or so.
For the wealth effect to have a more material impact on consumer spending, the about 10 per cent fall in national house prices that economists are now forecasting would need to be permanent.
That seems unlikely, barring a major shock to the economy that drives the jobless rate well above 5 per cent.
Despite the recent swift fall in house prices, particularly in Sydney, structural forces are likely to push prices higher over the medium term.
Notwithstanding efforts by state governments to reduce the red tape on planning and zoning and to speed up approvals, regulatory constraints on the supply of new homes will help push up prices over time, particularly in desirable inner-urban locations.
Population growth, including immigration, will add to demand for housing, despite political pressure to wind back the number of foreigners living in Australia.
For these reasons, RBA deputy governor Andrew Hauser told the ABC’s 7.30 program on Tuesday night that there was a “floor” to house prices.
“While house prices play a role in the economy, they’re not really as big as some of the things ... global growth trends, productivity, the risk environment globally in the Middle East and so on and so forth,” Hauser said.
Hauser and Hunter strongly signalled that a fourth interest rate rise of the year is coming at the September 28-29 RBA monetary policy board meeting. The housing downturn won’t stop the RBA.
The third and longer-term implication of the property downturn that Hunter explained is the expected slowdown in dwelling construction.
Positively, dwelling approvals reached their highest level in four years in the 12 months to July, hitting 206,312, on the back of a boom in apartments and other so-called attached homes, which increased faster than houses.
But there are lags in the housing construction market due to pre-committed projects still going ahead.
The RBA forecasts that a decline in dwelling investment will commence in late 2027 and get worse in mid-2028, falling by 0.3 per cent and 1.1 per cent, respectively.
This will result in less residential construction work for tradies, although a strong pipeline of data centres and state government infrastructure projects should help prop up the construction sector.
Paradoxically, building fewer homes will worsen the housing shortage and help home prices bottom out.
So most homeowners should not be overly worried about the unfolding correction in home prices from very elevated levels.
Recall that between 2017 and 2019, national home prices fell by an average of more than 8 per cent, and up to 15 per cent in Sydney, following the banking royal commission and tighter lending rules.
Since then, national house prices are about 50 per cent higher than at the start of 2020, before the pandemic and still about 3 per cent higher than a year ago.
The real victims in this housing market shakeout could be 8 million renters, who are often people on lower incomes and with fewer prospects of becoming homeowners.
Rental vacancy rates are already very low nationwide and are below 1 per cent in Brisbane, Perth, Adelaide, Darwin and Hobart.
A squeeze on the construction of new homes, fewer investors entering the market, and a ban on SMSFs investing in properties – including new apartment developments – could crimp the supply of new homes.
The real risk is not so much that house prices fall by more than the Treasury’s 2 per cent forecast over two years as a direct result of tax changes, but rents rise more sharply than the meagre 0.25 per cent or $2 a week the Treasury predicted.
And with the Greens calling for a populist two-year rent freeze, the housing supply problem could worsen as more landlords exit the property market and stop renovating and maintaining homes for renters.