Housing woes will get much worse
IDON’T like the word crisis’’ but problems in the housing markets are getting worse and will get a lot worse before they get better. It seems to me that there are a lot of issues, currently avoided, that need to be addressed.
Affordability, affordable housing, insufficient construction, a shortage of rental stock and rising rents, long commute times for substantial numbers of people and the effect of housing quality and cost on population shifts and state development. Where to start? We’re not building ( nearly) enough housing. Even in 2003 when the Reserve Bank was desperate to nip the housing price bubble’’ in the bud, there was not an oversupply of housing stock.
The problem was prices, not construction. And they were extremely successful, requiring only two interest rate rises to frighten investors out of the market and stop the escalation of prices.
But the price we paid was a fall in construction to levels significantly below the underlying demand for housing.
Most markets experienced setbacks, but the Sydney market collapsed, falling by more than a third to the lowest level in 50 years, far below previous recession levels.
Since then there has been an escalating deficiency of residential stock, particularly in NSW, where under- building is greatest, but also in Queensland, Victoria, South Australia, Tasmania, the ACT and Northern Territory. Only Western Australia missed the residential downturn of 2003, but even WA now has a deficiency of residential stock.
At the other extreme, NSW will have a deficiency of well over a year’s demand by early 2009 — that’s a lot.
Meanwhile, rising interest rates have been suppressing any recovery in residential con- struction. It’s like keeping a lid on a pressure cooker.
Even so, the extent of shortages means that we’ve seen some increases in residential prices and construction. But that may be short- lived.
Recent aggressive rises in Australian interest rates, the falling share market, an emerging credit squeeze and the need for equity sales are all bad news for the purchase of residential property. And that’s what drives new construction. For those geared into the share market and needing to raise finance for margin calls, their investment properties or even the family home could be the easiest way to raise cash.
I suspect we’ll see a lot more residential properties for sale over the next six months.
And of course those people won’t be in the market for new property.
Meanwhile, the credit beginning.
The residential mortgage securities problem in the US will now spread to commercial mortgage- backed securities as investors withdraw funds and borrowers needing to roll over funding find that source has dried up.
The problem is not limited to the US.
just Australia needs to finance the current account deficit either through offshore investment in Australia or by borrowing overseas.
The flight to perceived security has dried up equity funding. The banks are the conduit for borrowing and their US sources are all but gone.
The US Fed is trying to refloat the interbank loan market with limited success to date.
So far the credit squeeze has hardly been felt in Australia, but it could get a lot tighter.
Across the Australian property markets, the reassessment of gearing in the current financial climate will see a lot of property coming on to the market over the next six months.
And some of it will be residential. It will be a buyers’ market and I think it has already begun.
This is not an environment encouraging new investment, either by investors or owner occupiers. In fact, some will sell. And prospective purchasers will tend to sit on their hands and wait and see what happens.
It will be harder to get pre- sales to underwrite projects, while sales of new housing and residential lots will be more difficult. Housing price rises will stall. The only bright spot, depending on your point of view, is the leasing market, where the shortage of stock is driving strong rental rises. That’s good for investors but not terrific for renters.
The stories are horrific, with large numbers of people competing for any available goodquality properties, bidding up rents and gazumping each other to lock in a lease.
Owners are being picky, accepting only the best tenants — if you have a pet, forget it.
In fact, many of the people out looking to buy a house now are likely to be discouraged renters.
While the RBA should pause now to assess the impact of the four recent interest rate rises, I expect more rate rises later this year.
Housing itself is not the target — it’s just collateral damage. But that doesn’t help.
These events will operate to nip the incipient housing recovery in the bud, delaying a rise in construction and making the deficiency of residential stock even worse.
It means that, once an end to the rise in interest rates triggers a recovery, that recovery will be longer and stronger, with strong price rises.
Indeed, that’s our forecast, with recovery starting in two years’ time building momentum into a boom.
The strength of the residential market will be in the first half of next decade.
While this outcome may create difficulties for many, for an investor it’s not all bad. To me, with a medium- term horizon, it’s safe to invest in residential property now.
There’s no hurry. Current financial market difficulties could shake out some good- quality stock.
But I want to be in position by sometime late next year, ready for the next housing upswing. the and