Hous­ing woes will get much worse

The Weekend Australian - Review - - Primespace - FRANK GEL­BER ECON­O­MIST

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

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