MICHAEL PASCOE June 19, 2012
Yet another contradiction to ponder about our economy: of the two biggest purchases most Australians make, one is going gangbusters while the other is flat and getting flatter. Go figure.
And the one that is booming is guaranteed to be a completely dud investment, rapidly and inevitably losing value by double digits a year, while the laggard historically has done quite well, appreciating well ahead of inflation.
No prize for guessing the first is car sales running at near-record levels while the second is moribund housing. We're happily putting the pedal to the metal where the rubber meets the road, especially for the gas-guzzling SUVs, while refusing to invest in a new home. Oh well, worst comes to worst, you can always sleep in your truck.
And there's nothing new about our national investment in housing going nowhere – it's been a decade since housing made a really solid contribution to economic growth despite more-or-less strong population growth throughout. (In the realm of small mercies, it's also a dozen years since housing investment had a major bust – the sector's 6.2 per cent contraction in the year to the end of the March quarter is mild by comparison.)
Housing's performance can't be blamed on overall “consumer confidence” – a rather dubious animal anyway, as demonstrated in Ross Gittins' examination of the difference between what we say about how we feel and what we actually do. Consumer confidence surveys have become a debased currency when consumer spending tells such a different story.
However, some of the “consumer on strike” furphy owes its origins to weak housing investment – the parts of retail that depend on household formations are taking a hit because their driver is on a go-slow, not because the consumer has stopped spending overall.
So it's a difficult and confusing climate that the governments of the two most populous states have weighed into with hopes of spurring greater home building. On the confusing evidence available, there's a good chance that they will achieve little other than a direct transfer of funds from the majority of tax payers to a select few for not much overall economic benefit.
If you happen to be a first home buyer in New South Wales who particularly wanted to buy a new property for $550,000 after September 30, you'll cop a nifty sweetener from Treasurer Baird: “Here, kids, have $15,000 to spend at Harvey Norman. And don't worry about paying stamp duty either – another $20,240 on me.”
That $35,240 is a hefty handout for a government that's had plenty of other calls on its limited resources. It's targeted at a very select group with no means testing beyond the price of the new home – daddy might be buying his young'un their first investment bachelor pad and any spoilt little rich kid could still pick up the $35,240.
Indeed, given the price of new housing, qualifying first home buyers in Sydney have to be relatively well off to either save enough and/or qualify for a big enough mortgage to get into the game. Or they're limited to the cheapest housing on the urban fringe.
Not helping buyers
But this handout isn't really about helping the buyers. Encouraging people to buy a new house on Sydney's fringe (and ditto in other major cities) with high commuting costs and little social infrastructure might not be helping them at all.
Instead, it's all about providing work for builders and with hope that the traditional housing multiplier effect will kick in for retailers as well to lift a weak NSW economy that has trouble keeping its citizens from travelling north.
Not that there's anything especially wrong with that – stimulating the economy - if the state can afford it and if the plan works. The trouble is that, like the interest rate cuts, it's possible to offer a handout (to the benefit of a few buyers who are lucky with their timing) without starting the hoped-for economic party.
Housing investment hasn't been in the doldrums because the industry has lacked government handouts. There are much bigger and more powerful forces at work that are unlikely to be overcome by a break on what is a bad tax anyway and a gift to cover the carpeting and curtains.
At the margin, it might be enough to swing some buyers towards the desired policy goal of preferring a new building over a similarly priced existing residence, but I'm not rushing out to buy shares in building materials companies just yet.
The track record of such government interventions has been to distort the market for a while and not much else Tony Harris' Law of Capitalisation is at work anyway – everything is capitalised so the tussle between choosing new or existing stock will come down to other factors soon enough.
So what are these alleged other factors dragging on demand? Dr Kim Hawtrey of the housing industry's economic forecaster of choice, BIS Shrapnel, thinks there's more to it than simple de-leveraging.
“Rightly or wrongly, home buyers to date have formed the judgment that there have been too many unknowns surrounding the housing economy to commit,” Hawtrey suggests.
“This has been evident in their unwillingness to borrow to build. Whether it's because of job insecurity, soft house prices, Europe's troubles or gyrating economic news from one week to the next, home buyers have been hanging back.
“Taking out a 25-year loan and building a new house is a form of consumption, yet it is also an investment decision. Households must be confident they will be able to repay the loan and that the property will return their money…
“The bad news is that despite strong underlying housing fundamentals, an easing in uncertainty is needed for consumers to take on new home loans and for Australia's building industry to emerge from its funk.”
Hawtrey suggests, or hopes, that the latest GDP number might be the tipping point that will thaw consumers' housing hearts. Well, good luck with that, Kim, but I suspect the good doctor is on to something on the root cause of the freeze.
We didn't mind taking out a whopping great mortgage and “suffering housing stress” as it's now termed when we thought that the property's capital gain was more than making up for the pain.
When I came to Sydney 32 years ago, a colleague on the Financial Review advised that the secret to happiness in the city was where you lived and the secret to Sydney real estate was biting off more than you could chew and chewing like crazy.
And that worked pretty well for a long time as inflation and capital gain solved the affordability problem, the occasional bust notwithstanding.
Now the consumer has accepted the warning issued by the Reserve Bank two years ago about relying on residential real estate forever rising.
The RBA's quarterly statement on monetary policy last month revised down the near-term outlook for residential building activity “with recent data suggesting that there are few signs of an imminent turnaround in demand” thanks to:
“Poor sentiment regarding job security, notwithstanding recent low levels of unemployment; softness in established housing markets, consistent with expectations of flat or declining house prices; and relatively tight credit conditions for developers.”
The RBA did suggest the gloom wouldn't last forever:
“It is expected that residential building activity will in time pick up, as lower purchase costs, higher rental yields, population growth and pent-up demand following an extended period of weak growth in building activity combine.”
But the RBA's concept of “in time” can be lengthy. Governor Stevens' Glass Half Full speech explained that much of our previous economic enthusiasm came from the extraordinary and extended rise in house prices houses that made us feel richer.
He could only offer that “at some point” wealth will begin to increase again” and that “wealth will surely resume an upward track, sooner or later”.
It will be healthier wealth, built “the old fashioned way”, said Stevens, of saving and places the money in assets, but it won't be at the previous break-neck speed of 6 or 7 per cent real per capita per year. “I would guess that over the long term, something more like 3 per cent would be nearer the mark.”
And there's nothing wrong with that at all, but while prices are basically stalled and weaker in some markets, there is neither the greed driver to get into the market or the fear of missing out on easy money by staying out.
Rather than state government handouts, more fundamental reform of poor housing-related policies at all levels of government (zoning, federal and state taxation, red tape, green tape, union gouging in high rise projects, local government levies, general incompetence, et al) would lay the foundations for a healthier industry.
And the tipping point is more likely to be the increased pain of paying much higher rent than some nice GDP figures.
Michael Pascoe is a BusinessDay contributing editor.
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