New house sales fell to a 15-year low in August, underscoring the mixed picture for the housing market, a day after the Reserve Bank cut interest rates.
The Housing Industry Association new home sales report fell by 5.3 per cent in August, after a 5.6 per cent drop in July, led lower by a "persistently weak" detached house market.
HIA said new house sales fell 5.8 per cent in August, while apartments fell 2.5 per cent.
"New home sales for August are the latest in a string of soft new housing updates for this financial year, and that follows a very weak year for new home building in 2011-12," said HIA chief economist Dr Harley Dale.
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"Indeed, following two consecutive years of decline in new housing starts over 2010-11 and 2011-12, and leading indicators pointing to weakness extending into 2012-13, policy settings in August 2012 were clearly inappropriate."
The Reserve Bank cut rates yesterday to 3.25 per cent from 3.5 per cent as signs emerged that the mining boom is stalling and that the domestic sector is struggling.
Home prices, however, have shown signs of responding to lower rates. Capital city home prices rose 1.4 per cent in September, following a flat reading in August, according to RP Data-Rismark, as the effects of lower interest rates filtered their way into the housing market.
By city, new house sales dropped 7 per cent in New South Wales and 8.6 per cent in Victoria. They dropped 2.9 per cent Queensland and 2.6 per cent South Australia. In Western Australia, they plunged 9.4 per cent in August.
New home sales plunged in July, ending three months of gains and pointing to more weakness in the real estate sector.
The Housing Industry Association new home sales report showed a 5.6 per cent fall in July, following a rise of 2.8 per cent in June. New home sales were positive in April and May, as well.
“Consistently weak consumer - and business - confidence is weighing very heavily on new housing investment, far more so than is the case for retail expenditure,” HIA chief economist Harley Dale said today.
Weak confidence is weighing on housing investments.
“Combine that low confidence with very tight credit conditions and excessive taxation, and you have the unpalatable recipe for the recessionary conditions facing new housing,” he said.
New house sales dropped 5.5 per cent, while apartments sank 6.4 per cent in July, HIA said.
House sales fell in all states except Queensland in July. In New South Wales they slumped 6 per cent, compared with a 4.6 per cent decline in Victoria. In South Australia they fell 8.9 per cent, while in Western Australia they plummeted 14.4 per cent. In Queensland, they rose 11.1 per cent in the month.
The bearish read on new home sales comes even as home prices, measured by the RP Data-Rismark index, have posted two consecutive months of rises in June and July.
Auction clearance rates, an indicator of the health of the market, have been helped by a series of interest rate cuts by the Reserve Bank and the relative calm of the global financial markets in recent months.
Clearance rates were 62.6 per cent in Sydney last week and 66 per cent in Melbourne.
Analysts note, however, that activity in the housing market is expected to remain subdued when compared with the period before the financial crisis of 2008 and its immediate aftermath.
Before the global financial crisis Australian households routinely took out larger loans in the anticipation of further house price appreciation.
In the year to July, capital city home prices remain 2.6 per cent lower, RP Data said.
The WA property market will experience the greatest fundamental transformation in its history during the next decade, according to a highly acclaimed property economist.
And much of the dramatic change can be blamed on baby boomers, who are expected to sell much of their one-third share of the property market to collect their retirement savings, according to Mark Wallace, a WA senior economist at international consultancy firm RPS.
Mr Wallace said the convergence of an ageing population, affordability and housing finance issues, and mining investment would cause a restructure of the economy that would greatly change the property market.
Since 1970 baby boomers - those born between 1946-64 - have caused Australian home values to increase 33 per cent more than they would have had the age profile remained neutral, according to the Bank of International Settlements.
"As baby boomers work through the life cycle ... they've accumulated more ... than the society before them," Mr Wallace said.
"That's been great. The problem is that now baby boomers who have been net buyers of property are now moving into net sellers.
"They've had to do that because they haven't had the benefits of superannuation for as long. Property for them is a revenue making investment ... a way of funding their future superannuation but the way they need to find that is to sell their property."
At the same time, cheap and easy access to debt also has fuelled the property boom of the past 40 years but is unlikely to in the future.
Mr Wallace said increases in income would now be the key driver of property price rises.
That put WA in a prime position.
"WA is the fastest income growth location in the country," he said.
"Since 2005 income levels have decoupled from the rest of Australia ... and are now 15-20 per cent higher.
"Income growth, and therefore economic activity, is going to drive prices and sales going forward. So the relationship between the property sector and the broader economy is becoming more established, which means [WA] is a great place to be in the property sector."
However the change in the denominator driving property prices would see growth stabilise at 2 to 4 per cent each year over the next decade.
"That's very different to what we've seen over the last decade but historically that's pretty much the norm, so we are returning to this new 'normal phase'," Mr Wallace said.
However, the healthier property market in WA also would fuel the fly-in, fly-out workforce because workers from the eastern states would not be able to afford to move to WA.
"It's not as easy now to sell your home on the East Coast and move to Western Australia ... because price points are so much higher than they were during the last boom," he said.
"That means FIFO ... is actually going to increase in its prominence, so the current discussions on a policy level in terms of decreasing FIFOs will never come to fruition unless housing affordability and ability of households to move from one [state] to another across the country can be resolved."
Mr Wallace said the downturn in property prices since the global financial crisis - about 12 per cent in WA - was "not a problem at all" and was "a great launching pad" for a recovery.
"It's only a problem for the people who need to sell in the next one to five years ... namely the baby boomers because they need to fund their retirement," he said.
Higher rents also meant it was now "absolutely" viable to move into buying a home, which was encouraging more first home buyers into the market.
With the double-whammy of first home buyers and retirees looking for smaller homes such as apartments or townhouses, the property landscape would ultimately have to change.
Landcorp metropolitan general manager Luke Willcock said there appeared to be a greater demand for high density living than ever.
However, governments and the industry needed to better sell the idea to communities that feared overcrowding and traffic problems.
"People may be afraid of overshadowing, traffic problems or whatever they have in their minds," he said.
"We haven't explained it a lot in WA."
Mr Willcock also expected more people to live in regional areas, creating larger cities as opposed to towns.
Mr Wallace said the population boom - WA is expected to reach 3.2 million by 2050 - would see the state reach such critical mass it would have to decentralise, with more people living outside Perth.
WA's love affair with quarter-acre blocks, even when other states downsized, put the state in a better position to deal with greater density requirements because such larger blocks were easier to redevelop into build multi-dwelling properties.
"There is really nothing comparable in the western world at the moment".
A few weeks ago (okay, well a couple of months ago) the question I was asked for column was whether renting or buying is a better property strategy. It is – as I said in the column – a tricky question to answer because there are pros and cons to both renting and buying. In fact there are far more pros and cons than could possibly be covered in a short column, so this week - and given that the the RBA has lowered interest rates again today - I thought we’d discuss the issue in a bit more depth.
Note that the question isn’t whether or not residential property is a good investment – that’s a totally different thing. Just as carefully selected, good quality shares are and continue to be a good way to increase your wealth over the long term, so too do good quality and carefully selected residential properties continue to be a good long-term investment. Provided you’re not looking for a quick buck, anyway.
Instead we’re talking about the place where you live and while yes, it should ideally be viewed also as an investment if you buy it, the reality is that many of us choose where to live based on emotion. And quite frankly, given that it may well be the biggest purchase that you ever make, I think that some people put waaaay too little thought into the whole thing. Anyway - whether to buy or rent our own little slice of domestic bliss is the question.
There are plenty of advantages to renting. For one thing it frees up some of your cashflow. An average ballpark for rental cost is around 5 - 6% of the value of the home. (So for a house worth $300,000, rent would probably be around $320 per week). That cost covers you for the roof over your head, plus any repairs and maintenance to the property. Compare that to paying a mortgage, at an average interest rate of around 7%, plus rates, plus repairs, plus ongoing maintenance and costs. Freeing up some cashflow leaves you more money to invest elsewhere, or to fund additional study, or simply to live on.
Another advantage of renting is that it doesn’t cost anywhere near as much to move. I mean yes, you might end up moving more often – but all you have to pay is removal costs and maybe the cost of a cleaner. Compare that to the cost of advertising your property for sale, agent’s fees and stamp duty.
Renting also gives you a lot more flexibility about where you live. You can change cities for work (or pleasure), you can move into an area to be in the catchment for a fantastic school, and you can easily upsize/downsize your house according to the number and age of people living in it. You can still have that flexibility by buying and selling frequently, but the costs of doing that make it impractical.
One advantage of a mortgage though is that it’s a form of enforced savings. Because while yes you can potentially be wealthier by renting and investing the difference, that strategy also requires a lot of self-discipline (ie you have to actually investment the difference, every month). Most of us don’t have that discipline – thus a mortgage, which forces you to make regular repayments, is a form of enforced saving. And hopefully your property will increase in value sufficiently in time to compensate for the interest that you’ve paid!
Owning your own home also gives you certainty about where you’re going to live. Long-term leases aren’t common in Australia, so renters can find themselves moving every year or two. And in a competitive rental market that can be a/ stressful and b/ really inconvenient. It’s one of the reasons why I’m an enthusiastic owner.
There’s also just the pure happiness factor: whether it makes good economic sense or not, we simply like the idea of owning our own little castles. We can landscape them, we can paint the walls, we can spend our weekends trawling the “open for inspections” in our neighbourhood, to reassure ourselves yet again that we got a good deal back then. Home ownership guarantees solid viewing numbers for those DIY shows on TV. Home ownership makes us happy.
Well, some of us, anyway. Others might describe being financially tied down to a property as a living hell. So where do you stand on the issue? Do you prefer to rent, or buy?
And one quick addition: please note that all comments on this topic - whether mine or anyone else’s - are general opinion only. Whatever you do, get professional, independent advice before making any major financial decisions
New data shows that home prices are still trending down. Simon Johanson reports.
Home values fell the most in at least six years in May defying Reserve Bank efforts to spark a recovery in the nation's lacklustre housing market with interest rate cuts. Melbourne led declines.
Residential property values slid 1.4 per cent across all capital cities in May, and are now down by more than 5 per cent from a year earlier, according to property analysts RP Data. The monthly fall was the biggest since the series began in June 2006, Bloomberg analytics show.
Melbourne has struggled more than most on the home front, falling another 2.7 per cent last month.
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Home values are on the decline. Photo: Nicolas Walker
Over the year to May, Melbourne home values have fallen by more than 8 per cent. The only other city where they fell further, was Hobart.
Sydney, too, posted falls after defying national trends for some time. In May, home values in the harbour city were down 1.2 per cent, resulting in a 3.6 per cent fall over the year.
The sombre statistics follow news of a national slowdown in home building. Construction of new homes tumbled in April, with building approvals slumping 8.7 per cent after being revised upwards to 6 per cent rise in March, according to figures out yesterday.
The RBA slashed interest rates by 50 basis points on May 1, and Westpac says borrowers should expect another 100 basis points cut by the end of the year as the central bank battles to reignite growth in the economy.
Until recently Brisbane's values were falling most but last month they slid only 0.3 per cent.
Perth had a decline of 1.7 per cent, Darwin 2.4, Canberra 1.5 and Hobart 1.2 in May.
Adelaide's values rose 1.2 per cent.
Much of the weakness in real estate values was in detached housing rather than apartments, RP Data's research director Tim Lawless said. Approvals dive
“The broad national trend decline in dwelling approvals over the past year is clear, and should be of increasing concern to policy makers,” said ANZ head of Australian property research Paul Braddick.
By state, they collapsed 46.7 per cent in Western Australia and 27.8 per cent in South Australia in the month. In New South Wales they fell 15.3 per cent, while in Victoria they rose 13 per cent for the month, ahead of the state government's scrapping of the first home buyers grant.
“The collapse in Western Australia appears particularly strange and is at least partially attributable to the Building Act 2011 (approvals process reform), which came into effect in Western Australia on the April 2,” said Mr Braddick.
Over the year to April, approvals have fallen 24.1 per cent,
Myth #1: Renting is Like Throwing Your Money Away
Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don't pay interest to the bank, property taxes or maintenance fees. They pay rent.
Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.
Myth #2: It Doesn't Cost Any More to Buy Than It Does to Rent
People can usually rent a home by paying first month's rent, last month's rent and possibly a security deposit. All the money that is paid initially actually goes towards monthly payment obligations, with the exception of the security deposit, which is nearly always returned to the renter in the end.
When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent 'investment' ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.
Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.
Myth #3: Buyers Have Assets, Renters Do Not
At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.
Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the 'investment' they made through mortgage payments is gone--dried up virtually overnight through no fault of their own.
Renters may not co-own a home with a lender, but this doesn't mean that they don't have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven't been paying a lender to 'rent' money so that they could pretend like they own an asset.
Myth #4: Houses are a Good Investment
During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.The reality is that housing is not an investment. It's shelter. That is all housing has ever been.
Home values are on the decline. Photo: Nicolas Walker