Welcome to Finance and Fury
On the last episode – looked at signs property prices will be high
Today – continue and look at based on these factors - Will property prices keep going up?
First – recap of the Tell-tale characteristic to be able to tell if property prices are high – Urbanisation levels versus available credit (cash people have access to from savings or lending/mortgages of population) Concentration of people (higher demand with population levels) and the limited supply available when people are concentrated in living space Access to credit – it is the Borrowed funds by the population – household debt to GDP in Australia has grown massively until 2017 – stabilised/dropped slightly since – and property prices with it – One of the most privately indebted countries in the world - behind Switzerland In conjunction with the urbanised population – higher the amount people can borrow or put towards property – higher the prices will be Regulations – that have aims to increases the incentive for higher urbanisation How - Town planning – the restriction of supply of available developments Come back to Why next MondayThis episode – Looks at the factors controlling prices
Supply and demand – many individual characteristics involved -
Supply– focus on limitations and restrictions in supply –
A lot of major cities/urban areas versus viable rural areas– what to look for – Legislations – where are the most restrictive councils/states on land developments How much available land that is in demand is around – Available is important – Aus has 99.8% left available land Might be a lot of land that is vacant – but is it usable or available or demanded? Useable – most is, available – a lot isn’t – already held by developers or limited through state legislation (national forests or environmental regulations) – such as the CO2 sink laws that don’t allow you to cut down trees on your own property – one person made a firebreak on their property and got fined $100k by the state – but their house was the only one in the area to survive the recent fires Demanded – bigger one – where is? Available land – Look at Australia – 99.8% of the country isn’t urbanised – but we have very high property prices Why this alone isn’t a good measurement – but what is the population likely to do They are likely to want to live near a city due to employment or cultural/entertainment reasons Concentrates the supply and forces the demand into one of a few major areas Regulations and governments Whilst in USA – saw news that Democratic run districts prices went up $12k (extreme outliers – Detroit, San Fran), while Republican by $9k Looking at San Fran – seen a massive increase for prices – but thanks to feudal system San Fran has become – rich areas pay for their own private police, cleaners/sanitation – the city doesn’t provide it Increases built on increased costs and not fundamental tend to pop - they are bubbles = middle class in those cities are leaving – stealing less than $950 isn’t a crime but a citation – so property crime is highest in country – so people leave – reducing the demand and prices start to crash Use NYC as an example – limited development in a lot of Manhattan – when you look midtown or Tribeca regions you see massive high-rises – but you can buy airspace to avoid your view being bought out - so limits the supply of more high rises Demand– leading into what the population might do
Demographics – where the population is living and where immigration occurs – urbanisation factors Trends of urbanisation and immigration – the flow of people both internally and externally – Urbanisation – internal - are more people moving into cities from the country? Immigration - Say 200,000 people are coming into a country each year – and they have 20 or 30 viable cities to choose from – can get pretty evenly spread out – but with 3 to 5 – not so much Concentration combined with high levels of urbanisation = prices go up Sometimes – if population urbanisation is large enough – can have 30 viable cities and see prices go up massively Look at China – average income of china (very skew data – rural to city incomes) Price to income ratios – Shenzhen – 45, Beijing – 44.2, Shanghai – 40.91, Guangzhou – 33. China is playing catch up – rural and a lot of them = lower average incomes How much money people have access to also comes into play – you could have 1m people bidding on a property – but if they only have $20 on average, but the one at the top has $1,000 = property goes for $1,000 Equity/money access to = property price you can ‘afford’ – a term used – but more accurate to say purchase based around your access to money - Borrowing capacity and loan affordability – banks work out how much you can borrow – then allow you to borrow it – doesn’t mean it is affordable – Regulations affecting the access to credit – the two regulators who control credit – ASIC v APRA – alphabet soup organisations - APRA – regulates the banks – lending requirements and business practices – lending benchmarks and practices – also capital requirements – implementing the BIS’s Basel regulations as well (no on III) ASIC – regulates the consumer protection laws – National Credit Act – updated at end of 2018 to remove the HEM benchmark – Household Expenditure Measure or HEM was an assumptions based lending criteria – assuming how much the borrowers spending was every month – issue was the lifestyle option in assessment – basic, moderate, lavish = obviously every is basic if you are wanting to apply for loan – all done for QLD Couple – no kids - renting = $39,293 p.a to $70,728 p.a. from basic to lavish Say you are a couple with 3 kids renting - $53k p.a. expenses (own home $61,800 p.a.) Don’t want to say lavish - Thanks to ASIC – now banks had to change the benchmark of lending HEM to a look through the test – banks actually required to assess the borrowers spending – dropped lending capacity heavily – worsening the property price drops from 2018 and still continuing – Sydney lost about 9% of values on average since the start of 2018 APRA needed to help banks out – increase borrowing capacity again – through the hurdle rate testing Was about 7.25% - now 2%+ variable rate – say around the 5-6% mark – people can borrow more – estimates for a single person on $80-90k = $80,000 more in borrowingWhat will cause prices to keep going up? Peoples wages are going up – their incomes grow to help catch up to the gap in affordability compared to fulltime earnings – historically pre 1990s – 3.5-4.5 times – today some areas of Sydney 11 – while other cities in the 7-10 region Pre-inflation rate target – prices of property grew by 3.5% to 4% p.a. – in line with the wage growth of the nation - The population can afford more of a loan just based around wage growth – but with decreases in interest rate along the way – remember 1991 was about a 17% interest rate – few years later went down to 10% - dropping further to 7% not long after – massive spike to the size of a loan people could borrow Deposit gap to income ratios – increased by about 300% since 1990s The interest rates decline – loan size can increase – which allows prices to grow at accelerated rates – Example – your income goes up by 3%, but the leverage allows loans to grant you access to a further 15% at a 20% deposit/savings rate – loan access pushed up the prices due to affordability People wouldn’t need to borrow that much if they were all rurally spread out Thanks to changes to hurdle rate – as variable drops the number of borrowings can increase Recent history of China´s housing market During the global crisis, China´s housing market slowed sharply. In November 2008 the government introduced a CNY4 trillion (US$585 billion) post-financial crisis stimulus package. Developers were now easily able to obtain loans, with lower capital requirements. Buyers took advantage, with looser lending conditions and lower interest rates. The result? Existing house prices surged by 19.7% in Beijing during 2013 (16.77% inflation-adjusted) and rose by 12.85% in Shanghai (10.13% inflation-adjusted). In 2014, house prices in Beijing fell by 4.11% (-5.45% inflation-adjusted), but prices surged again by 21.01% (19.09% inflation-adjusted) in 2015 and 36.73% (34.06% inflation-adjusted) in 2016. In 2017, house prices started to cool down due to the tighter government measures implemented in late 2016. % of GDP grew from 10% in 2006 to 30% in 2018 Australia 1970 was about 10% - highest historical rate – from 1908s to 90s was about 15% - then from 90s went up to a casual 100% at the point Basel 1 was implemented - The land supply is restricted – but people can still afford it as long as they can continue to afford more loans Look at coastal property prices – tend to not move too much – why? Developers can buy up land regions and release developments as demand spikes occur What matters most – current makeup of Australia – as long as borrowing capacity and wages continue to grow = prices will continue to grow Borrowing – Legislation effects on the borrowing capacity – are a real thing – seen the effects between ASIC and APRA messing with the lending/banking regulations Wages - not so much
Situations from here
– who knows – but it is hard for borrowing to increase unless wages continue to grow
Somehow – mortgage debt boom continues – if not – prices may stagnate for a while – If debt/money supply is constricted – will be a massive bust Or if land is going to be opened up – which I highly doubt – council plans as stands are to increase the concentration of population within outlier suburbsThank you for listening to today's episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/
