The cash rate will fall tomorrow and most likely by 0.25%. The yield curve strongly suggests such. As at the middle of last week – I do write these in advance – the 10-year government bond rate was 3.76%, while the official cash rate was 4.25%, and the somewhat wide difference suggests that the cash rate should fall. This indicator is right about half of the time, while the average economist gets interest rate calls right just once every seven times. So, it’s the yield curve for me, Sunny Jim.
Now, what does this mean for Australian housing? Well, in the past it meant quite a lot, especially after a succession of interest rate falls. Historically, house sales improved, new housing starts picked up, and end prices stabilised – and more often than not, rose. And I still have the charts to prove it.
But over the last decade or so the connection between cheaper money and house market improvement has been broken. And unless action is taken, then this circuit might be broken for good.
In short, residential property, and especially new stock, is taxed way too much and there have been far too many government-induced grants and incentives, such as building boosts and first-home buyer grants. These have distorted the more normal property cycle, inflated demand and prices and have made the housing market far more cyclical than it used to be.
Despite mortgage rates falling by close to 1.5% over the past two or so years, new housing starts have continued to decline.
Sure there is at present a flurry of activity in several quarters as a variety of building incentives are about to close around the country. But all this has done is brought demand forward. There will a “hole” in these markets for the next three to six months, maybe longer. Sadly, many in the development industry will call for another quick fix, including further drops in interest rates, an increase in the first-home buyers’ grant or an extension of a building boost – you get the drift.
Only two things will lift new housing starts Down Under:
- Increasing population growth. While another drop in interest rates might temporarily boost new housing starts, the only real reason why housing starts would need to rise – under current conditions – would be to cater for higher levels of population growth. We need more migrants.
- Changing the current conditions. Increase the supply of raw land across urban Australia. Reduce the time taken to get an approval. Reduce the amount of unnecessary compliance needed to get a new residential development off the ground. Allow the market to dictate demand, not urban boosters (or whatever they are being branded as at present). Have new property valuations based on rental return, and not on mostly second-hand and dubious comparisons.
And importantly, reduce taxation on new property – the residential building industry is being weighed down by excessive and ineffective taxes.
Work by the HIA shows that the total tax-take from new housing can be as much as 40% of the final price of a new home. New housing is the second most heavily taxed business sector in Australia, and yet it still contributes almost $40 billion in tax revenue each year. And regrettably, it’s the new home buyer who pays.
And here is the real sticking point – this $40 billion every year makes up one-eighth of the government’s revenue. They are all hooked on the cash injection.
If you really want more new starts across the country, lift migration remove GST on new construction remove stamp duties on off-the-plan sales and reduce – dramatically please – the size of all levels of Australian government.
Now, let me turn my attention to the established resale market.
The biggest problem facing this market is choice. There is just way too much. There are close to 400,000 resales on the market across the country. A more healthy supply would be about half this volume. A 0.25% or even 0.5% drop isn’t going to magically make these properties enticing enough to buy. Heck, I could argue that dropping the cash rate by 1% wouldn’t do too much.
Far too many of them are overpriced, have been for sale way too long, and too many of the vendors trying to sell them just haven’t got a clue. Given how tight the vacancy rate is at present (1.7%), what many of these vendors should do is renegotiate their finance, take their property off the market, lock into a low fixed-interest rate for a couple of years and rent the property out.
Now if people really want or need to sell, then they should do the following things:
Understand what their dwelling is worth and accept its value. In other words, meet the market. Rip the bandage off once and move on.
Assign one good agent. One, not two or three, just one. Multi-listing is sales death in a buyer’s market.
Assign your agent a short time frame to sell the property. I am talking about 30 days. And get them to bring you signed contracts – not verbal offers. You want to see paperwork.
You must present the property well. If you were selling your car, you would have it detailed. The same applies to your home or investment property. Minimum budget is 1% of the sales price. If you cannot afford this, don’t bother trying to sell it.
Ditto goes for promoting it. Again, a 1% minimum spend and make sure you get your money’s worth. Do not accept crappy photos via an agent’s iPhone (not that Apple does anything crappy!) or being stuck on page 12 on a realestate.com.au’s property search for your area or price range. And you must put an asking price on the property!
For the month your place is for sale, your job is to make it look the best that it can and to promote it wisely to the appropriate audience.
Just because the average home loan might be about $50 cheaper per month from tomorrow – and remember, interest rates cycle like nearly everything else in life – it does not mean that the Aussie housing market will be automatically better off. That used to be the case, but not really anymore. We have interfered way too much for such simple things to have much influence any longer.
Of course, nearly every talking head will disagree with what I have just written. Real action is needed – not shifting deck chairs on the Titanic.
If you are in the property industry or trying to sell a property, don’t expect too much from a small drop in interest rates. You are likely to be disappointed.
Fight for bigger and more permanent change.