Reality or wishful thinking + Finance clauses at auction + NZ banks go easy on LVR’s

Reality or wishful thinking + Finance clauses at auction + NZ banks go easy on LVR’s

Highlights from this week:

  • Market facts make way for wishful thinking
  • Misunderstandings about finance clauses
  • Downsizer demands being met by developers
  • NZ banks ease up on high LVR’s
  • Renters dreams shattered


Market facts make way for wishful thinking – Cameron Kusher

Kevin:  According to the latest CoreLogic home value index results, the pace of declining property values has eased slightly. However, values continued to trend lower in six of the eight capitals, last quarter.

Kevin:  Cameron Kusher from CoreLogic joins me. Cameron, thanks for your time.

Cameron:  No worries, Kevin.

Kevin:  Which of the capitals are still trending lower, according to the quarterly figures, Cameron?

Cameron:  All of them, except for Hobart and Canberra. And in saying that, Canberra was actually seeing unchanged values over the last three months. Hobart, up 1.1%. But every other capital city has seen a decline in values. The largest falls in Darwin, down 5.1%. But both Sydney and Melbourne have seen falls of 4.1%, over the last three months.

Kevin:  If you look at Darwin’s figures, the rate of decline there seems to be slowing dramatically. 5.1% last quarter to 1.7, last month. Am I reading that correctly?

Cameron:  It’s hard to say. Obviously, the monthly decline is more moderate, but Darwin being a small market can be a little bit more volatile. And keep in mind that the market there is down 27% from where it was at its peak, so I wouldn’t say it’s close to the bottom yet.I wouldn’t say it has hit the bottom, and obviously, it’s got a long way to go to get back up to those previous highs.

Kevin:  Yeah. Some of the agents I’m talking to, maybe it’s just wishful thinking on their part, but they believe that it’s starting to turn around a bit. So I guess, time will tell. We’ll have a look at the figures, next month.

Cameron:  Yeah, the next couple of months will tell us the story.

Kevin:  Yeah. I want to talk to you about rolling averages, because that tells a great story. But before I do that, can I just ask you how values compare to say, five or 10 years ago?

Cameron:  Yeah. In most capital cities, values are much higher. If we look at Sydney, it’s had compound annual growth of 4.7% over that period of time. Melbourne, 5%. Brisbane, 2.2%. Adelaide, 2.6%. But you go to some of the other capital cities, Hobart quite strong at 6.2%. But Perth values are falling at a rate of 3.6% annually over the last five years, and Darwin has fallen at a rate of 5.7% annually, over the last five years.

Cameron:  Very mixed. Sydney, Melbourne, and Hobart, obviously, are well out in front. Canberra, not too far below behind that. Brisbane and Adelaide, fairly moderate growth. And then, some significant falls in Perth and Darwin.

Kevin:  I mentioned there about the rolling averages. I believe it gives us a really good understanding about the true direction of the market because it looks at the rolling change. The regions seem to me, to be holding on a little bit better than the cap cities, right now.

Cameron:  They are. Like on an annual basis, the combined capital cities have seen values fall 7.6%, whereas the regional markets have seen values fall 1.4%. But I think the broader overarching theme is that pretty much everywhere, whether it’s a capital city or a regional market, the annual rate of growth is slowing. Sure some of them are in negative territory, but the growth is on a slowing trajectory, even in markets like Regional Victoria, which has been very strong, and Regional Tasmania, over the last few years.

Kevin:  Yeah. Staying with that rolling change graph, just for a moment, it’s interesting how they really mirror each other. There are changes sometimes in which area is getting further ahead, regional or the cap cities. But gee, looking back at February 2004, that was a big separator between the regions and the cap cities, wasn’t it?

Cameron:  It was. And I guess, now what we are seeing is it’s a bit of a mixed result. In New South Wales, for example, Sydney was very strong, and that growth spilled out into regions like Newcastle, Wollongong, those kind of markets. And now, with Sydney’s slows, those markets are feeling the impact of that slowdown.

Cameron:  Whereas, you look to Melbourne, the growth only really spilled out into Geelong. But now, we’re actually seeing quite a lot of strengths in places like Bendigo, Ballarat, even Latrobe Valley, Tasmania. The strengths kind of spilled out of Hobart into those other regions of the state.

Cameron:  If we look at Queensland, for example, for most of the last five years, the Gold and Sunshine Coasts have actually been stronger in terms of capital growth than Brisbane has been. But now, the Gold Coast, for example, is slowing quicker. I think you can see the impact of a lot of demand for housing on the Gold and Sunshine Coasts coming out of Sydney and Melbourne. And now, that the values are declining in those markets, then there’s a lot less demand for housing on those regions.

Kevin:  Cameron Kusher from CoreLogic. Cameron, can we just have a look at the rents? That they seem to be on the rise, right now. Both in the cap cities, and in the regions?

Cameron:  Yeah. It’s one thing to be cautious of, because we do find that the first quarter of the year is generally seasonally a fairly strong time for the market. As you said, rents are up over the quarter. They’re up 0.6% nationally. Even a market like Sydney, where the rental market has been quite weak. We saw an increase of 0.3% over the month, and only down 0.1% over the last three months. But looking a bit deeper in the data, rents in Sydney, for example, are down 2.9% from the last year. The rate of growth in rents in Melbourne is slowing. On the flip side of that though, Perth and Brisbane have been seeing some large falls in rents, over the last few years, and we’re starting to see a bit of the acceleration in rental growth there.

Kevin:  Cameron, there has been a level of criticism about a lack of credit availability being to blame for slowing conditions. Do you hold with that? Do you agree with that?

Cameron:  Yes, I certainly do. I think the Reserve Bank has kind of pointed the finger at a lack of demand for credit, but I am not so convinced on that. I mean, the last 25 years has really been all about making finance and credit more freely available, and that’s certainly contributed to the strong growth in property prices we’ve seen over that time.

Cameron:  But really, since 2014, when the Reserve Bank started going down and APRA started going down this path of macro prudential policies, they’ve made credit harder to access. So whilst the banks might be getting less applications across their desks, and I’m sure that’s the case, I don’t know that it’s through lack of people wanting to buy. I would suggest that a lot of people are going and talking to their mortgage broker, and the mortgage broker is saying, you know what? You’re just not going to get there with these finances, at the moment, so we’re not even going to put in the application.

Kevin:  Yeah, I was just talking to some brokers. That’s certainly supporting what you’re saying. They’re becoming a lot more hesitant to even put them forward. And in fact, they’re seeing an increase in the number of applications that are being refused, Cameron.

Cameron:  Yeah, really really doesn’t surprise me at all. Credit has got a lot tighter. There’s a lot more questions being asked about your expenditure, and I kind of liken it to historically, when you apply for a mortgage, you’ve had to show that you have the capacity to repay that mortgage. There’s a kind of trust that you’ll adjust your expenditure, once you take out that mortgage to pay it off. Now, you actually have to show evidence that you’ve made that adjustment, before a lender is willing to give you that mortgage, and that’s a pretty big change. Because technically, if it’s your first mortgage, you don’t have any experience of paying off a mortgage, and cutting back on those expenses can be hard.

Kevin:  Talking about mortgages and interest rates, and so on, based on this report, how do you think the RBA will be feeling about the market, now?

Cameron:  They’ve certainly changed their tune a little bit over the last couple of months from saying that the market slowdown is orderly. They’ve had some questions in some of their speeches, and kind of alluded to the fact that they don’t know how far the market is going to fall, and when the falls are going to end.

Cameron:  I think there’s a level of concern, probably maybe even playing it down a little bit in their public statements at the moment. But I think the biggest concern for them is not necessarily that prices are falling, but what the consumer might do as prices fall. And if they start to go and spend less out there in the shops, then that’s the concern because consumer expenditure or household expenditure makes up about 60% of GDP. If that starts to fall, then economic growth slows, and that creates a whole range of other headaches for the Reserve Bank.

Kevin:  Yeah. Always a great insight. Cameron Kusher from CoreLogic. Thanks for your time, Cameron.

Cameron:  Thanks for having me, Kevin.

Misunderstandings about finance clauses – Cate Bakos

Kevin:  The Real Estate Buyer’s Agents Association of Australia is making some, I think, quite timely warnings or notices to buyers about the use of finance clauses in contracts. No wonder that there are more and more clauses, more of these finance clauses being used on contracts, when you look at the tightening restrictions around lending, what’s happening with the market as well. Joining me to talk about this, Vice President for the Real Estate Buyer’s Agents Association, Cate Bakos. Cate, thank you very much for your time.

Cate:   Always a pleasure to come on the show, Kevin.

Kevin:  Yeah, Cate, let’s clean up a few of the misunderstandings about finance clauses. And they are an important part of a contract and therefore there are some legal obligations that go with them, aren’t there?

Cate:   Absolutely.

Kevin:  Okay. Let’s have a look at myth number one that you can’t have a finance clause on an auction purchase. Is that true or not?

Cate:   Well, you can’t generally go to auction and assume that you can have conditions such as a finance clause without arranging them with the agent prior. Now we all know that the chances of an agent and a vendor and the vendor’s solicitor agreeing to let someone bid with conditions is very, very low. But if I said it had never happened before, I’d be telling a fib, because it has happened before and particularly in difficult times like we’re in today where credit availability has been the issue and it’s played a major role in the downturn that our major capitals are experiencing. In some cases, the agents might let you bid knowing that you will have a subject finance clause. Obviously they get that approved prior. But I also say to clients, if your finance isn’t quite approved and you’ve set your heart on this property, you can still go to auction, but you owe it to the agents to let them know that if you’re bidding, it’s generally to get the right to go inside on a pass in.

Cate:   So if you think that others aren’t bidding as well and you’ve got a chance of securing the pass in bid and then going inside and negotiating, you can then introduce your conditions and it really is a case of negotiating with the vendor and seeing whether they agree to your terms or whether they decide to let you walk and put the property on the market.

Kevin:  Yeah. If I could make just a couple of more points on that too, I think it’s a very dangerous situation to be bidding if you’re doing it under an understanding that you’re doing it with a finance clause, unless you’ve made that disclosure. Because there are times when a property can be knocked down when you think that you may be given that pass in opportunity when you’re not. It may just actually sell and then you’re caught.

Cate:   It’s a very real risk and it’s not one to toy with. In fact, even as a professional bidder, I would be very anxious about doing that because you’re absolutely right. You can’t predict at what point a vendor will put the property on the market.

Kevin:  That’s right. The other point I wanted to make too was that if you are given permission to bid under the condition that it’s with a finance clause, that same condition has to be offered to all other bidders.

Cate:   Well, you’d think so.

Kevin:  Well it does. Under law it does.

Cate:   Legally it should.

Kevin:  Legally, yeah, that’s right.

Cate:   There are situations where agents won’t necessarily announce what the other conditions are. And it’s the same for settlement variations. Let’s say they’re calling for 30 or 60 days and someone has an understanding that 120 days settlement is okay. The agents won’t necessarily announce that they’ve given permission to someone to bid under those conditions, but the reality is that they owe it to their audience and they owe it to their vendor because they could get additional bidders if they made it obvious that those conditions are being entertained.

Kevin:  Yeah, I think it’s very dangerous for an agent not to announce any special conditions because as one of the conditions of going to auction, you do announce these are the conditions under which you’ll be bidding. So if there is any variation to that, there could be a legal challenge after, if some bidders are put at a disadvantage, Cate. So I think once again, we’ve all got to be very careful of those situations.

Cate:   I agree.

Kevin:  Cate, can I take you to another one of myths and that is that if you don’t obtain finance in time and you wish to exit the contract on the basis of your finance clause, you can do so, no questions asked.

Cate:   Oh, I wish that was the way. No, that is a myth indeed. So you do have to demonstrate that you have made a serious attempt to get finance. You can’t just sit on your hands and then two weeks later say, look, sorry I didn’t get my finance, it didn’t come through. You have to demonstrate that you made an effort. And the vendor’s solicitor can take you to task on that and ask for evidence of the fact that you’ve tried to obtain finance. And if you haven’t, they could call you out on that. In Victoria we’ve actually got a section in the legislation that says that to get out of a contract on the back of not having obtained finance, you have to demonstrate that you’ve tried to obtain it.

Kevin:  Yeah, and that demonstration would be by producing a letter where you’ve been declined by the bank for your finance.

Cate:   That’s right. And you’ve got to do it in due time as well. You can’t just ask a bank manager on the day beforehand to draft you a letter. You need to demonstrate that you tried to obtain credit in a timely manner.

Kevin:  Myth number three, you don’t need a finance clause if your pre approval is granted by the lender. And this is something that I’ve got to say, even a lot of real estate agents don’t understand.

Cate:   This one is a tricky one and I’ll take it back to the letter that a lender will provide someone when they’ve got pre approval. It needs to be assessed firstly, so credit assessed. If you’ve got an indication of what you might be able to borrow without actually handing over documentation, then chances are your application hasn’t sat on an assessor’s desk. When the assessor does look at your information and decides that you might be eligible to borrow what you’re asking for, there will generally be conditions on your letter and they might be that the property has to be subject to the lender’s scrutiny. It needs to be a property that they’re satisfied with and it might be that it’s subject to a lender’s valuation. It could also have other conditions such as the applicant will provide evidence that they’ve closed down their credit card facility or whatever the condition is.

Cate:   But the point is you do need to be mindful of what those conditions are and you have to be very, very confident, if not certain that the property that you’re going for is one that you’re paying the right price on. And also it’s a property that the bank won’t refuse to accept. So in other words, it has to be a residential property. It can’t have any quirks that a bank might decide they’re not interested in accepting. So if it’s fire damaged, flood damaged, in the wrong zone. If it’s in a postcode restricted area, all of these things sound quite alarmist, but the reality is if you’re not certain and you can’t get that certainty from the bank or your broker, you should consider a finance clause.

Kevin:  I agree totally. And I think it could be clarified further by saying that a borrower can be pre approved, but there’s a big difference between a borrower being pre approved and a property being pre approved for finance, because it really depends on the valuation of the property, Cate, doesn’t it?

Cate:   It does and there are so many other quirks that the banks could decide they don’t like, ranging from their exposure to a high density building. They might say, look, there’s nothing technically wrong with this apartment, but we’ve already hit our quota in this building. Or it could be that they don’t like the size of the floor plan. There are so many quirks that a bank could be sensitive to. So borrowers should be very familiar with what banks like and what banks don’t like. And they also need to do some analysis and be confident that the price tag they’re paying is something that the bank’s valuer will agree with. Or they need to be sure that they’ve got some buffer funds on hand in case there’s what we call a bank val shortfall, evaluation shortfall.

Kevin:  Yeah. Yeah. Some very good advice. And if you are entering into a contract with a finance clause, make sure that you understand fully what you’re getting in for. There are lots of conditions around. Just putting a finance clause on it doesn’t mean to say that you’re safe and comfortable. You’ve got to meet all the conditions of the contract. Hey, Cate, thank you so much for your time. Great talking to you.

Cate:   You too, Kevin, always a pleasure.

Kevin:  My guest has been Cate Bakos. Cate is the Vice President for Real estate Buyer’s Agents Association. Thanks again, Cate.

Cate:   My pleasure.

Downsizer demands being met by developers – Shannon Davis

Kevin:  In the show we have in the past spoken about downsizes, what they’re doing, how they’re influencing the market, how developers are taking notice of what downsizes are needed. It’s classic that we would look at the Queensland Market, given it’s climate, and it’s attraction for people wanting to downsize, not necessarily retire, but maybe change their lifestyle. Shannon Davis from Image Property studies this and all the other trends in the Southeast Queensland and Queensland market in particular. Shannon joins me to talk about that. Shannon, thanks again for time.

Shannon:   No worries, Kevin.

Kevin:  Let’s talk about downsizes, because while you may not be noticing any real trends, do you think the developers are paying close attention to their requirements of their needs are?

Shannon:   Yeah, I definitely there’s a lot more stock for downsizers at the moment that perhaps the oversized apartments. Getting away from your traditional two and one bedrooms. Extra bedroom there for when the grandkids want to stay over. And you know, really low maintenance, single floor lift, elevator access or one story home.

Kevin:  Yeah, the feedback that I’m getting, too, from a lot of developers is that they’re not necessarily looking at retirement accommodation, but it’s people who are looking for a change in lifestyle. The kids are gone. They’re looking at having huge amount of equity in their property. And downsizing doesn’t necessarily just mean downsizing in price, it could actually mean downsizing in size but upscaling in price.

Shannon:   Yeah, there would be those downsizers that are looking to that, definitely. There’s been changing recently with superannuation that you can sell your big house after the kids have moved out, put some money into super. So yeah, there’s definitely a bit of both there. Some people are looking to downsize their mortgage, they’re close to mortgage free. And other people maybe just packing up and trying to go out on a bang, and live in a penthouse or something like that towards the end, or last stage of their life working wise. And yeah, you’re seeing a bit of both of that.

Kevin:  With a huge number of baby boomers coming through with downsizers, people who typically fit that category, with developers developing that style. What do you think in the future they’ll be looking at doing? What sort of improvements will they be doing in property to accommodate for that lifestyle need, Shannon?

Shannon:   Yeah, I think it’s been happening since the start. “Downsizers” is just a term that’s just a term that’s sort of risen to popularity recently. But what we’ve got to do is look for more specialised accommodation. Amenity is important, not necessarily a retirement lifestyle type access. But what downsizers are wanting is to live comfortably, and sort of maintenance free and easily for last part. So amenity is really important, green space, community. Because you’ve got more time on your hands. And of course you know, Kevin, the rise and rise of grandparents as babysitters these days as well is something that needs to be taken into account as well.

Kevin:  Yeah, we should never also ignore that lock and leave need, because people aren’t just necessarily retiring and then staying in one place and not travelling. They want to travel. They’ve got the finances to do it. So therefore that lock and leave is very, very important.

Shannon:   Yeah, definitely, you’re seeing a lot of that. And in groups travelling as well, and having a place that’s city abode, or perhaps by the beach. Somewhere where you can come and go as you please.

Kevin:  It raises another thought, doesn’t it, that many people aren’t necessarily retiring but they’re looking for a change in lifestyle while they continue to work. And we’re probably going to see a lot more people, maybe like myself, wanting to continue to work past the traditional retirement age. So therefore it’s going to be important for us to live in some of those business hub areas, so we’re not travelling as far, Shannon?

Shannon:   Yeah exactly. I think there was a period there where sea change, and tree changes all the flavour. But now, it’s going to be closer to your family, to your friends, where you’ve grown up, the community that you’ve lived in all your lives. And you’re looking for dwellings that suit that, with that moving too far.

Kevin:  It’s interesting to see how it all reshapes. Shannon, thanks for your insight. Appreciate it. Shannon Davis is from Image Property. Thanks for your time, mate.

Shannon:   Thanks, Kevin.

NZ banks ease up on high LVR’s – Kelvin Davidson

Kevin:  It’s interesting to see the figures from the Reserve Bank in New Zealand, the first lot available after easing of LVR rules there. They provide an interesting insight showing that the banks started to use their new freedom last month, raising the share of high LVR lending to owner occupiers from 9.8% in December to 12.1%. That’s, of course, still well below the new spend limit of 20%. Joining me to talk about this and some of the implications going forward for the New Zealand property market, I’m joined by CoreLogic’s senior property economist Kelvin Davidson. Kelvin, thanks very much for your time.

Kelvin:  A pleasure.

Kevin:  Okay, so what were the figures for January?

Kelvin:  The Reserve Bank reported that gross lending flows in January were $4.1 billion, up about 360 million from a year ago. So a rise of around about that 10% figure.

Kevin:  And I understand that owner occupiers contributed most of that increase. Is that right?

Kelvin:  Yeah, owner occupiers actually contributed all of it, so we’ve seen investor flows actually remain pretty flat year on year. So we’ve seen an overall increase for about the last 12 or 13 months, and most of that’s been driven by owner occupiers. So investors have been biding their time. They’re not dropping their lending but they’re not increasing it either.

Kevin:  What about number of loans? What’s happened there?

Kelvin:  Number of loans actually been pretty flat for a while now, perhaps 12 to 18 months. So they’ve been hovering kind of range bound is how I’d described them within the 20 to 25,000 mark per month. Around about in that range. So, yeah, pretty flat for a couple of years.

Kevin:  Based on what you’re seeing there and the feedback that you’re getting, Kelvin, what would you see the impetus is going to be like going forward?

Kelvin:  I think there’s still a bit of momentum there. We’ve had obviously these LVR rules have been loosened and I think that could provide a little bit of a one off boost, I’d say. There’s reasons to think that it won’t go too far, both supply and demand really. So it’s from the supply side. Banks themselves are still pretty cautious and they only want to lend to the absolute best borrowers.

Kelvin:  They’re potentially down the track going to face the Reserve Bank imposing higher capital requirements on them. So they’re thinking, yeah, we’re going to have to hold more in our balance sheet in future so that’s less to lend out now. So I think there’s a supply side restraint going on for lending. And then from the demand side too. I think, as I mentioned, the banks are only really targeting the best borrowers. And that pool of borrowers is not unlimited ’cause there’s only a finite pool of good borrowers so that demand is not infinite.

Kevin:  Of course, on top of all of this we also have the tax working group’s recommendations for capital gains tax on residential rental property. I wonder if you’d bring us up to date on that. Were there any surprises in those recommendations?

Kelvin:  No, not really anything major. The tax working group released an interim report three or four months ago. They’ve pretty much flagged up all of the things that were talked about in the final report. So no real major surprises, the key point being that they’ve recommended basically extending the capitol gain. Actually, we already have a capital gains tax in New Zealand called the bright-line test and people are overlooking that, I think, to a large degree.

Kevin:  What’s that called? The bright-line is it?

Kelvin:  Yeah, the bright-line test. It’s basically a capital gains tax on residential property if you buy and sell within a short period of time. So it’s really targeting property speculators to try and, if they are going to speculate, well at least they’ll be paying some tax on end gains. So really what they’re talking about here, what the tax working group is talking about, is effectively extending that to a wider base of assets really. So there’s no real surprises here. But there is a lot of water to flow under the bridge. It has to be basically voted on at the next election by the public. So, yeah, none of this is set in stone yet.

Kevin:  Okay. Well, given what you’ve told us and we’ve seen the growth to $4.1 billion in January, what do you see the share of owner occupier lending at high LVRs. What’s that likely to increase to, do you think?

Kelvin:  Yeah. Well, so it was up at 12.8% in January. I think it can go a bit further. The spend limit’s 20% so still a wee way to go to hit that spend limit. But what we’ve seen in the past is that the banks will increase it to about five percentage points below the spend limit. They like to keep that buffer as a sort of safety net, I suppose, and they don’t want to run the risk of going over the spend limit. So I think probably, given that the new speed limit’s 20%, I’d suspect that that figure will flatten off at about 15. So I think there’s still a little bit of impetus to come from the LVR loosening, but it’s not going to be a permanent ongoing boost to activity.

Kevin:  Kelvin, thank you very much for joining us. Kelvin Davidson has been my guest. He is the CoreLogic senior property economist in New Zealand. Kelvin, thanks again for your time.

Kelvin:  No worries. Thank you.

Renters dreams shattered – Tim Reardon

Kevin:  Well it was surprising to see that 92% of renters aspire to actually own their own home but less than half of them think that they’re ever going to achieve that dream. Joining me to talk about this chief economist for the HIA Tim Reardon. Tim thanks for your time.

Tim:  Good afternoon. Thank you.

Kevin:  Yeah, it’s interesting and I guess in a way it’s a little bit discouraging too. What did the research show?

Tim:  Yeah. So, we’ve taken a survey of 1500 everyday Australians across all jurisdictions and it was undertaken on behalf of HIA by an independent research organisation. And as you pointed out 92% of renters aspire to owning their own home one day. And to be honest with you I’m not quite sure why that isn’t 100% of renters aspire to own their own home one day. But it is very good to hear or to get data that reassures what you already know to be in place. The concern is just that just under half of those people expect that they will ever own their own home.

Tim:  The reason we found out that people aspire to own their own home is because they see that home ownership is important for retirement. It provides a level of financial security and that comes from the belief that or the fact that homes are not taxed or the family home is not taxed and the prospect also of if changes to government policy in relation to superannuation undermine the integrity of that. But home ownership is seen as being a stable base upon which you can build for retirement. And another interesting statistic we found out was 81% of Australians, or everyday Australians believe that they should be able to own their home regardless of whether they’re renting or not. And as a consequence of those factors we see that housing affordability is a top three issue at the next election just ahead of immigration and the environment in terms of where it ranks for everyday Australians.

Kevin:  In terms of priorities too I think a lot of people would think that housing affordability is a major concern ahead of things like healthcare and even ageing.

Tim:  Yes, that’s correct. And also of concern is that the majority of people see that affordability has deteriorated over the past decade and the majority expect it will continue to degrade over the course of the next decade. And within that they do see that government is the cause of that underlying problem and because of that the majority of average Australians believe that government have a very significant role in assisting first time buyers into the housing market. So, that most significant barrier to home ownership is getting a deposit to purchase a home. And so, 61% of the population ask for government assistance for first time buyers to get on that first rung of home ownership.

Kevin:  Well, just when we thought things may just get a little bit better then we see the decline and expenditure on residential housing became an even stronger head wind with the latest report out. Can you give us some comment on that Tim?

Tim:  Yeah. So, we’ve been expecting a downturn in building activity for some time and you have to keep in mind that the last four years we’ve built five years worth of new homes. There’s been an enormous boom, an unprecedented boom and there’s still an enormous volume of work that’s currently in the pipeline. But in the second half of last year, particularly within the last quarter and even worse in December we started to get some very poor data. The reasons behind that are numerous so a range of factors that we’re aware of, APRA restrictions included simply house prices causing a deterioration in market confidence. So, all of those factors we anticipated. The one we didn’t anticipate was the credit squeeze and that’s the bank imposed credit squeeze.

Tim:  And essentially, what occurred last year was the amount of money banks are prepared to lend to every individual is around about 15% less than what it was 12 months earlier and that’s just tightened up the market at that bit more that we hadn’t expected. Now, at this stage we haven’t revised our forecast and we don’t plan to until we have more data. One month of very poor data is not sufficient to draw too many conclusions from but we would hope to see some improvement in some of those leading indicators. I’m talking here about new homes sales and housing finance. We would hope to see some of those pick up in the first six months of this year. And given the constraints that banks have imposed we would expect that they would start to ease off some of those restrictions. They may recognise that those overcooked that credit squeeze and that we will see a few more investors and a few more first time buyers back into the market or borrowing more money to, able to borrow more money in order to purchase their first home.

Kevin:  Well, what does it take for them to realise that Tim because I think right now it’s fairly obvious that they probably have gone too far with some of those macro prudential controls. I mean is it just up to government? Is government that powerful that it can actually pull those levers and make properties more affordable almost overnight?

Tim:  Well, certainly the restrictions that have been imposed to the banks are government restrictions so the answer to that is yes. The government set out to take investors out of the market and they’ve been entirely successful in doing that.

Kevin:  Very successful yeah.

Tim:  Yeah. And so then, you begin that cycle that we’re in at the moment where house prices come off, market confidence comes off, and we’ve lost that fear of missing out. First time buyers take that pause and they go, “Well I’ll just wait another three months so I’ve saved more money and house prices will have come down. I’ll be able to buy an even more aspirational home.” What occurs after this is we know that house prices are going to go up again and the very moment that they do it’s actually a very sudden return of both first time buyers and investors. And we see a bit of a price spike for a short period of time. And that’s all of those first time buyers and investors who thought they could pick the bottom of the market perfectly and then discover that they missed it. And so, even myself as a housing industry economist I certainly wouldn’t prophet to say exactly when that will occur but inevitably at least half of the market will miss that.

Kevin:  Yeah. Tim what do you think long term if Labor win the next election and they start to fiddle with negative gearing? Do you think that’s going to make this situation even worse?

Tim:  It most certainly … Well, the short term effect is to further damage investor activity in the market. The long term effect is that it does reduce the supply of new homes and that’s the underlying cause of the rapid house price rises that we’ve seen over the past couple of decades. And the goal should be to have less government involvement in the housing market not more. The market needs to be able to respond to changes in demand. From a builder’s perspective they can deal with market risk, they can deal with product risk. What every business struggles to deal with is regulatory risk and so changes to taxation arrangements as they come in, as they come out, as they get adjusted that causes pain to businesses within that industry. So, certainly from our perspective we don’t see any gains out of that tax change quite whether the labour party embraces that early on if they were to be elected. Certainly the timing of that would be exceptionally inopportune at the moment given that the very rapid decline in building activity that we’re seeing at the moment. But in terms of principle as well regardless of the timing it’s not a good outcome.

Kevin:  Tim, great talking to you. Tim Reardon is the chief economist with the HIA. Tim thanks for your time.

Tim:  Awesome thank you.

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