Trouble in the bedroom for housing investors

As job and welfare benefit losses bite, areas with mortgage trouble will be further squeezed. That's likely to trigger changing patterns of habitation across the nation.

When Treasurer Hockey revealed his plan to put the nation on a crash diet to slim down welfare spending, it was clear that certain sectors would be impacted more than others.

The first place to look would be the outer suburbs, and a few regional centres, where cutting entitlements would most interfere with family budgets. It is in these areas that incomes and household expenditure are most finely balanced.

A good indication of the sorts of areas at risk came with this week’s report from Fitch Ratings showing where mortgage payments were most in arrears (see table below).

Victoria did particularly badly – Wallan and Craigieburn are satellite suburbs to Melbourne’s north, and Melton, Lynbrook and Wyndham Vale are far-flung suburbs within the greater-Melbourne area. Corio is in Geelong and Torquay is on the coast near the start of the Great Ocean Road.


Graph for Trouble in the bedroom for housing investors

There is no need to delve into this pattern too deeply here – it is just a reminder that losing benefits will tip the balance more often in these already strained suburbs.

And it is not only benefits that are evaporating. The jobs crisis that was latent at the end of Labor’s reign is appearing and has been made worse by low consumer confidence and businesses holding off on investment decisions.

As the RBA’s Governor Glenn Stevens said this week: “Signs of improvement in investment intentions in some other sectors are emerging, but these plans remain tentative as firms wait for more evidence of improved conditions before committing to significant expansion.”

That translates into growing unemployment and, as Roy Morgan Research keeps pointing out each month, a big problem with under-employment.

It noted this week: “...an estimated 1.326 million Australians (10.6 per cent of the workforce) were unemployed ... Among those who were employed 1,188,000 Australians (9.5 per cent of the workforce - the highest ever recorded) were under-employed, i.e. working part-time and looking for more work.”

Roy Morgan’s measure of unemployment does not immediately remove a person for the jobless count if they were not looking for work in the survey’s ‘reference week’ – for instance if they found an hour or two of work that week. That is why the Roy Morgan unemployment rate has diverged from the ABS count since the GFC (see chart below).


Graph for Trouble in the bedroom for housing investors

Where will these trends lead if not reversed? Well certainly to unhappier homes for lower socio-economic groups.

The trouble with living in the cheapest areas of a city is that when hard times strike, one cannot simply move out to even farther-flung, cheaper places.

Home owners and renters in such areas, once they’ve taken account of welfare changes and reduced hours of work, will have to do something to balance the books. But what?

One of the interesting things about the past two decades of Australian social history is the diverging trends shown in the chart below – we’ve been building bigger houses, and fewer people have been living in each one.


Graph for Trouble in the bedroom for housing investors

The lower line on the chart above shows that the number of persons per household fell until the start of the GFC, and has risen slightly since then. My guess is that a combination of welfare cuts and reduced hours of work will push more people back into accommodation arrangements that, in better times, they’d prefer not to endure.

Sticking with Melbourne for the minute, the last time the ABS published extensive figures on ‘surplus bedrooms’ in houses was after the 2006 census. It found 1.3 million empty rooms across Melbourne, when the population for the greater city area was 3.8 million.

Today, there are around 4.4 million people – so even if no additional housing stock had been added (and plenty has), there would still be 700,000 spare rooms.

There are many options for filling some of them. Adult children might move back in with their parents. Friends might house-share rather than have their own place. Childless couples might share a home. Whole families might share homes.

The number of hived-off granny flats, bedsits and lodging rooms offered for rent may also increase. Plus, charities warn, there may be increases in homelessness and demand for temporary accommodation.

Whichever of these predominates – and given that dole cuts will impact the young most, it will be that age group on the move first – the net effect is the same. A housing shortage could quickly become a housing surplus.

In my discussion of housing assets offering long-term income streams a bit like UK-style annuity products (A new asset class growing under Hockey’s nose, July 1), the missing risk, that some readers identified, was the prospect of being unable to rent out your ‘bricks-and-mortar annuity’.

That prospect may be exactly what faces owners of houses in the kinds of areas described above. If the number of people per dwelling rises through necessity, vacancy rates must rise.

Or, as has been a long-term strategy for governments of both stripes, the immigration spigot can be opened even further to flood outer suburbs with grateful migrants.

It has worked in the past, keeping a floor under house prices by keeping demand ahead of supply.

But that was in better times, when the long resources boom could soak up excess labour. Those conditions are rapidly eroding.

Moreover, it’s all happening at a time when, as Stevens notes, “a strong expansion in housing construction is now underway.”

For the owners of all those new bedrooms, the message from the market could be “not now dear – you’ve got a headache”.

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