In case you hadn’t noticed, property is hot right now, burning hot in fact. But if you’ve just missed out on the home of your dreams, think yourself lucky. You may have just dodged not one but three bullets, all aimed at your bank balance.
The ABS reckons capital city house prices were up 3.2% in the first half of last year and 6.1% in the second. With auction clearance rates at all-time highs on heavy volumes and housing finance commitments skyrocketing, that momentum looks set to continue.
The fear of missing out on a $600,000 inner city shoebox has even provoked xenophobic rants about the number of Asian buyers making life hard for the locals, who naturally take a tax system legislated to encourage speculation as a human right.
Unsuccessful buyers may well worry. Heaven forbid that, amid the sea of punters waving mortgage pre-approvals, you see the auctioneer pointing at you mouthing the word ‘Sold!’
As someone long bemused by the Australian property obsession, I’ll not pass judgement on where the market is heading. But research produced last week by Leith van Onselen of Macro Business in Intelligent Investor Share Advisor should have property investors quaking in their hush puppies.
Let’s start with the first bullet described by van Onselen: wages growth.
Last year, this metric slumped to the lowest level on record. Yep, while house prices went up by 10% last year, wages rose by just 2.5% - less than the rate of inflation. That, to paraphrase Robert Palmer, is simply unsustainable.
When Palmer’s song was on high rotation in 1988 the value of Australia’s housing stock was about 180% of GDP. Now it’s over 300% and, if the ABS is right, will breach the previous mid-2010 peak later this year.
That alludes to the second major bullet coming property investors’ way: the sheer number of them buying.
Accounting for almost half of all house finance commitments, just bellow the all-time peak set a decade ago, this is an investor-driven boom that proscribes volatility.
Homeowners tend to stay put, riding out periods of market declines because they’ve purchased a home rather than an investment. Debt-financed investors are far more fickle, running for the hills at the first sign of over-the-odds strata fees.
Comparisons with 2003, a much-favoured tactic used by property spruikers to justify rocketing prices and create fear of missing out, don’t stack up.
The 2003 peak preceded a once-in-a-lifetime mining boom that pushed wages through the roof, allowing people to devote an ever greater share of their disposable income to mortgage repayments.
Record low interest rates are now doing the same thing. The difference now is that the economy is at the end of a boom, not the beginning of it.
Which brings us to the last bullet aimed at eager property investors. Not only is income growth slowing, more people aren’t earning a wage at all. At 6%, unemployment is at its highest in a decade.
Last January was the 14th consecutive month where employment grew by less than the size of the labour force. With the mining sector accounting for nearly 10% of employment, the end of the boom could push unemployment up further. And that’s before the loss of 50,000 jobs in the automotive sector.
Not only are we not creating enough jobs to absorb new workers, existing workers are being given the boot.
As Leith concluded, “While Australian housing is likely to be well supported in the short term, propelled by positive sentiment and intense investor activity, it appears to be heading for trouble. Australian housing valuations are likely to hit their highest level on record later this year just as the economy enters its biggest adjustment since the early-1990s recession.”
That’s what property investors have to look forward to. Be careful what you wish for.
This article contains general investment advice only (under AFSL 282288).