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Why is there a housing shortage and why will government controls make it worse?

housing shortage

Rental control is a quick fix medicine to treat the symptoms, It will make the problem worse by exacerbating the fundamental problem, which is that Australians have been massively discouraged from becoming investors

A key reason why fundamental problems in the housing market are never solved is because people seek to treat the symptoms rather than the cause.

This is true in business and in life, as much as it is in the housing market. It makes little sense to take medication for high blood pressure if the underlying cause is that you’re overweight because you have a bad diet and you don’t exercise.

People who hover around the sidelines of the real estate industry, sniping at things they don’t like, are highly prone to demanding actions on the symptoms of a perceived problem when they should be addressing the underlying causes of the symptoms.

Treating symptoms, while ignoring causes, has a tendency to make problems worse. Right now, we have spectators to the housing market demanding controls on landlords because rents are rising.

Other spectators want draconian measures from regulatory authorities because prices are rising, bringing howls of outrage about housing affordability.

In both cases, their targets are investors, always a popular choice as scapegoats when there’s growth in housing markets and it’s characterised in media as a crisis.

The natural impulse of the sideline whingers is to demand a crackdown aimed at investors, because they’re always seen as the villains.

The reality for the issue of rapidly rising rents is that we need to be encouraging investors, not attacking them.

The symptoms of the problem are rising rents, but the cause is a chronic shortage of rental properties.

In my four decades of researching and writing about housing markets, I’ve never seen vacancies so low in so many places.

Anyone genuine in their concerns (rather than having a whinge or grandstanding for political reasons) should be asking why we have such a shortage and how we can fix that fundamental problem.

Rental control is a quick fix medicine to treat the symptoms, while ignoring the underlying market health issues. It will make the problem worse by exacerbating the fundamental problem, which is that Australians have been massively discouraged from becoming investors.

Rental vacancies are a function of the activity of property investors. When people buy dwellings and make them available for rental in large numbers, there are ample properties for everyone who wants or needs to be a tenant, and rents are likely to be stable.

But investors have been largely absent from the market in recent years. There has been a growing raft of disincentives to property investment over the past five or six years – including a series of negative measures by APRA, negative changes to depreciation rules and menacing political rhetoric at the last two federal elections, notably from the ALP which has been intent on scrapping negative gearing and increasing capital gains tax.

We’ve also had state governments discouraging investors by hitting them with new taxes, fees and charges. The impact of all those different milestone events since 2015 has been a profound discouragement to investment. Some sections of media have characterised property investment as something akin to a criminal activity, abetted by politicians who have claimed the average investor is a rich greedy bastard who owns 15 or 20 properties and is ripping off the system – a blatant lie (the official data shows 75% of investors have average incomes and own only one or two properties) but lapped up by a careless media.

The short-term consequences include a rental shortage crisis and the long-term outcomes include fewer Australians who will be self-funded in retirement and will need to be supported in growing numbers by taxpayers. If governments respond to the twits on the sidelines and enforce controls on rental levels, rather than allow market forces to set them, that will be yet another disincentive to investors – and the problem will get worse.

Limiting how much a tenant has to pay in rent is worthless if the prospective tenant can’t find a vacant property at any price. That’s the reality at the moment. There are so few vacant properties that there are dozens of applicants for every listing and people who desperately need a home keep missing out. Rents are rising because people are offering more than the asking rent in an effort to out-bid their competitors, not because landlords are asking extortionate rents.

And, as an aside, increasingly businesses can’t fill job vacancies because willing applicants can’t find anywhere to live. The only answer to this problem is to increase the supply of rental properties. And that means introducing measures that encourage property investors.

That will elicit further howls of indignation from the chattering economists and other sideline snipers, but it’s the only way to fix this problem.


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Don’t let FOMO rush you into the property market

property market

Hi Nicole. My partner and I are watching what is happening in the property market and I’m starting to feel desperate. It seems like things are crazy. We have been saving hard for three years for a home deposit but prices are increasing faster than we can save. Should we take the leap now and how can we do it without over-committing? Is there any help – or even just guidance – for people like us? It all seems quite scary. Many thanks, Lauren

It is a little tricky without knowing your deposit amount, target property price or location. However, there are certainly a few concessions and strategies that might help.

A couple of these were courtesy of the May federal budget.

The first is that the First Home Loan Deposit Scheme has another year to run.

A further 10,000 places were announced for the 5 per cent deposit scheme, for which the government guarantees another 15 per cent. That means you can borrow 95 per cent of a property’s value but what the guarantee does is avoid the cost of extortionate lenders’ mortgage insurance. This can be tens of thousands of dollars.

The scheme will apply if your household income is less than $125,000 a year. But you should get in quick as the concessional loans have been going fast.

The other newer initiative of note is the expansion of the first home super saver scheme.

With this one, you can tip extra money into your superannuation fund that is allocated specifically for a house purchase.

You can already pay in up to $30,000 but from July, 2022, the allowable amount will rise to $50,000. You can save this over two years and then withdraw it, plus earnings and less tax.

Inside your super, the tax is lower than your marginal tax rate, so you would amass money for a deposit more quickly.

The above measures add to first-home buyer grants and stamp duty waivers that are available, which differ by state, but can apply to homes you build or buy new. For more information, visit your relevant Office of State Revenue website.

The market is rather manic and you must guard against letting that pressure you into borrowing more than you can afford.

Ordinarily, I would advocate saving a 20 per cent deposit to avoid lenders’ mortgage insurance.

However, in capital city markets, where prices are rising by as much as $400 a day, that looks unrealistic. A more reasonable deposit is probably 10 per cent of the purchase price.

Still, make sure borrowing that amount would not put you into mortgage stress – defined as committing more than one-third of your before-tax household income to housing.

Be aware that under bank lending restrictions, a lender may “stress test” whatever you borrow for 2.5 percentage points of interest rate rises. That could reduce your capacity to borrow.

To make sure you are relaxed and comfortable with what you borrow, just calculate one-third of your after-tax income. You could then jump on an online mortgage repayment calculator and play with what loan size that amount of monthly repayments would cover.

Perhaps use an interest rate of 2 per cent, although the best quality loan in the market with a mortgage offset account is just 1.89 per cent.

Do your utmost to limit your borrowings. And, most importantly, remember that the time to buy is when you are ready – not when rushed.


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What does the return of investors mean for the property market?


Throughout the first half of this year, much of the talk of this property boom has been focused on owner-occupiers and especially first home buyers.

Record-low interest rates, a suite of government incentives and a burst of consumer confidence after last year’s dire economic forecasts were proved wrong helped usher in one of the biggest years of growth the Australian housing market has ever seen.

Over the past few months, though, affordability pressures have put the squeeze on those new market entrants, and it’s made way for a fresh wave of investor activity.

Will that shift continue to propel the market to greater gains, or is the heat set to die down? We spoke with Michael Yardney, one of the country’s leading property experts, to get the state of play.

What are the signs that investor activity is on the rise—and why now?

The latest data from the Australian Bureau of Statistics, which tracks new loan commitments for housing, shows a substantial uptick in lending to investors in recent months.

May especially saw a substantial jump in loans to investors of +13.3 per cent, or $9.13 billion for the month. That’s +116 per cent more than the same period last year.

ABS loan data, May 2021
New borrower-accepted loan commitments (seasonally adjusted) show a big uptick in investor activity. Source: Australian Bureau of Statistics

Mr Yardney, a best-selling author, founder and director of Metropole Property Strategists and the name behind one of the world’s leading real estate blogs, Property Update, says lending indicators are all pointing to a resurgence in investor activity.

“In my close to 50 years in the property market, I’ve never seen all the markets coordinate and grow as strongly,” Mr Yardney explains.

“Throughout Australia, investors are reading in the media that properties are going up in value, they’re seeing the value of their home going up, and so they’re also getting confidence to take on a commitment and get into the market.”

“In fact, more are experiencing FOMO, because they think ‘Hey, I’m reading that overall the markets have increased +13.5 per cent this year according to CoreLogic in the last financial year, and most of that’s occurred in the last half of that year.'”

In Mr Yardney’s view, the smartest investors would have already jumped on the rising market in the months prior, but with his forecast of a further +10 per cent growth nationally for the year, there are still big upsides to making a move now, even while rents are still recovering.

“Informed investors have always invested for capital gains rather than cash flow. They recognise that while cash flow keeps them in the game, it’s their capital growth that will get them out of the rat race.”

Many investors are also choosing to sell while the market’s hot. Is that wise?

While plenty of investors are making a fresh leap into the buoyant property market, others are choosing to list their assets and cash in on this year’s staggering growth.

“Yes it’s a trend, and it’s a silly trend,” Mr Yardney says.

“We’re seeing that because they’re seeing the market’s going up and saying ‘I’m making a profit, I’m going to sell.’ But most investors are in it, or should be in it, for the long term.”

As he sees it, acting on emotion rather than being patient and reaping the rewards over the decades is a more sound approach to investing.

“Property investment is the vehicle they’re using to get financial independence and choices in life in the future. For most of the investors we deal with at Metropole, they don’t ever sell. They’re wanting to create intergenerational wealth.”

The conditions now, however, present a good opportunity to capitalise on a hot market and offload any investment properties that aren’t A-grade.

“If they’ve got a secondary property, a dud property, one that’s not very good, this is a good time to sell and buy something better to see you through because you don’t want to be left with a dud property when the cycle finishes,” he says.

How will increased investor activity affect the market?

Investors swooping into an already booming market will no doubt have an impact on other buyers and sellers.

The first half of 2021 saw an influx of first home buyers breaking into the market, and the surging rates of growth have stimulated a lot of conversation around the topic of housing affordability.

Mr Yardney feels this concern is overblown to a degree, though, and it’s more an issue of desired location.

“First home buyers have always had difficulty with affordability,” he says. “I bought my first property for $18,000 in the early 1970s, and I could only go halves with my parents because I couldn’t afford it, and I took out a 30-year loan. We got $12 rent and we were excited.”

He points out that first homeowner activity has reached record levels in the past year, but many of them “want to live in the sort of property it took their parents 40 years to buy. So they’ve got to become more realistic.

“Having said that, moving forward first homeowners are going to have difficulty, and it will take a while. It’s not the level of the mortgage that’s the issue for first homeowners; they don’t bring a trade-in to the market like established home buyers do, so it’s saving the deposit that’s the biggest issue for first home buyers.”

Sellers, meanwhile, have been presented with a golden opportunity thanks to huge demand driven in part by record-low interest rates.

“Sellers are able to take advantage of the biggest property boom in a couple of decades,” he says. “This sort of property boom is a once in a generation thing where you’re going to get all the banks, all the big economists agree this cycle, property values will go up 25 to 30 per cent.”

With investors picking up where some first home buyers have left off, unable to keep up with such rapid growth, it looks like sellers will continue to benefit from a thriving property market.

Mr Yardney does caution, though, that high-density units in inner-cities are still an unattractive option.

“Investors are currently shunning CBD high-rise Legoland apartments which are proving to be poor investments and are being very cautious about buying off the plan,” he says. They seem to be more informed and not lured by unrealistic promises from developers and project marketers.”

So what comes next?

With first home buyers pulling back, investors upping their activity and a fresh coronavirus outbreak throwing the country into varying states of disarray, what could be around the corner for real estate?

“I believe in the second half of 2021, overall property values are going to go up 10 per cent,” Mr Yardney predicts.

“The investors and homebuyers have worked their way through Covid. They’re used to it now. It’s a nuisance, it’s a setback, but it’s not stopping them.”

He notes that, while the economy is likely to take a hit as a result of prolonged lockdowns, “we’ve seen what happened after Melbourne—once the gates are opened up, people are going to get going again.”

He characterises the current market as a “cycle of upgraders,” saying tenants are buying their first homes while homeowners are upgrading their properties or moving to better locations, all as a result of low interest rates.

“Why are property values going up? Because people can afford it. Despite people saying it’s unaffordable—if it wasn’t, there wouldn’t be so many people taking loans and buying properties. Because the banks are still very strict with their lending criteria.”

Ultimately, it looks like there’s plenty more action to come in this year’s property boom.

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Lockdowns more detrimental to buyers than hikes in fixed interest rates: mortgage brokers


Mortgage brokers say that lockdowns are far more detrimental to prospective homeowners looking to take out home loans than any potential fixed-rate hikes.

Some banks have already begun raising their fixed interest rates despite the Reserve Bank of Australia holding the cash rate at 0.1 per cent at its July board meeting, saying its central scenario was to keep it there until 2024.

But that rate increase will make no difference to buyers’ borrowing power if their pre-approval has since expired or they are looking to take out a home loan now, experts say.

Instead, the lockdowns have had far more wide-reaching impacts on affected buyers shopping around for a home loan, with some delaying plans for months and others shelving their plans altogether as more than half of the country’s population faces some restrictions across three states.

In NSW, Sydney entered its fifth week of stay-at-home orders, which has shut down a range of industries, including construction and retail, and has placed five entire local government areas into stricter conditions, banning residents from leaving for any work unless they are in essential services.

This has stopped many hopeful home owners from taking out a loan, said Rob Lees, Mortgage Choice Blaxland, Penrith and Glenmore Park principal.

“There is no doubt that for people in affected industries, they will not be able to get a loan. There is no way a bank will give a loan to a tradie if they’re not working during a lockdown,” Mr Lees said.

While banks have not changed policies, as they did last year, Mr Lees said, they do still ask for more information than usual, including whether applicants have been impacted by COVID-19.

Since the latest outbreak, he has placed several applications on hold until trades – from plumbers to beauticians – return to normal.

Fixed-rate increases were almost a “non-issue” as banks were assessing buyers’ borrowing power against the variable rate plus an extra 2.5 per cent as the serviceability buffer, he said.

Victoria’s snap lockdown – the fifth one for the state – is adding to the pent up demand for many house hunters who have put their plans on ice for months now due to the ongoing uncertainty.

Foster Ramsay Finance principal and mortgage broker Chris Foster-Ramsay said applicants need an uninterrupted six-week run of earning income to be able to apply for a home loan.

“There’s a whole lot of people who have sat on their hands in Melbourne for up to six months, if not more. Their plans are on hold, and that is very common down here,” said Mr Foster-Ramsay, adding that it was a responsible lending requirement since the Royal Commission into the financial sector.

“It’s not hard to find those [hopeful home owners] in affected industries – travel, hospitality, live performance – where they are doing whatever they can do to survive.”

But some banks are more understanding when it comes to some industries compared with others, according to Melbourne-based mortgage broker and Pearse Financial director Tom Pearse.

White-collar workers in accounting or legal industries were better placed to have a home loan application approved if employers were willing to write a letter outlining the length of reduced hours due to COVID-19, he said.

Meanwhile, in Queensland, the state has been barely affected by lockdowns, leaving most buyers with the same borrowing power even if fixed rates have increased since they began their house hunting months ago.

“The reason it doesn’t impact borrowing capacity as much is that the banks assess it on the ongoing variable rate, most of the time. It’s not assessed on the fixed-rate itself,” said Caroline Jean-Baptiste, Mortgage Choice Fortitude Valley mortgage broker.

She said the bigger impact for Brisbanites was that some banks were changing their assessment on expenditure around health insurance and private school fees.

“That had more of an impact than a rate change. Somebody, who a month ago could have borrowed $650,000 can now borrow $550,000 if they’re sending their children to a private school or have private health costs,” she said, adding that it was postcode-related.

“So, some lenders use a postcode to determine the benchmark living expenses that they will apply to a certain application.”


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