Trident Real Estate was recently invited by the UNSW Real Estate Society to be part of its Investment Strategy panel. The panel speakers included Brad Nelson, Property Finance Director at BankWest, James Quigley, Head of ANZ Capital Markets at Cushman & Wakefield, Anthony Millet, CEO of BRICKX, Christopher Gibbs, UNSW PhD Economist and Costa Argyrou, Managing Director of Trident Real Estate Capital.
Kevin Fox, a Professor of Economics at UNSW and the moderator for the panel, kicked off this vibrant debate by inviting the five esteemed panellists to offer their views on whether Australia is experiencing a ‘housing price bubble’, and whether any parallels or distinctions with the US housing market in the mid-2000s can be drawn to support such views.
Christopher Gibbs, who is currently helping the RBA model housing issues at a macroeconomic level, and also lived and studied in the US in the early-to-mid 2000s, was able to kick-start discussion by addressing the fallacy that the US crash was spurred by low interest rates. In reality, a fundamental shift in the US mortgage market was to blame – institutional lenders became wrapped up in rising prices, triggering a lapse in ethical standards and a decline in borrower quality. Furthermore, US tax incentives, being based off the size of interest payments, meant that mortgages were encouraged to be as large as possible. This oversupply of new credit effectively leveraged the market into a bubble.
James Quigley of Cushman & Wakefield distinguished the Australian market by noting the tighter and more stringent requirements imposed by Australian banks. Due to ‘corporate memory’ of the Australian downturn in the late 80s – early 90s (spurred by over-liberal lending to developers), stronger lending controls are safeguarding the current market. In requiring a ~10-20% down payment, different laws governing loan defaults, and incentives to pay off loan principals as fast as possible, the average Australian borrower is of much higher quality than their mid-2000s American counterparts, being on average 2.5 years ahead on their mortgage. Furthermore, Mr. Gibbs noted that property valuations in Sydney and Melbourne are normalising against global rather than local incomes. Since the marginal buyer of Australian property is the global investor, outside interest will continue to prop up any softening of domestic demand. It was our opinion that commentators who argue the low cash rate is leading Australia into a bubble are misled. Strong market fundamentals speak to the contrary.
Anthony Millet of BRICKX and Brad Nelson of BankWest also discussed the nuances within the Australian market. They noted the overgeneralisation of the Sydney-Melbourne markets as representing the whole country. There are large discrepancies between prices in blue chip inner-Sydney suburbs and regions 50-70km out of the CBD, so it is incorrect to infer an overarching price bubble. As Mr. Nelson points out, intra-state differences are an interesting point of distinction, with many localities experiencing rising property prices as a result of migration. Many new migrants flock to cultural enclaves that offer familiar communities and support, presenting a potential investment opportunity for the savvy.
The conversation segued into housing affordability. When asked about supply side challenges, Costa Argyrou of Trident Real Estate Capital spoke of the hurdles imposed by local government across the development timeline. Speaking from a developer’s perspective, Mr. Argyrou criticised the red tape that unfortunately undermines industry productivity including applications for countless permits and consents and unnecessary technical obligations, the resulting cost blow outs being passed along to the ultimate buyer and inflating prices. The lack of transparency and sole regulation by council is clearly an inefficient model, with Mr. Quigley querying whether State Governments could be brought into the equation. As Mr. Fox discusses, another supply-side issue is the rising mobility costs (stamp duty) as house prices rise, leading to older generations staying put even as their families move out, causing underutilisation and a suppression of supply. However, Mr. Quigley points out that this trend is not entirely negative, as extension and refurbishment activity grows as these homeowners look to re-allocate the funds that would have been lost to stamp duty.
A related topic of interest was the recent amendments to the first homeowners grant. As Mr. Fox notes, the reality, given the recent adjustments to property prices over the last 5 years, is that the scheme merely represents a transfer of wealth from the government to homeowners. In the Sydney-Melbourne markets there are already signs that the first homeowners grant has pushed up properties in the $500-600k bracket. That said, the benefit of the grant will have the most impact in other states, and provided that those states offer strong employment prospects, we might see more interstate migration away from Sydney and Melbourne. However, as Mr. Gibbs points out, the reality in Australia is that real wages and house prices have experienced a long term decoupling since the 1980s, making home ownership an increasingly difficult goal for many Australians.
The panel wrapped up with questions from the audience, one of which inquired as to the panel’s thoughts on negative gearing, a form of financial leverage where, in the short term, the gross income generated by an investment property is less than the costs of owning and managing the investment. Australia’s current legal system allows individual investors to negatively gear without restriction. Mr Quigley spoke to a key risk that is often not understood correctly when negatively gearing – the investor’s net loss each year and the opportunity cost of this loss must be built into the cost of capital, with returns only being achieved with sufficient capital appreciation. As a result, if the market slows or experiences a downturn, the investment will sustain a loss. From a macroeconomic perspective, Mr. Gibbs noted how encouraging such leverage may unhinge the stability of the economy. Mr. Nelson held a strong belief that investors should be taxed differently for any investment property past their third in order to stifle unencumbered borrowing. Mr. Millet noted the economic and political ramifications of unwinding the current Australian position on negative gearing due to the large amount of wealth tied up in residential property, saying that any undoing will be a long and arduous journey.
Ultimately, this panel focused primarily on several topics at the forefront of Australian real estate, and essentially the wider economy – house prices, the stability and outlook of the market, and how this will affect investors. Most of the panellists agreed that strong market fundamentals will continue to support the market, distinguishing us from mid-2000s America. However, robust examination and revision of policies and procedures at all levels of government will continue to play a crucial role in economic stability, housing affordability, and investment prospects. As Mr. Argyrou points out, interest rates are bound to rise eventually, and all players in the real estate market must be ready to deal with the ramifications.
You can watch the full video of the UNSW Real Estate Society Investment Strategy Panel by clicking here.