Construction recovery needed before we can start talking about a housing recovery: Analysis

Last week Michael Yardney re-published his rundown of Australia’s market cycles from the 1980s onwards.  The premise was to calm any ‘would-be’ property investors into recognising the various historical trends that traditionally affect the ‘ebb and flow’ of Australia’s real estate market.

If you’re a regular reader of Property Observer, you will have no doubt had your fill of where each individual state sits on the ‘property clock.’ It’s an arguably overused term to provide a fairly limited theory for our frequent ‘boom and bust’ cycles.

Question why property prices are so high and you’ll receive a basic lesson in real estate agent property economics – the top of which will be supply vs demand. ‘We have a growing population and not enough homes’… and on and on it goes.

Indeed, various commentators have already extrapolated out two months worth of housing data to ‘conclude’ a rise of ‘10%-plus’ over the course of 2013.

Certainly, if you want to ignite an emotional debate, housing is right up there with politics and religion.  Since history began, it has remained an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for: land.

Whether it be a means to make a living through effective cultivation, a form of wielding control over a resident population, a place to build the modern-day castle, or simply a speculative investment, it’s the most valuable commodity mankind owns – a valuable and finite commodity that becomes ever more so as the population expands.

Indeed, property rights are a foundational component of a capitalist economy, and under our current system of ownership, governments profit nicely from the advantage.  In Australia, state government revenues from property-related taxes alone equate to around 23% of the total balance sheet – hence why ‘stamp duty addiction’ and the consequential need to incentivise buyers to keep transaction figures high has such a strong hold.

However, no-one should be under the impression that property prices are high due to demand factors from home buyers. Prior to the GFC, following a global ‘borrowing’ shopping spree of cheap credit, Australia’s ‘too big to fail four’ were amongst the world’s most heavily exposed to the residential real estate market, with a grand total of 59% of loans offered to this sector alone.

Australia’s banks are as ‘pinned’ in their reliance on the ever-expanding growth of our resident population’s desire to borrow and buy, as is everyone else who has a hand in the pie.

In this ‘boom and bust’ merry-go-round culture, we’ve simply borrowed more to pay more, the vast majority of which has gone into residential housing – inflating prices disproportionately.

It’s a somewhat inevitable conclusion – made all the worse due to restrictive planning laws which have failed to accommodate for substantial capital city population growth – that the ease of credit has advantaged those at the beginning of its issuance, to the expense of those at the end.

Baby boomers who got in at the start of the ‘lending boom’ have certainly profited over those who are now at the ‘sticky’ peak, where prices have already had their ‘golden years’ of growth and the big profits have been made.

Mortgage debt – the largest component of all debt in Australia – is aptly living up to its original French meaning for the first-time buyers paying inflated prices, that being a “death contract.” However, as long as those purchasing are able to meet their repayments, the banks can continue to create money ‘selling’ their loans – backed up by overly generous wholesale funding guarantees – and there’s little incentive to improve the situation for a growing minority sitting at the bottom of the pile.

Albeit, there’s no doubt the property market has once again started to simmer – most agencies are reporting a spike of active enquiry – some declaring levels equal to those seen back in 2009 during which the federal first-home-owner boost was fuelling a post-GFC boom.

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