Read the previous week’s Investment matters.
Photo © Fatih Kaya from Via Canva.com
This week marked the midpoint in the series of First Samuel’s client CIO Dinners, with events at Centenove in Kew and Cumulus in the CBD of Melbourne. Both were enjoyable events for the investment team and informative for clients.
Without rehashing the presentation, one of the slides I presented dovetailed nicely into a quite constructive week of public policy that concentrated on housing affordability. Affordability we would argue is now almost synonymous with questions of intergeneration wealth and social equity. This week marked the midpoint in the series of First Samuel’s client CIO Dinners, with events at Centenove in Kew and Cumulus in the CBD of Melbourne. Both were enjoyable events for the investment team and informative for clients.
The Market
Affordability and convenience
As parents, there is a clear awareness that our children, either as first home buyers, or even as upgraders when a family arrives, will struggle to afford existing housing. Nor is it clear they will be even able to buy new housing of almost any quality in a location convenient to their employment.
It is equally obvious for a nation that has the majority of its wealth in housing, this affordability problem is the flipside of retirement incomes” policy and protecting the household wealth of the generations fortunate enough to already be secure in the housing market.
This makes for a capital P problem, not one solved in a week, nor by this author.
But a small p problem that may start the ball rolling would be to at least build enough houses for the existing levels of demand, perhaps in forms that appeal and in places that are relevant. Let alone enough to be affordable.
Expanding supply
That is why the following chart is so important, as a context for anyone looking to expand the supply of new housing, and also enable increases in housing construction.
The red line shows the number of Residential Building Commencements by year since 1960, both houses and apartments. Not all are completed, and of course some houses are demolished. So there isn’t a perfect relationship between commencements and net housing created, but the direction is correct.
We see that the red line has the standard economic cyclicality, has risen over time, and is currently lower than it has been for a decade. This decline would already be cause for concern considering the enormous flow-on economic benefits that come with building construction.
Source: Minack Advisors, ABS
But when the number of commencements (the red line) is divided by the population, you get the blue line. And the implication of current policy is exceptionally clear.
Fewer houses per capita
We are building fewer houses per capita today than almost ever before. And this is despite record population growth, increasing levels of congestion in expanding cities, and higher inflation across the board. The cost of land is high, the cost of building is high and higher interest rates mean the cost of borrowing is elevated.
So, both long-term and short-term measures are required, and we cannot rely on planning our way to a solution. Rather a series of small innovations that motivate market responses is more likely to work.
After all medium-term planning has been part of the problem. In 1998, when Melbourne’s population was 3.3 million, the projections showed that the city would likely reach 4 million in 2051 with an upper end forecast of 4.56 million by mid-century.
As shown in the chart below todays population is already 5.3m people, and we passed the 2051 high case a number of years ago.
Today’s planners would worry about the new target of 8.0m people by 2051 and need grand schemes of high-rise cities to achieve such lofty numbers. But will 8.0m people in Melbourne in 2051 be the correct answer? Perhaps the next generation of politicians will avoid a century of population growth in 25 short years.
Our point is simple: good incremental solutions are required as a minimum.
Incremental effective change
This week we saw two dramatic changes that are a step in the direction of incremental effective change.
- CBA and Westpac responded to calls from the Senate and commentators to reduce the ‘serviceability buffers’ for mortgages in a surprising way, and
- Victorian Premier Jacinta Allen turned to the simplest measures to try and increase the supply of new housing and assist with the purchase of dwellings under construction.
Serviceability buffers are simple measures enforced by regulation that require a mortgage provider to assess the capacity of borrower to make mortgage payments, not only at the prevailing rates but also at higher rates, just in case interest rates rise.
The current buffer is 3% over a lenders’ product mortgage rate. It increased from 2.5% in 2021. It protects borrowers from borrowing money they will not subsequently be able to afford.
Borrower beware?
In the spirit of libertarianism and personal responsibility it could be suggested that it is ‘borrowers beware’. First home buyers should assess these risks themselves. But in a society that needs to protect the banking industry as well as borrowers, we need to balance risks. Banks and lenders alike need protection from exuberance.
Whilst other banks have supported the calls to reduce the buffer both CBA and Westpac said “no” in a Senate inquiry this week. They effectively said the next generation of homebuyers shouldn’t face higher risks to support current owners.
“If we further loosen [lending] standards from where we are, you will only increase the burden on borrowers and increase their stress,” Paul Deall, a Westpac executive in charge of mortgage risk, told the inquiry.
Angus Sullivan, CBA’s retail banking boss, said the current buffer ensured “first home buyers and all borrowers do not overextend themselves”. He said first time buyers were twice as likely to be financially stressed or late in repayments than other customers.
Mortgage arrears
Recent data from CBA shows that 30-day arrears for mortgages written in 2023 and 2024 are already higher than all other vintages since 1996 over a similar timeframe, vintages referring to the year the loan was written. This potentially doesn’t augur well for these loans over the next ten years. Imagine seeking to reduce the affordability requirements and buffers for loans written today, when houses are more expensive, and incomes more constrained.
Let’s hope APRA doesn’t fold and reduce the buffer, allowing the next generation to take only the same amount of risks as the previous generation had to take.
Prices
Reducing or stalling price rises will need an increasing supply of dwellings of the right type in the right place. The construction industry has pointed to the need to increase the transaction volumes, especially in apartments.
Lower turnover has both negatively affected current projects and further delayed new projects commencing. This affects new home buyers for the next 2-4 years. The number of dwellings under construction in Australia is shown in the chart below, split between Single Houses and Apartments.
Source: Minack Advisors, ABS
To assist with the blockages of both price and quantity, the Allan government in Victoria has announced three initiatives.
The first is to extend the stamp duty concessions in Victora. The temporary stamp duty concession is no longer capped to specific price points or first-home buyers – now, all buyers of off-the-plan dwellings are stamp-duty exempt at any price point.
The second is subdivision planning reforms, whereby large suburban blocks can be sub-divided without a planning permit. The spin is to make Victoria the country’s “townhouse capital.”
We see that portfolio positions in clients’ Property Securities sub-portfolios will benefit from these three initiatives.
Each incremental measures appears to subtly move policy towards younger families’ preferences, less housing on the periphery, more about manageable mortgages and slightly higher density close to workplaces. Is this the precursor to changes in the way policy with deliver housing to the next generation?
Investment implications of the nation incrementally changing its preferences will be large, but take time to emerge. There are not any hasty investment moves required today. Incremental awareness of possible change suffices – but our antennae are raised.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.