Latest indications from RBA, etc.

Why young people are leaving our big cities
August 9, 2005 (The Age)

First home buyers are being outbid by investors for homes, writes Tim Colebatch.

Melbourne and Sydney are Australia’s global cities: its creative hubs, its centres of finance, business, research, innovation, sport, entertainment and fun. They should be magnets pulling young Australians where their futures can be made.

Around the world, throughout history, that’s how big cities work. But that’s not happening here: not now, not for many years.

Adelaide University geographer Graeme Hugo has come up with some amazing research on where Australians are moving to and from. Over the 30 years to 2001, census figures show, Sydney lost a net 463,771 people to the rest of Australia.

While thousands of Australians moved to Sydney each year, they were heavily outnumbered by Sydneysiders moving out. The net exodus from Sydney averaged more than 15,000 people a year: half moving interstate, and half to the coast.

Only one other place in Australia lost people at anything like that rate. It was Melbourne.

Melbourne’s losses were far less, but still staggering: a net exodus of 237,325 people over the 30 years, about 8000 a year. Two-thirds of them went interstate, and a third to the rest of Victoria, mostly between 1976 and 1991.

In both cities, growth came mainly from overseas migration. But as migrants moved in, Australians moved out.

By contrast, Brisbane gained a net 236,580 people from the rest of Australia. Perth gained 120,266, while in Adelaide and Hobart the inflows and outflows were even. Regional NSW gained 84,133 people, mostly along the coast, while regional Victoria lost 11,411.

Professor Hugo says part of the story is that retirees have sold their homes at premium prices and moved to the coast. But they are a small minority, he says. Most migration is by people in their 20s and 30s and their children.

“It’s when people are at the stage of starting families that they look at different locations, and housing is very much part of that decision,” he says. “Housing costs are partly the issue.”

The census figures end at mid-2001. They predate the housing boom that inflated Sydney house prices by 63 per cent in three years, to what the Reserve Bank points out equalled almost 10 years of average wages. What has happened since?

Well, population growth in NSW has plunged to barely half the national average, and its economy has slowed with it. In three-and-a-half years, the state lost almost 100,000 people to other states, almost as many as in the entire decade of the ’90s.

Who is leaving? Even including overseas migrants (almost all of whom are under 40), the Bureau of Statistics estimates that in the three years to mid-2004, NSW lost a net 11,400 people aged under 40: essentially young people and their children.

Why are they leaving? You don’t have to be Bob Carr to know that they want to live where it won’t cost them 10 years’ wages to buy a home.

Sydney will always attract professionals and executives. But for many of the ordinary workers it needs to keep functioning, it has priced itself out of the market.

KPMG’s urban guru, Bernard Salt, blames the Carr government for not zoning enough land for urban development, and the figures suggest he is right: in 2004-05 Sydney councils approved barely a third as many houses as Melbourne.

But the other problem is that even now, after developers told us the Carr government’s vendor tax had driven them to Queensland, tax-favoured housing investors are outbidding the first home buyers.

NSW has 34 per cent of Australia’s people, yet for years, the bureau figures show, it has hosted 42 per cent of lending for investor housing – but only 28 per cent of sales to first home buyers.

In Melbourne, first home buyers are pouring back into the market. But even now, NSW provides 42 per cent of the property investment that led to a net $2.6 billion in tax losses in 2003-04 – thanks to our dopey tax system that allows investors to use their losses to cut tax.

The problem of tax-driven housing investment is a national one, but Sydney is where it is most intense. The Carr government’s vendor tax, coupled with the abolition of stamp duty for most home buyers, was a gutsy effort to correct the imbalance; new Premier Morris Iemma’s decision to axe it may lower prices for a while, but will make it harder to restore the equilibrium Sydney desperately needs.

The good news is that in Canberra at least, Labor is talking sense. Shadow treasurer Wayne Swan declared last week: “We need to take an axe to the Tax Act, and think long and hard about the need for many of the concessions, exemptions and deductions which mean our marginal tax rates are higher than they need to be.”

Treasurer Peter Costello should join him, and stop trying to defend the indefensible. Anyone who thinks these tax breaks are better than lower tax rates needs their economic head read.

Tim Colebatch is economics editor.

House prices falling
By Nicki Bourlioufas
09-08-2005
From: NEWS.com.au

Falls in house prices were recorded for Sydney, Melbourne and Brisbane in the June quarter.

HOUSE prices are falling in Australia’s big cities, while the resources boom is pushing prices sharply higher in the west, according to an index of house prices.

A new housing price index released yesterday by Australian Property Monitors (APM) reveals that on a national scale, house prices have been flat in 2005.

Falls in median house prices were recorded for Sydney, Melbourne, Brisbane, while Darwin and Perth recorded healthy rises.

The series has been commissioned by the Reserve Bank of Australia (RBA) to gauge the growth of median house prices in capital cities.

Overall, the national house median house price fell 0.1 per cent during the June 2005 quarter to $390,600, according to the index. For the 12 month period, house prices rose 0.6 per cent.

Sydney house prices have fallen through 2005. Following a 2.6 per cent fall in the March 2005 quarter, prices fell again by 1.2 per cent in the June quarter to $526,000.

House prices in Sydney have now fallen by 8 per cent from their peak in the March quarter of 2004.

Melbourne house prices fell by 0.3 per cent during the June quarter to $339,000 after a 0.1 per cent drop in March quarter.

Melbourne prices have fallen in five of the last six quarters, though the falls have been slight compared to Sydney.

The median house in Brisbane dropped 0.9 per cent in the June 2005 quarter to $325,000.

But in the west, house prices are surging, following the resources boom. House prices jumped 2.8 per cent in Perth to $323,000, giving a sharp rise of 12.5 per cent over the year.

In Darwin, house prices jumped 4.5 per cent over the quarter to $326,000, to be a strong 17.1 per cent higher than a year earlier.

The housing market is slowing in Australia’s eastern states as housing affordability has plummeted in recent years due to the sharp rise in house prices.

A recent rise in interest rates has also weighed on demand for houses and prices. The central bank in March raised interest rates to their highest level in four years, taking the official cash rate to 5.5 per cent, and standard variable lending rates to 7.3 per cent.

The nation’s biggest property market, Sydney, has suffered more than most after the New South Wales state government slugged investors with stamp duty on the sale of investment properties last year. Combined with an interest rate rise in March 2005, property buyers in Sydney have been scared off.

However, the recent removal of the tax should help put a floor under house prices, said Louis Christopher, head of research at APM.

“While I don’t think we’re going to go back to growth rates of 10-per-cent-plus anytime soon, I don’t rule out a 5 per cent annualised growth rates over the next year,” he said.

Confidence is starting to return to the Sydney property market, he said. “There are still more sellers than buyers out there, but gradually we will get into a position of more equilibrium,” he said.

For the past few months, I have been thinking that the mining boom in Australia will inject a lot of wealth into the Australian economy and continue to do so for the next year, at least.

Shareholders in mining companies are reaping huge profits and collecting big dividend cheques. Employees in the mining industry are rising in numbers and collecting big pay rises. They are likely to buy better and bigger houses and spend more money on consumer goods (furniture, renovations and electronic goods).

This mining boom is already causing house prices in Perth to soar. This is likely to continue, as long as the mining boom continues.

The following article in The Australian, provides an indication:

10aug05

THE two things most Australians want to know about interest rates is what they will do to their mortgage and what they will do to house prices. Hardly surprising, given the large share of our wealth tied up in housing.

Monday’s monetary policy statement from the Reserve Bank of Australia tells us interest rates won’t be going up for a while, good news on both fronts. But it also has some interesting things to say on the links between monetary policy, housing prices and economic activity.

A careful reading of the central bank’s housing analysis throws up a riveting question: how close has Australia’s housing boom come to ending in a real bust?

First, the new RBA data on housing prices. The bank has been very unhappy about the available information on housing prices for some time. It has been out of date and unreliable, making it a dangerous basis for policy.

The bank commissioned Australian Property Monitors to produce a house price series that is comprehensive, less volatile, more reliable and timelier.

Among other things, the new series shows that the rise in house prices stopped dead in the March quarter last year. In the 18 months to the December quarter 2003, average nationwide house prices rose nearly 30 per cent. In the 18 months to the June quarter this year they didn’t rise at all.

The picture isn’t uniform across capital cities, with Sydney prices falling 7.0 per cent and Perth prices rising by 19 per cent, for example.

But right across Australia, in every suburb in every capital, there was a dramatic slowdown in house price growth. Why?

Well, in November and again in December 2003 the Reserve Bank put up official interest rates by 0.25 per cent. It could be a coincidence, of course. Australia’s property bubble might have burst of its own accord, as bubbles can.

Property prices in Sydney, Melbourne and Canberra looked seriously overvalued and due for a fall.

However, the timing is suggestive. It looks like a relatively modest rise in interest rates rang the bell on the housing boom. The impact of the rate rises on prices was psychological. The rate rises and, importantly, the fear of more to come sent a shock wave through heavily indebted households.

The extraordinary plunge in consumer sentiment after the next rate rise, in March this year, lends credence to the view that against the background of highly geared households and overpriced assets, a modest movement in interest rates can have a remarkably swift and powerful psychological effect. Particularly when the RBA indicates there are more rises to come, as it did.

The RBA also looks at the effect of house prices on the broader economy. It says that, given the importance of housing in the economy, it is not surprising the sharp slowing in house prices has been associated with a slowing in the growth of domestic demand. It notes signs that households are beginning to cut back on borrowing and spending as they consolidate their balance sheets in the face of flat house prices and high gearing. Looking at developments on a state by state basis, it concludes the swing in house prices has had big direct and indirect effects on the Australian economy.

It doesn’t say so directly but there is little doubt the sharp reaction to its 0.25 per cent rate rise in March is the main reason the RBA has modified its inflation forecast and backed away from further interest rate rises.

Was the March rate rise a bridge too far in an economy apparently so sensitive to small changes in interest rates? The economic picture presented by the RBA this week doesn’t support such a view.

It shows an economy where domestic demand is slowing from an unsustainable to a more moderate, but still respectable, pace against a background of a continuing global economic expansion.

Despite the plunge in the growth of house prices, the boom hasn’t been followed by a crash, the adjustment to household borrowing and spending seems to be proceeding smoothly and employment growth remains strong.

But as the RBA concedes, there has been an important element of luck in this. Or as it puts it, “the prospect of an excessive and unwelcome slowing in domestic demand has been reduced by the boost to national incomes coming from the favourable terms of trade”. This is the commodities boom, with the RBA’s commodity price index at its highest level in its 23-year history.

And China hasn’t been the only piece of luck. The economic impact of the drought looks like being much less severe than feared and Peter Costello’s tax cuts will keep household incomes growing.

The chatter at budget time about tax cuts pushing up interest rates has proved ill-founded yet again.

Without this luck it is certainly possible the effect of interest rates on housing prices could have turned much uglier, but there is no way of knowing for sure. England may provide us with some insight.

Like Australia, it has had a long economic expansion, developing capacity constraints and a housing bubble. Like Australia, it put up interest rates. But unlike Australia, England hasn’t had a terms of trade boom, linked as it is to a barely growing Europe. Last week the Bank of England cut interest rates 0.25 per cent on concerns about the economy.

The RBA doesn’t have rate cuts in mind but is certainly sensitive enough about the response to its last three rate rises to have dropped its view they will need to rise again. As for luck, as with any Test cricket team, every central banker needs some.

Rates move a 50-50 chance, says RBA
12-08-2005
From: AAP

RESERVE Bank governor Ian Macfarlane has ruled out any move on interest rates in the near term, saying an interest rate cut is just as likely as an increase.

Inflation was largely under control, the economy was moving along well, and the global economy was strong, Mr Macfarlane said in evidence to the House of Representatives Economics committee sitting in Melbourne.

Although an interest rate rise could not be ruled out, there was no more than a 50 per cent chance, he said.

“This is a pretty comfortable position in which to be,” he said.

“We are not expecting to change monetary policy in the near term, and when we look further into the future we no longer see a clear probability of it moving in one direction rather than the other.”

But Mr Macfarlane cautioned investors against thinking the bank would not lift rates at all.

“We haven’t rung that bell, we think there’s a 50 per cent chance that we might have to go up again, and a 50 per cent chance that we might have to go down,” he said.

Mr Macfarlane said the bank’s 25-basis-point lift in rates in March did its job particularly well.

He said even he was surprised by the way homeowners and consumers reacted in general to the decision.

“There is also some evidence that the momentary policy tightening itself may have had a quicker affect than normal,” he said.

“I don’t want to make too much of this point, but the saturation coverage of the event in the print and electronic media must have had some dampening effect on expectations, as some surveys have suggested.

“It would not be surprising if the household sector had become more sensitive to news about interest rates given the increased debt and debt servicing loads it is now carrying.”

Mr Macfarlane said although sharp increases in oil prices were a concern, they were not lifting because of supply restrictions but instead because of demand.

He said the prices had not pushed up inflation, or even the expectation of inflation in the near term.

Mr Macfarlane said the size of the United States current account deficit, which had raised concerns on global markets, was not a big worry.

“In fact, the US current account deficit has been financed relatively easily, and the US dollar has risen over the past year,” he said.

“More importantly, long-term real interest rates around the world have stayed exceptionally low, which indicates a more-than-adequate supply of world savings, rather than a shortage.

“Although China has been cited as a third source of risk to the global expansion, it continues to power ahead, and the recent changes to its exchange rate regime, although small, will improve its prospects at the margin.”

Mr Macfarlane said despite the hopes of the real estate industry, he did not think house prices would move up quickly anytime soon.

“I think after the size of the boom we had, it’s going to take a lot longer,” he said.

I have not visited this forum for around a week. In every cyber forum board that I have visited, I always find that there is a resident “loud mouth” arrogant type of person, who always thinks he knows it all.

During the time I joined this forum, I avoided any discussion with “Dazzling” as I knew I did not have any respect for him. His ego is beyond belief.

In real life, I avoid such people. Same in cyberworld. Signing off. Moderator, please close my subscription.