Housing: positive signs but one worrying trend

The real estate commentariat have kicked off 2014 with broadly positive views on housing markets and house prices. Media reports are running strong with headlines about 'booms' but amongst the positive signals in the market lies one worrying trend.

After such a long period of subdued market conditions, you can't blame people for being positive when signs start to emerge of strengthening demand for housing. Developers, once struggling to find sufficient depth of buyer demand for their product and meeting plenty of buyer resistance, essentially put projects on ice for several years. Now they're being dusted off, particularly for apartments, as buyer demand re-emerges from a long hibernation.

The recent ANZ-Property Council industry survey reported a significant lift in confidence, particularly in Queensland and NSW, when it came to housing market performance driven by investor demand. Then there have been other reports equally buoyant about the prospects for growth in 2014. Take this one, for example, by credit reporting agency Veda which glowed about 'the strongest levels of housing finance in four years.' The headline finance figures are good, and the dwelling commencement figures will also strengthen during the year – mainly for apartments – as more approved projects move into the construction phase.

So with record low interest rates, which look like staying down for some time, and with rising housing finance commitments and rising prices, what could there possibly be to worry about?

As usual, digging a little below the surface of headlines can be revealing. While total new housing finance commitments are rising and this is a sign of stronger overall demand, that demand is coming almost entirely from investors and upgraders. First home buyers, despite the record low interest rates, remain largely still absent from the market.

The graph below shows the trend since 2000, when First Home Buyers (FHBs) represented roughly half the total finance as investors and roughly a third of that of upgraders. Over the decade, that broad relationship has blown out, as investors and upgraders have become more and more dominant in the market.

By late 2013, investor demand had risen from twice that of FHBs to more than four times that required by FHBs, with upgraders keeping pace with the investors. (The bump in FHB demand in 2009 represents the impact of temporary additional FHB incentives).

The growth in this spread is a clear sign that something has fundamentally changed in our housing markets. First time buyers are becoming an at-risk species of buyer while investors continue to add to portfolios of rental property every time their existing equity increases, and upgraders do likewise. At auctions and open homes, whether for apartments or detached homes, the competition from investors is intense, with first time buyers outbid.

Macrobusiness' Leith van Onselen described this process as it's been happening in Sydney as "speculators continuing to eat their young."

For developers, this is not a market problem. Their role is to respond to opportunities and work within planning frameworks (as dysfunctional as they might be) to deliver a product that sells. It is not the market's role to be concerned about the absence of first time buyers, or what this means for Australia as a society.

This is, however, a legitimate role for public policy makers. If falling rates of home ownership amongst a younger generation of Australians is not of concern, then no policy action is needed. If we believe it's not a problem for this generation to reach future retirement with large mortgages or never having owned and saved through housing, and for them to be more dependent on the future taxpayer, then no action is required. But for a host of reasons, many of which I outlined here, it's my view that some policy interest in this widening gap – and its consequences for our society - is long overdue.

Don't get me wrong. I've been hoping to see an upturn for some years now. This downturn has been longer and more frustrating than others I can recall, which were typically deeper but much shorter. The general improvement in housing and construction will generate significant employment, add to confidence, and restore depleted government revenues. So in the main, it's a good thing. But it is hard not to be concerned about the lack of policy interest in the absence of first home buyers, and what that could mean down the track.

So while the media headlines continue to crow about a housing recovery in 2014 and beyond, it might be worth sparing a little time to question if this dominance of demand through investors and upgraders is a balanced market, and whether it is sustainable. If not, how long before the music stops?