Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Friday, 11 January 2013

What next for Australia's home ownership rates?

No ordinary asset class

Australia is a country in which home ownership rates have been high, at close to 70%. Today I’ll take a look at what we might expect to see happen to that figure in the future.

Residential property is a curious beast. Landlords treat it as an investment market, but for most, property is a place for shelter. Yet even this is an over-simplification. Home-buyers also attribute status to their home and therefore often elect to buy larger or more expensive houses than they need.

For many, buying a dwelling represents the single biggest purchase they will ever make and this results in great emotion when house prices move sharply up (consumer confidence jumps and exuberance ensues as jubilant owners re-draw equity) or sharply down (negative equity can lead to major recessionary effects on the economy).

In an ideal world, prices would simply track the growth of an economy – and over the long-term there is plenty of evidence to suggest that they do – but instead the invisible hand of capitalism and self-interest sees prices continuing to ebb and flow irrationally in cycles.

Of course, different markets have different dynamics, and it is in those markets where demand is increasingly chasing a limited supply (whether caused by a lack of available land or planning restrictions – or particularly both) that sees prices out-strip economic growth.

In almost every sense, residential property is no ordinary asset class.

Ownership rates

There has been a huge shift through the twentieth century in developed economies as it has become commonplace for people to want to own their own home. Whereas perhaps a quarter might have owned homes a century ago, in some developed countries ownership rates soared to around three-quarters.

Research has shown that the ownership rates in countries are partly an economic phenomenon as wealth increased, and partly a social one. Much depends on the culture of the country. Prior to the First World War only around 10% of Brits owned their homes, partly because wealth was not distributed equally but mainly because most had little interest in property ownership. Even the wealthy often elected to rent.

We see similar trends even in some developed countries today – Germans, for example have never embraced home ownership with such fervour as the Australians or the Brits.

Political interference

The boom in UK ownership rates was in part due to political policy after the Second World War as the government pledged “homes for heroes”. Over time, home ownership came to be seen as a worthy objective and even perhaps a right, along with free healthcare and free education for all.

Then in 1980, Margaret Thatcher introduced the ‘Right to Buy’ legislation into the Housing Act of that year and hundreds of thousands were given the option to buy their council houses (social housing) at a discount. More than 1 million council houses were sold.

Naturally the legislation had its critics. One major benefit was that the tenants were able to feel as though they were participants in society and the economy (the “stakeholder economy”).

Critics argued that the scheme encouraged speculation. Recently the legislation has been amended so that tenants must have rented for 5 years before they have a right to buy and in April 2012 discounts to market value were capped at 60% for a house and 70% for flats (units).

British home ownership peaked at 70% but as reported in The Times yesterday ownership rates fell over the past decade. A significantly weaker housing market since 2007 will have played a role in that.

Effect of high ownership rates

Free market capitalism suggests that governments do not artificially attempt to encourage or intervene in markets, instead allowing the invisible hand of capitalism to allow markets to find a rational level. And yet some developed countries have introduced all manner of tax breaks on mortgages and first home owner schemes in order to encourage home ownership.

There is an argument that higher ownership rates can cause booms and busts to develop. Economists cite countries with low ownership rates such as Switzerland and Germany as countries in which house prices have moved in a noticeably steadier fashion.

Indeed where people are inappropriately encouraged into the market when prices are high, defaults will inevitably follow. Fannie Mae and Freddie Mac in the US were guilty of dishing out mortgages to those with no hope of ever meeting repayments and the outcomes included lender insolvencies, and housing and economic busts.

What next for Australia?

In this interesting recent article Mark Armstrong argued that increasing prices are likely to put home ownership increasingly beyond the reach of more Australians and see our ownership rates fall closer to levels seen elsewhere.

He cites cities such as London and New York where massive demand has sent prices ever skyward and seen tenancy levels rise to around 50%. In fact, there are many who believe that this trend to towards lower ownership rates is already playing out in Australia.

Armstrong believes that it will be the inner and middle suburbs of Australia's expensive capital cities which are in the greatest demand which will see dwelling prices rise and ownership rates drop. I tend to agree with him.

The high transaction costs (stamp duty, legal fees etc) associated with property combined with a transient population which moves around more frequently than ever before will, in my view, almost certainly lead to lower ownership rates. In the future, I expect there will be more people like myself who rent their place of residence yet also own investment properties.

As for the moral side of the argument of whether home ownership should be a “right”? I certainly appreciate that families often want the security and stability of owning their residence. 

For mine, with the exception of a two year period when I lived in a couple of my apartments in Sydney, I’ve lived in rented apartment accommodation for my entire adult life and it’s never really bothered me - in fact, I very much appreciate and enjoy not burdening myself with a mortgage debt noose for a place of residence. It means I'm free to be more flexible and am able to let my money work much harder for me elsewhere in stock markets - but many Aussies clearly feel very different to me on this subject.

While we may dislike high prices and high costs of living, markets will ultimately find their own level, and individually our we need to ensure that we keep our own financial houses in order, whether we are owners or renters - or both.

Other countries have challenges too

We tend to live blinkered lives as humans, it's the way we're designed - to look out for ourselves.

Today I live in East Timor where 70% of dwellings and infrastructure were torched or destroyed during the disorderly and brutal military retreat of 1999.

During 24 years of occupation the UN concluded that the country had experienced some of the most shocking and depressing events even imaginable and a deplorable genocide.

After tens of thousands were yet again displaced in the East Timorese uprisings of 2006, the fortunate refugees have now again found shacks to live in. Some own houses but land disputes and now compulsory acquisitions are common. Civil unrest continues sporadically but foreign troops have again been withdrawn and we hope and pray to see no further violence in 2013, and that we have a year of peace. 

Is Australia a “Lucky Country”? That depends upon your perspective. Yes Australia will certainly face some accommodation challenges but thankfully the majority of us have a roof over our heads and for that, at least, we should be grateful.