Australia | Jul 30 2008
By Greg Peel
After a big fall in new dwelling approvals in Australia in May – revised down today from a 6.5% decline to a 7.2% decline – economists were expecting July would show a jump in approvals of a consensus 1.7%. There is, after all, a shortage of some 200,000 houses in Australia at present.
But the Australian Bureau of Statistics today revealed that in fact dwelling approvals fell 0.7% in July. Economists have been quick to find excuses.
Under normal circumstances dwelling approvals should fall – nay, plummet – at the top of a monetary policy tightening cycle such as the one we are experiencing right now (otherwise known as a peak in interest rates after a long rise). A typical response is for approvals to fall to 10,000 per month, but since 2003, approvals have moved around in a range between 12,250 and 14,500 per month, note the economists at ANZ. July’s slight drop is just another fluctuation within the range.
The reason for this supposed plateau is the aforementioned housing shortage acting as a dampener on what should be a solid decline given current mortgage rates are as high as they’ve been in over a decade. ANZ thus suggests any further fall in approvals to also be fairly shallow. Nor do the Westpac economists see a typical 15% slump as likely, although they do expect the housing market to remain under pressure through 2008 and 2009.
Where are all these 200,000 households currently on stand by in cardboard boxes going? Well they’re certainly not building houses in New South Wales, Queensland or Western Australia. Victoria remains flat, but there was another pick up in South Australia, and the ACT saw a whopping 17.4% increase in approvals.
The lesson here is that people who can’t afford to live where’d they’d like to are instead choosing to live where they have to, or can.
I noticed with interest two separate media reports over the weekend. As a Sydneysider, I was intrigued to learn that rents in this city’s most affluent neighbourhoods have not been jumping 25% as some areas have experienced, nor the 10% regarded as a country-wide average. In fact, rent in areas such as the Upper North Shore, Mosman and the Eastern Suburbs are actually falling!
The reason given by real estate agents is that those who once chose to rent in such areas because they couldn’t afford to buy there, can no longer afford to rent there. So they are moving down the rental scale, which means increasing their target radius to encompass not-as-desirable suburbs. I think this is what an oil analyst would call “demand destruction”.
This, one presumes, would place upward rent-price pressure on properties further down the scale, except that one assumes we there meet another socio-economic demographic who has been forced yet further away from the CBD as well because all these people from the snooty suburbs are piling in. Take this to the nth degree, and one might envisage a wave, like that following a stone dropped in a pond, as all renters take one step further away from where they’d rather be.
Except that at some point renters might otherwise decide that perhaps Sydney is not the place to be.
The other interesting story was of a town 45 minutes drive from Hobart, and thus deep in the heart of rural Tasmania, which was offering houses at $1 per year rent. Ostensibly the town was trying to stop its local school enrolment from falling below 12 (that’s the whole school) as this is the cut-off pint at which the Department of Education would shut it down. Obviously the $1 rental was only open to families with children, and the more the merrier. But the economic realities go deeper.
The houses on offer are all cottages on rural properties which were once the accommodation of farm managers or other farm workers. They have long fallen vacant as the ravages of the drought have wiped out the need for such workers and slashed the population of the town. Despite some more recent drought relief, the town is now dying (and remember, 45 minutes drive and you’re in the state capital). So those townsfolk remaining decided to do something about it.
The ad was only on the internet for about a day before it had to be swiftly taken off again, for it was absolutely swamped with responses for all over the country, and beyond. For $1 a week rent, there are apparently a multitude of families who would up and move to a dead town with a 45 minute drive to find work in Australia’s smallest, southern-most, and coldest state.
Westpac economists are expecting next week’s ABS house price data to show the first average decline since 2005. House prices will fall because homeowners can no longer afford the mortgages. New homes are not being built because potential homeowners cannot afford a mortgage which covers today’s spiralling building costs.
After a period of consolidation in the cost of renting, following the period in which interest rates have risen 70% (the cash rate was 4.25% in December 2001 and is 7.25%) but rents had, until recently, barely moved at all, a relative equilibrium will be found. Rents, nor house prices, cannot just simply go up and up because there is excess demand, if no one can afford it. There will simply be a point of population redistribution, and it looks like we’ve found it.
Econometric models suggest rents must rise by as much as 50% on a demand/supply basis. But neither computers, nor econometrists, tend to rent houses. If rents cannot go up any further, then the next step is for house prices to come down.