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Australian house prices in 2010, part 3
I just had an “aha” moment this week about the Australian housing “puzzle” which I would like to share with you. For the past few months I have been puzzled by some of the data that I have seeing about property sales. We see record auction clearance rates yet the number of home loans have been shrinking. This would imply that a lot of these property purchases are done without a need for loans, so who do you think are buying the houses? It is definitely not Joe the average wage earner. Housing affordability in Australia is among the lowest in the world and if Joe is buying, he will be need a huge mortgage. It is also unlikely to be the Peter the Australian property investor as Peter likes to borrow to invest so he can benefit from negative gearing. The most likely buyers I think are:
- “empty nesters” and retirees downsizing i.e. buying a smaller cheaper house by cash
- foreign investors who either has cash or gets his finances from outside of Australia
In March 2009, the government relaxed the rules for property ownership by foreigners. The changes made it easier for foreign companies and temporary residents, such as 12-month business visa holders, foreign students, and their parents, to invest. In August 2009, Treasurer Wayne Swan announced a further relaxation of Australia’s foreign investment screening to ”help boost Australia’s growth”. These changes in regulation has caused a surge in property purchases by wealthy foreign property investors. From anecdotal evidence, around 40% of sales in the higher end suburbs are made to foreign investors. I was discussing this with Greg Atkins from Shareswatch blog via the comments on a previous post on this topic and we could not understand why the government decided to relax the rules for foreign property ownership, and could not see how this helps the first home buyer. The answer dawned on me when I read about a typical baby boomer living in Sydney who was profiled in the Smart Investor magazine. This 59 year old man owns a $2 million home but only has $420,000 in his super. His living expenses are around $800 per week ($42,000 per year). I plugged these figures into the retirement planning calculator on the FIDO website and worked out that if he were to retire soon, he will not be able to fund his own retirement with his super and will have have to rely on the age pension, as shown in the chart below.
However, if he sells his $2 million home as recommended by the financial planner, downsizes to a $800,000 unit and puts the extra $1.2 million into his super, he would become a totally self-funded retiree as shown in the chart below.
That was when my “aha” moment came. Allowing foreign investors to buy existing Australian houses is not to help the new home buyers but to help the existing home owners cash out of theirs! Most baby boomers would already have bought a home in an inner city suburb many years ago at a cheap price. These people have automatically become millionaires through the property boom but new local home buyers could never afford to buy their properties at current prices. Clever Kevin realised he needed new buyers with money to keep this Ponzi scheme up, which is why he changed the foreign investment rules as it helps him solve another big problem, which is funding the retirement of the aging baby boomer population as well. If more people can become self-funded retirees, the government would need to pay out less in terms of the aged pension. I have also read some comments that foreign property investors are also helping Australia to reduce our foreign debt. Kevin is much cleverer than I thought.
So to all the Gen Xs and Ys and new skilled immigrants who are trying to get into the property market, tough luck for you for now. Keep on renting and when the China bubble eventually collapses, property prices will come down to a more realistic level again. It has happened before in the 1980s when the Japanese seemed to be buying everything in Australia, until their bubble collapsed in 1989.
Well, that’s what I think anyway. Let me know if you agree or not with this analysis.
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Good infomation here, thanks.
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Sylvie,
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WE don’t want foreign investers, the real estate and developers would like them to keep driving up their prices. but if our idiot governments since 1970 had kept to an intelligent personal tax, our wage earners and other low income earners would be able to buy and keep their own home. The escalating price of homes is only being driven up by the buying capacity of the rich, and they have no scruples in organising loans and repayments that are not viable for workers. None of the political parties are honest enough or intelligent enough to really see just what their low top tax is doing, Today we have had recessions, In the period 1950 to 1970, Our economy and ability to live comfortably was tops. Our politicans can’t even look into the internet to see what our success was then, I don’t know what they do, it is not researching for better government, all they can say “it is a global problem” well so it is, because all the countries have the same problem their members of their parliament ” are either corrupt or stupid”.