By Catherine Cashmore, a market analyst and journalist with extensive experience in all aspects relating to property acquisition. Follow Catherine on Twitter or via here Blog.
Land. Since history began, it has remained an integral part of the most valuable asset man desired, fought over, possessed and in many cases died for.
Indeed, property rights are a foundational component to a capitalist economy, and under our current system of ownership government’s profit nicely from the advantage.
In Australia, revenue from rates and land accounted for $20 Billion in 2012 – hence why ‘stamp duty addiction’ and the consequential need to incentivise buyers to keep transaction figures high, is all-but a national obsession.”
Housing and construction are a driving force behind our economy, and the banks are as ‘pinned’ in their reliance to the ever-expanding growth of our population’s desire to ‘borrow and buy,’ as everyone else is who has their hand in the pie. And let’s face it, there are plenty of sticky fingers profiting from our national past time, spanning not just the ‘FIRE’ (finance, insurance and real estate) sector, but also its numerous retail, TV and ‘chat forum’ offshoots – often encountered in the land of social media.
Following a pre-GFC global (‘borrowing’) shopping spree of cheap credit, Australia’s ‘too big to fail four’ have subsequently become the worlds most heavily exposed to residential real estate.
Therefore, economists such as Christopher Joye, have not been slow to point out the ‘potential’ dangers an acceleration in property prices may herald, if the recent boom in some of our most populated states, is not reigned in.
Leading fund manager James Gruber, (who writes an excellent weekly newsletter entitled “Asia Confidential”) most recently commented;
“…banks have an average leverage of 20x (equity/assets), it would take less than a 10% fall in residential property prices for equity in these banks to be wiped out….” And the warnings continue.
Whilst you can argue whether to call a bubble or not, house prices in Australia, where most need to live if they wish to maintain good access to hospitals, schools, social amenities, and a healthy job market, are high by anyone’s standards, and certainly so on an international scale.
Comparative countries include the UK, New Zealand, Canada, Denmark, and the Netherlands, all of which experienced an unprecedented house price boom in the lead up to the GFC.
Like Australia, all suffer restrictive planning and zoning laws, which have subsequently placed stress on supply.
I pointed out last week, how the complexities of urban zoning by state governments who publicly advocate affordable housing initiatives, are doing quite the reverse.
Poor policy has ensured we have sparse facilities to meet the demands of those who choose to live in fringe suburbs. Therefore the price of commuting on over-crowded roads, frequently forgoes any benefit gained from paying a ‘marginally’ lower price for the privilege of more space in regional areas.
Additionally a CIE (Centre for International Economics) study, commissioned by the HIA two years ago, demonstrated the total tax expenditure on the land and price of a new home once rolled together, equates to 39% of the sale price. Therefore, aside from constipated supply side policy, expecting developers to deliver affordability as well as profit from their efforts is unduly burdened.
The speculative culture that results from restrictive planning laws, coupled with tax incentives that benefit the home owner and investor above that of the ‘lowly’ renter (as is the case in the countries I cited above,) was clearly highlighted in the recent Grattan report entitled ‘Renovating Housing Policy.
Consequentially Australian investment in real estate is pinned to the cyclical nature of the oft termed ‘property clock,’ where valuations seem to forever trend ‘upwards,’ and ownership rates amongst younger generations struggle to maintain their historic ‘norm,’ in a post GFC macro environment where higher unemployment and slower wage growth is all but certain.
The nicely manipulated tax incentivised environment promotes speculation into a limited pool of established stock, leading investors to compete against each other in a game not unlike ‘musical chairs,’ as they attempt to shore up funds for retirement.
Yet other countries have accepted a culture far more adapted to renting than owning, where lower demand for the purchase of property and better levels of affordability, coupled with stricter lending requirements, have protected them from the economic woes brought on by the domino effect of the USA sub-prime crisis.
Germany is one such relatively well-known example, and France isn’t much further behind.
Whilst home values in Australia over the last 10-15 years have doubled (and in some cases and localities trebled,) property prices in Germany have struggled to track the rate of inflation.
Subsequently, the feeling of ‘buy now, or pay more later’ is not evident in their cultural mindset, with a little less than 50% of the population happy to accept a rental lifestyle.
It’s not always been as such. In the 1990s generous tax benefits heavily favoured the investor, so much so, a complete renovation could be written off against a property owner’s tax bill.
This inevitably lead to speculation into rising values, resulting in a boom of high-density inner city development with little due diligence taken into the analysis of genuine demand from a home buyer market.
A glut of supply consequently occurred and the boom came to a painful end in the late 1990s. Tax incentives were stripped away and the ‘euphoria’ ceased – but the hard lessons were learnt, and Germans remain wary of booming real estate values, which to some extent has kept them insulated from manipulating a repeat scenario.
The subsequent Dot Com bust in the early 2000s added insult to injury as unemployment peaked and the country suffered through periods of recession.
However, a lengthy duration of stagnated home values in the lead up to the GFC, coupled with strong laws protecting tenants, and restrictions on high loan to value borrowing ratios, arguably created a normal ‘supply/demand’ environment, where home buyers looking to ‘settle’ were able to save and acquire accommodation outside an inflationary atmosphere, and renters did not suffer undue discrimination.
Minimum tenancies in Germany are long – often starting at 2 years, with most ‘unlimited’ – meaning a landlord cannot easily evict without good reason to do so (and then only through a court process.)
Rent increases are strictly regulated – at a minimum occurring only once every 12 months, with limits on the incremental rise over any given period. For example, as a general guideline, a maximum could be 20% over 3 years (although this varies across different municipalities.)
Reasons for eviction can include a landlord needing to use the premises to reside in, however the ‘need’ must be justified – and not simply because they would ‘like’ to do so (as in Australia.)
Properties must be presented in good condition – painted prior to each new tenant moving in, with renters often responsible for the provision of various fixtures and fittings, such as lights and window furnishings.
If the landlord wants to sell, they must provide proof that selling without a tenant would profit their cause more so than selling with. Therefore due to the length and roll over of tenancies, rental stock is generally sold onto investors rather than owner-occupiers, with the renter protected from eviction.
Bonds equivalent to 3 months rent are placed in interest bearing accounts, so renters don’t lose out on the rate they could expect to achieve if the cash was deposited in a normal savings account.
Long-term tenants are permitted to decorate accommodation and change the decor to suit their own tastes, promoting at least the feeling of ‘ownership’ over that of a temporary dwelling.
Property investors can expect a 7% yield, which at current borrowing rates is, particularly attractive to larger off shore equity firms and this sector is growing.
‘Publicly subsidised housing,’ or ‘housing promotion’– the terms generally used for social housing – is controlled by local government and refers to shelter provided below market rent for low-income families. This type of accommodation represents around 5% of the national housing stock – although recent sales of a large percentages to off shore yield seeking investors by local government has lead advocates to warn of a shortage.
As for home-buyers, when Germans purchase accommodation it’s for an extended period of time – usually life – and in the absence of highly restrictive planning and zoning laws such as those experienced in Australia and the UK, many choose to self build – therefore adding, not diminishing from the housing supply.
According to the ‘National Association of House Builders’ in the UK, who have compared self-build rates across the EU, 60% of German housing stock is classified as such, and competition between small homebuilders high.
When large tracts of farmland are identified for housing developments in Germany, the local municipality acquires the land, paying only a small sum of compensation to the landowner.
The blocks are then sub-divided and sold at an affordable level with priority given to local homebuyers, who then approach a builder of their choosing to construct their preferred accommodation. Hence why the atmosphere is more competitive than our own, leaving larger developers no opportunity to ‘land bank.’
Building in both the city and regional areas faces fewer restrictions than Australia. Developers are not burdened with lengthy periods during which holding costs accumulate whilst waiting for planning approval, and outside of a general ‘master plan;’ developers are free to commence construction upon demand.
For those wanting to investigate this further, I recommend reading the writings of Mark Brinkley, author of the ‘House builder’s Bible’ who has a good grip on the comparative details.
Unlike in Australia, banks don’t court the buyer market – there are no property grants and few tax incentives. Deposits are a minimum of 20%, and there’s a general, inbuilt, reluctance to borrow or even spend on credit. Additionally, interest rates are fixed – thereby avoiding the inflationary tendances changes to a variable rate can evoke.
Whilst, the absence of restrictions on foreign investment and relatively stable economic atmosphere compared to the rest of the EU, has lead to recent and robust off-shore acquisition of residential real estate, producing a somewhat concerning rise in prices and rents in cities such as Munich, Hamburg, and Cologne – for the time being, the Germany market remains attractive to both home buyer, investor and renter.
Drawing comparisons between two countries and their ‘in-built’ cultures is complex and I’m not suggesting we copy the German system in its current form.
However there are attractive elements in the tenancy laws, which in light of a cultural switch toward renting over ownership in a younger generation who change jobs often, and require a longer period to save if they want to enter the market – tighter rental controls, longer tenancies, and restrictions on incremented rises in yields, are worthy of consideration.
The subject deserves deeper analysis, which should be immediately undertaken and funded by local authorities, especially in light of recent headlines showing a sharp rise in evictions due to financial circumstance.
Meanwhile, whilst we continue to exist in a speculative atmosphere with a tax environment that consistently marginalises ‘generation rent,’ instead rewarding a ‘gamble’ on rising valuations in established accommodation – improving affordability, especially in the absence of effective low priced supply, is highly improbable.
