My family have been fortunate enough to own a holiday home up at Palm Beach for over 30 years. As I was driving up there on the weekend I noticed that there seemed to be an unusually large number of properties listed for sale. In fact, I was told that one commentator has described Palm Beach as the ‘suburb for sale’. Based on a casual, and certainly non-exhaustive, drive-by I counted 23 homes on the market.
Before bringing this to your attention, I thought I should do some more thorough due diligence. Accordingly, I consulted RP Data’s databases.* Using RP Data’s ‘on-the-market’ database (which includes all listings nationally), I was able to identify a much higher total of 53 properties that were currently listed for sale. (I suspect that some of these may have recently sold given a few ‘sold’ stickers plastered on the For Sale signs.) In any event, this seems to be a fairly large number of homes and makes for a rather ominous sight as you arrive at the peninsula. And there is absolutely no doubt that median valuations have fallen considerably, although we are normally reluctant to formally publish our indices at the postcode level in view of the relative paucity of sales data.
Perhaps the most expensive home currently on the market is 36 Ocean Road, Palm Beach, which is situated right on the beachfront. RP Data’s database tells me that it last traded for $3.1 million in 1994. I had heard talk that the vendor’s expectations were around $18 million—agents confirm that in a more positive market it would trade for $20 million plus given sales valuations of smaller properties in the proximate area. It is a large home comprising circa 2,561 square metres of land. The vendor is understood not to be a distressed seller, but has bought elsewhere.
There is little doubt that this property is going to be a critical litmus test of the resilience of the ultra-luxury segment of Australia’s holiday home market. (I have heard stories of opportunist bidders lobbing in offers of as little as $8 and $10 million.) As it turns out, the vendor has purportedly received bids of $18 million or more with the property expected to trade around this level. Assuming it settles, this will presumably set a record for Australia’s holiday home sector.
Another interesting high-value trade was 40 Ocean Road, Palm Beach, which is a few doors down from the property described above. This 900 square metres, absolute beach front and otherwise vacant block sold for an impressive $12 million on the 2nd of December.
Returning to the broader Palm Beach market, I could only count 5 of the 53 properties listed for sale that had been acquired since 2006 (using RP Data’s data), which was another surprise. I had thought that perhaps the listings surge was a case of various financial services supremos over-extending themselves and getting caught short. But most of these homes have been held for a decade or more.
Discussions with leading local agents confirm that there is an element of seasonality to the listings. There is a tendency to put many beachside homes on the market in November and December with a view to maximising exposure during the high traffic summer months. This is also the best time to pitch to the ex pat market, which has displayed especially strong interest due to the depreciation in the Australian dollar. But even taking this into account, I don’t recall seeing so many homes listed for sale before (but then one’s mind does play tricks, so perhaps I am wrong).
This phenomenon is obviously not limited to just Palm Beach. We recently spent a weekend up at Boomerang Beach and saw exactly the same thing—it seemed like every fourth or fifth property was for sale. And there are similar stories from Victoria’s Mornington Peninsula.
While the performance of these holiday homes will ultimately be picked up in the RP Data-Rismark indices, there is evidence that there is a significant bifurcation in the returns realised in the holiday home and investment markets relative to the owner-occupied sector (which the indices obviously do not distinguish between).
I had a fascinating chat on this subject with the principal of one of Australia’s larger real estate agencies. He said that using their sales data they can actively discriminate between investment and owner-occupied homes. This has not historically been possible with the Valuer Generals’ data. Importantly, this individual commented that based on a fairly long time-series of sales they had found that most of the losses crystallised during downturns in the market were in the investor/holiday home sector.
He claimed that given the considerable ‘loss-aversion’ exhibited by owner-occupiers they tended not to trade (and realise losses) when they perceived that sales conditions were weakening. Investment and holiday homes, by way of contrast, seem to be treated far more ruthlessly.
With this in mind, there has been much talk of late about the impact of rising levels of unemployment on house prices. With Australian dwelling prices off only 1-2 percent in the first 10-11 months of 2008 the doomsday scenarios have not materialised.
It is sometimes forgotten that just like all other asset prices, house prices are determined by the intersection between demand and supply. If you want to take a view on house prices, you must, by definition, have opinions on the future course of both the demand for housing and its supply. It is simply not good enough to focus on adverse changes in housing demand to the exclusion of the supply-side, as is the wont of the extreme bears.
The supply-side is pretty easy to deal with. We know with certainty that current Australian housing starts are near historic lows of around 140,000 properties per annum. Indeed, housing starts in NSW, which is Australia’s biggest housing market, are now at their lowest level since 1958 falling by -25.1 percent in Q3.
Consensus estimates of housing demand sit around 180,000 to 190,000 properties per annum (with the Commonwealth Treasury on the high-side). There is, therefore, a significant disconnect between the demand for, and supply of, housing that is growing at around 40-50,000 homes per annum. This has led to a housing shortage that Westpac now estimates has hit about 140,000 homes—or approximately one year’s worth of supply.
To put this in historical perspective, Australia’s current housing shortage is, according to Westpac, quite literally multiples of any supply deficiency previously recorded since the beginning of the 1990s when they started their analysis. In discussing the state of Australia’s hosing market, the Governor of the Reserve Bank highlighted this point in the December Board minutes: “Building approvals data suggested that residential construction was trending down, though the current level of activity was already running well below estimates of underlying demand for housing”.
All other things being equal, one would expect that house prices need to rise to encourage developers to produce more homes to sate the pent-up demand and clear the market.
Given anaemic housing starts, which is a clear positive for prices, the biggest risks to Australian house prices are on the demand-side of the market. In short, we face two potential challenges: (1) rising levels of unemployment (and distressed sales); and (2) credit rationing by the banks. I will deal with the credit rationing risks in a future article.
Macquarie Bank’s Rory Robertson and I have both noted that the most powerful historical precedent that we have for examining the influence on house prices of dramatic increases in unemployment is the 1991 recession.
Between January 1990 and December 1992 Australia’s unemployment rate rose from circa 5.6 percent to 10.9 percent. Yet according to the ABS House Price Index, Australian house prices actually appreciated during this three year period by a compound annual growth rate of 2% per annum (ie, over 1990, 1991 and 1992). The chart below plots this data.
Source: ABS; Rismark International
And for those concerned about household debt levels, Glenn Stevens has some encouraging words (again from the December minutes): “On the monetary front, interest rates right across the spectrum have fallen...as a result of the decline in interest rates that has occurred already, the fall in the household sector’s gross debt-servicing burden will be almost 3 per cent of household income. This is roughly equal to that seen in the early 1990s, when the cash rate fell from 18 percent to 4.75 percent. But on that occasion it took two and a half years; this time it will take place over about four or five months.”
* RP Data is Australia and NZ’s biggest property information company and has collected over 121 million data records. RP Data also publishes the patented RP Data-Rismark Hedonic Property Price Indices that Rismark designed and developed.
Before bringing this to your attention, I thought I should do some more thorough due diligence. Accordingly, I consulted RP Data’s databases.* Using RP Data’s ‘on-the-market’ database (which includes all listings nationally), I was able to identify a much higher total of 53 properties that were currently listed for sale. (I suspect that some of these may have recently sold given a few ‘sold’ stickers plastered on the For Sale signs.) In any event, this seems to be a fairly large number of homes and makes for a rather ominous sight as you arrive at the peninsula. And there is absolutely no doubt that median valuations have fallen considerably, although we are normally reluctant to formally publish our indices at the postcode level in view of the relative paucity of sales data.
Perhaps the most expensive home currently on the market is 36 Ocean Road, Palm Beach, which is situated right on the beachfront. RP Data’s database tells me that it last traded for $3.1 million in 1994. I had heard talk that the vendor’s expectations were around $18 million—agents confirm that in a more positive market it would trade for $20 million plus given sales valuations of smaller properties in the proximate area. It is a large home comprising circa 2,561 square metres of land. The vendor is understood not to be a distressed seller, but has bought elsewhere.
There is little doubt that this property is going to be a critical litmus test of the resilience of the ultra-luxury segment of Australia’s holiday home market. (I have heard stories of opportunist bidders lobbing in offers of as little as $8 and $10 million.) As it turns out, the vendor has purportedly received bids of $18 million or more with the property expected to trade around this level. Assuming it settles, this will presumably set a record for Australia’s holiday home sector.
Another interesting high-value trade was 40 Ocean Road, Palm Beach, which is a few doors down from the property described above. This 900 square metres, absolute beach front and otherwise vacant block sold for an impressive $12 million on the 2nd of December.
Returning to the broader Palm Beach market, I could only count 5 of the 53 properties listed for sale that had been acquired since 2006 (using RP Data’s data), which was another surprise. I had thought that perhaps the listings surge was a case of various financial services supremos over-extending themselves and getting caught short. But most of these homes have been held for a decade or more.
Discussions with leading local agents confirm that there is an element of seasonality to the listings. There is a tendency to put many beachside homes on the market in November and December with a view to maximising exposure during the high traffic summer months. This is also the best time to pitch to the ex pat market, which has displayed especially strong interest due to the depreciation in the Australian dollar. But even taking this into account, I don’t recall seeing so many homes listed for sale before (but then one’s mind does play tricks, so perhaps I am wrong).
This phenomenon is obviously not limited to just Palm Beach. We recently spent a weekend up at Boomerang Beach and saw exactly the same thing—it seemed like every fourth or fifth property was for sale. And there are similar stories from Victoria’s Mornington Peninsula.
While the performance of these holiday homes will ultimately be picked up in the RP Data-Rismark indices, there is evidence that there is a significant bifurcation in the returns realised in the holiday home and investment markets relative to the owner-occupied sector (which the indices obviously do not distinguish between).
I had a fascinating chat on this subject with the principal of one of Australia’s larger real estate agencies. He said that using their sales data they can actively discriminate between investment and owner-occupied homes. This has not historically been possible with the Valuer Generals’ data. Importantly, this individual commented that based on a fairly long time-series of sales they had found that most of the losses crystallised during downturns in the market were in the investor/holiday home sector.
He claimed that given the considerable ‘loss-aversion’ exhibited by owner-occupiers they tended not to trade (and realise losses) when they perceived that sales conditions were weakening. Investment and holiday homes, by way of contrast, seem to be treated far more ruthlessly.
With this in mind, there has been much talk of late about the impact of rising levels of unemployment on house prices. With Australian dwelling prices off only 1-2 percent in the first 10-11 months of 2008 the doomsday scenarios have not materialised.
It is sometimes forgotten that just like all other asset prices, house prices are determined by the intersection between demand and supply. If you want to take a view on house prices, you must, by definition, have opinions on the future course of both the demand for housing and its supply. It is simply not good enough to focus on adverse changes in housing demand to the exclusion of the supply-side, as is the wont of the extreme bears.
The supply-side is pretty easy to deal with. We know with certainty that current Australian housing starts are near historic lows of around 140,000 properties per annum. Indeed, housing starts in NSW, which is Australia’s biggest housing market, are now at their lowest level since 1958 falling by -25.1 percent in Q3.
Consensus estimates of housing demand sit around 180,000 to 190,000 properties per annum (with the Commonwealth Treasury on the high-side). There is, therefore, a significant disconnect between the demand for, and supply of, housing that is growing at around 40-50,000 homes per annum. This has led to a housing shortage that Westpac now estimates has hit about 140,000 homes—or approximately one year’s worth of supply.
To put this in historical perspective, Australia’s current housing shortage is, according to Westpac, quite literally multiples of any supply deficiency previously recorded since the beginning of the 1990s when they started their analysis. In discussing the state of Australia’s hosing market, the Governor of the Reserve Bank highlighted this point in the December Board minutes: “Building approvals data suggested that residential construction was trending down, though the current level of activity was already running well below estimates of underlying demand for housing”.
All other things being equal, one would expect that house prices need to rise to encourage developers to produce more homes to sate the pent-up demand and clear the market.
Given anaemic housing starts, which is a clear positive for prices, the biggest risks to Australian house prices are on the demand-side of the market. In short, we face two potential challenges: (1) rising levels of unemployment (and distressed sales); and (2) credit rationing by the banks. I will deal with the credit rationing risks in a future article.
Macquarie Bank’s Rory Robertson and I have both noted that the most powerful historical precedent that we have for examining the influence on house prices of dramatic increases in unemployment is the 1991 recession.
Between January 1990 and December 1992 Australia’s unemployment rate rose from circa 5.6 percent to 10.9 percent. Yet according to the ABS House Price Index, Australian house prices actually appreciated during this three year period by a compound annual growth rate of 2% per annum (ie, over 1990, 1991 and 1992). The chart below plots this data.
Source: ABS; Rismark International
And for those concerned about household debt levels, Glenn Stevens has some encouraging words (again from the December minutes): “On the monetary front, interest rates right across the spectrum have fallen...as a result of the decline in interest rates that has occurred already, the fall in the household sector’s gross debt-servicing burden will be almost 3 per cent of household income. This is roughly equal to that seen in the early 1990s, when the cash rate fell from 18 percent to 4.75 percent. But on that occasion it took two and a half years; this time it will take place over about four or five months.”
* RP Data is Australia and NZ’s biggest property information company and has collected over 121 million data records. RP Data also publishes the patented RP Data-Rismark Hedonic Property Price Indices that Rismark designed and developed.
