Forecast housing numbers that simply won’t add up

Negative gearing might be safe, but the outlook for house prices has been undercut.

The Prime Minister’s announcement this week that negative gearing would not be affected by any looming tax reforms is a relief for a staggering 1.3 million Australians who have placed a lot of faith in the tax break and invariably invested in residential property.

But the controversy around negative gearing — an ACOSS report has estimated tax breaks related to housing cost $7 billion a year — highlights only the tax aspect of the current boom.

Investors — rather than first-home buyers — will now continue to drive the housing market because they see it as a reliable, tax-efficient investment class with strong prospects.

But what are those prospects? And what is the medium-term outlook for house prices?

Every once in a while an economist will break with the pack and make a ‘‘call’’ that will set them apart, for better or worse. Just a few days ago Goldman Sachs head of Australian economic research Tim Toohey bravely predicted when our current housing shortage would end.

And it’s a hell of a lot sooner than you might think. In fact it’s considerably sooner than Toohey himself has been thinking.

Toohey says Australia will move from a housing shortage to a housing surplus in 2017. That means a key driver of the strong house price lift we have been enjoying in most cities, especially Sydney, is heading to an abrupt end.

This is big news because for years we have been investing into a housing shortage. Housing shortages keep house prices and rents high. Now this is going to change.

Moreover, Toohey is willing today — just 20 months out from 2017 — to identify the numbers.

In a dramatic change of tone at the investment bank, Toohey says we will have a surplus — 75,000 houses we don’t want — by 2017. It is important to note that until a few weeks ago Toohey thought that in 2017 we would have a shortage — he was working on a scenario that assumed we would have 140,000 homes too few.

What happened? As the economist Lord Keynes used to say: ‘‘When my information changes, I change my mind.” Toohey, it seems, had until recently been working on very different population figures.

Specifically, Toohey has come to doubt the migration numbers everyone uses from the Australian Bureau of Statistics and has reworked those numbers.

He believes there is something like 40,000 fewer people legally migrating to Australia on an annual basis against ‘‘official’’ figures from the ABS of 200,000 a year.

Putting those numbers together means that Goldman Sachs is suggesting there will be half a million fewer people in Australia in three years time than have been pencilled in by the ABS in its widely used “Series B” projections.

This is entirely feasible and we already know that the ABS figures can be misleading. Earlier this year Treasurer Joe Hockey publicly demanded the bureau explain exceptionally volatile unemployment numbers.

Moreover, Toohey’s revelations have to be overlaid with what we know is going to happen anyway: interest rates will eventually move higher, house prices will eventually reach numbers that lose all relationship with the real economy and the end result is that the lift we see in house prices now dissipates and the boom comes to end.

Economists have a poor record in forecasting stockmarkets — that’s due to a range of factors concerning the volatility and globalised nature of stockmarkets. But when it comes to housing markets the track record is better.

Bear this in mind: seven years ago, ANZ economist Paul Braddick also broke with the pack.

Back in 2008, when interest rates were going higher, Braddick wrote a presentation that he took around the country called ‘‘The Mother Of All Housing Booms’’. Braddick argued that population figures combined with housing construction figures presented a clear shortage of housing stock.

In that immediate post-GFC period, confidence in all markets was weak. Australia had yet to feel the full impact of global downturn and the stockmarket had yet to reach its bottom (struck in March 2009). Braddick was a voice in the wilderness.

Braddick then, in common with Toohey now, was given little airtime — his views were not in line with consensus. Moreover, many investors just refused to believe Braddick’s message that things would get better.

With Toohey the issue is that investors will refuse to believe that things will get worse.

But it seems that by 2017 the housing market, which is luring new investors every day, will have a major brake applied and this is going to hurt, whether you have negatively geared property investments or not.

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