No huff or puff will blow this housing market down

CHANGING market conditions carry the ‘fix’ regulators are seeking for home prices

Home price rises are not evenly spread. Sydney is hot but other cities are doing very little.

WHAT can stop this hot residential property market? In the absence of rate hikes — which we can’t reasonably expect for some time — will it be the government, the banks or perhaps the retreat of foreign investors?

In recent weeks four key developments have emerged that have the potential to rattle the housing market:

1. The regulatory effect of the Reserve Bank and Australian Prudential Regulation Authority working on the banks to pull back from excessively generous lending in the nation’s property hot spots (central Sydney and Melbourne). This is tagged as macroprudential reform.

But so far the limits set are hopeless — banks must do no more than restrict lending growth to 10 per cent. None of the big four banks are at risk of breaking this regulation. The RBA has decided to not impose the optimum weapon here: explicit loan-to-valuation ratio limits, a policy that has been introduced in New Zealand with some success.

2. Financial inquiry chief and former Commonwealth Bank CEO David Murray has raised the prospect of negative gearing reform. No politician has the power, skill or gumption to touch this issue. Not even Paul Keating at the peak could kill it off.

Negative gearing is one of the few tax breaks open to all and sundry. There is only a slim chance this will be the policy move to weaken house prices.

3. The prospects of tightened regulation over gearing rules within the flourishing DIY fund sector. Investors, led by DIY funds, are leading the investment rush into property.

Reversing this rule would be unfair and unreasonable. Unfair, because DIY funds should have access to a full suite of investment choices. And unreasonable, because the same regulation regime would still allow the same ­investors to access other forms of gearing such as geared ­managed funds and hedge funds.

4. A crackdown on overseas buyers who are boosting prices in selected suburbs. The new tighter FIRB regulations underpin the government’s forced sale of a $39 million Point Piper, Sydney home — owned by interests connected with Chinese tycoon Xu Jiayin.

Indeed, Sydney radio stations may be peppered with callers talking of “millions in cash” being presented by Chinese buyers to buy houses, but there is little hard evidence yet to suggest this practice is in any way common. An unidentified real estate agent who called in to Sydney’s 2GB station on Wednesday talking of a Chinese client who presented him with a “suitcase with a million dollars” set the hares running. But typically the caller did not use his real name, did not nominate the location of the transaction and failed to detail any efforts he might have made to report suspicious trading.

Just now I don’t see the political or regulatory will to bring in any of the mooted changes to the market. What’s more, the only one that may have real teeth — macroprudential controls — is simply not possible to implement in a single locality. Worse still, any macroprudential rules could choke off the housing revival under way which, along with creating new housing stock, is a key factor in arresting unemployment from nearing 7 per cent.

As the Housing Industry Associaton’s economist Harley Dale has suggested, it may be feasible for New Zealand to operate a blanket regulation but not Australia, where Sydney is running hot but cities such as Perth, Adelaide and Hobart are doing very little.

More to the point, it seems to me that property yields are declining steadily — even if the statistics we have to deal with are out of date and often unreliable. We know the national aggregate yield is closer to 4 per cent than the previous 4.5 per cent and in the centre of attractive metropolitan centres yields are under 3 per cent and falling.

Just recently an attractive art deco block of four apartments in Melbourne’s plush South Yarra sold for $4m. At first glance the price seemed disappointing for an entire block in an area where $2m apartments are common.

It turns out the building sold on a gross yield of 1.8 per cent. In other words, for paying $4m the buyer could expect $72,000 a year in rent and that is before any costs or inflation. For that buyer from an income perspective it is almost certainly a losing proposition as expenses could easily match this figure … and that is before we bring in inflation.

What’s more, if you apply mortgage rates of 4.5 per cent to the South Yarra situation then the buyer absolutely must see a substantial rise in the value of the block to get a return.

That’s what’s happening at the top end: the numbers are not adding up any more. As prices continue to rise the numbers will not add up for more people more often and that is the only way the housing market is going to cool.