There was a report out last week that caught my eye. It was JP Morgan’s Australian Mortgage Industry Report, and it offered up some interesting insights into the demand dynamics at play in the housing market right now.
Basically, they broke the housing market down in to a number of categories:
The first is group is the “property inactives”. These guys fall outside of the housing market. They don’t own a house and they aren’t looking at buying one anytime soon.
About 2.3 million households fall into this category, making up about 25 percent of the total in Australia.
That pretty much means that one in four households are locked-in renters.
The remaining 75 percent are what they call “property actives”. This includes people who already own a home or an investment property, but also first-home buyers who are actively getting their finances in order with a view to buying their first place.
They estimate that there are currently 1.2 million households in the “want-to-buy” category (about 12 percent of the total). This makes sense. We know that first home buyers (FHBs) make up about 12.5 percent of current sales.
The wannabuys are keen to get into the market, but just haven’t got the money together, or are in the wings waiting for the perfect time and the perfect place.
But for most, it’s about money. Apparently, more than half of the wannabuys say, “I can’t afford to buy because prices are too high.” Another one third say, “I just cannot put together the savings for a deposit” or “I can’t service the loan that I need.”
The implication of this is that up to 80 percent of wannabuys are effectively being priced out of the market.
Now before we start bemoaning how hard it is for our suffering children to get a house over their heads, remember that every market works like this.
It’s one of the things that ‘price’ does in a capitalist economy. It rations out goods and services. Some people can afford it (or are willing to pay the asking price), some people can’t (or aren’t).
But this isn’t a problem per se. Take jet-skis for example. There are probably quite a lot of people who would buy a jet-ski if they were a few grand cheaper. But there will always be people who would buy something if it was cheaper. In this sense, there will always be people ‘priced out of the market’.
But the price is made by the market – it’s the meeting point between buyers and sellers. If it’s out of the reach of some people, that doesn’t necessarily mean it’s ‘over-priced’.
And it certainly doesn’t mean there’s an ‘affordability crisis’ as some people in the media have been pushing.
I can understand why people would be worried about their kids getting priced out of the market. That’s natural.
But you want to make sure there actually is a crisis before you go and start messing with the market – especially something as big as the housing market.
And I don’t want to be a Grandpa Grumpy-Pants, sounding off about how much tougher it was in my day, when we actually had to build our houses out of used paddle-pop sticks and chewing gum peeled from the bottom of the seats on the omni-bus.
But I think Gen X and Y are all about instant gratification. And buying a house was never meant to be easy. It’s one of the great challenges of life – working hard and saving enough for a deposit.
It builds character.
And if not every twenty something can afford a Fitzroy terrace today, it certainly doesn’t suggest to me that the government needs to get involved a put some sort of lid on prices.
Or that the RBA should raise rates as some people have argued…
Anyway, off ya soap-box Grandpa, and back to the JP Morgan report.
The other thing that was interesting I reckon, is if you look at the other segments in the ‘active’ market. They include refinancers, up-graders and ‘down-traders’. Check out the graph:
It’s the down-traders that’s really interesting here. These are people looking to move from a larger, more expensive place into a smaller, cheaper dwelling. We haven’t seen much actual analysis of this segment before.
It’s a common scenario that in the retirement years the empty nesters move into a place that’s easier to clean and look after. Something smaller. Something neater. Even a ‘lock and leave’ type pad while they get out on the great lap.
And we’ve heard how a lot of the demand for apartments in recent times has come from the baby boomers.
But we haven’t seen much in the way of firm data. We haven’t seen anything that’s given us a fix on just how big this kind of demand might be.
So it’s interesting that JP Morgan estimate that this segment is also up around the 1.2 million mark.
Think about that for a second. The number of baby-boomers looking to down-shift their dwelling story is almost the same as the number of young buyers starting out on their own.
That’s huge.
But that’s not all. Many baby boomers well sell the old family home, and move into a smaller, and cheaper, home. That’ll free up a bit of cash, which they’ll put into their retirement plan – either into super, or potentially into another smaller, cheaper investment property.
So that 1.2 million figure could actually be an underestimation in terms of entry level housing demand!
And this means that the low end of the market (cheaper, smaller) is caught in a pincer move, with pent up demand from FHBs crashing into demand from down-shifting baby boomers.
Kids will be bidding against their parents at auction!
What’s more, these kinds of properties are also typically attractive to investors.
So it’s a market segment that’s very hot indeed, and it could be the case that a lot of the action we’ll see in the early days of the boom will be at the low end of the market.
It’s clear that at a national level, Australia still has an undersupply of housing. However we’ll need to be quick on our feet to see just where the shortages are being felt.
And that’s where we want to position ourselves.
Something to watch.
SF says
Segmenting the market into purchasing appetite is useful (although the above article is purely speculative), however you might want to ensure you understand demographic categories as your statements are inaccurate and easily refuted by substantiated data available in demographic research.
Baby Boomers were born between 1945 and 1962, those born in the subsequent period from 1963 to 1977 are classified as Generation X and are currently aged between 36 and 50 years old. The vast majority of Generation X have been home owners for at least a decade and most certainly are not characterised by an “instant gratification” mentality in their behavioural characteristics, whether property, career or in a consumer orientation.
As someone who sits in the younger end of that category I saved hard and sacrificed plenty to purchase my first property at 21 (having been unsupported by my parents since 16) whilst simultaneously working multiple jobs to support myself through university, and I have been investing regularly in the property market since then. I do not consider myself to be unique in this regard, and I do my own research and analysis.
I think it is a long bow to draw that parents and their offspring will be bidding for the same properties, and it assumes the categories of “uptraders” and “downtraders” applies only to the size and price of property. This is generally not the case, there are a number of other factors which contribute to a purchase decision over the consumer lifecycle. Attitudinally those trying to get into the market tend to be seeking the best “bang for buck” balancing desired dwelling attributes with a suburb that they can afford, and they will generally be influenced by perceptions of their peer group as well as proximity to their place of employment and social hub.
Downsizers will generally hold more capital, be significantly less influenced by peer group and proximity to the CBD, and will make choices more towards lifestyle and a sense of “permanency”. My experience is that while someone seeking to get into the market may keep their first place as an investment property later on, a downsizer will seldom see an investment property as a desirable eventual home.
N BRANSON says
The Australian Government has a debt or money crisis. Mining jobs are falling. Houses are way over priced, all thanks to the greedy banks and property pushers, who want to keep the party going deeper and deeper into a sad end. The outlook in Australia is sad. Just look at the faces. Debt worry is everywhere. The media lies to us all. The Median house price is now $535 000. They will fall-beginning in 2014: as American and Europe are dying from debt.No one is telling the truth.I doubt if this post will stay up long, for obvious reasons.Australian families and kids are suffering in their own country. Government charges and red tape means the little man can no longer get up here. The reality and gravity of the situation is being hidden and not told. The truth will evolve in 2014, as the USA has to raise its debt ceiling, to finance some 17 trillion USA.
TC says
I hope you’re wrong N Branson. I think 2014 will be OK. It may not be as great as all those who so thoroughly beat up the property market want, but it will be OK. We are still the lucky country and can still leave if we dont like it here. So many others in our world are so much worse off than we are in so many ways – I don’t see that Australia is sad at all. We will be fine – maybe not fantastic as we have been in the past, but fine.
The writers for the media have their opinions and we just need to bear that in mind that they write from ‘a perspective’ which is not necessarily meant to be taken as fact.
I know people who have left Australia for the UK because job prospects are better there at the moment, so not all are ‘dying from debt’ over there. I have colleagues who are doing way better in the USA than we are here in Aus at the moment too. The truth is personal and I think we can choose which way we see it.
Best wishes for everyone in the world for 2014.
Bill Coulter says
N Branson. You see the world how you are, not how the world is
Danny Raslan says
I have noticed the property market slowly improving especially with units and apartments selling faster than houses. I’ve been analysing and researching the property boom in the lower price range in my state and the writer is right in one sense, the lower end price range is picking up in units and apartments smaller blocks little or no maintenance are attractive to the 55+ who has the finances resources to quickly act and buy faster than houses are selling. Investing in units or apartments with conveniences and within 30 mins from the city center is where ill put my money. This is only my view others may have their own but this works for me, good luck everyone”
Stevan says
SF makes good sense and I congratulate them for taking the bull by the horns and getting themselves in touch with reality and achieving. key point is to do your own research.
It makes sense that older people want smaller homes. The difference is that new people to the market are not having as many children as their parents or earlier generations and don’t need a larger home. larger homes are usually worth more money which is where the older generations are getting their capital from to fund there lifestyles. The simple answer for first home buyers is to buy investment property before you buy your home and starting increasing your wealth portfolio and increasing your income through investment properties. Become a landlord change the hat you wear and realize your dreams.
Marat says
Ha, ha . Country full of landlords. Who is going to need your investment properties… Maybe another investor)
Ken. says
2013 was good, 2014 will be better, 2015 will be best, mark my words.
paul m says
30 mins from the city Danny Raslan, which city is next to up?. Brisbane I think
mark says
This is an interesting article.
The author proposes that the housing is just fine, that being a market, price is set by the market to ration supply, and that the young people of today are essentially just soft.
I would ask the author if they have an economics degree.
I would suspect not, unlike myself however…
In economics, when we start talking about supply and demand curves, and price being set at the intersection of those curves, we almost immediately have to add several very important caveats.
Our supply, demand and price models work if a few assumptions are in place…
Assumptions like it being an efficient market, with fully informed participants for example, and we assume that the market is free from any distortions as another example…
I would love to see an efficient and distortion free market for Australian housing.
I would love to see a genuine market for aus resi property.
Unfortunately what we have is nothing of the sort.
We have so many government, policy lead distortions in our housing market that the authors glib comments about price rationing supply are just about meaningless.
What am i talking about?
Preferential tax treatment to the whole asset class
Bank tier 1 capital adequacy ratios when lending to resi lending vs ANY other type of loan
State governments and land supply
First home buyers incentives
A lower effective cost to buy the same item for incumbents….
(ie, when we think about supply and demand for widgets, if you already own 1 widget, that makes no difference to your ability to afford another widget, what matters is your earnings/available cash. In the housing market, this is completely not the case. If you already own a home, your ability to buy another is much greater than someone who doesn’t, even if you earn the same….)
The list goes on and on
Its not a free market at all…
Remove all of the distortions, and lets see a genuine market for Aussie homes…
Dean says
Jons argument seems flawed to me. Relying upon baby boomers to sell their big houses, to down size and then invest the rest of their newly liberated capital into a relatively non liquid asset such as housing (cheaper smaller investment properties) which are still expensive to get into… and moreso to get out, and sooo reliant on the present uncertain market does not, to me, add up.
Baby boomers who liquidate property are after liquidity after all. To rely upon these boomers to stimulate a buying trend is, again, to me, drawing a long bow.
Mark, whilst i agree with your argument about a distorted market existing, it is these distortions that favor the conscripts to this blog. Tax advantages for investment properties and preferential Bank treatment for those already with property is just up investment alley is it not. Whether this is sustainable, ethical or worthy of promoting is a different argument entirely.
TC..you make a good point, but which also applies to Jons ideas… you wrote..The writers for the media have their opinions and we just need to bear that in mind that they write from ‘a perspective’ which is not necessarily meant to be taken as fact. Point taken. I have to agree here with Stevan who points out that the ” key point is to do your own research”
Gotta Love Jon’s optimism though.. pincer movements in the early part of the boom..he he….fingers crossed folks!
.
mscorrellMichael Correll says
N Branson is right about Australian debt etc. Everyday I see boat and plane-loads of Aussie-battlers fleeing to start a new life in Afghanistan, Iraq etc.