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.
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.