Higher IR's, Higher Taxes, Higher Prices....

HAMISH_MCTAVISH

An interesting example from our Antipodean cousins as to what happens when you don't build enough houses for a growing population, even with far higher taxes, much higher interest rates and a lot more land to play with...

Australian home prices hit a new high in the third quarter as a chronic shortage of houses, a strong economy and rising demand driven by population growth combined with the last throes of the First Home Buyers Grant boost.

The data come just a day before the Reserve Bank meets to discuss interest rates. It is widely expected the central bank’s board will lift rates by a quarter of a percentage point tomorrow - and today’s housing figures are likely to add impetus to the rate-rise cycle that began last month.

The home price index jumped by 4.2 per cent in the three months to September, matching the rise in the previous quarter, but vaulting 2.6 per cent higher than the index’s previous peak in the first quarter of 2008. The September quarter rise was much higher than analysts’ expectations of a 3 per cent gain.

Year-on-year, home prices shot up by 6.2 per cent in the 12 months to September, the Australian Bureau of Statistics figures show. Economists had tipped a 4.3 per cent increase for the year to the end of September. In the year to June, the index fell 0.7 per cent, half the fall posted prior to a revision recorded in the latest figures.
"These strong results will be seen as validating RBA concerns that ultra-low rates may be triggering another house price boom, adding to their comfort in reversing policy stimulus at a fair pace," said 4Cast Ltd chief economist Ray Attrill.

Home prices increases, driven by a shortage of available homes, population growth and a resilient Australian economy - which has avoided the recession triggered by the financial crisis elsewhere - have combined to push up home prices and whet the appetite of buyers.
In recent months, the Reserve Bank has said it is considering rising home prices and worsening affordability as factors in considerations on interest rates and monetary policy.

Rates
Tomorrow the bank’s board will meet to consider interest rates. It is widely expected the board will push the official cash rate up by at least a quarter of a percentage point.
That would take the rate to 3.5 per cent, effectively adding another $45 to the monthly mortgage repayment on an average $300,000, 25-year loan.
"First home buyers have really kept house prices afloat at low to middle end of the property price spectrum since October last year,’’ said JP Morgan economist Helen Kevans.
"What we do expect is that those house price gains will still probably moderate as the (Federal) Government stimulus is withdrawn."
The boost to the First Home Owners Grant, announced about a year ago, was cut at the end of September and will be phased out at the end of the year.

State by state
House prices in Melbourne increased the most, 4.7 per cent in the quarter, while Perth house prices rose 4.5 per cent in the same period, the ABS said.
Brisbane house prices jumped 4.4 per cent and Sydney’s increased 4.3 per cent, the same change as Canberra’s.
House prices in Darwin rose 3.4 per cent, while Hobart’s increased 1.8 per cent. Adelaide’s rose the least of the eight capital cities, only 1.7 per cent.

Affordability
"The housing industry and the policy authorities face a considerable challenge in the years ahead to deliver an adequate physical supply of housing," said ANZ head of property analysis Paul Braddick.
Rental vacancies remain near record lows while rents are rising sharply, he said.

Expanding migration to Australia pushed population growth to 2.1 per cent in the year to March, with an additional 439,000 people in the country, Mr Braddick said.

Dwelling completions are forecast to fall below 130,000 in the year ahead, he said, which foreshadows a further "dramatic tightening of the housing demand-supply balance".

Mr Braddick said higher interest rates will weigh on a fragile building upturn but in the medium term, "unless significant action is taken to remove the structural impediments to housing supply, Australia will face an intractable shortage of housing that will drive a deterioration in housing affordability-both purchase and rental - beyond anything we have ever seen before".

http://www.theage.com.au/business/house-prices-jump--again-20091102-hsfy.html

Australia has seen average house price to income ratio's consistently above 3.5 times income for the last 25 years or so, even during their crashes, and with far higher interest rate averages and income tax levels than us over the last decade, which completely blows a hole in the often portrayed bear meme that anything above 3.5 times income is unsustainable.

The chart below also illustrates just how cheap houses were here in comparison to global standards during the mid 90's at the last trough.... So trying to compare XYZ% rises since then is not really a valid point. The abherration was not the rises to peak, it was how exceptionally low the last UK trough was.

(bear in mind it's an older chart, AUS prices are now already back above peak at over around 6 times income on average)



Now, in fairness, the original article does point out that rising rates will cool the Australian market for a while, as will reduction of the extra FHOG component, but nothing can really stop prices heading moonbound until supply meets demand.

Interestingly, they built 60% more houses than we did last year, and their population grew by a similar level to ours in nominal (although not percentage) terms. And unsurprisingly, we have also seen big prices rises this year.

Those who assume we cannot sustain long term price averages of 5 or 6 times income or higher should really look closely at the example Australia sets... Even with higher taxes and higher interest rates.

inspector_monkfish

04:32 13Nov09 POLL-Australia central bank seen hiking in Dec trifecta

* Opinion swings to favour interest rate rise in Dec

* Most analysts now see 25bps hike to 3.75 pct

* Rates seen at 4.5 pct by June, 5.0 pct end of 2010

SYDNEY, Nov 13 - Australia's central bank is now
thought likely to raise its key cash rate in December, marking
the first time it would have tightened three months in a row.

A Reuters poll of 18 analysts on Friday found 15 expected the
Reserve Bank of Australia (RBA) would hike by 25 basis points to
3.75 percent at its policy meeting on Dec. 1. The rest felt it
would keep rates at 3.5 percent.

The central bank has already raised rates by 25 basis points
in both October and November, becoming the first in the G20 to
tighten since the global credit crisis blew up.

Until this week, many had suspected the RBA might skip a move
in December given it had already hiked twice and the global
outlook remained uncertain.

But a spate of upbeat domestic figures, including another
surprisingly robust jobs report, convinced most that rates needed
to rise more quickly from their emergency lows.

The market has moved to price in an 84 percent chance the
central bank will tighten by 25 basis points <CSRBA=CSAU>.

The RBA has said it wants to gradually remove stimulus and
move rates toward neutral, which analysts tend to see as anywhere
from 5 to 6 percent.

Fourteen respondents expected rates to reach 4.5 percent or
more by June next year, and 11 saw 5.0 percent or over by
year-end.

---

Economists were asked where rates would be after the RBA's
meeting on Dec 1. Where would rates be by June next year and by
the end of 2010.

---

Rates June Dec
Dec 1 2010 2010
AMP 3.75 4.5 5.0
ANZ 3.5 4.25 4.25
Barclays 3.75 4.5 5.5
Citi 3.75 4.5 5.5
CBA 3.75 4.5 5.0
4Cast 3.75 5.0 5.5
GSJBW 3.75 4.5 4.75
ICAP 3.75 4.5 5.0
IFR 3.75 4.5 5.25
JP Morgan 3.75 4.5 5.0
Macquarie 3.5 4.0 4.5
NAB 3.75 4.25 4.75
Nomura 3.5 4.0 4.25
RBS 3.75 4.5 4.5
St George 3.75 4.5 5.0
TDSec 3.75 4.5 5.25
UBS 3.75 4.25 4.75
Westpac 3.75 4.5 4.5

---

Low 3.5 4.0 4.25
High 3.75 5.0 5.5
Average 3.75 4.4 4.9
Median 3.75 4.5 5.0

---

Generali

Bear in mind that the Australian economy is less screwed than the UK economy and also that the banks were required to keep a higher level of cash in reserve so the credit crunch didn't hit in the same way.

What impact do you think that hundreds of billions of pounds of extra national debt will have on disposable incomes and thus the money available for house purchases for example. Net debt in Aus is predicted to peak (IIRC) at 15% of GDP. Australia has most of her pension liability covered too. UK debt is at about 60% and rising with a massive pension and healthcare liability that isn't even acknowledged let alone paid for.

HAMISH_MCTAVISH

Generali wrote: »

Bear in mind that the Australian economy is less screwed than the UK economy and also that the banks were required to keep a higher level of cash in reserve so the credit crunch didn't hit in the same way.

True. But Australian banks have tightened lending criteria to some extent, and increased deposit requirements for FTB's beyond the gifted grant money. And prices are still rising.

What impact do you think that hundreds of billions of pounds of extra national debt will have on disposable incomes and thus the money available for house purchases for example. Net debt in Aus is predicted to peak (IIRC) at 15% of GDP. Australia has most of her pension liability covered too. UK debt is at about 60% and rising with a massive pension and healthcare liability that isn't even acknowledged let alone paid for.

That of course is unknown.... There seems no doubt that taxes here will rise, and interest rates too.

But it is worth pointing out that Australia has had a significantly higher income tax burden and much higher interest rate average than us for a very long time.

And yet people still afford to pay far higher house prices, in income terms, than us.

Graham_Devon

Now compare the house you would get here for 150k, with the house you would get there for 150k!

I'm always wary of comparing taxes. Saying they have higher income tax is one thing. But then do they have NI? Council Tax? Etc etc.

inspector_monkfish

Graham_Devon wrote: »

Now compare the house you would get here for 150k, with the house you would get there for 150k!

I'm always wary of comparing taxes. Saying they have higher income tax is one thing. But then do they have NI? Council Tax? Etc etc.

...and then compare the 150k house in north wales to the 150k house in london

HAMISH_MCTAVISH

Graham_Devon wrote: »

Now compare the house you would get here for 150k, with the house you would get there for 150k!

I've seen pokey little concrete shoebox flats in Melbourne that you couldn't swing a cat in.... For prices that even I find astonishingly high.

Of course you can also get a nice house at a good price in some areas.

Just as in the UK, location is everything with prices.

150K will get you a lovely detached house with a garage and garden in many parts of the UK, and in many parts of Australia.

It won't even buy you a one bed flat in Melbourne or Sydney, just as it won't in London.....

I'm always wary of comparing taxes. Saying they have higher income tax is one thing. But then do they have NI? Council Tax? Etc etc.

I have relatives that live there, and they are extremely bitter about the amount of tax they pay. They claim that overall it is significantly higher than the UK. And that costs of living, which used to be cheaper, have also risen to comparable levels in most things.

But they acknowledge the quality of life, recreationally anyway, is better than here.

Generali

UK Government spending in 2009-10 is predicted to be 44.3% of GDP.
Australia's Government spending in 2005-6 (the only year I could find figues for) was 35.7% of GDP.

Australia's highest marginal rate of tax is 45% which kicks in at $180,000 (£99,000).
In the UK the highest marginal rate of income tax is 40% which kicks in at £34,800. Plus NI of course which Australia doesn't have which has a marginal rate of about 20% for most (employer + employee rates).

GST is 10%, VAT is 17.5%

Living in a good bit of Sydney is expensive (and Melbourne too I would imagine). It's cheaper if you compare like with like than London by a very long way.

Graham_Devon

HAMISH_MCTAVISH wrote: »

I have relatives that live there, and they are extremely bitter about the amount of tax they pay. They claim that overall it is significantly higher than the UK. And that costs of living, which used to be cheaper, have also risen to comparable levels in most things.

But they acknowledge the quality of life, recreationally anyway, is better than here.

Well all I can say is I know 2 couples who have moved there. Both have gone for a better quality of life in terms of houses, and lower taxes. So I guess it might depend on the area.

Lower taxes is one thing, HUGE spiders that just look scary and teeny spiders than kill you are another. I'd rather pay me taxes!

Graham_Devon

inspector_monkfish wrote: »

...and then compare the 150k house in north wales to the 150k house in london

Well I just assumed that people would compare like with like, without me having to explain that bit

HAMISH_MCTAVISH

Graham_Devon wrote: »

So I guess it might depend on the area.

Possibly so.

In reality, if you sell a house in the South East and move to some parts of rural Scotland, you could get a castle for what a 5 bed detached in a nice area would cost.

I've seen 16 bed castles for sale in Scotland for the price of a family house in the London commuter belt.

Australia has similarly huge price variances.

Lower taxes is one thing, HUGE spiders that just look scary and teeny spiders than kill you are another. I'd rather pay me taxes!

:rotfl: