Market Update – July 2017
The proportion of properties being sold to first home buyers has fallen in most parts of Australia. Property advisers CoreLogic released a report in late June which detailed the percentage of purchases that have been made by first home buyers during the first four months of 2017. On a national level, the proportion has fallen to just 14% (less than one in six). This is the lowest it has been since at least 1991.
The fall has not been standard across the country. Western Australia, for example, saw 28.4% of its housing being purchased by first timers – about 1% more than it’s long-term average of 27.4%. The fall was most pronounced in the NSW market, where the percentage of first home buyers was only 8.4% – or one in twelve purchasers. This is a huge fall from the long-term average of just over 20% (obviously people change houses more in NSW than they do in WA – the relatively high long-term average for first home buyers in the West indicates that people tend to hold onto their first home for longer). South Australia was not far in front of NSW, and Tasmania was not far ahead of South Australia. This has caused some consternation as to the cause of the sharp reduction in first home buyers.
Housing inaffordability is nowhere near as much of a problem in South Australia and Tassie as it is in other states, and yet the reduction in first home buying has been quite pronounced in both of those states. This complicates the most tempting conclusion for the reduction overall: that housing inaffordability is hitting hardest those people who do not yet own a home. Such a conclusion makes good sense. When house prices rise in general, people who already own a home enjoy a capital gain. This leaves them better able to afford to purchase another home than someone who has not enjoyed the same capital gain; second and subsequent home owners are better able to participate in rising markets than new home owners. And this conclusion is supported by the high rate of first home buying in Western Australia: prices in the west have been flat or declining for a few years now, and that state is the only one in which first home buying is better than the long-term average.
What all this really tells us is that Australia is made up of multiple housing markets – which makes sense given we are the largest island in the world. This poses a huge problem for the economists whose job it is to drive monetary policy (interest rate policy) in Australia. The Sydney market dominates the overall market, but it’s economy is quite different to that of other states. Setting policy to address the dominant Sydney market can have unwanted impacts elsewhere. This is one of the reasons that interest rates have remained low in recent years, even as Sydney (and to only a slightly lesser extent Melbourne) has seen a sharp increase in the price of housing: spending in other parts of the country needs the boost that lower interest rates provide.
So, it is all very interesting and it will be even more interesting to see what comes next. Certainly, there are a lot of factors impacting on the property market. In early June the NSW state government announced an exemption on stamp duty payable by first home buyers. Will that encourage them back into the Sydney market? If so, what impact will that have on the broader market? (The full exemption is only available for houses valued up to $650,000, and there are further discounts available up to a limit of $800,000). History would suggest that measures designed to assist first home buyers end up assisting people who are selling properties to those first home buyers, as the assistance just leads to higher prices. The exemptions take effect from 1 July, so now is probably a good time to be selling a Sydney property valued at around $600,000 – a price rise to $650,000 would not be unexpected.
Share Market Update
Nothing happened in the share market in June. Absolutely nothing. The ASX 200 started the month at 5,738 points, and ended it at 5,728 – a change of only 0.1%. Here is how Google reported it:
Of course, things are not as simple as that. The market actually rose by 1.7% in the first two weeks of the month, and then fell by 3% in the third week. The fourth week saw it meander its way slightly upwards. June marks the end of the 2016/2017 year. For the twelve months to June 30, the market rose from 5,233 points to finish on 5,728 – a rise of 9.5%. Add an average dividend yield of around 4.5% and the market produced an average return of around 14%. That makes it a good year, by any stretch. We needed a good year: during the previous 2015/2016 year, prices in the market fell by 5.3%. This is offset by dividends, but the year was still a slightly negative one for the average investor. The year before that saw basically no capital growth at all. If you want to go back slightly further, the five years to 30 June 2017 saw overall capital growth of 37.8%. This implies an annual growth rate of around 6.6%. Again, add an annual dividend of 4 to 4.5% to that figure and you get an average return of around 11% per year for the past five years. The point of all this: you needed to be in the market for the whole time to achieve this very good return. Had you invested for shorter periods within the five-year period, you may have done better – but you might also have done worse. Creating wealth via investment is a long-term process.