Australian House Prices in Gold / Silver Ounces (2016)

Every 12 months I have been updating the data I keep on Australian house prices measured in ounces of Gold and Silver. Here is the latest update which takes us through to June 2016 (inclusive).

Data for house prices is via Residex (median house price indices).

Data for Gold and Silver prices is via Perth Mint (bid average AUD).

Key Figures:

Adelaide (Ounces to buy a house) 

Housing Peak Against Gold (February 2005): 501oz Gold

Latest Figures (June 2016): 258oz Gold, 19,332oz Silver

Based on Current Spot Price: 249oz Gold, 16,389oz Silver

Brisbane (Ounces to buy a house)

Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver

Housing Peak Against Gold (February 2004): 600oz Gold

Latest Figures (June 2016): 296oz Gold, 22,237oz Silver

Based on Current Spot Price: 286oz Gold, 18,852oz Silver

Melbourne (Ounces to buy a house)

Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver

Housing Peak Against Gold (February 2004): 661oz Gold

Latest Figures (June 2016): 433oz Gold, 32,460oz Silver

Based on Current Spot Price: 417oz Gold, 27,519oz Silver 

Perth (Ounces to buy a house)

Housing Peak Against Gold (July 2007): 642oz Gold

Latest Figures (June 2016): 295oz Gold, 22,128oz Silver

Based on Current Spot Price: 285oz Gold, 18,759oz Silver

Sydney (Ounces to buy a house)

Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver

Housing Peak Against Gold (February 2004): 1100oz Gold

Latest Figures (June 2016): 625oz Gold, 46,876oz Silver

Based on Current Spot Price: 603oz Gold, 39,741oz Silver

(Spot Price ratio calculated on A$27/oz for Silver, A$1780/oz for Gold)

Gold and Silver (monthly data) outperformed all capital city prices since the last update.

My position remains the same as it has been since 2014:

"Over the same period (next 3-5 years) I expect rising precious metal prices and a lower Australian Dollar, so do think investors stacking ounces for the eventual purchase of a house will be rewarded (even those in Sydney). Only time will tell if I'm right." 

That said I purchased my own home again in the past 12 months as recently covered on the site:

"But my advice would be not to live your whole life waiting for, planning for, or even hoping for, the next "big crash" (either of the financial system or housing market, arguably the two are joined at the hip in many modern economies).

That might sound odd coming from someone who's analysis, speculation and investments led them to buy a lot of precious metals and write under a handle like 'Bullion Baron'. Some readers may picture me as a nutter with a bunker full of long life food, guns and Gold, just waiting to live out the financial apocalypse 'doomsday prepper' style, but the reality is far less intense.

I'm not saying you shouldn't be prepared for and insure yourself against financial catastrophe, but once you have done so, go out and live a little. The last significant purchase of Gold I made was in late 2014 (after accumulating in the dips periodically in the 6 years prior). I have recently felt comfortable buying a home again in my local property market, Adelaide."

Here are the charts (click any to enlarge).

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Rights and Wrongs of Labor's Negative Gearing Policy

Last year I wrote a post on negative gearing (The Politics of Negative Gearing), finishing on this note:

"Despite housing affordability being a hot topic at the last federal election, neither of the major parties had any policy specifically directed at tackling it. Though quarantining negative gearing to new builds or removing it completely would only be one part of a solution to tackle the problem, Abbott has made it quite clear that he's not interested in a sensible debate on the matter. Last month Labor released a discussion paper aimed at informing Labor’s Housing Affordability Strategy (to be taken to the next election). I'd expect that with the right mix of policies directed to tackling housing affordability and the right attitude, Labor might just have an edge that could help them secure a win at the next federal election."

Recently Labor released their policy on negative gearing (along with reducing the capital gains tax discount) and it has been making plenty of headlines since.

For a long time negative gearing has been considered a sacred cow, but it was obvious with housing affordability concerns growing that something would need to change and we are nearing a point where even the 'untouchables' of our tax system may end up being manhandled (if not as a result of this election, then perhaps the next). Sentiment and polls have moved in Labor's favour following their policy announcement, but not yet decisively enough to win them an election.

Sadly some of those who have been campaigning for changes to negative gearing for as long as I have are blinded by the shiny coating of Labor's policy and are not interested in looking under the bonnet at the details.

The subject of negative gearing brings out a very black and white argument from most. Both those for and against negative gearing changes seem content spreading any research they can to support their particular side, without any consideration to the accuracy. For example the Liberal Party was quick to highlight the details from a BIS Shrapnel report and connect them to Labor's policy even though the details modeled were not all the same as Labor's policy. Similarly those in support of Labor's policy have suggested independent modeling from Ben Phillips is a 'slam dunk' in support of that policy despite the fact that it doesn't account for behaviour changes, doesn't consider the accounting impacts (such as carrying forward losses) and doesn't differentiate between the types of income investors negatively gear against (i.e. wage vs investment, so at face value it doesn't appear to model Labor's policy either).

I have tried to take a more objective approach even though I am in favour of changes to negative gearing in order to reduce investor demand in the housing market. We do need to take care when changing the rules which govern our $6 trillion housing market. Negative gearing should only be removed or changed with an objective in mind and it should only be changed if we are confident the legislative changes will achieve that objective. With that basis I present what I consider to be the rights and wrongs of Labor's negative gearing policy (because it's far from perfect).

Firstly, what Labor got right...

☑ Making the first move

Changes to negative gearing are something that have been raised regularly in political discourse, but not to the point where a major political party was ready to take a policy to an election (in recent history). Labor released a discussion paper on housing affordability in early 2015 and now have a policy to change negative gearing (and capital gains tax) to improve the same. Whether you agree or disagree with the policy (or parts of it), there is no question that it is a brave move and Labor deserves applause for taking the issue seriously and being the first to bring forward firm policy for consideration.

☑ Tackling housing affordability

Some may be surprised that I support changes to negative gearing, which essentially results in higher taxes for investors (at least in the short term). I come from a position that government controls essentially all levers affecting the housing market (see Who's to Blame for Australia's Expensive Property?), if that degree of control over the market is to continue (and I would be all for a change to that), then government needs to take responsibility for the outcomes of their policy, such as the reduction in housing affordability and home ownership rates (source).

Click Chart to Enlarge

Abolishing (or changes to) negative gearing isn't a one policy fix to housing affordability, but it will reduce investor demand by removing an incentive and reduce the level of debt they can carry/prices they are prepared to pay.

Click Chart to Enlarge

Secondly, what Labor got right/wrong depending on how you view it...

☒ / ☑ Grandfathering existing investors who are negatively geared

As Jordan Eliseo pointed out in a recent post, grandfathering existing investors is unfair:

..it hardly seems fair to say to 1.3 million Australians that they can keep a tax lurk that will be closed forever more to the remaining 20 million plus Australians, the great majority of whom are nowhere near as well off financially as a large portion of those who will get to keep the sweetheart deal in perpetuity.

If it is bad policy it should be junked outright.

It could also pull forward demand as is highlighted by Eliseo, if the policy is introduced at a future date investors may rush out to buy before the cutoff.

However not grandfathering investors is also unfair to those who've made significant decisions based on the current taxation settings.

Also, it's likely a policy change wouldn't get wide enough support without the grandfathering of existing investors.

☒ / ☑ Allowing negative gearing for new builds

There are well-intentioned reasons for allowing negative gearing (against salary/wages) to continue for new construction. It has the potential to encourage investors to provide and drive new supply. That means jobs and a boost to economic growth.

The downside to encouraging more new residential construction is that many say we already have an oversupply, particularly in the apartment market. Such a policy could broaden the oversupply to other types of housing and/or increase the oversupply of apartments, which I expect would lead to a collapse in prices. An oversupply of property has been one characteristic of other global housing bubbles which have collapsed.

Lastly (but not least), what Labor got wrong...

☒ It will help to repair the budget

Labor's policy document states that:

Two specific tax deductions – negative gearing and capital gains subsidies – are both significant calls on the budget and are growing at a rapid rate.

However, negative gearing shouldn't be seen as a budget boon for reasons I have highlighted in the past:

The reality is that an end to negative gearing for property wouldn't be a huge budgetary boon (as these commentators have suggested). Most advocating for it's removal suggest a 'grandfathered' approach, which means properties already owned by investors aren't affected (until the asset is sold). Even when investors make a purchase (following negative gearing's removal), any losses which would have previously been deducted in the same financial year against other income could be carried forward to claim against future income or profit from the same asset class (property). While it might delay when deductions are made (and some investors may not make a future profit in property meaning it never is), improving the government budget in the short term, it's long term impact would be negligible.

Furthermore, it's likely that over time investors would adjust their expectations and reasons for investing in property. Currently a large number of investors buy for the tax advantages that negative gearing (and other tax breaks) offers. 

It's removal would result in a lower number of investors prepared to speculatively purchase at higher prices knowing that (as it stands now) low yields (& resulting losses) are partially offset by a tax deduction against other income at the end of the financial year (or as they go for those investors using an Income Tax Withholding Variation). Over time this would likely result in a normalisation of rent to price ratios so that fewer investment property purchases would be loss making from the outset.

Other than the carried forward losses and behaviour changes, we also have to consider that Labor's policy doesn't necessarily stop an investor from negatively gearing an established property if they have other income (that doesn't fall under salary / wages) against which they can claim their property related losses (covered in more detail below).

☒ Only stops losses claimed against salary/wages 

Some have tried to claim that negative gearing (as it relates to property) is only those net losses which are claimed against salary / wages, but that is not the case. The ATO makes it quite clear:

A rental property is negatively geared if it is purchased with the assistance of borrowed funds and the net rental income, after deducting other expenses, is less than the interest on the borrowings.

The overall taxation result of a negatively geared property is that a net rental loss arises. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income) when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it is carried forward to the next tax year.

Labor's definition and policy appears to only affect those offsetting losses against salary / wage income:

The investor can deduct any losses associated with the investment from their salary and wage income.

&

This will mean that taxpayers will continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.

This suggests investors will be able to continue buying established homes and negatively gearing those losses against income other than wages. Granted salary and wages are the largest income item, but there is plenty of other income that property losses could be offset against. Look at this table from the ATO (showing 2013-2014), rental losses are minuscule compared to the other income they could be offset against:

Click Table to Enlarge

Based on the information we have available I am not convinced we can conclude (with certainty) that negative gearing of established houses will reduce with Labor's policy.

☒ It could increase rents in desirable (established) suburbs

Some have made the point that negative gearing won't increase rents because even if the pool of rental housing reduces due to fewer investors (in the established market), these houses have to be sold to someone, i.e. one less investor is one new home owner. They also highlight that increased investor participation in new builds will expand the rental supply.

I agree with those comments and would think it unlikely rents in aggregate increase as a result of Labor's policy, however... while median rents may see downward pressure or a lack of growth, the ability for investors to negatively gear new properties could create a distortion where most of that downward pressure on rents is in the outer suburbs (where the number of rental properties will increase), while inner/sought after suburbs with mostly established housing stock see rents rise as natural attrition of existing established investors reduces the pool of available rental properties. Yes that means an increase in owner occupiers in those suburbs, but those who can’t afford to buy in those suburbs may be left to pay higher rents or be forced to move to less desirable suburbs.

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As you can see, while well intentioned Labor's policy is far from ideal, in fact we can't even be sure it will achieve what it sets out to. Sadly many of those who want negative gearing to go are defending Labor's policy without giving it the careful consideration it needs. Here's hoping that changes as we near the election or if Labor does get into office, then I hope they review their policy and make the changes required to meet an objective of improved housing affordability and a higher home ownership rate.

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Don't Live And Die Waiting For The Big Crash

I saw The Big Short recently and this quote flashed up on the screen:

“Everyone, deep in their hearts, is waiting for the end of the world to come.” ― Haruki Murakami, 1Q84

But my advice would be not to live your whole life waiting for, planning for, or even hoping for, the next "big crash" (either of the financial system or housing market, arguably the two are joined at the hip in many modern economies).

That might sound odd coming from someone who's analysis, speculation and investments led them to buy a lot of precious metals and write under a handle like 'Bullion Baron'. Some readers may picture me as a nutter with a bunker full of long life food, guns and Gold, just waiting to live out the financial apocalypse 'doomsday prepper' style, but the reality is far less intense.

I'm not saying you shouldn't be prepared for and insure yourself against financial catastrophe, but once you have done so, go out and live a little. The last significant purchase of Gold I made was in late 2014 (after accumulating in the dips periodically in the 6 years prior). I have recently felt comfortable buying a home again in my local property market, Adelaide. I have also been spending a fair amount of time and capital over the last several months working on a new business venture (one reason my posts here have been less frequent) and with the recent news that the Australian government will be incentivising investment in startups I may continue to put money in this space.

In a comparison of renting vs buying (Rent vs Buy: An Adelaide "Cost Comparison" Revisted), the financial burden of buying has fallen substantially over the last half a decade as rents have increased (moderately), prices stagnated and interest rates fell. I still think Adelaide property prices have some tough headwinds ahead, the state economy is still struggling (highest unemployment rate in the country) and prices may yet fall again, but I expect them to outperform the likes of Sydney or Melbourne over the next 5 years (even if that means prices fall less in Adelaide).

Sydney house prices grew far more than in Adelaide over the last 7 years

While I'd agree with many housing permabears, that house prices are high in Australia (it is an expensive market, perhaps even a bubble in some cities/regions), they have also remained at elevated levels (relative to incomes) for well over a decade. Whether they correct back to past levels or not should be of no concern if you are treating housing as a consumption good.

I would never discourage others who want the stability of ownership and are prepared to treat housing as a consumable (rather than an investment) from buying. If you have a healthy deposit (preferably one that will help you avoid LMI), fixed interest rate (or able to service higher interest rates), protect yourself (income protection, cash buffer, etc) and expect to stay in the property you purchase for the long term (until mortgage paid off), then it shouldn't matter what prices do (rise, fall or stagnate). - Bullion Baron

Despite buying a home and investing in a new business, I still think the risks to the financial system are immense and I'm in no hurry to reduce my exposure to one of the assets that I still expect to flourish as financial instability returns.

No Gold was harmed (or sold) in the making of this home owner. #StillVaulting

— Bullion Baron (@BullionBaron) December 9, 2015

By the way, I looked up the quote from The Big Short when the movie finished as I was interested to see where it came from and it's context. The book it came from, 1Q84, is a novel originating in Japan. The paragraph reads:

Sometime after that, Aomame happened to see the movie On the Beach on late-night television. It was an American movie made around 1960. Total war broke out between the U.S. and the USSR and a huge number of missiles were launched between the continents like schools of flying fish. The earth was annihilated, and humanity was wiped out in almost every part of the world. Thanks to the prevailing winds or something, however, the ashes of death still hadn’t reached Australia in the Southern Hemisphere, though it was just a matter of time. The extinction of the human race was simply unavoidable. The surviving human beings there could do nothing but wait for the end to come. They chose different ways to live out their final days. That was the plot. It was a dark movie offering no hope of salvation. (Though, watching it, Aomame reconfirmed her belief that everyone, deep in their hearts, is waiting for the end of the world to come.)

Wikipedia describes Aomame (and another character in the story) as 'long-lost lovers who are drawn into a distorted version of reality'. I don't think it would be wise to live by the beliefs of this fictional character, rather you should ensure you are prepared for the worst case scenario, but once you have done so live life to the fullest.

 

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Defining a Housing Bubble

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts". - Financial Times

A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest. The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments. - Investopedia

A bubble is an upward price movement over an extended period of fifteen to forty months that then implodes. - Charles Kindleberger

A lot of people have been using the term ‘bubble’ to describe the Australian housing market, others say we don’t have one and Former Treasury secretary Martin Parkinson recently suggested it was the wrong question to be asking (i.e. do we have a bubble?), a comment I recently agreed with.

The problem with debating whether or not we have a bubble is that, like the term affordability, it’s definition is subjective.

I provided a few definitions of an 'asset bubble' above, one thing they all have in common is the need for the eventual ‘pop’. So analysts, economists, bloggers, property commentators and perma-bears can rave on all they like about a housing bubble in Australia, but the proof of having had one will be when and if it bursts.

That leaves us with a question though, what size and speed of decline do we need to see in order to confirm the bubble? The above definitions use terms that indicate a quick outcome, 'sudden collapse', 'steep decline', 'panic' and 'implodes', these all indicate a fast and substantial decline. I think anyone arguing that the 'Australian housing bubble' will burst by a slow paced, long term decline in price (real or nominal) is not really describing the bursting of a bubble at all, but rather a slow revaluation of the asset based on the deteriorating fundamentals.

Here is a chart I posted on Twitter over the weekend (click to enlarge):

I would suggest one of these cities had an obviously bubble (Las Vegas) which was confirmed by the bursting price, but what of the other two cities? In my opinion Boston's price decline was not a bursting housing bubble (it's decline was not steep and sudden as it was in Las Vegas), but rather was impacted by the conditions caused by the GFC and credit conditions resulting form the bursting of housing bubbles elsewhere in the United States and was probably overdue some sort of correction. That might also be the case for Adelaide (included on the above chart) and some other Australian cities which aren't experiencing strong price growth.

At it's peak the United States had a bifurcated housing market just as we have in Australia now with unsustainable rates of annual price growth in Sydney and Melbourne, but only moderate growth (at best, if not negative) in most other locations. Cameron Kusher posted a great chart on Twitter recently which highlights differences in price growth since the GFC.

Capital city home value growth since GFC - Dec-08 to Sep-15

Is 10-15% growth over (almost) 7 years the sort of price increase you'd expect to see in an 'asset bubble'?

Now I'm not arguing that Australian property (anywhere) is cheap or affordable (see the first few charts in this post), there is no doubt in my mind that it's historically and globally expensive, but that doesn't mean that every Australian capital city is in a bubble (and going to pop), nor that the Australian housing market should be considered a bubble as a whole.

There's a good chance it will be years before we can confirm whether any Australian capitals are in a property bubble right now or simply expensive/somewhat overvalued. My best guess is that Sydney and Melbourne could be in bubbles and peak this year experiencing a steep decline in price over the years ahead, but some other Australian cities like Adelaide and Brisbane I expect may only experience modest declines. For example if Adelaide saw a 10% nominal decline into 2017 (which I think is a possibility given weak economic factors), then it would result in growth having been 0% over the previous 9 years.

Whatever lies ahead I wish more commentators would define what they consider a bubble to be, because it's become clear to me that some individuals have a completely different opinion of what the term means.

Not sure HnH really understands what an asset bubble is (consensus view) given this comment: http://t.co/NPJncrAVRD pic.twitter.com/A3uaZh4K02

— Bullion Baron (@BullionBaron) September 25, 2015

If you have a view on what differentiates expensive or overvalued property to an actual property bubble and what we will need to see from Australian property prices (or in one of the capitals) to confirm we've had one here then I'd be interested to hear your opinion in the comments below...

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