The property market across Australia is alarming many, Alan Kohler says. The property market across Australia is alarming many, Alan Kohler says.
Finance Alan Kohler: The housing market is exploding again Updated:

Alan Kohler: The housing market is exploding again

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In the street outside 10 Chelsea Street, Brighton on Saturday afternoon, a significant economic event took place.

It’s a nice two-bedroom art deco house, in need of some work, and it went up for auction on a beautiful sunny Melbourne day.

There was a pretty good crowd and it was obviously going to be a spirited auction, but even the auctioneer was stunned when someone immediately called out “$2.1 million” in response to his standard kick-off: “Who’s going to start me off, what am I bid?”

That was the reserve.

“Right,” he said. “The house is now on the market”. Fifteen minutes later he knocked it down for $3.075 million to a developer – almost 50 per cent above the reserve and what the agent had been quoting.

Sydney’s clearance rate on Saturday – one of the wettest days in years – was 90 per cent, which is possibly the highest ever clearance rate anywhere in Australia, and definitely the highest in the rain.

The real estate industry is reaping rewards after COVID-19 imposed many restrictions in 2020. Photo: AAP

The Sydney sales included a place on the clifftop at Vaucluse that went for $7.5 million, also 50 per cent above the reserve of $5 million. An apartment in North Bondi sold for $20.1 million.

Vendor pleasure and buyer frustration have quickly reached another crescendo five years after the last time, but while politicians might commiserate with frustrated buyers, the evidence shows where their true sympathies lie: There are more votes in rising house prices than falling ones.

Australia is one of the few countries in the world that encourages speculation in residential housing, which means we get boom/bust cycles in shelter.

To avoid that, many countries have rent controls or direct regulation of house prices, or both.

After all, accommodation is an essential service, like the electricity to light the house and gas to heat it, so it’s arguably a responsibility of government to ensure we can all afford it. In fact, probably more so than the utilities, since without a house we don’t need electricity and gas.

It’s also an unproductive asset, so over-investing in it can hold back a country’s productivity.

But in Australia, housing speculation is actively encouraged: Tax is applied to only half of the capital gain, and if you live in it rather than rent it out there’s no capital gains tax at all.

Plus, negative gearing – any losses on an investment property between rent and mortgage cost can be deducted for tax purposes against other income.

But wait, there’s more: An array of grants and stamp duty concessions have now brought first-home buyers back into the market, bidding against investors and upgraders, and all of them bathing in the lowest interest rates ever seen.

RBA governor Philip Lowe says the board is keeping a close eye on the booming housing market. Photo: AAP

Not only is the RBA cash rate now at 0.1 per cent, but RBA governor Philip Lowe has told us that interest rates will still be down there in 2024.

“FOMO” (fear of missing out) is abroad, and not least among the banks: Home loan competition among them is reaching fever pitch.

Earlier this month, Westpac announced the lowest rate for a two-year fixed rate mortgage – 1.79 per cent. Owner-occupiers don’t have to pay more than 2 per cent interest these days, and investors can get a loan for less than 2.5 per cent.

So, the craziness we’re now seeing in the residential property market is not crazy at all – it’s perfectly rational.

For most people, owning one or more houses seems to be the best, in fact the only, way to build some wealth, and with tax concessions and super-low official interest rates the authorities are begging us to do it.

To deflate the housing boom six years ago, the Australian Prudential Regulation Authority (APRA) introduced what were called “macroprudential controls”, which basically involved imposing a limit on lending to investors, stopping interest-only loans, increasing deposits and increasing the interest rate that banks must use to test the ability to repay.

That had the desired effect – and between 2016 and 2018, house prices went from rising 1 per cent per month to falling 1 per cent per month, even though interest rates were cut 0.5 per cent over the same period.

Now, house prices are back above the record highs of 2016, so housing analysts are once again predicting more APRA controls on lending.

But whereas the previous boom was all about investors, this one is more complicated.

First-home buyers are flooding into the market because of the state grants and stamp duty concessions, and upgraders are being encouraged to buy renovators’ delights to take advantage of the federal HomeBuilder grants designed to lift the construction industry out of the pandemic.

Investors have come into the market lately, but they are often developers like the one who bought 10 Chelsea Street, Brighton, presumably looking for one of the HomeBuilder grants to renovate it.

While another round of APRA lending controls will probably have some impact, the accelerant for this fire is being splashed by other arsonists – the government and the Reserve Bank, with miniature interest rates, grants, negative gearing and the capital gains tax discount.

Interest rates are apparently locked in until 2024 and political decisions to remove tax concessions and grants are even less likely.

That’s because politicians have learnt that most voters already own a house or two, so they like it when prices rise and hate it when the tax lurks and grants are removed.

Which means it will be up to APRA to take the steam out of the market again, and soon.

Alan Kohler writes for The New Daily twice a week. He is editor in chief of Eureka Report and finance presenter on ABC News