‘Greed and envy’ driving property prices, warns fund manager

Sydney-based fund manager John Abernethy has flagged the potential financial stability risks of “excessive” real estate prices and a worryingly high proportion of interest-only mortgages held by the big four banks.

In a recent report, the Clime managing director and former NRMA Investments head of equities explained how interest-only home loans are fast approaching 40 per cent of major bank mortgages books.

“The huge lift in average Sydney and Melbourne residential prices over the last three years has become a significant political issue for state and Commonwealth governments. If residential prices are left unchecked to market forces, this could ultimately threaten the financial stability of the whole economy,” Mr Abernethy said.

“Interest-only loans now represent about 40 per cent of total housing and property investment loans.

“Arguably this level reflects both the high level of property speculation (targeting capital gain only) and affordability (interest but no capital repayments of debt). It also suggests that investors are buying their second and third investment properties through interest-only loans.”

Clime’s review of CBA’s recent results shows that interest-only loans have grown from 37 per cent of residential assets to 40 per cent in the last year.

“No one should be deluded,” Mr Abernathy said. “Excessive residential property prices, driven by greed, envy or excessive debt, will not create a good outcome for Australia.

“High residential property prices may be maintained for long periods when governments and regulators support them, but eventually either affordability and/or intrinsic value will bring prices down.”

The fund manager explained that investors, rather than owner-occupiers, are responsible for driving up property prices in Sydney and Melbourne. This, he says, has made the current property cycle very different from previous ones.

“The price of housing along Australia’s south-east coast has risen because a multitude of factors: envy, greed, the poor regulation of debt, excessive taxation breaks for property investment, the lack of restrictions governing non-resident investment, population growth and high immigration, poor infrastructure development, poor urban planning and uncoordinated land release,” he said.

“The recent GDP report for 2016 calendar year showed an unhealthy focus in Australia on housing investment over virtually all other sectors. Indeed, only exports, buoyed by the extraordinary rise in coal and iron ore prices, outpaced dwelling investment in the last year while business investment collapsed in a hole.”

Mr Abernathy argues that Australia is producing more part-time jobs so that people can buy homes with interest-only loans. He added that the dream of “owning your own home” is being replaced by the hope of merely living in your own home.

“This transition mostly affects the growing “Y” generation,” he said.

Housing affordability has become a major political debate in recent months and core issues such as negative gearing, capital gains tax and the resurgence of investor lending have been on the table. Earlier this month, the Turnbull government established its Affordable Housing Implementation Taskforce.

Mr Abernethy believes any impact from government measures to alleviate the lack of housing affordability will be marginal.

“Affordability is governed by the interconnection of price, interest rates and wages. Given that the world economy is at the bottom of the interest rate cycle, either wages must massively rise (therefore inflation surges) or property prices must fall, to bring the market back to long-term equilibrium,” he said.

“We think that a surge in wages is unlikely, and therefore that residential prices must fall – despite every effort by government to hold them up.

“For those that invested driven by envy, this will not be an issue as everyone will suffer similarly. For those driven by greed, they have been warned but greed will ensure that they ignore it.”

[Related: RBA prepared to intensify investor lending crackdown]

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