Tim Lawless - CoreLogic
Home Equity as a Source of Wealth
Shelley Wettenhall: I'm pleased to introduce Tim Lawless, who's the Executive Director of Research at CoreLogic. Tim is well-known throughout the Australian and New Zealand market as a commentator on real estate; very topical at the moment, Tim, given what's going on in the real estate markets due to COVID. Being a homeowner in Melbourne, I'm certainly experiencing that at the moment. Tim is also well-known for regularly publishing papers on the Australian and New Zealand markets outside of CoreLogic. So welcome, Tim, and thank you for joining us today.
Tim Lawless: Thanks very much, it's a pleasure to be part of the program. So, the focus of my session today is around housing markets. I know, as you mentioned, there is a lot of focus on housing markets at the moment, not only because we see more than half of household, Australian household wealth directed towards housing assets, but also because housing does provide a real multiplier to the Australian economy. So when housing markets are very strong, you generally find there's a lot of credit activity, there's a lot of payments in terms of stamp duty to governments, consumers are spending more on household appliances and white goods and so forth, but the downside effect also comes through when housing markets are weak, we see less of that sort of consumption activity. So I wanted to focus a bit more on the long-term trends, mostly because we are focusing here on retirement, and retirement savings and wealth. The housing asset, of course, is a big part of that.
So the long-term trends, arguably much more important than what's happening at the moment, but equally we are moving through some disruption in housing markets as we navigate the COVID disruption and uncertainty. So I'll touch on where housing markets have been over the past six months, and then we'll finish off with some anecdotes on where I think the market may be going from here. So, let's look at the marketplace over the past 20 or so years. You can see from the graphs, the market is extremely cyclical. We don't see value as always rising, there's plenty of examples where values have fallen across each of the ____ for example, those have been falling consistently since the middle of 2014, and were only just starting to rise prior to COVID-19 becoming a ____. You look at a market like Sydney or Melbourne where the past decade has certainly been very strong in both of those markets, but prior to 2009, particularly in Sydney's case, the market was actually quite weak after 2004.
So there's a whole bunch of things that actually dictate housing market conditions. The economic activity and conditions, demographic trends, but also things like credit availability, government policies around, say, first home buyers grants or structural development. Those factors have a bearing on where housing markets are heading. You can see the most recent trend on this graph is generally towards weaker conditions in Sydney and Melbourne in particular. That's clearly the impact from COVID-19. But you can also see other markets are in, well and truly, into an upswing, at least in annual terms. If we look at those trends rather than in percentage change but look at actual dollar values, you start to get a little bit more of a feel for housing values and the wealth creation component across each of the capital cities. So in Sydney for example, on one end of the spectrum you've got a median house value that's bordering on a million dollars; in fact, prior to COVID it was over a million dollars. But just coming down a little bit now in Melbourne, the typical house is worth about $780,000.
And you can go down through the list to look at somewhere like Perth, the fourth largest capital city, but it has the lowest median house value now. You only have to go back to, say, 2006 and Perth actually had the highest median house value. So it really highlights how values have changed over time. And if you look at that in aggregate over the past 20 years, you can see that every capital city has generally seen an annual rate of growth, typically around the 4% to 5% in annual terms over the past 20 years. So the benefit of time absolutely helps to smooth out some of that cyclicality of the ups and downs of the market. But you can look at some areas, Perth and Darwin are the best examples, where the annual rate of growth has been much lower than that. If we looked at the first part of this two-decade period, Perth and Darwin would have been around the top of the list for annual growth. But over the past 10 years, considering values have been down since 2014, those markets have been much weaker over the second part of this 20-year period. But in dollar terms...
Joshua Funder: In terms of looking back, that gives us an idea of both the cyclicality, but also the long-term strength of the property sector as a way to accumulate wealth in Australia. Help us look forward for another 20 years when most retirees in Australia are thinking that term deposits and superannuation investments, rental yields, will all be quite a lot lower for longer. That's a real challenge to both their wealth and their retirement funding. What can you tell us about the structural market forces facing retirees in managing their home equity and other sources of retirement wealth and funding into a future which is probably lower growth across the board? How's housing going to play in that market?
Tim Lawless: Yeah, absolutely. I mean, nobody really knows what's going to happen in a year's time, let alone 20 years time. So it's certainly a bit of crystal ball gazing here. It's... You'd have to expect that the normal forces of supply and demand will be at play over whatever time horizon we're looking at. And that's been one of the major drivers of growth in Australian housing, is that generally supply levels have been largely or less responsive to housing demands than what they needed to be. There's always going to be some lag between the supply and demand response. The next couple of years, of course, we're expecting the demand side of housing to be quite low, simply due to the fact that overseas migration, which has been a big part of Australian population growth, is likely to remain low, potentially even zero over the next six to 12 months. But longer term, you have to expect that international borders will re-open. We'll start to see that demand fly back in from overseas. But outside of overseas demand, you've also got normal natural increase, so, growths minus deaths and the interstate migration flows.
Shelley Wettenhall: So Tim, if you wouldn't mind just doing a little bit more crystal ball gazing for us. Obviously, but particularly on the Eastern seaboard, we've seen the property markets fall substantially. What sort of time period is it usually until they at least recover what they've lost? I know we're talking longer term of 10 to 15 years, but to get back to what we've lost, what's the usual time period?
Tim Lawless: It varies remarkably. And I suppose to your point, we actually haven't seen housing values fall substantially along the Eastern seaboard; the largest falls through COVID have been in Melbourne, where values over the past six months are only down 5.5%. I mean, that is a significant amount in six months, but in the context of a global pandemic and a domestic recession, I think that's a pretty solid outcome. In Sydney, housing values are only down a little bit more than 2%. Most of the other capital cities are already starting to nudge back into capital growth over the past month or two; so we can see that across every capital city market outside of Sydney and Melbourne.
So, if we look back through time at the recovery cycles, at the most recent downturn we saw, went between the middle of 2017 and the middle of 2019. And we saw Melbourne's housing market recover in the space of about nine months. So about two years to reach the bottom and then about nine months to actually recover. Sydney values didn't quite recover back to the mid 2017 highs before COVID hit. They're only about 1% off that. So it looked like that marketplace was also about to recover in about half the time that it took to reach the bottom of the cycle. But normally you'd expect a recovery cycle to be roughly the same amount of time as the amount of time it took to reach the bottom from the previous peak.
Shelley Wettenhall: They're really interesting statistics, because talking to retirees, it's all doom and gloom out there. And the stats really do play out a different scenario to perhaps what we are all projecting. So, thank you, that's really interesting.
Tim Lawless: Yeah, so if we look at the... Just finishing up and looking at the outlook, at least the short to medium-term outlook is very much going to be based on how do we see the balance between the headwinds and the tailwinds? The headwind's clearly coming up in a wind-down in fiscal stimulus from JobKeeper. We're moving through a situation now where a lot of those distressed mortgage holders are reaching the expiry of their repayment holidays, as well. And also, of course, we have labor markets that are still quite slack, and migration is set to remain very low, as well.
But my professional view is that the tailwinds are likely to outweigh those headwinds. And those tailwinds will be seen as extremely low interest rates, we're probably looking at the cash rate coming down from its already record lows of 25 basis points, probably getting down to one basis point in November. Low interest rates are set to stay, probably until about 2023, at least. We've got the additional fiscal support coming out of the federal budget as well, particularly when you look at, say, tax cuts being brought forward, a very large infrastructure spend. And finally on top of all that, there's also a proposal to make access to credit a little bit easier as well. If we do see that wind-back of credit legislation approved, we should start to see credit becoming more available from early March. Which we've seen historically has been a solid driver of increased activity across the housing market.
Joshua Funder: Tim, we're running out of time, but I do have one more question that relates to some of the points you made earlier in your presentation. Housing has a multiplier effect on a number of dimensions. For retirees, it is a very strong correlate to outcomes. People staying in their communities, staying near their local services, their friends and their family, do better. Housing is also important for your own lifestyle, at home, and during COVID we've seen retirees want to stay safe at home. And during the Royal Commission on Aged Care, we see retirees want to stay safe and out of Aged Care. And at the same time, the value of retirees' savings in their home has a multiplier effect in giving them confidence, to consume locally in the shops, stimulate the economy, and also to remain at home longer. So where are you seeing various parts of that multiplier effect of housing change for Australia, for the older community in Australia, relative to the underlying property market that you know so well, what are the multipliers doing into the future?
Tim Lawless: So I think when you look at the wealth of more mature-aged Australians, a lot of them are going to be relying on the value of their home. If you look at most of those homeowners, those elderly homeowners are going to have owned their home for some period of time, they can benefit from the accumulation of wealth in the equity they've aggregated over time. If you're a typical Sydney household, for example, the last 20 years, typical homeowner would have seen about a $570,000 increase in the value of their home. If you're in Melbourne, it's about $480,000. So I think there will be some drawdown of that equity, and clearly that's going to be the mainstay of where financing is coming from for the older generations as they fund their retirement or move into different types of either dependent or independent housing.
A big part of those considerations, of course, are going to be what happens with the value of their home. So I think there is some, definitely some interest from policy-makers in government in ensuring that housing values are supported, that housing demand is supported. Otherwise, you're going to start to see a lot more of that reliance on civil lifestyle funding or housing funding coming from the federal government in terms of pensions and so forth, rather than being privately funded.
Joshua Funder: Tim. Thank you very much for your contribution to the 2020 Third Pillar Forum. Much appreciated.
Tim Lawless: Pleasure. Thanks very much for inviting me.
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