Property: Why Supply Is More Important Than Interest

The noble way to wealth is through property. Dating back to the Romans, it was real estate, and not commerce, that was seen as the noble way to riches.

To be deemed noble or elected to political office, you had to prove you owned property. In fact, you had to own around 1,000,000 sesterces (coins) worth of property.

Opinions differ, but each sesterce is worth around US$10.50 today. So if you wanted to become a politician in Roman, you had to have US$10.5 million worth of land.

Just like Trump, it’s a good thing that Romans went into politics with a fortune. Political office provided no salary. But political life offered something far more valuable than riches. It offered you the chance to build a legacy.

One of the most famous Roman property moguls was Marcus Licinius Crassus.

Crassus lived from 115 BC to 53 BC. He played a key role in the transformation of the Roman Republic. However, his unethical property strategy sometimes foreshadowed his political life. Crassus didn’t buy property the traditional way.

Instead he bought extremely hot property, literally. Crassus made a fortune from buying Roman homes that were on fire at the time of purchase.

Once Crassus knew a house in the area had gone up in flames, he quickly rushed to the site. Standing outside the burning house, he’d watch the owners cry in despair. There was no official Roman fire brigade at the time.

If they couldn’t put the fire out with a bucket of water, it was pretty much a lost cause. As you can imagine, Crassus’ offer was a fraction of the property’s value.

An overwhelming majority of homeowners accepted Crassus’ offer. They would rather get something for their burning homes than be left with a pile of ash.

As soon as Crassus and the homeowners came to an agreement, he’d tell his 500-strong private fire brigade to put the fire out. That’s right; Crassus had the only fire brigade in Rome. He also had a team of slaves who worked on restoring the homes to their pre-burnt condition.

By buying problems and selling solutions, Crassus amassed a fortune. It sounds a lot like the strategy property investors use today. Australia is commonly known for its beaches, resources, animals that want to kill you, and property.

The last has earnt the Reserve Bank of Australia (RBA) a lot of flak. When they lowered rates in May and August this year, they were criticised for igniting buyers to pump up property prices.

Commentators and analysts believe the RBA is the anti-Crassus. While Crassus put flaming hot property out, the RBA adds fuel to the flame.

Is interest really the problem?

The RBA has gone on record stating that lower interest rates would not ignite a buying frenzy. Yet an article published by the AFR disagrees:

The Reserve Bank of Australia’s humiliation over its housing calls must be starting to hurt.

The index it was relying on to justify repeated claims housing conditions were cooling — and that its August and May rate cuts would not reignite another round of aggressive price growth — has reported stunning capital gains across the nation’s largest cities.

The Fairfax-owned Australian Property Monitors found that house prices in Sydney, Melbourne and Canberra, which account for half of all metro homes, surged by 2.7 per cent, 3.0 per cent and 2.3 per cent respectively in the September quarter (multiples income growth). 

This reconciles with Sydney and Melbourne’s crazy auction clearance rates, which have regularly punched through 80 per cent since the RBA’s August cut, and more precisely measured data produced by CoreLogic, which had been the RBA’s preferred benchmark until the May rate cut.

Lower interest rates do encourage buyers in the market. But there’s something far more important to property prices that is commonly overlooked: the supply of housing.

If there aren’t enough sellers and too many buyers, obviously more homes would be bought at auction, and prices would increase.

While high-rise apartments are going up in all major capital cities, apartment supply does little to affect house prices. And this is because different types of buyers are attractive to different property types.

A family of four isn’t in the market for a two-bedroom apartment in Docklands. The opposite applies to the single bachelor. He’s looking to live close to the city and might opt out for buying an apartment.

Acknowledging supply of a particular type of property is extremely important when looking at clearance rates, price growth, etc.

In CoreLogic’s October Monthly Housing & Economic Chart Pack, new listings had decreased noticeably in the September month. Over the past 28 days there were 45,634 new homes listed for sale nationally. Of these, 27,337 were listed across capital cities. This was 2.6% lower than last year’s figures.

According to Michael Yardney’s property update, August listings were even worse. For August 2016 listings were 4.7% lower from where they were a year ago.

While interest rates might contribute to property price growth, I believe supply is arguably a more important factor.

Härje Ronngard,
Junior Analyst, Money Morning

PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research and take control of your financial future.

But where do you start?

Check out Money Morning’s property expert Callum Newman’s report ‘Australian Real Estate Game Plan’. In the report, Callum reveals the eight letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Callum’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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