Global financial crisis 2.0 or just a lot of hot air?
Sydney property markets appear to be cooling, leading to speculation that the Australian property market could crash. Dr Shane Oliver, Chief Economist at AMP Capital, has weighed in on the debate, and he’s not entirely convinced.
“A common narrative on the Australian housing market is that it’s in a giant speculative bubble propelled by tax breaks, low interest rates and “liar loans” that have led to massive mortgage stress and that it’s all about to go bust, bringing down the banks and the economy with it.
“Recent signs of price falls – notably in Sydney – have added interest to such a view,” explained Dr Oliver.
According to Domain Group data, Sydney house prices fell 1.9 per cent over the September quarter (around $23,000).
Dr Oliver points to three basic facts about Australian property making residential property “Australia’s Achilles heel”:
- Property prices are expensive relative to income, rents, long-term trends and global standards;
- Affordability is poor and saving for a deposit is extremely hard; and
- Our debt to income ratio is on the high end of OECD countries.
However, there are five key factors to consider which make the possibility of a housing market crash “too complicated to call”:
- It’s dangerous to generalise
Sydney and Melbourne may have sustained rapid price gains in recent years, but they do not make up the whole Australian property market.
CoreLogic data shows that “prices in Brisbane, Adelaide, Hobart and Canberra have risen by a benign 3 to 5 per cent per annum and prices have fallen in Perth and Darwin,” said Dr Oliver.
“Australian cities basically swing around the national average with prices in one or two cities surging for a few years and then underperforming as poor affordability forces demand into other cities,” explained Dr Oliver.
- Supply has not kept up with demand
Australia’s ever growing population, up 1.6 per cent to 24.5 million over the last year according to ABS data, has not seen the supply of dwellings keep up with demand. This has led to a shortfall of supply, which has driven up home prices.
High levels of property oversupply are an indicator of an incoming housing crash. While the recent surge in unit supply is helping to drive down prices, according to Dr. Oliver, the level we are at now means “there is no broad-based oversupply problem.”
- Lending standards have been improving
Thanks to strong Australian housing market regulation, such as APRA’s crackdown on interest-only and high loan to valuation loans, we are not likely to face anything like the deterioration in lending standards other countries experienced prior to the GFC.
By avoiding ‘dodgy practices’ and tightening lending standards, we help to ensure borrowers are better able to pay back their loans.
Dr Oliver points to recent RBA research that shows while getting into the housing market is hard, “those who make it are doing okay and bad debts and arrears are low”.
“Finally, debt interest payments relative to income are running around 30 per cent below 2008 peak levels thanks to low interest rates.
“Sure, rates will eventually start to rise again but they will need to rise by around 2 per cent to take the debt interest to income ratio back to the 2008 high,” said Dr Oliver.
In July, the RBA did state that the neutral cash rate is 3.5 per cent – a 2 percentage point rise from the current 1.5 per cent. However, Dr Oliver has previously stated that the cash rate will not rise 2 percentage points, and to not “read too much into the neutral rate”.
- Importance of tax breaks is exaggerated
The significance of additional factors impacting the housing market, such as tax breaks and foreign buyers, is “often exaggerated” relative to the supply shortfall, according to Dr Oliver.
“While there is a case to reduce the capital gains tax discount (to remove a distortion in the tax system), negative gearing has long been a feature of the Australian tax system and if it’s the main driver of home price increases as some claim then what happened in Perth and Darwin?”
“Similarly, foreign buying has been concentrated in certain areas and so cannot explain high prices generally, particularly with foreign buying restricted to new properties,” said Dr. Oliver.
- Conditions for a crash are not in place
There are a few conditions Australia would need to have to see a housing crash.
- Higher unemployment levels – there is no sign of recession and jobs data remains strong.
- Higher interest rates – while the RBA is likely to start raising interest rates next year, these increases will likely be small and gradual.
- Property oversupply – approvals to build new homes are slowing, so this seems unlikely.
What is the verdict?
While Dr Shane Oliver acknowledges the excessive house prices and debt levels are posing a risk for Australians, “it is a lot more complicated than commonly portrayed.”
“We continue to expect a slowing in the Sydney and Melbourne property markets, with evidence mounting that APRA’s measures to slow lending to investors and interest-only buyers (along with other measures, e.g. to slow foreign buying) are impacting.
“This is particularly the case in Sydney, where price growth has stalled and auction clearance rates have fallen to near 60 per cent.
“Expect prices to fall 5-10 per cent (maybe less in Melbourne given strong population growth) over the next two years.
“This is like what occurred around 2005, 2008-09 & 2012,” concluded Dr Oliver.