The Australian housing market, depending on who you ask, is a huge bubble that is about and set to burst. This will ultimately cause banks and the economy to fall as house prices crash.
Shane Oliver, AMP Capital’s head of investment strategies and chief economist, said that the bubble has been inflated with tax breaks, low interest rates, and liar loan which are causing major mortgage stress. However, he claims that the conditions for a housing price collapse are not in place.
Oliver noted that the danger of a housing market crash has been looming for many years. The Organisation for Economic Co-operation and Development’s (OECD) 2004 estimate that Australian housing was 51.8% undervalued. Due to the high prices of property and excessive borrowing, Australia was dubbed “America’s ugly brother” by The Economist in 2004.
Also Read: IMF: Don’t expect any correction in Australia’s housing affordability
Oliver stated, “Property crashes were repeatedly wheeled out after the Global Financial Crisis(GFC), with one commentator losing an important bet that prices could drop up to 40% and then having to walk to Mount Kosciuszko’s summit as a consequence.”
Many have predicted that housing prices will fall since then. According to a major American news publication, Australia may experience what Los Angeles experienced, when home prices fell 40%.
Oliver provided three facts on the Australian market to help answer the question about whether house prices are likely to collapse in the near future. First, property prices are high relative to income, rents and its long-term trend. This is even compared to global standards. It is difficult to afford a property, as the income-to-price ratios are still higher than they should be.
Lastly, Australia’s debt-to-income ratio has risen due to rising prices. It is now at the highest level of OECD countries. Australia is at risk of financial instability if people try to reduce their levels of debt.
Oliver said that Australia must have higher unemployment, higher rates of interest, and a massive supply glut to prevent a housing crash.
He stressed that there is no indication of recession and that jobs data is strong. The RBA will likely increase interest rates next year.
“But it knows households are now more sensitive to higher rates & will move only very gradually – like in the US – and won’t hike by more than it needs to keep inflation on target.”
Oliver added that property oversupply is a potential risk if there is a continued construction boom for several years.
These factors being considered, Oliver predicts that there will be an easing of the Sydney and Melbourne property market, due to APRA’s decision to moderately lend to investors and to interest-only buyers.
Prices in Sydney could fall by five to 10% over the next couple of years. Melbourne will experience a similar price drop, although it will be smaller due to its population growth.
The flip side of the coin is that home prices in Perth or Darwin will likely plummet as the mining investment reaches its lowest level. Hobart (Breeze), Adelaide and Melbourne will continue to benefit from the increased demand for their products and services in Sydney and Melbourne.
Oliver stated that “Housing plays a long-term part in investment portfolios. However, the combination of strong gains in Sydney and Melbourne over the past few years, vulnerability around high household debt levels (official interest rates eventually rise) and low net rent yields means investors need to be cautious.”