The elder statesmen of Australian finance have said its nothing but green lights as far as Australian property is concerned. And bubble? Forget it, young Frodo.
The AFR recently asked the chief economists of the big four banks what they thought about Australian property, and if some of these hyped-up claims that we were heading towards a bubble were true.
But the grey-beards of money magic, normally known for squabbling like seagulls over a chip, were united in their view: “No bubbles, no dramas.”
“Certainly no bubble,” mused Wise Warren Hogan from ANZ. He added,
The perceived expensiveness of our property market is as much as anything a social issue, affordability issues. We simply don’t have the speculative credit element there to describe it as a bubble. Low-income earners getting heavily leveraged was the problem in the United States we don’t have that issue here.
This will be a bit of a slap in the face to the “what about the children?” brigade. ‘Expensiveness’ is a question of perception. I think that’s maybe a little harsh. Prices are expensive (and a stretch for young buyers) because we just aren’t building enough houses.
Australia has, and is stuck with, a housing shortage.
But the other point is spot on. Credit growth is chugging along at a cruisy pace. There’s no sign of it getting out of control. And what’s more, since the GFC, Australian households have generally gone out of the way to de-leverage and repair their balance sheets.
I’ve never heard of a country deleveraging into a bubble.
So let’s ask Michael ‘Magic Ball’ Blythe from CBA what he reckons.
No bubble. Housing credit’s running at the bottom end of the range the last 30 years. You need to see banks easing their lending standards as they chase more dubious borrowers that’s certainly not happening and you need a general expectation that house prices are going to keep rising forever. Now there is an element of that I think.
I think it is probably fair enough to point out that some people just don’t get how property cycles work. Prices rise, and sometimes they stall. Investors who focus on negative gearing miss this fact. That’s why I love the positive cashflow strategy. It works no matter where you are in the cycle.
But he’s spot on when he says banks aren’t getting carried away with themselves. And he’d know. Banks are still pretty strict, and a whole lot stricter than they were in the US before the market went belly-up there.
Next round the round table is the all-knowing Alan Oster from NAB:
No bubble. If unemployment in our models gets to around 8 or 9 per cent then you get the same problem as you’ve got everywhere else but we’re undersupplied, interest rates are low, we think unemployment’s gone up but nowhere near 9 per cent, so no bubble.
True enough. If unemployment got above 8 per cent, incomes would be stalling, mortgages would be coming under pressure, and that would start to weigh on prices. But we’re a long way from 8% right now, and it would take a pretty dramatic turn of events to drive us towards 8% in a hurry.
But this is just the usual cyclical story, and it’s overlayed over the same fundamentals. And the fundamental story is that the market is undersupplied, and we’re in a super-low interest rate environment. Both of these factors put sustained upward pressure on prices.
And of course, if unemployment were to suddenly lurch towards 8%, then interest rates would start falling, and that would have a balancing impact on house prices.
Finally, Westpac’s Bill Evans, the goodly Gandalf of high finance:
If you look at the growth in incomes over the last 15 years, it’s sort of kept pace with the growth in house prices. I think you get bubbles when house prices run well ahead of income growth. We just haven’t seen that.
This comes back to the first point. The so-called ‘affordability’ crisis is a matter of perception. And if prices are high, it doesn’t necessarily mean that the market isn’t working, and that prices are somehow ‘irrational’.
Prices of bananas spike when a cyclone wipes out supply. That’s just what markets do. We’ve under-built on housing and so prices are rising. They may be unaffordable to some people, but it doesn’t mean that the market’s broken.
It doesn’t mean there’s a bubble.
And as I’ve said before, I’m not so sure there really is an unaffordability crisis. Sure, high-end apartments in Bondi are out of the price range of early 20-somethings earning the minimum wage, but you know, so are helicopters.
According to some recent data from RP Data that I saw, 17.3% of homes sold in Sydney last year were in the $200,000 to $400,000 bracket.
That’s almost one in five homes in our most expensive city, selling for a price that I think most people would say was affordable.
If 20% of the market is under $400,000, how much sense does it make to say that the ‘whole market’ is unaffordable.
“Bubbles”, “Affordability Crisis”, “Crash”. They’re all just media memes. Trot them out on a slow news day and see if you can kick them down the road a little further.
Thanks to the Greybeards from the big banks for bringing the fire-hose of sense to the inferno of hysteria.
Unfortunately though, it won’t be the last we hear of it. Mark my words.