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.
Ronel says
The grey beards are wrong on one thing…the house market is to expensive…over priced….the bubble has already burst …look for the signs
B-dog says
Did you read the article?
J says
“Nobody saw this coming!” Hindsight will be the winner again
Charles says
Affordability crisis is for average people. The overall amount of money can still buy the houses, because government pumps $6 billions a year to the market via negative gearing. Average people don’t have the advantage, young people can’t use it, so most Aussies have been trapped. Isn’t it a interest conflict if the policy makers have lots of investment properties? Isn’t the negative gearing enlarge the gap between the rich & the poor and the rich pays less tax?
Ken says
Eileen, read what the bank experts say about Australia not the same as U.S.A. or in my opinion, not the same as anywhere else in the world.
Phil says
Further to Charles comment about negative gearing – plus the addition of SMSF funds being used as equity for the same social-class of old, money-advantaged people. And the increse in foreign investment.
So a useful statistic would be – compared to say 25 years ago – what percentage of city-based housing is owner-occupied vs investment? The change in that statistic would show where affordability has gone; and to who.
A wise political system would start providing advantages to young people to own property. Access to a proportion of super would be a good starting point. And disadvantaging the interest rates of investors in EXISTING property; as it chews up capital on something which is economically non-productive; and kills supply for those that need the social benefit of owning a home (like families; and those that don’t want to be enslaved to permanent renting; or travelling 5 hours to work). Affordable owner-occupeid housing isn’t just wise economcis – but wise social policy.
peter says
nah. wrong. much more complicated than you understand it looks like. ppl who own investment properties pay tax on the income once its positive geared forever thereafter. not to mention the capital gains tax they cough up when they sell if they make a profit. owner occupiers give the gvmnt nothing and when they sell they still give the gvmnt nothing. you also cannot disadvantage investors to help youngsters live in vaucluse because sooner or later there will be no investors which will have the vacancy rate at 0% almost then you will cry wolf that the rental prices are crazy. cant have it both ways im afraid. lots of people dont quite get it. also when you talk about negative gearing. dont think its all roses for the investor. to claim negative gearing you need to make a loss. that means youre subsidising the person renting out of your own pocket with the gvmnt helping a bit at the same time. but the investor is still behind. as you can see not so straight forward as ppl think.
Tom says
NAH. WRONG AGAIN!!! Once the equity rises, creating a taxable income, the smarties re-finance, bringing down tax liabilities and re-investing the cash in further appreciating investments. Tax minimisation, with equity maximisation is the name of the game.
peter says
nope. no smart investor uses negative gearing. no smart investor esp one that is rich will use nrgative gearing because losing money isnt the name of the game. you might be able to reinvest a couple of times using equity via negative gearing but cannot grow a portfolio because banks will notlend to someone who has no income to service a loan. and yes they might get capital gains increase but the gvmnt shares that gain so the country doesnt lose. the system is fair and very water tight. its just the uninformed get scared and anger grows against investors because people seem to hate on people who make a buck. you dont see the same people despising the likes of Ms Reinheardt. She makes her BILLIONS out of the ground and doesnt share her riches with the young and underpriviliged other than to import workers from overseas for cheap labour. making money isnt a shameful game
anyone is welcome to do it. if you dont want to or cant be bothred then dont bash the ones that can. otherwise bash everyone who makes a buck.
Jenny says
Bottom line is still that there is a huge housing shortage. Until (or unless) that is fixed, prices won’t come down – why should they? Shortage = higher price. I thought that would be a no-brainer?
Grant says
If you cut a cake in half is it still one cake? If you paid $2 for the first cake and then ate it i cost you $2. If ingredients and bakers labour go up the cake costs $4. So when estate agents talk about average house prices over say 20 years they are not talking about the same thing. Twenty years ago it was one house on a quarter acre block as the average house price. The block is now divided in 2 and a new house is put at the rear. So please someone claculate the average price of a quarter acre block in the middle suburbs and tell us what the price curve is really like.
JR says
Great point. Then throw in the household income factor- it has changed from 1 income per household yo 2 incomes per household. What next? Send the kids off to work early to help pay the 40 year mortgage? I see the whole thing starting to run out of puff like any good Ponzi. Never mind- property keeps doubling every 7 years. Can’t lose.
Gruffley says
10 yrs ago, I had to fight to buy a cheap house on income of $40Kpa…now people in their 20’s are often on starting incomes of $70K plus…fight hard to get in the market, don’t complain about affordability.
Robert says
Since many MPs, MLAs and local government councillors have investment property you can be sure that the supply side constraints will continue for a long time. The market may be determining the price, but the market is rigged.
Anthony says
They may have grey beards, but I wouldn’t take too much notice of what the banks say. They’re in the business of selling home loans.