If the headlines are to be believed, the Australian property market is either bouncing back or it’s rushing headlong into an inevitable crash.
But according to AMP Capital chief economist Shane Oliver, the real picture isn’t so black and white.
“The Australian housing market remains far more complicated than optimists and doomsters portray it to be,” he said in a note.
“Yes, it’s expensive and heavily indebted but talk of mortgage stress is overstated and it’s been undersupplied.
“The combination of rate cuts, the election and a modest regulatory relaxation have helped turn property prices back up, but the upswing is likely to be constrained.”
Here are the hard-and-fast straight facts you need to know about the Australian property market:
1. It’s expensive
Even though the property market is currently recovering from bottoming out over the last two years, it’s remained expensive since early last decade, Oliver said.
“According to the 2019 Demographia Housing Affordability Survey, the median multiple of house prices to income is 5.7 times in Australia, versus 3.5 in the US and 4.8 in the UK,” he said.
“In Sydney it’s 11.7 times and [in] Melbourne is 9.7 times. The ratios of house prices to incomes and rents relative to their long-term averages are at the high end of OECD countries.
“The surge in prices relative to incomes has seen household debt relative to household income rise from the low end of OECD countries 25 years ago to the high end now.”
2. It’s diverse
Within the ‘Australian property market’ exists a huge divergence between cities, the economist said: for example, Perth and Darwin saw major price falls over the last five years in response to the end of the mining boom.
3. Talk of mortgage stress is overstated
We saw quite a few headlines relating to mortgage stress and mortgage arrear rates being at its highest since the GFC – but these headlines have been running for a decade now, Oliver said.
“There is no denying housing affordability is poor, household debt is high and some households are suffering significant mortgage stress. But most borrowers appear to be able to service their mortgages,” he said.
4. It’s chronically undersupplied
Our population growth has meant we need an extra 75,000 homes every year – but the supply of dwellings hasn’t kept pace with the population surge, said Oliver.
“So a massive shortfall built up driving high home prices. Thanks to the surge in unit supply since 2015 this is now being worked off, but it follows more than a decade of accumulated undersupply which is the main reason why housing has remained relatively expensive in Australia.
“Not tax breaks or low rates – all of which exist in other countries with far more affordable housing!”
5. House prices go up and down
We’ve seen prices both dip and rise over the last decade and a half, Oliver pointed out.
“After several episodes of price declines ranging from 5 to 10 per cent across various cities over the last 15 years and 15 per cent, 21 per cent and 31 per cent for Sydney, Perth and Darwin respectively in recent years, home buyers should be under no illusion that prices only go up.”
6. The housing market remains rate-sensitive
This varies from city to city – but the RBA’s cash rate moves have helped.
“Despite much scepticism recent rate cuts have helped push up the property market again,” Oliver said.
7. House price crashes aren’t easy to forecast
Over the last 15 years, there have been multiple calls of a crash in the Australian property market due to the expensive nature of Aussie property and its associated high debt levels.
But the elements are not all there yet for a crash to happen, said the economist.
“Our view remains that to get a national housing crash – as opposed to periodic falls in some cities – we need much higher unemployment, much higher interest rates and/or a big oversupply.
“But while the risk of recession has increased it remains unlikely, aggressive rate hikes are most unlikely and while property supply still has more upside it’s unlikely to lead to a big oversupply as approvals to build new dwellings are now falling,” he said.
“As we have seen for years now overvaluation and high debt on their own are not enough to bring on a crash.”
Where to next? What to expect in Australia’s property market
Long story short, we shouldn’t expect to see a return to boom-time conditions; expect “constrained gains” of around 5 per cent throughout next year.
According to Oliver, there are three key things to watch:
The spring selling season: “If auction clearances remain elevated as listing pick up then it will be a positive sign that the pick-up in the property market has legs.”
Housing finance commitments: “These have bounced but will have to pick up a lot further to get 10-15% price rises.”
Unemployment: “If it picks up significantly in response to slow economic growth then it will be a big constraint on house prices and could result in another leg down in prices.”
Property investors should look towards regional centres, Perth, and Brisbane, he added.
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