By David Taylor
OK, time to eat humble pie.
Up until now I have been absolutely convinced that the “great correction” is coming. A correction that would see house prices in Sydney fall by between 10 and 15 per cent. Admittedly even that wouldn’t be enough for many millennials, but it would be something.
Now, I don’t believe any sort of correction is imminent.
In fact, I would go so far as to say I think the two most likely outcomes are that Sydney and Melbourne house prices hover around the levels they are currently, or they rise further.
Now the problem with writing a piece like this is that I open myself up to eating even more humble pie if prices go south… but I’ll accept that because frankly that would be welcome, for a lot of Australians.
So here’s a quick outline of how I’ve come to change my mind. Feel free to tweet me if you disagree. I’d be interest to know what you think @DavidTaylorABC.
A brief history
The OECD reckons house prices have risen 250 per cent since the 1990s. Most of that price inflation has taken place over the past 5 years.
The last 20 years has seen a couple of dips in prices, but it’s been followed a strong pick-up each time.
In addition to that, I’m told over and over again by so-called experts that the local government od Sydney and Melbourne have been taken “off guard” by low interest rates, and a surge in population growth for both cities. It’s led to a major under-supply of houses.
Home ownership has become increasingly unaffordable over the past couple of decades, but it’s become most pronounced in the past 5 years.
Why prices are elevated
As I mentioned above, two factors are pushing up prices: cheap finance and supply (or the lack of it).
We’ll start with supply. Can you imagine if there were big cities out west, with beautiful lakes, entertainment facilities, low crime rates, and, of course, jobs?
The prospect of “going bush” wouldn’t be nearly so hard to swallow. Right now, us city slickers assume anything west of the ranges is for the farmers. It doesn’t have to be like that. If it wasn’t, folks would move into the country and the demand for housing in cities on the east coast wouldn’t be nearly so intense. House prices would fall.
Then there’s all that cheap finance. Make no mistake, the official Australian cash rate is at recessionary levels – at the record low of 1.5 per cent. Most of the big commercial banks haven’t yet materially raised their standard variable mortgage rates. Investor rates have lifted here and there, but there haven’t been any significant developments on that front.
Given how tepid growth is in the Australian economy, including record low wages growth, and lacklustre inflation, I can’t see interest rates moving up anytime soon.
Debt is high but consumers seem to be coping
Investors, and mums and dads home owners, know that interest rates aren’t moving materially higher anytime soon. I suspect that’s why they’re out there bidding up the prices of homes every Saturday in Sydney and Melbourne.
Auction clearing rates consistently come in above 70 per cent for goodness sake. It’s just incredible. The market is hot.
All this takes place why household debt continues to push higher, now at around 187 per cent of disposable income. Yes, consumers might be cutting back on things like footwear and fashion (as noted by the Bureau of Statistics last week), but they can still, apparently, afford their mortgage repayments.
Economy will be hit too hard if prices fall
The other obvious point to make is that it’s become increasingly obvious in recent months that there simply isn’t the political will to push house prices lower.
Labor is in favour of changing some tax laws (especially with regard to negative gearing), but the Coalition has rejected that idea – hence, as long as the LNP is in power, it ain’t happening.
The fear is that if any policy to make house prices more affordable for millennials works ‘too well’, the market will crash, and that could send the economy into a tailspin. Neither the government, nor the Reserve Bank, want to see that.
There seems to be too options: keep house prices elevated, and toss out a generation of home owners, or let the property market sink, and cop millions of job losses.
APRA keeping things under control
There is a small ray of light for GenY. APRA (the Australian Prudential Regulation Authority) is considered the ‘cop on the beat’ for the banking sector. It’s been charged with the responsibility of reining in investor demand.
APRA’s been reasonably effective at doing this but by late last year (and early this year), especially in relation to the Commonwealth Bank, investor loans are starting to grow again at a fair clap.
Unless APRA is asked to really ‘step-it-up’ by the Reserve Bank, I suspect it will just keep tweaking around the edges of the loan books of the big four banks.
Brisbane apartments over-supply
I should note there are some dark clouds building on the property horizon.
There has been an argument recently that a big oversupply of properties in Brisbane is coming, and that could force apartment prices down dramatically in the city, and then elsewhere. That may well happen, and in some pockets I understand prices are already coming down.
If you’re looking to buy, go to as many auctions as you can. I’ve been to plenty to check out demand, and it’s really quite strong.
You get the sense at auctions in Sydney at least that folks are prepared to be quite aggressive in their bidding. I have to say in a lot of cases properties don’t even make it to auction. That is, an offer is made well before hand!
WA and NT economies will help keep rates low
I suspect so as long as the western side of the country continues to struggle, and the economic transition to broader economic growth struggles to find its legs, interest rate will remain at record lows and property prices elevated.
So long as nothing comes from left field, which I might add the OECD has listed as a concern, I can’t see property prices coming crashing down anytime soon. I’m very happy to be proved wrong though, for the sake of millennials.