“Of course, easier credit and lower interest rates are factors, but I think you can’t discount the undersupply and strong population growth and I think we’ve just had good growth for a long period of time.”
Louis Christopher, founder of property research firm SQM Research, told us that there are suburbs which are anomalies.
“We’ve got to be careful, because we have no doubt seen some rises and some areas have been stronger than others. This is an anomaly. These areas have risen faster than the overall market for a number of reasons, the suburbs could be more popular, more people want to live there for whatever reasons, etc. A combination of factors.”
In other words, there are suburbs we need to watch out for?
Absolutely. Buyers really need to do their research, particularly in Melbourne where prices jumped 18.5% last year, according to APM. That market looks very warm right now.
What about the outlook for house prices going forward? You’ve got me a little worried with all this overheated talk.
You’re not the only one worried – this is an issue that has even vexed the Governor of the RBA, Glenn Stevens. Here’s what he said back in July, since when housing prices have only climbed:
“A very real challenge in the near-term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run-up in prices.”
“If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track.”
Stevens can’t be put in the category of a property bear, but his concerns do highlight a few of the issues confronting the sector.
What else are the doomsayers worried about?
There are two main things: the debt levels of Australian household and the difference between house prices and incomes.
Dr Steve Keen, Associate Professor of Economics & Finance at the University of Western Sydney, is one of Australia’s biggest housing bears – he famously predicted house prices could fall by as much as 40% last year, a claim that has been proven to be very wrong.
But Keen is a close watcher of the level of debt carried by Australian households. Here is a graph from his Debt Watch blog that shows how Australia’s debt level as relative to GDP has doubled in the last decade, mainly due to borrowing for homes.
What Keen fears is a huge period of deleveraging when Australian households start to feel that they are simply carrying too much debt.
“When debt is as high as it is now — literally 100% of GDP for households and another 60% for businesses — then deleveraging can cause a dramatic fall in demand,” he writes.
He argues that drop in demand will also bring house prices down with it, and says this process was delayed last year by the Government’s first home owners grant, which has since been wound back.
Does Keen have a point?
The state of Australia’s household balance sheets is bubbling along in the background as a real problem, particularly if unemployment was to jump, if rates were to rise very quickly or, as Keen argues, if households were to begin deleveraging. The issue is, it’s tough to see what causes those things to start happening at the moment.
What else are the bears worried about?
How expensive Australian house prices are. This question, measured typically by the ratio of house prices to household income is one of the most fiercely debated questions in the property sector.
There appears to be reasonable agreement that the long-term average for Australian house prices is about 3x household income.
But the current ratio is more contentious. Many commentators say the ratio is 7-8x. Using the APM city house price median of $525,000, the ratio is around 5.8x.
But Christopher Joye of Rismark says the ratio is a much lower 4.1x – largely unchanged over the last six years. He gets this figure by using a median of around $370,000, which is based on all dwelling types (houses, units, terraces) across all of Australia (including regional areas, as this is where 40% of Australia’s housing stock is).
So there is an argument to say Australian housing remains affordable?
Sure, although income is only one reason of the measures of affordability – interest rates and bank loan-to-value ratios are also important. And there are plenty – including the Housing Industry Association – who have some big concerns about affordability levels, particularly if rates continue to rise as expected this year.
Are there any other good signs for house prices?
Perhaps the best sign is what economists like to call the “fundamentals” of the market – that is, that demand for housing is far higher than supply. Put simply, Australia is not building enough houses to meet the demand from a growing population and migration. Paul Braddick, head of property and financial system research at ANZ, summed this argument up in the bank’s recent property outlook.
“Each day underlying housing demand remains above new supply, the market tightens further. We estimate that underlying housing demand is running at an annual rate of 200,000 while dwelling completions are expected to fall to under 130,000 in 2009-10.
“With the market already extremely tight (reflected in near record low rental vacancy rates in most state capitals), an additional shortfall of 70,000 dwellings will have a marked impact. The nascent recovery in dwelling approvals will partially close the gap in 2010-11, however, it remains highly unlikely that annual completions will get anywhere near the 200,000 required to meet demand in the foreseeable future.”
Sounds like a very positive long-term trend, but I thought SmartCompany had a story the other day raising some questions about this housing shortage issue.
We did. Brendan Darcy, chief executive of property information provider Hometrack, told us too many analysts look at the housing supply issue and do not consider other factors putting upward pressure on prices, such as the availability of credit.
Darcy points to the Government’s National Housing Supply Council State of Supply Report 2008, which notes 85,000 extra dwellings are required to ease the housing problem. However, 9,000 of these are stated as being set aside for people who are sleeping rough, with a further 35,000 dwellings needed for people staying with friends or relatives.
These people clearly need homes but they are not necessarily in the market to buy a home. So the question is whether they should be taken into account when we are talking about how the housing shortage relates to house prices – probably not.
Data from Louis Christopher’s SQM also showed rental vacancy rates actually rose last year, also suggesting the shortage might not be as bad as some think.
The point is that while there is a housing shortage, nailing down its exact size isn’t easy.
Okay, so what were likely to see house prices do in 2010?
For all the differences of opinion in the housing sector, this is one area there seems to be general agreement on. Most commentators are expecting that prices will ease as the first home buyers leave the market and interest rates rise, making households more cautious. Craig James at CommSec is predicting a rise of 8-10% across the year, while ANZ economist Alex Joiner is tipping 5-8%.
What about over the longer term?
That’s a very tough question. House prices generally tumble when high unemployment and high interest rates force people to sell their homes, but it is difficult to see either of these things happening. The Australian economy is relatively strong, unemployment is coming down and rates, while rising, remain at historically low levels. The housing shortage (while questions remain about its size) should also help support the market.
But question marks do remain about housing affordability, particularly in places like Melbourne, where the market has run very hard in the last two years.
The huge level of debt held by Australian households also is something of a dark cloud on the horizon. As rates rise, how will households react? Particularly the 135,000 first home buyers who have bought into the last 12 months? And if house prices do keep rising, will our banks start to become increasingly concerned about the mortgage market (some have recently tightened lending criteria)?
The scenario that most commentators are predicting over the next 12 months – the market cooling slightly as rates rise and the stimulus of the first home owners grant fades – would be a welcome one and would do much to dispel any fears that we’ve got a housing bubble building.
But if house prices continue to climb at the rates seen last year, concerns about debt, affordability and overheating will only grow.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
