Crash calls for the Australian property market – how valid are they?

In the most recent Oliver’s Insight, Dr. Shane Oliver, chief economist of AMP Capital, addresses the recent media scare claiming that the Australian Property Market is heading for a crash, and looking at its validity.

Here’s what he had to say:

To modify Benjamin Franklin, it seems that in Australia nothing can be said to be certain, except death, taxes and endless debate about property prices.AMP-chief-economist-Dr-Shane-Oliver

Why is it so unaffordable? Are foreigners to blame? Is it a good investment? Is negative gearing the problem? Are property prices about to crash?

Worries about a property crash have been common since early last decade.

In 2004, The Economist magazine described Australia as “America’s ugly sister” thanks in part to a “borrowing binge” and soaring property prices which had seen it become “another hotbed of irrational exuberance”.

At the same time the OECD estimated Australian house prices were 51.8% overvalued.

Since the GFC, predictions of an imminent property crash have become more common with talk that a property crash will also crash the banks and the economy.

Our view since around 2003 has been that overvaluation and high levels of household debt leave the housing market vulnerable.

As such it could be seen as Australia’s Achilles heel.

However, in the absence of a trigger it’s been hard to see a property crash as a base case.

Not much has really changed.

This note takes a look at the key issues and what it means for investors.

Overvalued, over loved and over indebted

The two basic problems with Australian housing are that it is expensive and household debt is high.

Overvaluation is evident in numerous indicators:

  • According to the 2016 Demographia Housing Affordability Survey the median multiple of house prices in cities over 1 million people to household income is 6.4 times in Australia versus 3.7 in the US and 4.6 in the UK. In Sydney it’s 12.2 times and Melbourne is 9.7 times.
  • The ratios of house prices to incomes and rents are at the high end of OECD countries and have been since 2003.
  • Real house prices have been above trend since 2003.


Source: ABS, AMP Capital

The shift to overvaluation more than a decade ago went hand in hand with a surge in the ratio of household debt to income, which took Australia’s debt to income ratio from the low end of OECD countries to now being around the top.


Source: ABS, RBA, AMP Capital

Overvaluation and high household debt are central elements of claims that Australian house prices will crash.

These concerns get magnified whenever there is a cyclical surge in prices as we have seen recently in Sydney and Melbourne.

But a crash seems elusive decrease rent price house cost stats data crash property market decline

However, given the regularity with which crash calls for Australian property have been made over the last decade and their failure to eventuate, it’s clear it’s not as simple as it looks.

First, the main reason for the persistent “overvaluation” of Australian home prices relative to other countries is constrained supply.

Until recently Australia had a chronic under supply of over 100,000 dwellings, as can be seen in the next chart that tracks housing completions versus underlying demand.

Completions are at record levels but they are just catching up with the undersupply of prior years.


Source: ABS, AMP Capital

Consistent with this, vacancy rates while rising are below past cycle highs.

In fact, in Sydney they are still quite low.


Source: Real Estate Institute of Australia, AMP Capital

Secondly, Australia has not seen anything like the deterioration in lending standards other countries saw prior to the GFC.

There has been no growth in so-called low doc and sub-prime loans which were central to the US housing crisis.

In fact in recent years there has been a decline in low doc loans and a reduction in loans with high loan to valuation ratios.

See the next chart.

And much of the increase in debt has gone to older, wealthier Australians, who are better able to service their loans.


Source: APRA, AMP Capital

Third, and related to this, there are no significant signs of mortgage stress.

Debt interest payments relative to income are low thanks to low interest rates.

See the next chart.


Source: RBA, AMP Capital

By contrast in the US prior to the GFC interest rates were starting to rise.

Yet in Australia bad debts and arrears are low.

While new loan sizes have increased, Australians seem focussed on cutting their debt once they get it.


Finally, while some seem to think that because property prices in mining towns like Karatha are now crashing this is a sign that other cities will follow.

This is non-sensensical.

Property prices in mining towns surged thanks to a population influx that flowed from the mining boom.

This is now reversing.

Perth and Darwin are also being affected by this but to a less degree.

By contrast the surge in property prices in cities like Sydney and Melbourne that occurred into early last decade predated the mining boom and their latest gains largely occurred because the end of the mining boom allowed lower interest rates.

The current state of play

Our assessment is that the boom in Sydney and Melbourne is slowing thanks in large part to APRA’s measures to slow lending to property investors. map australia country population state house property vic qld nsw tas wa nt

However, house price growth is likely to remain positive this year.

Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind.

Hobart & Adelaide are likely to see continued moderate property growth, but Brisbane may pick up a bit.

Nationwide price falls are unlikely until the RBA starts to raise interest rates and this is unlikely before 2017.

And then in the absence of a recession or rapid interest rate hikes price falls are more likely to be 5-10% as was seen in the 2009 and 2011 down cycles rather than anything worse.


What to watch for a property crash?

To see a property crash – say a 20% average fall or more – we probably need to see one or more of the following:

  • A recession – much higher unemployment could clearly cause debt servicing problems. At this stage a recession looks unlikely though.
  • A surge in interest rates – but the RBA is not stupid; it knows households are now more sensitive to higher rates.
  • Property oversupply – this is a risk but would require the current construction boom to continue for several years.

Implications for investors

There are several implications for investors:

  • While housing has a long term role to play in investment portfolios it is looking somewhat less attractive as a medium term investment. It is expensive, offers very low income (rental) yields compared to all other assets except bank deposits and Government bonds and it’s vulnerable to possible changes to taxation arrangements around property.
  • There are pockets of value, eg. in regional areas. You just have to look for them.
  • As Australians already have a high exposure to residential property (directly and via bank shares and property trusts), there is a case to maintain a decent exposure to say unhedged global shares because it could provide an offset if it turns out I am wrong and the Australian property market does have a crash.

Source: Oliver’s Insights


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'Crash calls for the Australian property market – how valid are they?' have 6 comments

  1. Avatar

    March 19, 2016 Jeff

    There is so much talk about the high levels of debt but I have never seen this broken down into more detail.
    It is regularly shown as a percentage of household disposable income and currently above 150% and I am assuming this is an average of all residential loans for both peoples own homes and investment properties and includes other bad debt such as credit cards, personal loans etc etc.
    The reason I ask this is my partner and I own seven properties in total and have a disposable income to debt ratio of more like 1500%.
    All of our loans are interest only with 70 – 80% LVR which have all been refinanced or are new loans in the last six months.
    We don’t consider what we are doing to be risky and obviously the banks we deal with don’t either or they wouldn’t have approved our loans.
    What I really want to know is – are we, and others doing similar residential property investment, severely distorting the percentages?
    If this is the case Australians as a whole may not be as over leveraged as the figures suggest.
    We own our own business supplying products to the building industry so have first hand knowledge of just how extravagant people’s new homes and renovations have become here in Sydney.
    The home I was brought up in as a child and my own home currently are quite modest in comparison to the mansions people are putting themselves so far into debt to own nowadays.
    I think this has a lot to do with average homes in Sydney being worth twelve or more times household disposable income plus people are happy to pay a premium to live in the most desirable locations which because of their scarcity is driving up the prices even more.
    Ian in the comment above has said interest only and high LVR loans have not being mentioned but I’m sure they would have been included in the chart titled “tightening lending standards” above. It shows at the end of 2015 interest only loans were approx. 35% and high LVR loans were approx. 10% so interest only/ high LVR loans should be probably about 3.5% although these shouldn’t be a risk to the banks at least as I couldn’t imagine these being made available without mortgage insurance covering the banks should things go pear shaped.
    Ian also mentions loans issued prior to the tightening of lending practices but I think a lot of the riskier loans at high LVR and low doc etc have probably benefitted from recent increases in property values and would no longer be high LVR.
    The most important thing people need to do is make sure to have a financial buffer sufficient enough to cover the worst case scenario. We have a buffer available to cover our payments for approx. 2 years.
    That way there is no need to panic or worry too much about what may never happen.
    Most loses are made by being forced to sell at the wrong time.


    • Michael Yardney

      March 19, 2016 Michael Yardney

      Jeff – there is a very valuable lesson in those last 2 sentences


  2. Avatar

    March 18, 2016 Ian Fraser

    Hi Michael.
    I read your commentary with interest but it left me worried, then amused, then just disappointed. Firstly, I thought your lending summary is flawed, mentioning only a tightening of standards. What of all the loans out there prior to the new restrictions and what of the new loans that are both interest only and high LVR? Lending rates to individuals and rates to capital held by banks have been of such a concern, the restrictions have been brought in and enforced, but you make no mention of this.

    The way you brush aside the effects a recession will have on the current real estate market I also find disturbing. A recession will have dramatic and strong and negative effects on all markets, industry, retail, consumer spending, jobs and real estate. The problem I see with your commentary in this regard, is that you fail to take into account outside forces. You mention there is no trigger to force a recession. Well there is and it is ready to go off. It’s just may not be in our backyard. Australia didn’t cause the 2008 GFC. If new outside influences cause a meltdown of financial markets, Australia does not have the two major benefactors (China and mining) it had then, to protect it’s failing, almost no growth economy. In fact if you took out resources and banking from our economic data, you would see an economic decline for many years.

    Our problem is we are over-leveraged as you yourself state. We as a nation are incredibly susceptible to outside forces beyond our economic control because of this. We are up to our ears in debt so anything that rocks the boat will have dire consequences. To imply this level of a problem is of no concern I find to be reprehensible and capricious.

    BUT, to say at the end of your commentary that you’d better hedge your bets with shares, (which will be the first thing to go down the gurglar in a financial meltdown), just in case you’re wrong about everything, makes you look like a clown and quite possibly that is a good conclusion.

    Such a shame, because up until now I always thought you had a sound property mind and plenty of experience for me to draw from.


    • Michael Yardney

      March 18, 2016 Michael Yardney

      Thank for your thoughts- but just before you write me off….
      Please note this was NOT my commentary but a transcript of Shane Oliver’s commentary


  3. Avatar

    March 18, 2016 Belinda Smith

    A well balanced, perfectly written assessment by you (Michael) and Shane Oliver, based on facts and data, not what the media continually sensationalize about what is happening in certain sectors of Australia’s property market. Thank you!


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