The wall of property worry – Louis Christopher

Wow! There has been a lot of apparent ground shifting by real estate commentators in recent weeks.

The whole “bubble” question and recent bullish forecasts for dwelling prices has created quite a stir in the sector.

Old rivals have found some common ground and old friends have found new division between each other. At least we can say in all this that debate in this country is alive and well when it comes to the housing market.

Of course , we have been out there with our rather bullish forecasts of late, something of which I was expecting some critical scrutiny for (as our forecasts should).

Only last week, one commentator (Andrew Wilson) while not explicitly referring to us, inferred in a tweet that we forecast the Sydney market was going to go down by 20% in 2012. If Andrew was indeed referring to us, then his claim is a lie. After some rather furious tweets written back in reply from yours truly, his management wrote me an email claiming Andrew wasn’t referring to us after all…..hmmm okay.


Nevertheless, we are bullish on dwelling prices for the current period and into 2014, and we are particularly bullish on the Sydney housing market.

To repeat from our recent Housing Boom and Bust Report, the base case forecast for capital city dwelling prices is for a 7-11% rise in 2014 with Sydney leading the charge.

Our forecast for the Sydney property market is 15-20%.

If you consider our asking prices series , the current annualised tempo nationwide is about 5%  and for Sydney it is about 9% .

So even now, it would not take that much further acceleration for our forecasts to come within range.

And then when we consider charts like this  and this and  this it does become apparent the Sydney market at least is looking very strong.

Here is another chart taken from our recent conference and a modification from our recent Housing Boom and Bust Report.

It shows the Sydney market at least has been in this type of premium territory.

The wall of property worry - Louis Christopher

Source: SQM Research

Indeed, back in 2003 the Sydney housing market was at a 55% premium to National GDP.

Right now Sydney is just at a 5% premium and if our forecast for 15-20% proves right, the market will just move into a 20% premium.

I agree this method of measurement of fair market value is not perfect but I think it is one of the best out there.

Such a price rise in one year is certainly not without its precedent.

It recently occurred over the 12 month period to March 2010 when the ABS recorded a 19.5% increase in house prices for Sydney – something of which the Doctor decided to leave out of his facts in a recent write up.

That time the rise was driven by a massive surge in First Home Buyers.

This time, it is investor driven as has been well documented.


In all this talk, you might be forgiven for thinking we have turned into outright property bulls with no sense of the risks in the market.

No way! Let me be clear on some points in this regard.[sam id=38 codes=’true’]

While Steve Keen has, rightfully or wrongfully taken a lot of criticism over the years for his 2008 40% crash call, he needs at least to be paid the respect of raising the issue that household debt to GDP levels in this country are very high, making the market susceptible to changes in the supply and subsequent cost of credit.

Where Stephen went wrong was underestimating the power and determination of both sides of politics plus board members of the RBA to stop a large scale house price crash – something which, when tested again in future, the same, active participants, will likely intervene again unless they have run out of resources to do so.

But for the purposes of the here and now, while household debt to GDP levels are high, they are off their highest levels which was 153% back in 2007.

Currently we are at 148%. I note that commentary around a 160% threshold is a point that no one thinks would be a good idea to break through.

Assuming that 160% is a key threshold what type of increase in debt (and then translated into dwelling price rises) would it take over a 12 month period to reach that point once again?

Well, we have attempted to roughly work this out. See our chart below:

The wall of property worry - Louis Christopher

The answer is there is some runway left at current levels.

But not much runway.

So if our forecasts come within range next year, we think that could translate into about a 7% increase in total household debt for the year.

Assuming nominal income growth of 4%, the market still would not have breached the 160% point, but it would have breached the 2007 high by the end of the next year.

Assuming another 7% rise in debt in 2015 and 2016 and then it would breach 160%.

Here is another chart you will find interesting. It looks at the change in household debt verses house prices. It seems roughly that changes in debt roughly lag house price changes. The correlation is about 53%. I have marked up in green what the chart would look like for next year assuming the mid-point of our range for house price rises comes into play (7-11)%.

The wall of property worry - Louis Christopher

What would it mean if we breached 160%?

The housing market would be, like no other time, more sensitive to interest rate movements and more sensitive to adverse movements in unemployment.

Even now, the thought of having average home loan interest rates at 7+% (as they were in 2011) would certainly create a large correction in the housing market.

As time goes on it just feels like that monetary policy setting is increasingly put in a corner.

Lift interest rates back to what was once regarded as “normal levels” and the economy tanks.

What if we get to the point in future, that having a cash rate of 3% or even 2% is too much for the economy to bear? What then? What if there is another global choke on credit supply? Do we eventually go down the path QE for Australia?


Where does it all end?

I don’t know.

But for the here and now, interest rate settings have been low enough to stimulate dwelling prices and they are going to continue to stimulate dwelling prices into 2014.

The bubble talk will no doubt keep going too and that will create some worry out in the market. But the market will climb the “wall of worry” and it will likely keep climbing that wall  at least until interest rates rise again.



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Louis Christopher


Louis is recognised as one of Australia’s most respected and impartial research property analyst. He has extensive knowledge and experience of property and is regularly quoted in the media on his insights and is director of SQM Research.

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