The future is always uncertain, but according to most forecasting houses, the most likely outcome in 2014 would seem to be moderate increases in property prices on average, given that the official cash rate appears likely to be stuck in the 2-3% range through the next calendar year.
While owners tend to like to see the value of their homes increasing more rapidly, over the medium-to-long term rapid dwelling price increases are dangerous and potentially destabilising.
In a recent discussion I had with Louis Christopher of SQM Research, he likened Sydney’s housing market to a “high PE ratio stock” – property prices tend to trade at a premium to elsewhere in Australia due to Sydney’s popularity and eminence as a global city equating to expectations of future price growth.
After its relative under-performance since early 2004 when price to income ratios were higher than they are today, Sydney’s market can potentially cope with further price growth (Sydney had a price boom in the years preceding 2004, before price action tailed off for a prolonged period of time).
However, housing markets which continue to appreciate very rapidly are dangerous and elevate recession risk.[sam id=40 codes=’true’]
We saw this is the United Kingdom through the 1980s after the Conservative government sold off 1.4 million council homes and Britain embarked upon a debt-driven decade.
Like Australia, Britain has tended towards high home ownership rates, which can potentially accentuate boom/bust cycles.
This became dangerous in the UK when higher house prices translated into a equity redraw binge, with withdrawals spiralling from a little over £1 billion in 1980 to well over £12 billion in 1988.1
“Loadsamoney!” rang the famous comedy phrase, and for a while at least, we indeed had that. However, as government attempts to moderate economic activity failed and consumer spending raged out of control, the Observer newspaper noted that Brits were effecively “eating their own seed corn”.
The wealth effect which was both cause and effect of the boom in the 1980s reversed in the early 1990s and the British economy fell into recession. Of course, far fewer British millionaires were made in the early 1990s, although one industry thrived like never before: repossessions. 75,000 British homes were repossessed in 1991, up from 3,000 in 1980 – and doubtless more would have sold had the been able to afford to (many couldn’t due to being in negative equity).2
In Australia, dwelling price to income ratios according to the Reserve Bank of Australia (RBA) have moved within a relatively narrow range for the past ten years. The housing market may be able to cope with moderate price increases which are tied to household income growth while interest rates remain so low.
However, should dwelling prices again begin to significantly outstrip income growth over a prolonged period of time, alarm bells will ring and the RBA will intervene.