For the bubble theorists like Steve Keen, it is evidence that the Australian housing bubble is over, while the bulls that dominate the industry say it is a sign the market can re-adjust without crashing.
This week we’re going to argue that there is NO housing bubble in Australia but if that makes you feel good, you had best not read the paper next week when we join Team Gen-Y and argue the opposite.
Some of the most bullish commentators agree that house prices are expensive in Australia, but there are reasons why they are unlikely to fall.
House Prices Flat
As reported in the Australian Financial Review, internal modelling by Macquarie Bank has found the percentage of household income needed for a typical mortgage repayment ranges between 20 and 30 per cent for most capitals, which is historically high, but not unprecedented—it reached that level just eight years ago in Sydney and in most capitals in the early 1990s.
When houses get too expensive, house price growth slows, stagnates and sometimes prices fall, which is a normal phenomenon. Since 2003, house prices in Sydney have been broadly flat. But incomes have continued to rise, meaning houses have gradually become more affordable.
It’s dubbed a “soft landing” approach by the talking heads, as opposed to an outright crash. It is hard to see why prices should see the kind of broad-brush falls that we have seen in America.
Different to the US
There are a number of reasons mitigating against a US-style crash in house prices.
Most people have jobs and as long as that situation continues, there will be few forced sales.
Across much of Australia, housing supply is limited, unlike the over-supplied market in the United States. Red tape, infrastructure levies and an entrenched culture of nimbyism (not in my backyard) are keeping housing construction below the levels needed. The approval process for building apartments has become so agonising that some major developers like Stockland have given up trying to build them. This will keep buyer competition strong for the limited choice available.
Further, loans in the United States were non-recourse, meaning the debt was secured only against the house. When mortgage repayments got too hard, or when house prices began to fall below what their owners had borrowed, thousands of ordinary families made a rational choice to post their keys back to the bank and forfeit the house. The bank had no claim over their other property or income, meaning the debt was as good as settled. Many continued to live in their houses as renters.
In Australia home loans are full-recourse. If you default, the bank will take your house and whatever else they can get their hands on until the full amount is repaid. If you can’t pay, you will go bankrupt. Australian home owners with mortgages will go to far greater lengths and make deeper cut-backs to their living standards, to keep up their loan repayments.
Price Falls Variable
Of course, there were some regions in Australia such as the Gold Coast that did witness massive falls, owing to the absence of some of these factors. The Gold Coast was heavily oversupplied after a building boom before the financial crisis and it was holiday apartments, rather than the owner-occupied houses in the hinterlands, that saw the biggest falls. And while Australia as a whole avoided a recession, Queensland’s tourism-dependent economy didn’t.
The majority of economists are predicting at least a year of zero house price gains and some are going further to say the era of easy house price gains well above wages growth is gone for good.
But it would take a major shock to the economy, such as a slowdown in China that hits its appetite for our resources, to bring about substantial house price falls here.
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