7 things you need to know about the Australian property market according to Shane Oliver

After the biggest fall in at least 40 years – with a 10.2% top to bottom fall between September 2017 and June this year – average capital city home prices have turned up again.

  • IT’S STILL EXPENSIVE

This has been the case since early last decade and remains so despite the recent correction in prices:

  • According to the 2019 Demographia Housing Affordability Survey the median multiple of house prices to income is 5.7 times in Australia versus 3.5 in the US and 4.8 in the UK. In Sydney it’s 11.7 times & Melbourne is 9.7 times.
  • The ratios of house prices to incomes and rents relative to their long-term averages are at the high end of OECD countries.
  • The surge in prices relative to incomes has seen household debt relative to household income rise from the low end of OECD countries 25 years ago to the high end now.
  • EVERY CITY IS DIFFERENT

While it’s common to refer to “the Australian property market”, in reality there is significant divergence between cities. This divergence has been extreme over the last five years with Perth and Darwin seeing large price falls in response to the end of the mining investment boom, as other cities rose.

  • MORTGAGE STRESS IS OVERSTATED

There is no denying housing affordability is poor, household debt is high and some households are suffering significant mortgage stress. But most borrowers appear to be able to service their mortgages.

And despite some seeing negative equity and a significant proportion of borrowers switching from interest only to principle & interest loans (which has seen interest only loans drop from nearly 40% of all loans to 23%).

  • UNDERSUPPLY

Annual population growth since mid-last decade has averaged 373,000 people compared to 217,000 over the decade to 2005, which requires roughly an extra 75,000 homes per year.

Unfortunately, the supply of dwellings did not keep pace with the population so a massive shortfall built up driving high home prices.

Thanks to the surge in unit supply since 2015 this is now being worked off, but it follows more than a decade of accumulated undersupply which is the main reason why housing has remained relatively expensive in Australia.

  • HOUSE PRICES GO UP AND DOWN

After several episodes of price declines ranging from 5 to 10% across various cities over the last 15 years and 15%, 21% and 31% for Sydney, Perth and Darwin respectively in recent years home buyers should not be under the illusion that prices only go up.

  • THE HOUSING MARKET REMAINS RATE SENSITIVE

While it varies from city to city, despite much scepticism recent rate cuts have helped push up the property market again.

  • HOUSE PRICE CRASHES ARE NOT EASY TO FORECAST

Property crash calls were wheeled out repeatedly after the Global Financial Crisis (GFC) with one commentator losing a high-profile bet that prices could fall up to 40%.

But our view remains that to get a national housing crash – as opposed to periodic falls in some cities – we need much higher unemployment, much higher interest rates and/or a big oversupply.

WHERE TO NOW?

  • The Spring selling season – if auction clearances remain elevated as listing pick up then it will be a positive sign that the pick-up in the property market has legs.
  • Housing finance commitments – these have bounced but will have to pick up a lot further to get 10-15% price rises.
  • Unemployment – if it picks up significantly in response to slow economic growth then it will be a big constraint on house prices and could result in another leg down in prices.

*source Property Observer

Posted in Latest news, News on 13th September, 2019