The property market – is it a bubble about to burst?

The property market - is it a bubble?

In the red corner we have market analysts, hedge funds and economists lining up to predict a property market crash, using words like “catastrophe” and “doom”. In the green corner, we have economists ridiculing these claims as “hysterical”, and an evidently relaxed Reserve Bank of Australia.

So which is right? Is the property market about to fall off a cliff? Or will it be business as usual?

The doomsayers point to ‘clear evidence’…

Household debt levels at around 130% of GDP (the size of the economy) compared with a world average below 90%.

Increases in house prices over the last two decades, compared to income growth or rents. In the last three or four years alone, prices in some parts of Sydney and Melbourne have risen 50-100%.

A high proportion of residential mortgages: over 60% of total loans in Australia, compared with 15-45% in comparable countries.

The popularity of interest-only loans, now around 40% of all residential loans, and negative gearing.

Total real estate valued at 3.8 times GDP (the size of the economy), compared with Ireland and Japan which were at 3.5 times GDP before they experienced a housing market crash.

Indications that foreign buyers are pulling back.

Expected oversupply in apartments particularly in the inner-city areas of Melbourne and Brisbane.

Sounds worryingly convincing, doesn’t it?

So why aren’t major bank economists or the RBA worried?

Economists counter the doomsayers, arguing:

The simple ratio of household debt to income is misleading. If the debt figures are adjusted for amounts held in mortgage offset accounts and borrowings for business purposes (which, for small businesses, are often secured by property mortgages), they are at the same level they were eight years ago.

Banks report that, in general, households aren’t having problems servicing their debt.

Typically less than 5 per cent of home owners are “highly leveraged”. The rest either own their own home outright or spend less than 30% of their incomes on repayments.

Most loans are held by upper income earners and the housing debt is fairly well allocated.

Despite expectations of a temporary oversupply in apartments (particularly in Melbourne and Brisbane) most of Australia suffers from undersupply, particularly in houses, and in Sydney.

Regulators have already acted to take some of the heat out of the market by enforcing foreign ownership rules, restraining banks credit growth rates, and a two tier interest rate regime making investment loans more expensive than home-owner loans.

A large fall in prices will only occur if something triggers it – if interest rates rise (which is looking extremely unlikely any time soon) or if there is a large increase in unemployment (whereas unemployment is currently falling).

As the Reserve Bank notes, household survey data indicates that the share of households ahead on their mortgage repayments has increased over recent years (for both owner-occupiers and investors) to its highest level since the early 2000s.

So what should we expect?

Some niches may experience weakness over the next year or so, including Melbourne and Brisbane inner city apartments, and areas affected by mining industry weakness, particularly in Western Australia.

Generally, though the more sober forecasters expect prices to be flat, perhaps slightly negative for apartments, but quite possibly modestly positive for houses.

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