Lots of noise, but no housing bubble

Co-founder of the Switzer Report
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There is no housing bubble in Australia.

Maybe in a couple of years’ time when price growth is rampant and there is something to “prick” the bubble – like new supply of housing stock – but not yet. There is lots of noise, and many alarmist headlines.

The latest instalment came last Thursday, after the RBA published its semi-annual ‘Financial Stability Review’. “DIY super funds take $80bn property bite”, The Australian screamed. The Australian Financial Review wasn’t much better. Only in the accompanying table did The Australian show that commercial property accounted for 77% of this exposure, and neither saw fit to mention that as a proportion of all assets, the total exposure by SMSFs to residential property is a tiny 3.5%. Yes – you read it correctly – 3.5%.

This morning we have “SMSFs effect on property is $450bn elephant in the room” again in the Australian Financial Review. This is based on “high-level” analysis by Christopher Joye (see Peter’s chat with “Bubble boy” here).

Today, our mainstream financial media is so bereft of considered analysis there is almost no reason to subscribe – so it is only alarmist headlines that will draw you in. Alarmism, unfortunately, sells.

The regulators (such as APRA and the RBA) are also making noises. This “jawboning”, however, is being done to make sure that the banks don’t get carried away, keep lending standards high and don’t let the situation develop where a ‘bubble” could quickly take hold. The regulators are doing what they are supposed to do.

Let’s look at the respective cases for and against the “bubble” – and why I think we are just in the early stages of a bull property market.

The case for a ‘bubble’

Just troll the web and you will see numerous articles on this. Google “Australian property bubble” – and you’ll find millions of pages of references, there is even a special Wikipedia article on this!

Essentially, the case comes down to the following arguments:

  • Australian housing is ‘expensive’, more so following the GFC and the corrections that occurred in other countries. Ratios such as ‘house prices to incomes’ or ‘house prices to rents’ are discussed. Dr Nigel Stapledon of UNSW has produced an index called ‘Australia’s Real Home Price Index’, which shows a marked acceleration in “real” home prices since the late 90’s.
  • Australia’s four major banks are very exposed to housing. Investors drive the market, and household indebtedness is high. Groups such as the IMF join the chorus, warning in a report last November that “residential mortgages are the banks’ single largest asset, and a combination of high household debt and elevated house prices increases the risk in this portfolio”.
    As Chart 1below show, Australian financial institutions have over $1.13 trillion of home loans, which represents 63% of their total loans and advances. This is high by international standards. Investors are also active, with 33% of all housing loans outstanding being for investment property. New home loan approvals show that investors have been a little more active of late, accounting for 35% of the market in the June quarter.

Chart 1 – Residential Housing Loans (All ADIs)

  • Thirdly, as would be expected in a “bullish” property market, the demand signals are strong. Prices are increasing (Chart 2), auction clearance rates are high (Chart 3), ‘time on the market’ is decreasing. We have been covering this in the Switzer Super Report for some time now – arguably a very normal reaction to a sustained period of low interest rates.

Chart 2 – Capital City Home Value Changes to 29 Sept

Chart 3 – Weekly Clearance Rates to Sept 29 – Source RP Data

The case against

A “bubble” (if it exists) needs something to “prick” it – so what could trigger this? Rising interest rates? Rapidly rising unemployment? New supply of housing stock?

We can rule out interest rates, which are destined to stay low by historical standards for some time. And although unemployment and underemployment have been increasing, if the new Government gets its act together and creates a better environment for business, it is hard to see this deteriorating rapidly. Moreover, if the rest of the world switches on the growth engine, Australia won’t be left behind.

Supply of new housing stock is the most likely trigger, but all the signs are that any material increase is years away. In fact, developers are still reeling from the GFC when new finance suddenly dried up, and there has been very little pick up. This is highlighted in Chart 4 below, which shows lending by all banks to the commercial sector (i.e. non households). Lending today for land development/subdivision and for residential housing is running at approximately half that of the peak in December 2008 – and there has been negligible change over the last 12 months.

Chart 4 – Commercial Property Lending (All ADIs)

So, let’s rule out the supply trigger. What about the state of our banks and household finances?

Well, the household balance-sheet has improved. As the RBA notes, ”households are continuing to exhibit more prudent management of their finances than a decade ago”. The Household Saving Ratio has increased to around 11% (Chart 5).

Chart 5 – Household Saving – Percent of Household Disposable Income

Household indebtedness, as measured by ratios such as debt to income, debt to assets, interest payments to income have all improved. Mortgage holders are holding the highest recorded level of mortgage buffers (amounts in offset accounts and redraw facilities) at 14% to outstanding mortgage balances, or approximately 21 months of total scheduled debt repayments (Chart 6).

Chart 6 – Mortgage Repayment Buffers – Sources: RBA, APRA

And with our financial institutions, there are no signs of pressures arising from their exposure to housing. Housing loans that are past due or impaired have remained steady at 0.7% over the last 12 months, 0.2% less than its peak in 2011.

Some bubble!

Conclusion

While parts of the Sydney property market are quite hot, an overall annual price increase of 5.8% for the five capital cities is not huge – the share market has done more than 20% over this period. Bank balance sheets are not stretched, households are not showing signs of financial distress and perhaps, most importantly, supply of new housing stock is a long way from hitting the market. When I see the residential equivalent of the cranes and pits, and hear of people queuing to buy Gold Coast property “off the plan” – then I will start to think we might be in a bubble. It will probably happen – at the moment though, we are just in the early phases of a bull market.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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