Share Facebook

Twitter

Whatsapp

Mail

Whatsapp Australia does not have one homogeneous housing market

Foreign hedge funds and other observers have consistently warned of an Australian property bubble that could burst, reducing prices by up to 50 per cent. What would need to happen for that scenario to eventuate? Sheryle Bagwell takes a look.

Could an Australian property price crash really happen?

Of course it could happen. I imagine many Australians locked out of the housing market would be hoping it does—such is the wealth divide between the property haves and property have-nots.

In Sydney and Melbourne we still aren't building enough to match population growth, although that doesn't mean there aren't pockets of oversupply.

However, we've been hearing warnings of a property crash in Australia since 2002 and we haven't had one yet, so I wouldn't bank on one happening during this cycle.

There's no doubt that Australian household debt is high; we are borrowing more, not just to buy property, but also for education in the form of HECS.

Yet as our debt has risen, so too has our wealth. The ratio of debt to income is about the same as it was before the GFC by some analysis. We also have to remember that mortgage rates are at record lows—you can get a variable rate below 4 per cent right now. That means the cost of servicing that debt takes up a smaller amount of our household income, and many households are using that windfall to get ahead on their mortgage payments.

Of course, some households are using those record low rates to take on even more housing debt. But 'household financial stress remains fairly benign' according to the Reserve Bank's most recent review of financial stability in February.

That doesn't mean households should bank on house prices always going up. Indeed, 5-10 per cent falls are not uncommon in the Australian market. Prices have been falling for the last year in Perth and Darwin, and in mining towns like Karratha demand for housing waned alongside mining investment.

After all, there isn't one homogenous market for property in Australia. In Sydney, where housing demand still outstrips supply, the research firm Corelogic is expecting modest house price growth of 2.2 per cent this year even as regulators tighten the rules around lending to investors. In Melbourne, house prices are expected to rise 7 per cent.

What would have to happen for property prices to crash?

We would have to overbuild to the point where supply far exceeds demand, which was the real trigger for the housing bust in the US last decade.

In Sydney and Melbourne we still aren't building enough to match population growth, although that doesn't mean there aren't pockets of oversupply—particularly in CBD apartments. Analysts are forecasting that prices could fall in that sector over the next couple of years, particularly if the government changes the rules around negative gearing.

But for prices to crash by 30 to 50 per cent, you would need to see interest rates jump to record highs, which is not going to happen any time soon. Alternatively, the economy would have to collapse into a recession causing unemployment to spike, but there's no sign of that happening either.

The jobless rate rose from 5.8 per cent to 6 per cent in January. Couldn't the economy do with more stimulus?

December quarter GDP data out is due out on Wednesday and it's expected to show that growth below trend. Moreover, at 71 to 72 US cents, the Australian dollar is probably a touch higher than where the RBA wants it to be.

Aside from that, however, not much has changed economically since the RBA's last meeting, so the board is expected to keep rates on hold again.

Yes, the jobless rate has jumped back to 6 per cent, but these stats do jump around from month to month, and at the moment the trend in unemployment is still down.

Markets are still pricing in a rate cut as a strong chance later in the year, though, and it's a live option from May.

Economists are a little more cautious. Several, including Westpac's respected chief economist Bill Evans, believe the RBA will leave the cash rate at 2 per cent for the entire year.

What might trigger a rate cut from the RBA this year?

If the jobless rate continues to go higher, the RBA will probably step in. The central bank is also monitoring what impact, if any, financial market turmoil is having on the real economy.

Markets have rebounded a little in February, but the main benchmark index is still down nearly 8 per cent for the year, and no one thinks the volatility is at an end.

A typical super fund might have between 60 to 80 per cent of its balance invested in risky assets like shares and property, so volatility goes straight to your super fund's bottom line.

Of course, super should be seen as a long term investment and not watched month to month. But less than a decade after the GFC, declining super balances make Australians nervous, and perhaps even cautious about spending. If that's the case it could act as a real drag on the economy.

The RBA will be watching that, particularly as slow wages growth puts a drag on consumer spending.

Listen to the full analysis Sheryle Bagwell previews the week ahead in finance.

Subscribe to Breakfast on iTunes, ABC Radio or your favourite podcasting app.