Home truths about the Australian housing market
Most critics of the Australian housing market say current prices are too high because they don’t match prices from 15, 20 or more years ago. These critics ignore three important ways in which our economy is different today than it was prior to 1997.
The relative taming of inflation from its former extreme highs, the subsequent reduction in interest rates, and more abundant housing credit brought more people into the housing market and raised the price existing buyers could afford.
The reduction in interest rates alone expanded the potential housing market by 600,000 households, says Commonwealth Bank. It would take a reversal of these structural changes for housing prices to fall back to the levels of earlier eras. No one expects that.
Attacks on the housing market are often paradoxical. The market’s very strength is considered a sign of weakness. The facts suggest, however, the opposite is true.
The Australian population has grown faster than housing stock in the past five years, for the first time in the post-war period, as HSBC’s Paul Bloxham points out. This strengthens the floor price of housing. Our population has grown at more than double the rate of the US and the UK, and there will be almost 36 million Australians by 2050.
Nor is the regular handwringing about affordability wholly justified, because prices have broadly tracked income growth. Since the end of 2003, the ratio of housing prices to income has stayed in a narrow band, between 3.5 and 4.5, reports Rismark. If this relationship holds, housing prices should gain around five percent per annum over the medium term, which is HSBC’s forecast for growth in household disposable income.
Household debt is another source of unreasonable worry. There is no mortgage debt crisis among Australians who—because of lower incomes—are most vulnerable. Only 23% of lower income households have any mortgage debt at all. Those that do, spend less, not more, of their income on their mortgage repayments today than 10 years ago, reports the Australian Bureau of Statistics.
The household debt we do have mostly belongs to the wealthy. Those in the top two income quintiles owe almost two-thirds (64 per cent) of all debt. And, yes, they can afford it. Paying off mortgages accounts for only about 15 percent of the gross income of the highest earning households.
Less than one percent of mortgages are in arrears in Australia, low by international standards. Household savings have also risen dramatically, from a negative number in 2005 to an historic high near 10 percent in 2010.
That Australian mortgages are ‘full recourse’ makes the system even more stable. In the unexpected event of a market downturn, borrowers with full recourse loans are less likely to abandon property whose value has dropped below what they still owe the bank. This keeps large numbers of repossessed properties from coming onto the market in a downward price spiral, as in the US recently.
True, relative to some other countries, housing on average is fairly expensive in Australia. There are good reasons for this.
For one, the Australian home is the largest in the world, at 214 square meters on average. The next closest is the United States at 202 square meters. The average floor area of new houses increased by 40.3 percent between 1984-85 and 2002-03.
There is short supply in good locations, with little opportunity to build more. At 61 percent, more of our population lives in large urban areas than in Japan, the US or the UK. Yet, we have fewer apartments in the close-in suburbs around our major capital cities, limiting the number of households that can fit in the space available. Because our public transport is relatively poor, the typical worker cannot conveniently live in more distant locations.
Our policy makers today rightly worry more about managing our export growth than our housing market. We have a strong economy, almost full employment, a capable Reserve Bank and a government with strong balance sheets.
It is not that there are no risks whatsoever to our housing market. The biggest risk we run today, however, does not come from property. On the contrary, it is the risk of an external shock, such as from China, which now accounts for 24 percent of our exports.
All economies go through cycles, China included. For Australia, such an external shock could have a knock-on effect on commodity prices, exports, employment, national prosperity and property. Saying the economy has cycles, however, is a long way from saying the housing market is fundamentally overvalued.
L. Janusz Hooker is CEO of LJ Hooker.