INTEREST IN THE HOUSING BUBBLE
Household debt is more than Australia’s entire Gross Domestic Product, mortgage rates won’t stay at historic lows forever and the property market is getting hotter – something, at some point, has got to give
The Reserve Bank appears increasingly uncomfortable with the heat in the housing
T HE problem with bubbles is they only become really apparent after they’ve burst. This applies in any market – be it for shares, commodities such as gold and oil, or Dutch tulips – when demand is in considerable part driven by speculation of future price rises rather than yield.
Bubbles are further inflated when they are pumped with cheap credit, which leads us to the Australian housing sector.
The property shills will tell you there is no problem; that Australian housing is not overvalued and it’s all a matter of (not enough) supply and demand. Nothing to see here, move along.
The argument is also mounted that the cost of servicing the average mortgage is quite low.
This, of course, belies the fact that, yes, while we may be enjoying record-low interest rates now, generally a mortgage is spread over 25 years, during which time the RBA’s official cash rate will at some point be considerably higher than it’s current “emergency” 2 per cent.
Remember that prior to onset of the Global Financial Crisis in 2008 discount mortgage rates were about 9 per cent, or at least twice what is on offer now.
Over the life of most loans, they will likely reach that level again (and then some) based on economic and inflationary cycles.
Another important point is Australians, while tending on average to save since the GFC, have never been so indebted.
Total household debt is running at about $1.9 trillion (or more than Australia’s entire Gross Domestic Product), of which about $1.4 trillion is mortgage debt.
On average, the household debt to income ratio is 150 per cent – higher than other advanced nations including the UK, France, US and Germany, and about double the levels that prevailed 20 years ago.
When it comes to home prices, on average the ratio of prices to household income now exceeds six-to-one, again about double the levels that prevailed 20 years ago. In some markets – take a bow Sydney – the ratio is even higher, and prices are still rising fast.
The demand, amped up by cheap credit, is largely being driven by investors, with firsthome buyers now representing less than 15 per cent of new loans.
In a world of low interest rates and tepid economic growth this is money looking for a capital return with the added benefit of negative gearing tax breaks.
Some of the investment coming in is foreign, which is in part driven by the depreciation of the Australian dollar against currencies such as the Chinese yuan, which makes investing here attractive to offshore investors prepared to take an exchange rate risk.
Much of this money though is going into new unit development rather than further inflating the prices of existing dwellings.
CoreLogic RP Data analysis shows the average gross rental yield across Australian capital cities is now down to 3.6 per cent, and falling as prices continue to outstrip rental growth.