Cheap money buoys Aussie real estate
Forecasts of a real-estate slump have been replaced by concerns about a bubble
Australia’s A$7.1 trillion ($7.5t) housing market is facing the ultimate stress test — the first recession in almost three decades — and passing with flying colours for now.
Economists had predicted property prices would tumble 10 per cent or more as Covid-19 swept Australia; now, they’re scrambling to reverse those forecasts to gains of 5-15 per cent in the next couple of years.
Policy makers have switched from worrying about plunging prices to being on guard for excessive exuberance.
A recent Saturday auction in the Sydney suburb of Forest Lodge captured the bullish mood. About 30 people gathered in front of a fourbedroom Victorian terrace. The bidders kicked off at A$2.4 million and moved up in increments of A$10,000, then A$5000, until the hammer came down at A$2.74m.
A similar pattern is emerging in other countries as low interest rates fuel asset prices. While the housing strength is good news for the economy’s recovery, there are fears that further gains risk fuelling the bubble that is destined to pop one day, leaving a trail of bad debts.
The lending books of Australia’s banks are among the world’s most exposed to mortgages, with housing loans at the four major banks equating to about 75 per cent of the nation’s gross domestic product.
The statistics office estimated the value of the nation’s residential dwellings was A$7.1t in the June quarter, when weighted average prices in capital cities were up by 6.2 per cent from a year earlier.
Behind the bonanza are interest rates unseen in Australia before. Three of the four big banks are offering fixed-rate mortgages below 2 per cent, according to broker Mortgage Choice. That has been facilitated by the Reserve Bank of Australia (RBA) cutting its interest rate to 0.10 per cent, as well as its bond-buying and bank lending programmes that aim to lower borrowing costs.
“It’s not a place I think anybody thought we would be,” says Susan Mitchell, chief executive of Mortgage Choice. “There’s a lot of stimulus. I’m a bit worried about prices spiking up.”
Modelling by the RBA found that even if the economy contracted by 20 per cent and unemployment soared to 20 per cent, banks still wouldn’t breach minimum prudential capital requirements. “The likelihood of a major bank failing is very low,” it says.
The RBA has been clear that reducing unemployment is its priority, rather than worrying about asset prices. Governor Philip Lowe has said the absence of population growth — with international borders still closed — changes housing market dynamics and he doesn’t think an unsustainable increase in housing prices is likely.
Yet there are tools should the situation change.
“We know from the experience of recent years that the macroprudential instruments can curtail the growth in debt in a stabilising way. So it’s an issue we’re watching carefully, but I’m not particularly worried about it at the moment,” Lowe said last week.
By contrast in New Zealand, economists expect loan-to-valuation ratio restrictions will be put in place early next year.
Fiona Guthrie, chief executive of Financial Counselling Australia, worries more people will end up finding themselves under financial strain from easier finance rules.
“Weaker lending standards mean people will be loaded up with as much debt as possible,” she says. “There is significant profit to be made in pushing borrowers to the edge.”
But the housing market strength isn’t uniform. Many people living in inner-city Sydney and Melbourne apartments are looking more space.
The result has been a collapse in rents and flat prices — with more to come as apartment blocks are still under construction. That’s unlikely to hurt Australian banks, which have steered clear of developers after a recent period of over-building. But it does affect smaller investors.
In addition, there are households still on deferred mortgage repayments because they lost their job in the Covid lockdown. When these are scaled back and loan holidays end sometime next year, they could be forced to sell.