Early this month, we discussed whether the world’s longest running bull market – 55 years – in Australian house prices had come to an end. This was UBS’s view following the October 2017 monthly report on Australian house prices from CoreLogic suggested that measures to tighten credit standards and dissuade overseas buyers (especially Chinese in Sydney and Melbourne) have finally begun to bite. As CoreLogic’s summary table shows, Sydney prices fell in October, for the second month running, and poised to lead national prices lower.
We followed up that discussion with “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale described how Australia’s three decades long economic expansion had mostly been the result of “dumb luck”.
As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.
Now Bloomberg has followed UBS in calling the end of the bull market, while showing some of the frankly scary metrics for Australian housing versus the country’s GDP.
The party is finally winding down for Australia’s housing market. How severe the hangover is will determine the economy’s fate for years to come. After five years of surging prices, the market value of the nation’s homes has ballooned to A$7.3 trillion ($5.6 trillion) -- or more than four times gross domestic product. Not even the U.S. and U.K. markets achieved such heights at their peaks a decade ago before prices spiraled lower and dragged their economies with them.
Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche, fueled by record-low interest rates, generous tax breaks, banks hooked on mortgage lending, and prime-time TV shows where home renovators are lauded like sporting heroes. For many, homes morphed into cash machines to finance loans for boats, cars and investment properties. The upshot: households are now twice as indebted as China’s.
One thing which should slow Australian property prices on the way down is that the Governor of the Reserve Bank of Australia (RBA), Philip Lowe, is still in no rush to raise rates. However, his hands are tied…and he knows it…as Australia’s New Daily reported.
“In striking the appropriate balance in our policy setting we have paid close attention to trends in household borrowing given the already high levels of debt.”
Over the past four years, household borrowing has increased at an average rate of 6.5 per cent while household income has increased at an average rate of just 3.5 per cent, he said. An area of particular concern for Dr Lowe is the slow growth in household incomes. Over the past four years, nominal average hourly earnings have grown at the slowest rate in “many decades”.
“This means that borrowers haven’t been able to rely on rising incomes to reduce the real value of the debt repayments in the way they used to,” he said.
Here’s Bloomberg on the same theme.
Aussie households have racked up record private debts and aren’t getting the pay rises to help service them. That’s a core concern for the RBA and frequently cited as a deterrent for hiking interest rates. Macquarie Bank has said such debt levels mean any hikes will have triple the impact on consumers than tightening cycles in the mid-1990s. With retail sales looking grim and wage growth near record lows, debt will likely vex policy makers for years.
Of course, as Bloomberg notes, the RBA is pointing out the resilience of the Australian financial system should it be hit by any shocks...somewhat reminiscent of Ben Bernanke prior to the sub-prime crisis.
So far, the Reserve Bank of Australia has relied on banking regulators to apply the brakes with lending curbs. It reckons the financial system is well-placed to withstand any shocks, but isn’t so confident on consumers.
The banks didn’t fare so well in the 2008 crisis, nor will they in an Australian housing crisis. Bloomberg continues.
On one hand, the dizzy valuations reflect a desirable location and strong population growth. But they also reflect the massive liabilities that are now tied to these assets. “The risk is that it leaves the Australian economy extremely exposed, and a minor shock could become far more significant,” said Daniel Blake, an economist at Morgan Stanley in Sydney.
The increasing treatment of housing as a financial commodity has seen borrowers rush into a byzantine maze of mortgage-related products. That’s made banks very profitable, but very exposed. While the RBA is satisfied that lenders have adequate buffers to cope with any downturn, banks may find it harder to value their collateral in a falling market as investors look to consolidate their portfolios of multiple homes, said Blake.
Meantime, aside from tighter lending standards and fewer overseas buyers, the major Australian cities are poised to see a wave of new supply, especially apartments – as this chart shows.
As you’d expect, even that is not something that will change the rhetoric from the central bank, as Bloomberg notes.
While cranes dot the Sydney skyline for miles, the central bank remains confident that population growth will eventually fill all those new apartments. Its worries about a Melbourne glut have eased off recently, with the main concern in the Brisbane market, where peak completion is expected this year, capping a three-year period in which the number of apartments has increased by more than a third. Overseas buyers comprise up to 15 percent of new dwelling purchases nationwide, according to the RBA.
Having called the end of Australia’s housing boom, UBS notes.
“The cooling may be happening a bit more quickly than even we expected.”