Inside Australia's looming housing and real estate crash
A common agreement on the Australian real estate and housing markets is that it is in a giant speculative bubble propelled by tax breaks, low-interest rates and “liar loans” that have led to massive mortgage stress and that it is all about to go bust, bringing down the banks and the economy with it. As a matter of fact, the critics say, the property markets are long overdue for a crash since they have been steadily been climbing up for over ten years. Recent signs of price falls, notably in Sydney, have added interest to such a view.
The trouble is, Aussies have been hearing the same for years. Calls for a real estate and property market crash have been pumped out repeatedly since early last decade. As early as 2004, Australia was described as “America’s ugly sister” by the media, thanks in part to a “borrowing binge” and soaring property prices. At the time, the OECD estimated Australian housing was 51.8% overvalued. Property crash calls were wheeled out repeatedly after the Global Financial Crisis (GFC) with one commentator losing a high-profile bet that prices could fall up to 40% and having to walk to the summit of Mount Kosciuszko as a result.
In 2010, the US media outlets warned “Pay close attention Australia. Los Angelification (referring to a 40% slump in LA home prices around the GFC) is coming to a city near you.” At the same time, a US fund manager was labeling Australian housing as a “time bomb”. Similar calls were made last year by the hedge fund researchers and the hedge funds that the Australian property market was on the verge of blowing up on a spectacular scale. The feed-through effects will be immense and the economy will go into recession. Over the years these crash calls have repeatedly made it on to popular TV shows as 60 Minutes and Four Corners.
What are the basic characteristics of Australia’s real estate and property markets? First of all, it is extremely scarce. Affordability is so poor that price to income ratios are very high and it is a lot harder to save a sufficient deposit either to rent or buy. It would be fair to say that very little real estate has been built in Australia at all between 2000 and 2018. Secondly, it is very expensive relative to income growth – and this is a long-term trend, even by global standards.
Australian real estate and property market prices have been steadily growing for over a decade now, while there has not been any real growth in earning power and the many family incomes still linger around the year 2000 threshold. Finally, the surge in prices has seen a surge in debt that has taken the Aussie national household debt to income ratio to the high end of OECD countries, which exposes Australia to financial instability, should households decide to cut their level of debt.
On a bright side, while it is popular to refer to “the Australian property market”, a notion that invokes apocalyptic images of economic turbulence sweeping through the nation, only the cities of Sydney and Melbourne, plus adjacent metropolitan areas have seen sustained and rapid price gains in recent years. Over the last five years dwelling prices have risen at an average annualized rate of 11.4% per annum (pa) in Sydney and 9.4% per annum in Melbourne, but prices in Brisbane, Adelaide, Hobart, and Canberra have risen by a benign 3 to 5% pa and prices have fallen in Perth and Darwin.
Australian cites basically swing around the national average with prices in one or two cities surging for a few years and then underperforming as poor affordability forces demand in other cities.
It is fair to say that Sydney has been leading the cycle over the last twenty years, with Melbourne following closely, and Perth lagging. Besides, predictions are both Sydney and Melbourne will end up housing about 7.5 million people each in another twenty years. There is a clear-cut possibility that the real estate prices and the housing markets will be always somewhat inflated in these two cities while staying relatively benign for the rest of Australia.
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