Australia’s second biggest home lender has joined the biggest in arguing there is no housing bubble.
With international investors looking at Australia’s housing market as one of the few among developed economies not to experience significant price falls, Westpac has joined the Commonwealth Bank in trying to allay their concerns.
In arguing against the possibility of a house price collapse, Westpac’s report concedes that Australia’s housing market is expensive historically and relative to other nations, something the CBA presentation attempted to deny by a creative use of figures (as I explained in a previous report).
Westpac does suggest (as did CBA) that certain widely-used international figures by Demographia overstate the ratio of house prices to income (a commonly used measure of affordability), but even the more conservative RP Data figures Westpac cites would place Australia as a whole on the cusp of being what Demographia describes as “severely unaffordable”.
Cities such as Sydney and Melbourne would still be well into severely unaffordable territory whatever measure you used, no matter how conservative.
Instead, Westpac’s chief economist Bill Evans says the woeful shortage of new housing construction means that Australians are likely to continue having to pay too much for a place to live compared with people in other countries, keeping house prices stable.
“[There is] an imbalance between the demand for housing, which is associated with strong population growth, and the supply of housing,” he said.
“And basically the growth in new housing supply hasn’t changed much for quite a few years, so we expect that imbalance to widen further.”
The bank’s figures (sourced from the ABS) show that Australia’s new dwelling production dropped from 120,000 a year in the 1990s to about 105,000 a year in the 2000s, despite annual population growth rising from 210,000 to 305,000 over the same period.
It says that has left a shortage of around 200,000 dwellings.
While construction of new homes has fallen short of demand, the ability of many households to pay more to compete for the dwellings that are there has increased.
This is firstly because there was a structural shift in the economy towards lower inflation and therefore interest rates (also assisted by competition from non-bank lenders) and, secondly, because there are more two income households.
But both of these factors present other problems and risks.
The structural decline in interest rates looks like it is in rapid reverse, with the official cash rate heading up and banks looking to recoup the higher cost of funding now that financial markets are again requiring a risk premium for money lent.
Add to that the absence (as independent entities) of most of the major non-bank lenders that existed before the financial crisis, and it is not hard to conclude that there is a structural shift back towards mortgage lending rates being consistently higher than they were pre-crisis.
The second factor of increasing reliance on two income households to pay higher housing costs presents several obvious problems.
Bill Evans succinctly summarises the first:
“If we look at say a single income [household] attempting to purchase a house in Sydney with little equity then it’s quite unaffordable, but what we find is it’s very much the dual incomes that tend to purchase the detached homes and the single incomes tend to purchase the apartments.”
The message – if you want to buy anything other than a shoebox in Sydney or Melbourne, go out and find a partner (or sibling, parent, cousin or friend) quickly. This is a message several of my friends have already heeded.
Another problem is that Australians are working more (two people instead of one in a household) just to pay more for housing.
It is a zero sum game for everyone – except the banks that get to make bigger loans with larger interest bills, the real estate agents who get fatter commissions, and property investors who might get some capital gains the Federal Government taxes at a discount rate to those of us who actually work for a living.
The reliance on two incomes just to meet the bills also increases the vulnerability of households to rising unemployment – if you are using the majority of both incomes to pay the mortgage and bills, what do you do if one person loses their job for three months?
The over-pricing of Australia’s housing is further indicated by the emerging trend back towards bigger households, as people stay at home longer and share houses are no longer confined predominantly to uni students.
Westpac reports (from ABS figures) that the number of ‘children’ over the age of 35 still living in the family home nearly trebled from 65,000 in 1996 to 187,000 in 2006.
The bank says this has left a larger pool of potential first home buyers who are ready to step in at the first sign of falling prices and lower interest rates (as happened during the global financial crisis, assisted by federal and state government incentives).
Bill Evans cites this response to the financial crisis as further evidence that Australian house prices are unlikely to collapse like those in the US, UK or New Zealand.
“Bubbles are things that emerge quickly and burst. If this level of high prices has existed since 2003, and given that the Australian economy has been subject to some extreme shocks during that period, if it was a bubble it would have burst by now,” he told me.
He may be right about the absence of what he defines as a bubble, but that does not mean Australian homes are reasonably valued.
It seems clear that the problem of falling house prices is only being averted through the worse problem of housing shortages that are forcing many people into living arrangements they are uncomfortable with, and some people into homelessness.
Bill Evans could only agree when I suggested that Australia is caught in a Catch-22, where genuine moves to increase housing supply will undermine the exorbitant values existing home owners have put on their properties.
Given the major banks have such a big stake in house prices remaining stable or increasing, it makes one wonder whether the lack of loans to developers is only about increased risks after the financial crisis, or if there is a secondary benefit to them of restricting extra supply.
Either way, every indication is that Australia’s housing market is far from healthy, both for those investing in it and for those of us who just want an affordable place to live.
For owner-occupiers, there is a desperate need to get out of the mentality that rising house prices are good – if the value of your house rises because of a general rise in prices, so too will the cost of the next house you need to buy to live in.
For investors, there is a need to seriously re-evaluate what kind of returns are coming from the investment.
The Reserve Bank looks to be aiming for a few years of house price stagnation to allow incomes to catch up a bit, and Bill Evans expects that to happen.
He could only laugh when I suggested that prospective property investors might be better off lending their money to the bank (through a deposit) for it to lend out to someone else to buy a house.
If the Federal Government did not subsidise housing investment so heavily, the decision would be a no brainer.
Michael Janda is the ABC’s online business reporter.
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