For years there have been various commentators saying we have a bubble about to burst. They compare Australian housing with real estate in other parts of the world, however they often fail to recognise fundamental differences between the respective regions, for example we have much higher population growth and housing demand in Australia, and better trading relationships with the growth economies of China and India. [1]
Here are four events which could hypothetically crash the market (they are all highly unlikely in my opinion):
- Interest rates would have to skyrocket – but inflation has been below the Reserve Bank of Australia target for six and half years [2], the consensus among experts is that any interest rate rises would be small and gradual, most experts believe we will be in a relatively low interest rate environment for the foreseeable future.
- Unemployment would have to skyrocket – but corporate profits are at thirty-three year highs [3], our economy is strong enough for this to not be a genuine concern.
- The market would have to be flooded with an oversupply of dwellings – this may be possible in certain sub-markets, for example where there is an oversupply of high-density apartment dwellings, however it is less likely for established housing in the inner and middle-ring suburbs of our major capital cities.
- Residents would need to be willing to give their houses away at fire-sale prices – but our market is underpinned by owner-occupied dwellings. Most Australians will go to great lengths to prevent losing their homes. There are also plenty of willing and able buyers, particularly in the more desirable areas, which creates a floor).
Australia has one of the world’s most stable banking systems. We have full-recourse lending, which means borrowers have strong incentives to honour their mortgage commitments (this wasn’t the case in the United States in the lead up the Global Financial Crisis).
Also the aggregate level of housing debt is actually lower than much of the media sensationalises. Only 58.4% of residential housing is mortgaged to an Australian bank. This combined debt is only 22.6% of the total value of the housing market. [4]
It’s not unreasonable to expect a slower period of growth now (that’s healthy, and very normal in the context of a cyclical market), but for those taking a long-term view . . . it’s probably not too concerning, anyway.
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[1] “The world in 2050, will the shift in global economic power continue?” PwC, https://www.pwc.com/gx/en/issues/the-economy/assets/world-in-2050-february-2015.pdf. (accessed March 20, 2018)
[2] Australian Bureau of Statistics, Consumer Price Index 6401.0.
[3] Company profits are rising as living standards fall” The Australian, http://www.theaustralian.com.au/news/inquirer/company-profits-are-rising-as-living-standards-fall/news-story/be5c41f2aa5c4eecfd6b2632f7e3b178 (accessed March 20, 2018).
[4] “The number of properties mortgaged is climbing however, values are increasing faster than outstanding debt”, Cameron Kusher, CoreLogic, https://www.corelogic.com.au/research/number-properties-mortgaged-climbing-however-values-increasing-faster-outstanding-debt#.Wqy-WmxrzSk (published June 22, 2017, accessed March 20, 2018).
