Apart from “what will home prices do?" and "where are the best places to buy a property?" the main debate around the Australian housing market has been about poor housing affordability, occasionally interspersed with a scare that home prices will crash. The most recent example of the latter was on 60 Minutes last week with a call by US demographer & economist Harry S Dent that Australian house prices could fall “as much as 50% in the coming years”. But how serious should we take forecasts for a crash?
And more fundamentally how do we fix affordability?
Basic facts on the Australian property market…
The basic facts regarding the Australian housing market are well known:
First, after strong gains in home prices over many years, it’s expensive relative to income, rents & its long-term trend and by global standards.
Second, flowing from this, housing affordability is poor:
• The ratio of average dwelling prices to average wages & household income has doubled since 2000.
• The time taken to save for a deposit has roughly doubled over the last 30 years from five years to more than 10 years.
• The portion of income needed to service a mortgage has hit an all-time high, thanks to the combination of the high price to income ratio and the sharp rise in mortgage rates starting in 2022.
Third, the surge in prices has seen our household debt to income ratio rise to the high end of OECD countries, which exposes Australia to financial instability on the back of high rates and or unemployment.
These things arguably make calls for some sort of crash seem plausible.
Crash calls for Australian property are nothing new
US commentator Harry S Dent’s forecast for an up to 50% fall in property prices is nothing new. Calls for an Australian property crash – say a 30% or more fall - have been trotted out regularly over the last two decades.
• In 2004, The Economist magazine described Australia as “America’s ugly sister” 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 GFC with one commentator losing a high-profile bet that prices could fall up to 40% & having to walk to the summit of Mount Kosciuszko as a result.
• In 2010, a US newspaper, The Philadelphia Trumpet, warned: “Pay close attention Australia. Los Angelification (referring to a 40% slump in LA home prices) is coming to a city near you.” At the same time, a US fund manager was labelling Australian housing as a “time bomb”.
• Similar calls were made in 2016 by a hedge fund: “The Australian property market is on the verge of blowing up on a spectacular scale…The feed-through effects will be immense… the economy will go into recession".
• Over the years, these crash calls have periodically made it on to Four Corners and 60 Minutes. The latter aired a program called “Bricks and slaughter” in 2018 with some predicting falls of as much as 40%.
• And Harry S Dent was regularly predicting Australian property price crashes last decade that didn’t occur.
Why a crash is unlikely?
Of course, a crash can’t be ruled out, but as I have learned over the last two decades the Australia property market is a lot more complicated than many “perma property bears” allow for.
First, the property market is not just a speculative bubble fuelled by easy money and low interest rates. Sure low rates allowed us to pay each other more for homes but the key factor keeping them elevated relative to incomes has been that the supply of new dwellings has not kept up with demand due to strong population growth since the mid-2000s and more recently with record population growth resulting in an accumulated shortfall of around 200,000 dwellings at least but possibly as high as 300,000 if the reduction in average household size that occurred through the pandemic is allowed for. This partly explains why property prices have not collapsed despite the threefold rise in mortgage rates since May 2022.
Second, the property market is highly diverse as evident now with strength in previously underperforming cities like Perth, Adelaide and Brisbane but weak conditions in Melbourne, Hobart and Darwin.
Thirdly, Australian households with a mortgage have proven far more resilient than many including myself would have expected in the face of the rate hikes in 2022 and 2023. This is evident in still relatively low mortgage arrears (of around 1% of total loans). This may reflect a combination of savings buffers built up through the pandemic including in mortgage pre-payments and offset accounts, access to support from the “bank of mum and dad”, the still strong jobs market allowing people to work extra hours & an ability to cut discretionary spending (suggesting definitions of what constitutes mortgage stress may be overstating things). Of course, arrears are starting to rise as these supports recede, so the continuation of this resilience should not be taken for granted.
Finally, the conditions for a crash are not in place. This would probably require a sharp further rise in interest rates and/or much higher unemployment. Sharply higher interest rates from the RBA are unlikely as global inflationary pressure is easing and global central banks are now cutting. Our inflation & rates went up with a lag versus other countries & are likely to follow on the way down. Higher unemployment – with jobs leading indicators pointing to less jobs growth – is the biggest risk though.
So, a property price crash is a risk, but would likely require a deep recession. Our base case for average home prices remains for modest growth ahead of a pick-up after rates start to fall.