by David Thorpe
August 2010
Anyone who has made the 12,000 miles journey to Australia from the UK knows just what a long, long way that feels. Most people would seem to agree that it’s definitely worth making the trip for, especially the ones that have decided to start a new life there. (Just ask their new Prime Minister Julia Gillard, she made it all the way to the top job from a coal-mining village in the Vale of Glamorgan. Good for her!) This is a country that produces great wine, plays most of our national sports and where you can still drive on the left hand side of the road. Oh and I nearly forgot, a place where it is warm for most of the year and where B-B-Q’s actually take place outside. The only thing you have to overlook is that it is home to some of the deadliest creatures in the world but hey that’s got to be a price worth paying for! In order to start a new life of course you need to find a place to live. This is when it becomes interesting. The time it now takes on average for first time buyers in Sydney to save for a deposit is 6.2 years. In the past year, Sydney has seen a 10-15% rise in house prices and the average deposit for a first home has risen to $128,200 against a national average of $85,800. Is it any wonder that so many young Australians continue to reach for their back-pack and start travelling?
Earlier this year, Glenn Stevens, the governor of the Reserve Bank of Australia warned that property prices were “getting quite high” and of the dangers of taking on too much debt. The governor was getting nervous and for good reason too it turns out. (I did read somewhere that a new credit card teether for babies launched in Australia had sparked outrage from experts and financial counsellors. I don’t think the governor was referring to this). The Australian housing market is possibly one of the last remaining bubbles left in the wake of the financial crisis and some commentators believe it is only a matter of time before it crashes. Stevens has already warned that interest rates might have to rise again soon and the fear is that if and when they do go up the game could be over. Let’s hope that this is not the case.
So is the Australian residential housing market heading for a bubble? Well let’s look at the facts. Property prices have undoubtedly outstripped inflation and household income. The price of housing typically trades at about 3.5 times family income and in a bubble it can reach 7.5 times which worryingly is where it sits today. However other people believe this is a simple case of housing supply failing to meet demand. High immigration and a lack of land being released by state governments for development are cited as two of the biggest causes for creating this imbalance. There may be some truth in this. Annual immigration in Australia is currently running at 300,000 a year. This is the biggest migration programme since the late 1960’s and among the biggest in the world. Under new rules introduced last year, people on temporary visas can purchase a property, including established property and should they return home, they can now rent the property out for investment purposes. In addition to this, house builders in New South Wales claim that the State is still doing far too little to meet the pent up demand for housing and they appear to have a point. In 2001-2, the number of new home starts was about 47,000 units but now it is running at less than 25,000. No one really knows why this is but developers blame the state government for bad planning and high taxes (where have we heard that one before?). Based on this information, it comes as no major surprise to learn that over 75% of Australians believe property prices will continue to rise in the current quarter.
There is however one other statistic that might offer an alternative explanation as to why prices continue to rise so much. Mortgage debt has grown from about 15% of GDP in the 1970’s to more than 80% now. Financial deregulation, low interest rates and the growth of double-income households have fuelled the debt binge. The massive lending for residential properties is predicated on house prices continuing to rise, continuing low interest rates and low levels of unemployment. You can see why homeowners breathed a collective sigh of relief last month when the Reserve bank announced that it was holding the cash rate steady at 4.5%. Analysts immediately warned that with inflation running at 3%, a strong labour market and a record number for monthly car sales, you couldn’t rule out future rate increases soon. So it is definitely a case of wait and see. Interestingly, one of the main reasons given for holding the rate steady for a second month running was as a reaction to volatile financial markets caused by problems in Europe and a weaker than expected rebound in the US economy. We may be over 12,000 miles away but it is quite astonishing to know that we can still exert so much influence over the Australian housing economy.