In the past 12 months, the median house price has dropped about 4 per cent. After the surge in house prices over recent years it’s been a reasonably orderly retreat.
However, a deep gloom has descended on the housing outlook, with many people claiming the “housing bubble” is about to become a “housing crash”.
One interesting thing about being an Australian is we each are surrounded by 25 million housing experts. Google (NASDAQ:GOOGL) the phrase “Australian house prices” and in 0.54 of a second you’ll have a billion items on that topic to consider.
In my view, housing, and the economy generally,- does not face the full fire of dire times now feared. But prospects are there’ll be a further, noticeable, fall in the median house price (5 to 10 per cent), followed by an elongated slump in house prices.
This will involve real pain for some home owners who purchased at the peak of the cycle, paid over-the-top prices or borrowed too heavily, especially where people lose their jobs or partnerships break up.
We’ve already experienced unbalanced comments. In August last year, aFour Corners program ran a shrill report on the “powder keg” left behind by the last surge in house prices. It was based on comments from an ultra-bearish economist, a bearish London-based investment adviser and a bearish analyst of mortgage stress. Alternative views were not offered.
Last month, Channel Nine broadcast a similar piece, called “Bricks and Slaughter”, claiming Australian housing was about to “fall off a cliff”. Among comments from “real estate and finance experts” was a prediction for a 40 per cent drop in house values with “catastrophic” effects on the economy. Later, a couple of the participants criticised the report for distorting their views — one said the 40 per cent decline in the average house price he predicted was only his 20 per cent probability.
But it won’t be easy to maintain a balanced outlook. Each item of news on the housing market, including weekly auction clearance figures, will be dissected to see what unpleasant news it offers on the housing outlook.
Are things as bad, or even half as bad, as the army of naysayers claim? Are there any shades of grey in the housing outlook?
Traditional concerns for housing — the high level of household debt and mortgage stress — are exaggerated.
But newer worries, such as the impact on bank lending from the revelations of unfair practices by the royal commission and from the likely introduction of changes to negative gearing and capital gains taxes (if the ALP wins government) will push housing prices lower and constrain recovery. Yes, Australian households are now among the world’s most indebted. House mortgages are the equivalent of 130 per cent of household income, and all debt of households stands at 190 per cent of household income.
But plucking a couple of numbers — gross household debt and mortgage debt — from the aggregated balance sheet of Australian households is not enough. These ratios do not include important “buffers” such as offset accounts, redraw facilities and prepayments making household finances more resilient.
Net debt matters more than gross debt, but notice how all the shrill reports only mention gross borrowings. Currently, prepayments equal 18 per cent of mortgages outstanding. That’s nearly three years of scheduled repayments. But the distribution is uneven: one-third of borrowers have more than two years’ worth of prepayments while another third have less than a month’s worth.
“Mortgage stress” also looms large in many predictions of an impending crisis. Mortgage stress is often arbitrarily defined as repayments in excess of 30 per cent of a household’s income. Thanks to low interest rates, the proportion of borrowers with mortgage stress isn’t much higher than it was a decade ago. Of course, with 80 per cent of housing loans carrying variable interest rates, mortgage stress will become more widespread as rates rise. Perhaps there’s some comfort, though, in the prospect that the next cyclical upswing in interest rates — maybe in late 2019 — will turn out to be mild and drawn out.
The Reserve Bank observes: “At present, households in aggregate appear well placed to manage debt repayments. Reliable and relatively timely indicators point to pockets of household financial stress, but this is not widespread.”
Additional concerns for the housing sector have developed recently including side effects of the macroprudential policies introduced as part of monetary policy; responsible lending laws; additional regulation of banks likely to flow from the royal commission; and Labor’s commitments to abolish negative gearing on future investments in housing (except on new dwellings) and to increase by half the capital gains tax payable when investment property is sold.
Don Stammer is an adviser to Altius Asset Management and Stanford Brown Financial Advisers. The views expressed are his alone.