Barely a day goes by without another warning from some property pessimist, columnist or overseas economist about a looming price collapse. So let’s get things straight up front – there is no property bubble in Australia – at least not yet! And there is another point Michael Yardney, from Metropole Property Strategists, wants to get straight as well and he does so in today’s show. Hear what he has to say.
Kevin: I saw an interesting post on the Real Estate Talk just recently – a video from Michael Yardney about putting the property bubble into perspective. I want to go a little bit deeper into that today.
Thanks for joining me, Michael.
Michael: My pleasure, Kevin.
Kevin: Michael, what is a property bubble?
Michael: Good question, because so many people are talking about it. Interestingly, high prices don’t mean a bubble. A bubble is defined by a rapid rise in property prices where prices are way above their long-term fundamentals, and it’s usually related to highly geared, highly leveraged speculators entering the market for short-term gain.
Kevin: What happened to property prices last year?
Michael: When you look back, other than in Sydney, the property market was pretty tame. Sydney did particularly well over the last year, but Melbourne and Brisbane only had 5.5% and almost 3% growth. The other cities really didn’t grow much more than inflation. That is not bubble territory, Kevin.
Kevin: What about the property prices in this cycle?
Michael: If we go back to the post-Global Financial Crisis market, it bottomed in the second quarter of 2012, so now we’ve had about three years of capital growth. The Sydney market has done particularly well. It’s grown close to 40%. Melbourne market properties have gone up about 25%. Darwin did well, but has been slow the last little while.
Other than Sydney, house price growth hasn’t been spectacular. The market is moving its way through but not into property bubble territory.
Kevin: Is it all about low interest rates, Michael?
Michael: People say that, don’t they? They say it’s low interest rates that has encouraged everybody. But if you think about it, low interest rates are all over Australia. Clearly, cities other than Sydney and Melbourne have enjoyed the same low interest rates, yet their markets haven’t been firing.
To me, it’s more about the local market factors: the strength or weakness of the local economy, consumer confidence or lack thereof as in some states, employment levels and job security – there is a bit of issue with that at the moment – and of course, the local property supply and demand factors. A lot more than interest rates, Kevin.
Kevin: What about high levels of debt and mortgage stress?
Michael: Yes, people are talking about that and saying, “Look how much debt people are taking on.” But recently in its Financial Stability Review, the Reserve Bank found that low interest rates have made servicing of household debts much easier. The level of household financial stress in Australia, interestingly, is declining.
In other words, there is actually less mortgage stress than there has been for a long, long time and there is only a really small percentage – just under 4% – of the total population whose mortgage payments equate to more than 30% of their income. They are the only ones who may get themselves into trouble if and when interest rates rise.
Kevin: Michael, when did the Australian property market last crash?
Michael: If you look back according to John Edwards from Residex, it was in the 1890s, before Federation. The answer is we’ve actually never had a crash in the modern era with a modern economic system and a modern banking system.
Property prices slump. They slow down. They even drop in certain segments of the market. In regional Australia and more in the mining towns, they have crashed because they had a bubble. But if you’re talking capital city markets, Kevin, not in a couple of lifetimes.
Kevin: Michael, accepting what you say about the lack of a bubble, what could cause our property markets to collapse?
Michael: It has happened in the past and it has happened overseas, so why could it happen here? It could happen if we had such high unemployment that people would have to be forced to sell their homes and nobody could afford to buy them. That is what causes a crash, where you just give away your properties and there is nobody there to buy them. That is different to the orderly, slowly lowering of values or flat market values.
The other thing that could cause it is terribly high interest rates, which could cause a raft of homeowners to default on their mortgage. That is unlikely, as well. A recession may, but it’s unlikely because a recession lasts for one or two quarters and then moves on. You would really actually have to have a depression, and that’s not on the radar, or in selective segments of the market, an oversupply – like is happening in some segments or in certain regional towns, particularly the mining towns. Again, that is not on the cards in our big capital cities.
Kevin: In summary, what is ahead?
Michael: Each state is going to be affected by its local supply and demand and economic factors for the rest of 2015. New South Wales is likely to be the top performer because it has a strong and very diverse economy. Queensland’s economy is now being helped by the falling dollar, and that’s helping the export and the tourist markets. Victoria’s economy is set for a bit of a decline because we are really a manufacturing state here, but strong population growth is helping drive the Melbourne property markets.
Western Australia’s economy is hurting a bit as the mining/building boom is now fading. South Australia’s economy is finally showing some early signs of revival, but it’s going to be gradual and, I think, a very lengthy process. Tasmania’s economy is likely to underperform, and the Northern Territory’s resources-based economy is really still creaking.
We’ve got some good things happening but we’ve also got some challenges ahead. I think we’re going to have some very fragmented markets, meaning you have to do careful homework and lots of due diligence.
Kevin: As always, Michael, it’s great talking to you. Michael Yardney from Metropole Property Strategists.
Thanks for your time, Michael.
Michael: My pleasure, Kevin.