What happened to the crash?

AMP Capital Chief Economist Dr Shane Oliver says Australian house prices have been overvalued for more than a decade and we continue to hear predictions of a price crash – so why hasn’t it happened.  We ask Dr Oliver that question today.
Kevin:  The long-predicted crash has never eventuated. Now, according to The Economist, Australia’s housing market is 40% overvalued based on price-to-income measures, with one expert warning an entire generation is now praying for a property crash. So why hasn’t it happened? Joining us, AMP Capital Chief Economist Dr. Shane Oliver.
Dr. Oliver, thank you for your time.
Dr. Oliver:  My pleasure. Great to be talking to you.
Kevin:  Why haven’t we had the crash?
Dr. Oliver:  That’s a good question. We occasionally hear these predictions. Most recently, I think it was aired on 60 Minutes back in February, someone talking about a 40% or 50% crash in property prices. But those sort of predictions have been around for a decade or so now, and it hasn’t happened.
Several factors are behind that. One is we haven’t had the deterioration in lending standards that they had in America. Back in America, prior to the GFC, money was going to people who didn’t have jobs, didn’t have assets, didn’t have a means of supporting their so-called NINJA loan – no income, no job, no assets. And of course, that caused massive problems.
We haven’t had that in Australia. Most Australians are servicing their mortgages and paying their debts down at a reasonable rate. We also have, of course, low interest rates, so even though house prices have gone up, interest rates have gone down. So the amount of money that a typical household devotes to servicing their debt isn’t much higher than it was a decade ago despite house prices being higher.
Finally, unlike America and other countries that have had 30% or 40% property crashes over the last decade, we haven’t had an oversupply of properties. There might be in certain areas – the Gold Coast occasionally has that, parts of Sydney, parts of Brisbane, parts of Melbourne – but on a generalized basis, we haven’t had an oversupply. We still have immigrants coming into the country, the population is growing, and therefore that oversupply hasn’t hit the market.
So yes, it’s overvalued measured against income and measured against rent, but it’s still very hard to see what the figure for a crash is.
Kevin:  Yes, the points you make are all very good, too, and we do tend to generalize a lot. The Economist singled out Sydney along with San Francisco, Vancouver, and Shanghai. I thought that might have been just drawing a very long bow to say that the price growth is the norm by comparing all of Australia to those markets.
Dr. Oliver:  It’s certainly not. And the other thing that foreign commentators often miss is that the Australian markets are all very different. Over the last four years, Sydney property prices have risen 40%, but they virtually did nothing from about 2004 up until 2010. It was a very constrained market in Sydney for a whole bunch of reasons. So there is a degree of catch-up after a very weak period.
But then you go around the rest of the country: Melbourne also very strong over the last four years with prices up 30%, but then when you look at Brisbane, prices there are only up 8% or so over the last four years, so it’s been a lot quieter. Price gains have been a lot more constrained.
Likewise, say if you’re a property investor and you want to get some rental income, the rental yield reflecting those gains in Sydney is now very low. It’s down around 4% for a unit, whereas in Brisbane the rental yield is more than one percentage point higher at above 5%. So it’s very wrong to generalize, just to look at Sydney and say that’s indicative of the whole country; it certainly isn’t.
Kevin:  You mentioned there when you were talking about America, about reckless lending. Do you think it’s too easy to accumulate debt in Australia?
Dr. Oliver:  Yes and no. For a typical borrower it’s not. Most people I think are quite responsible with their loans, and banks are quite responsible, as well. But it is possible to accumulate a lot of debt, particularly for property investors. If you know what you’re doing, you can do it quite well. You hear those stories occasionally  in the media about people having 10 properties, they’re all investment properties, the income from them is paying the interest on them. There is a risk there that if something happens and the prices do crash, then those people could be in trouble servicing their 10 mortgages.
But by and large, most Australians don’t have the sort of debt that caused trouble in the US, and I think banks are generally fairly responsible in terms of assessing the income that Australians have and whether that income is sustainable enough to service their debts over time.
The proof is in the pudding. The level of nonperforming loans – that is loans that are in arears by Australian banks (this was from a report from the Reserve Bank just yesterday) – is running around 1% of total bank loans, whereas in Europe for example you’re up around 6% or 8%. Many other countries are, again, quite high. So Australia actually has a very low level of loans that are not being serviced by the borrowers properly.
Kevin:  Just before I let you go, the negative gearing debate: do you think negative gearing has actually encouraged too many investors to get into property who maybe shouldn’t be there?
Dr. Oliver:  There may be an element of that, but I don’t think it’s the main problem. I think negative gearing is often seen as the reason why Australian property prices are high, but negative gearing in Australia dates back for a long, long period, long before this period of expansive property prices we’ve had more recently.
I think yes, there may be some people who are taking excessive advantage of negative gearing and maybe borrowing too much on the back of negative gearing benefits, but by and large, most ordinary Australians use it quite sensibly.
My concern would be that if we do away with negative gearing, then the supply of properties in the Australian property market that comes from investors will dry up and we could end up with a worse situation where the supply situation coming to the market is again not enough to meet up with underlying demand for housing.
I certainly don’t think the negative gearing is the problem and the reason why we have relatively expensive property in Australia; the real issue has been a lack of supply over many, many years.
Kevin:  Dr. Shane Oliver, thank you so much for your time. Appreciate it.
Dr. Oliver:  My pleasure. Have a great weekend.
Kevin:  Thank you very much.

Leave a Reply