In recent years we have interviewed Dr Shane Oliver, AMP Capital’s Head of Investment Strategy and Economics and Chief Economist, about whether Australia’s property market is in the grip of a housing bubble and if it’s about to pop.
In this article, he demystifies the bubble concept and examines what opportunities exist for people who are still keen to own a slice of the lucrative Australian property market.
Q: Is there a housing bubble (in cities like Sydney and Melbourne) and how long is it likely to continue?
A: There has been talk of a bubble in Sydney and Melbourne property prices since early last decade. The problem is that no one seems to agree on what the term means precisely. So it’s become a bit emotional and it’s not that helpful a concept in that either we are in one, in which case it’s about to burst (well, we've been hearing that for years and it hasn't burst). Or we are not in one and there is nothing to worry about (which isn't quite right because housing affordability is poor and a lot of debt has been taken on, which poses risks if economic circumstances change and people can't service their loans). The truth is probably somewhere in between.
On most measures Sydney and Melbourne housing is overvalued in that price-to-median family income. Price-to-rent ratios are well above long-term averages and real prices are well above their long-term trend. In fact, prices have been rising by double digit rates since 2012, with gains of more than 50% in Melbourne and more than 70% in Sydney, whereas wages are up by around 15%. This has been made possible by household debt rising faster than wages, with buying by foreigners adding to the pressure.
The rate of price growth in Sydney and Melbourne has probably peaked with the combination of bank mortgage rate hikes, tightening bank lending standards, rising levels of unit supply and a crackdown on expenses that can be claimed under negative gearing that are likely to result in a slowing in price gains going forward, and probably modest price falls next year. Units are most at risk and will likely see sharper price falls as newly constructed units hit the market.
Q: How are other cities or regions being affected (in terms of prices and availability)?
A: Conditions in other Australian capital cities vary dramatically, ranging from solid price gains in Canberra and Hobart (as strength in Sydney and Melbourne has started to rub off) to very modest gains of around 3% p.a. or so in Adelaide, and Brisbane and price declines in Perth and Darwin as the mining investment slump has continued to impact.
Q: Are there still opportunities for investors?
A: Investors should be cautious regarding buying property in Sydney and Melbourne and inner city Brisbane given a large increase in supply in some areas, low rental yields and more constrained capital growth potential after strong gains in Sydney and Melbourne. Rather the best opportunities lie in other cities and regional centres where rental yields are higher, supply is more modest and prices have lagged gains in Sydney and Melbourne. This includes Adelaide, suburban Brisbane and, for those with a bit of patience, Perth and Darwin may be worth looking at over the next year.
Q: What about homeowners?
A: As with investors, the best opportunities for home owners are in cities and regional centres that have lagged the gains seen in Sydney and Melbourne.
Q: What impact do you see on the housing market as a result of the government’s proposed Federal Budget changes for:
a. First home buyers who can now to contribute part of their super to a housing deposit?
This is a smart move by the government. Given the tax savings it provides, first-home buyers would be crazy if they don't take advantage of it in terms of being able to save for a deposit faster.
b. Older Australians (over age 65) who can downsize and contribute $300,000 of the sale proceeds into super?
This will only have a minor impact, as only a small proportion of retirees using super are likely to take advantage of this move. A bigger impact could have been achieved by relaxing the pensions asset test for pensioners who downsize.
Most of the measures announced in the Budget will have only a marginal impact on their own, but taken together - by helping first homeowner demand and at the same time making way for this demand by cooling investor and foreign demand - they could help boost housing affordability for first-home buyers.
But the main impact will come if the commitment to work with the states to boost supply is successful. All of this will take time, though, and any lasting impact may not be apparent for several years down the track.
The current pullback in shares has been triggered by a range of things and there may be more downside. Shane Oliver explains what investors should keep in mind.