Introduction

A pick-up in the housing sector was a necessary part of the adjustment in the Australian economy following the end of the mining boom. The RBA started cutting interest rates in 2011, home buyers returned, home prices rose and this has all encouraged a dwelling construction boom that has helped offset the mining investment slump. However, as always the surge in home prices has refocussed attention on whether there is a property bubble and how it might end.

Analysing the Australian residential property market is a bit like Groundhog Day as the big picture fundamental issues don’t really change much in that Australian housing is expensive, affordability is poor, household debt is high and there is a constant debate as to whether there is a crash around the corner. This has been the case ever since 2003.

So quite clearly the issues around the property market are much more complex than many would see them. This note takes a look at where we are now in the Australian residential property cycle and implications for investors.

Overvalued with too much debt…

At a big picture level it’s hard to get away from the view that Australian property is expensive and household debt is high:

Source: ABS, AMP Capital

The shift to overvaluation has come higher household debt. The next chart shows the deviation in house prices from their long term trend against the ratio of household debt to income.

Source: ABS, RBA, AMP Capital

Naturally all of this has led to concern that Australia is in a housing bubble that will inevitably burst.

…but not as simple as it looks

However, it’s not as simple as this:

Source: ABS, AMP Capital

Source: CoreLogic, RP Data, AMP Capital

Despite all these qualifications, high house prices combined with high household debt to income ratios suggest Australia is vulnerable should something threaten the ability of households to service their mortgages. As such the RBA and APRA have been right to try and slow the property market down

So where are we now?

Our assessment is that the national property market is cooling.

Source: Australian Property Monitors, AMP Capital

However, this slowdown is likely to be concentrated in Sydney & Melbourne, which are likely to see price growth slow to around 5% over the year ahead. Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind. Hobart & Adelaide are likely to see continued moderate property growth, but Brisbane may start to pick up a bit.

Nationwide price falls are unlikely until the RBA starts to raise interest rates and this is unlikely before 2017. And then in the absence of a recession or rapid interest rate hikes price falls are more likely to be 5-10% as was seen in the 2009 and 2011 down cycles than anything worse. In fact, the cooling in investor demand in Sydney and Melbourne are likely to provide greater flexibility for the RBA to cut interest rates again.

What to watch for a harder landing?

I would nominate the following:

Implications for investors

There are several implications for investors:

Source: Bloomberg, REIA, AMP Capital

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.