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Is Australian housing in crisis?


The Australian housing story over the past three years has been characterised by phenomenal dwelling price growth, record housing debt and booming asset values, particularity in Sydney and Melbourne. This has crowded-out first home buyers from the market.



The significant build-up of housing debt has led to heightened concerns over the risks to financial stability which led to a further tightening of macro prudential policy towards investor lending and interest-only loans by the Australian Prudential Regulation Authority.

In this video, Diana Mousina, Economist, Multi-Asset Group, AMP Capital explores the issue of housing affordability in Australia and highlights the role of the Federal Budget in seeking to address some of the key concerns. We also provide an outlook for the residential property market.

Housing affordability is a long-term challenge

The government’s focus on affordability is a step in the right direction. The proof, however, will be on whether the issues are resolved over the long term. Nevertheless, the broad set of issues facing the housing market (tightening of macro prudential policy lifting interest rates, a surge in new supply, particularly for apartments, and the pending housing package) should put downward pressure on dwelling price growth and after many years of very strong price gains we expect to see some moderation in prices. 

As the Reserve Bank of Australia starts to hike rates (potentially late-2018), we expect a 5-10% pullback in property prices. But there will be wide variations across the states, with apartments in Sydney, Melbourne and Brisbane at greater risk given very high levels of construction.

What does this mean for investors?

There is an important long-term role for residential property in investor’s portfolios, but the current state of play in the market would warrant some caution. Residential property remains expensive on the metrics and rental yields are low (at 2% or less). As such, investors are very dependent on capital growth.

There are variations across the states. Sydney and Melbourne are looking very overvalued but the other capital cities have not had such a large run-up in prices, with prices even declining in some states (e.g. Perth). It is best for investors to focus on areas that have lagged the housing price boom. Investors also should allow for the fact that they already likely have a high exposure to Australian housing – as a share of household wealth it’s around 60%.

Final thoughts

The focus on risk management around housing is critical, given the high position housing has in consumer balance sheets and the significance of Australian banks in the sharemarket; a focus on affordability issues is also just as pressing.
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