Right. My turn. I’m going to weigh in on the shambles that is the Australian housing market.
My colleague over at Markets and Money, Greg Canavan, wrote about it on Thursday. Do yourself a favour and go read Greg’s piece.
Now, from all accounts, this topic has smacked the mainstream media in the last couple of weeks.
60 Minutes did a report about it on Sunday. The Age ran it as a major headline on their website. Even the Herald Sun squeezed in something about it in between ‘Supercoach’ and showbiz ‘news’.
It’s everywhere right now. So what’s my take on it?
Aussie property is in a current state of denial. Denial there’s a problem. Denial about the dark times ahead. Denial that it’s all going to come crashing down — but it’s just a matter of time.
On one hand you’ve got young Australians that can’t get into the property market.
On the other hand you’ve got older Australians sitting on very expensive properties.
These younger people are the kids of the older ones. And the older people see their kids struggling. And, as we all know, the great Aussie lie — sorry, I mean ‘dream’ — is to own a home no matter the cost.
But can your average Aussie afford property anymore?
After all, APRA data show that total bank exposure to residential mortgages is $1.19 trillion. $462 billion were interest-only loans — that’s 38.8%.
There are usually only two reasons you get an interest only loan:
- You can’t afford to make higher capital repayments;
- It’s an investment property, and you’re negatively gearing.
In terms of point one, if you can’t afford repayments with interest rates this low — then if rates move higher, you’re stuffed.
If you’re negatively geared, what happens if you can’t anymore? What’s the point then?
If you can’t afford to maintain your repayments, you’ll sell your property. But the price you’ll want is so high that it’ll be beyond the reach of most. Or they get interest-only loans to finance it, magnifying the problem in the first place.
And if rates ever rise, it will all come crashing down.
When 142% gains are no good
CoreLogic RP Data is fully of interesting figures.
There are 3,800 suburbs in Australia. At the end of 2015, there were 530 suburbs with a median value of over $1 million. That’s about 14% of the country.
Furthermore, 60.3% of all home sales were between $400,000 and $1 million in 2015. 18.3% were over $1 million.
Compare this to 1995, when 95.2% of all capital cities houses sold for less than $400,000. Just 4.4% sold between $400,000 and $1 million. 0.4% sold for more than $1 million.
% of annual capital city home sales by price point over time
|Source: RP DataClick to enlarge|
Clearly, this dramatic increase has almost solely taken place over the last 15 years. As property prices have unnaturally taken off — riding the back of increases in wages and the commodities boom — it’s become the single most important factor in peoples’ investment psyche.
However, something just isn’t making sense for me.
The REIV says median house prices in Melbourne, for the December quarter, were $718,000. In 1995, median prices were at $129,000.
The ABS says the ‘Full-time adult average weekly ordinary time earnings’ is $1,499.30. Or, $77,963.60 a year. In August 1995 the same earnings were $654.20. Or, $34,018.40 a year.
Now, simply taking the average annual salary in 1995 you can see the median house price was around 3.79 times salary.
In 2015, it’s 9.20 times…
Therefore (little bit more maths), the average earnings has increased around 2.29 times in 20 years. Meanwhile, the median house price has increased 5.56 times.
See where I’m going here? Increases in house prices have outstripped the pace of wages growth by a whopping 142%.
Let me make this very clear. This is an unsustainable trend.
If things were ‘normal’ then the median house price should be around $295,482. You probably think that sounds absolutely bonkers — but that’s exactly what’s wrong with things now. There’s a delusional, distorted view of what ‘normal’ is.
It can’t continue like this. One of two things has to happen.
- Wages increase at breakneck speed over the next 20 years to return things to the ‘real’ normal. That’s clearly not going to happen;
- Property prices must readjust to reflect wages.
Now the 20-year window here is significant too. In 20 years (don’t take this the wrong way anyone), a vast majority of the baby boomer generation will be dead.
The youngest of baby boomers is now 52. The oldest is now 70. Those not already retiring…will be soon. So here’s the news, you’re unlikely to get a pay rise in retirement. Your income, more than likely, will fall over time.
You wouldn’t want to own any properties with outstanding mortgage loans.
There is no wealth transfer, just pain transfer
The economy is in struggle-town. You can thank the end of the mining boom for that. Younger Australians are stepping into a very difficult jobs market. That means for many young Aussies there will be very low wages growth. Certainly nowhere near the unsustainable increases in house prices.
As reported in The Guardian on Wednesday,
‘Wages of Australian workers have grown at their weakest rate in almost two decades, adding weight to the perception that incomes are falling behind the cost of living.’
There’s no ‘perception’ here. The reality is wages growth is way behind property price growth. And it’s all about to cause havoc.
Wages growth, according to the ABS, was 2.2% last year. Meanwhile, the weighted average increase in residential property was 10.7% for the year.
Sorry, hang on a second. Wages grew by 2.2% yet property grew by 10.7%… hmmm?
Does this sound sustainable to you?
This might sound a bit cold but what happens to the property market when the baby boomer generation does ‘fall off the perch’? If you are fortunate enough to own your house, what happens then? The kids just move in? What if you’ve got two kids, with two families? Or three kids…or four even?
I guess the property goes to market. But when a flood of properties goes to market — and there’s not enough people to buy said properties — that’s what we call an oversupply problem. And that, my friend, drives down prices.
And what of those investment properties you might have? The ones that are 100% geared on interest-only mortgages. Who’s going to pay the debts on those? The kids? With record low wages growth, will they be able to afford the loan repayments? What do you think? Yeah, me neither.
So I guess the property goes to market. Or gets repossessed.
Here’s a news flash for anyone young enough: there’s no ‘transfer of wealth’ coming from the baby boomer generation. It’s a transfer of trouble, debt, and properties on the market.
What’s the outcome here? Prices will crash. Maybe not for a couple of years still, but the elastic is stretched and pretty close to breaking point. It might even be a ‘Long Bust’ as Vern Gowdie believes. He just might be right.
If you’re young and can’t buy a property where you want, here’s my advice. Save; save like a demon. And be patient. It will all come crashing down soon enough. The moment it does, that’s when you’ll want to pounce.