In today’s Money Morning…why the sceptics are always wrong about house prices…stopping the crash at any cost…our crazy property bubble may still have legs yet…and more…
It’s funny to think that this time last year the property market was on tenterhooks…
Waiting to see just how much house prices would be wiped out by the pandemic’s economic onslaught.
How foolish we were, huh?
The housing crash that was predicted never arrived, as seems to often be the case in this country. Proving once more just how resilient or absolutely insane our property market is. Depending on which side of the argument you lean towards…
Personally, I err on the side of caution when it comes to property.
I think the fact that average house price figures rose at their fastest rate in 32 years during the month of March is a telling sign as to just how hot the market is. With CoreLogic reporting a 2.8% rise in their home value index for last month.
That kind of growth, in the midst of a broader slowdown in GDP, is a little worrying.
But it certainly isn’t all that shocking either. Not when we’ve got our RBA governor pumping the market with talk of low rates ‘til 2024. And if the central banks’ latest statement is any indicator, it seems they’re happy to let the mania run a little wild for a little longer:
‘Housing markets have strengthened further, with prices rising in most markets. Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers. In contrast, investor credit growth remains subdued. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.’
So, is the property bubble set to burst, or is this just the latest chapter in our never-ending housing dilemma?
Why the sceptics are always wrong about house prices
Historically, accurately calling a house price crash in Australia has been near impossible.
Over the past decade or so, we’ve seen plenty of pundits and speculators comment on the matter. Always attracting plenty of attention in the media because housing affordability has long been a contentious topic.
However, rarely are these predictions correct. With arguably no real ‘crash’ in the property market yet to be seen. At least, not to the extent of the most pessimistic commentators out there.
We have certainly seen pullbacks and ‘soft landings’ in recent years, just no real crash.
And this, in my opinion, is precisely why we’re seeing such rabid FOMO (fear of missing out) once more. Because as recent history suggests, property is the one asset Australians can’t get enough of.
What’s more, it seems first home buyers are the ones driving demand in this recent price run-up. With lending to this demographic undergoing a sharp rise over the past year. Aided by generous incentives and record-low interest rates.
Just take a look at this graph showcasing the average size of first homeowner loans:
Source: Sydney Morning Herald
The clear, and very apparent, rise in 2020 and 2021 is stark. Especially for those living in New South Wales, no doubt led by Sydney.
It is precisely these kinds of outliers in demand that keep propping up housing prices. With the boom in international investors being another noteworthy outlier of the past.
Point is, no matter how bad the economy seems to get, owning a home in Australia is a popular dream.
Not that anyone can really blame them for these dreams. After all, owning your own home is something most people aspire to. So why wouldn’t these younger buyers jump at the chance to snap up their own piece of paradise?
No, the real issue is what may become of these exorbitant loans once interest rates begin to rise. Because, even if the RBA holds off on rate rises ‘til 2024, many of these new mortgages will be paid off well beyond that date.
Which is precisely why the RBA has stated it will be ‘monitoring trends carefully’. Because even they know that a wave of defaults is a potential long-term risk to be wary of.
As for whether they’ll actually intervene, well, that’s another matter entirely…
Stopping the crash at any cost
I believe the most telling revelation to come out this week about the RBA’s policy future wasn’t even from the RBA.
Rather, it was the fact that Josh Frydenberg held talks with both the RBA and APRA — apparently discussing the issue of these rapidly rising house prices and what, if any, measures they may pull out to ease it.
As The West Australian reports:
‘“Right now, when I spoke to the head of APRA and the Reserve Bank governor, they have monitored the housing market closely and they are comfortable where it is at,” he told ABC radio on Wednesday.’
With Frydenberg later adding:
‘The fact interest rates are historically low is giving an opportunity to first homebuyers to come into the market.’
And herein lies the problem — the fact that Frydenberg, and by extension the government, don’t see this lending bonanza as a problem. In fact, I’d wager that they’re banking on it as an election drawcard.
Because at the end of the day, house prices and affordability have always been a popular election issue. Something that I’m sure both parties would love to weigh in on come next year.
My concern is that most of the time this political talk about housing is simply posturing. Both parties tend to conflate the property market with the economy as a whole.
But then again, so do most Australians…
Which brings us to the heart of the matter for investors. Is it too late to cash in on this crazy property boom?
Short term, I would say probably not. Because while I do think this rampant lending may cause headaches down the road, right now it is fueling demand like crazy.
On top of that, I’d be surprised if the RBA or APRA step in to stop said demand. Because as Frydenberg has made clear, he clearly wants this demand. And I doubt Lowe — or any other regulators for that matter — will risk their skin to defy him.
After all, even if they did, we’ve seen the government be more than happy to rollout new policies to support lending recently. A position that will likely stay in place in the lead up to the election if they deem it necessary.
So, our crazy property bubble may still have legs yet.
The only consideration is whether investors are game to chase it.
Editor, Money Morning
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