Australia | Oct 28 2010
By Chris Shaw
According to Westpac Bank, any bubble in the Australian housing market is more myth than reality as house prices and affordability issues are reflecting a structural imbalance between supply and demand rather than any pricing bubble.
The bank's chief economist, Bill Evans, notes measures that take into account all dwelling types, after-tax income and financing costs show housing prices have broadly tracked income growth over the past seven years. As well, typical mortgage payments as a proportion of household income are below peak levels.
On a price to income basis Evans notes the all regions national median is 4.3, having ranged between 3.9 and 4.4 over the past seven years. A ratio above 5.0 is seen as indicating severely unaffordable levels.
This compares with figures of a ratio of closer to 7.0 offered by some market commentators, Evans noting the difference is Westpac's measure is a broader indicator. For example, the bank's measure takes into account different price structures for houses and units and a more detailed breakdown of incomes, rather than a simple comparison of median house prices and average income levels.
The other issue Evans has is general price to income levels ignore financing costs, which have changed as the buying power of average household income has risen over the past 20 years. As well, more households are now dual income households.
The supply-demand imbalance is clear in Evans's view, as over the past decade Australia's population is estimated to have risen by 305,000 while the stock of dwellings has only increased by an estimated 105,000.
This shortage is being exacerbated by demographic and social drivers pointing to strong housing demand, as population growth among first home buyer age groups has risen from 0.6% for the 15 years to 2006 to 1.8% annually now. Evans expects growth of more than 1% annually can be sustained over the next 15 years.
New building is forecast to weaken in 2011 as interest rates rises impact, so at best Evans sees the current shortage of housing as being sustained. If net migration remains near current rates, the housing shortfall is likely to rise significantly.
Australia's housing market recorded resilient performance in 2008/09 and this suggests to Evans there was no pre-existing bubble in the market, as this period saw high interest rates, a tightening in credit, job losses, negative sentiment and actual price falls yet the market held reasonably well.
What also dispels the bubble notion, in the view of Evans, is there is little evidence of excessive speculative activity in the market. A disruption to the market from investors selling property appears unlikely as Evans notes property continues to outperform other assets and offers a stable, secure income stream.
Another plus for the market, according to Evans, is most recent first home buyers, those who have entered the market since 2008, have already built up a sizable equity buffer of around 18.8% from house price gains alone. While these buffers are lowest in Queensland and Western Australia, Evans points out these states have the most positive outlook for incomes and job security thanks to their exposure to resources.
Interest rates appear likely to rise through 2011, credit should continue to be constrained and affordability will be below long run averages, according to Evans. As a result he expects Australian house prices will remain broadly steady over the next two years, while over the same period he anticipates household incomes rising by around 7%.
This will improve affordability in the Australian housing market, so setting the basis for higher housing prices in the medium-term. What supports this view is authorities are well placed to cope with any economic shocks, as interest rates can be cut and fiscal stimulus applied.