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Australian and US house prices remain firm

House prices in Australia suffered only about half of the declines seen in the United States during the GFC. They then resumed their climb in 2012, fuelled by cheap debt courtesy of 12 interest rate cuts by the Reserve Bank of Australia since November 2011.

The chart below shows real house prices (i.e. after inflation) in the major capital cities over the past 45 years.

Prices have fallen in each of the major economic contractions, but have generally moved steadily upward for more than a century. Growth in house prices has been driven largely by steady population growth (mostly from immigration) in each of our main cities, a feature that is unique in the world.

Rises softening but support remains

House prices have started to soften in all the major markets over the past year. The local economy is heading for a slowdown with the end of the mining boom and the upcoming end of the housing construction boom, but there are several factors that should provide some support for house prices:

  • Interest rates are low and more cuts are on the horizon
  • Banks remain keen to lend for housing (but little else)
  • There is a seemingly never-ending flood of cashed-up immigrants (and locals) looking to buy here
  • Little risk of high unemployment (eg above 10%) for a while
  • Potential changes to superannuation rules may encourage more investment in the family home, which is likely to remain free from capital gains tax.

The high rise apartment market, however, is another story altogether. In the coming year or so we will probably see many thousands of high rise unit buyers in Melbourne and Brisbane lose money as they struggle to obtain finance to complete their purchases at boom-time prices.

US housing – recovery on track

Readers often ask why I pay so much attention to bond markets. One reason is that they are critical to the US housing market (unlike in Australia) and that in turn is an important driver of the US economy, which is still the engine of world growth and investment markets.

The US housing finance bubble was the underlying cause of the ‘sub-prime’ crisis that triggered the deepest US and global recession since the depression of the 1930s. It is also central to US economic recovery. House prices across the US more than doubled during the 2000s boom but then crashed by more than one third on average in the bust, with many cities suffering declines of 60% or more. Prices have been recovering steadily since early 2012. The key has been mortgage interest rates, which have come down from 8.5% in 2000 to below 4% since 2012.

Most Australian mortgage interest rates are variable and driven by short-term interest rates, so mortgage borrowers here are directly hurt by cash rate hikes. But the US market is different. Most US mortgage rates are fixed for up to 30 years and linked to long-term bond yields.

Because of this, as the Fed raises short-term rates in the coming years, long-term bond yields (and with them mortgage interest rates) may stay relatively low. Even when economic growth and inflation rates do rise (which they surely will in time), there is a good chance that each Fed rate hike will dampen expectations of future inflation and work to keep long yields relatively low.


Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities.


Brett Edgerton
September 15, 2016

To preface my comment, this is a general comment about our housing markets and it is not specifically meant to contradict or argue against Ashley's article.

I would simply make the point that the price falls in Australian markets were coincident with the GFC, not due to it. Look at the graph for Sydney 2003 to 2009 - a cause and effect relationship is certainly not present there. It is my strong belief that the GFC had a net positive effect on the housing market (or most markets - the obvious exception is the more international Gold Coast market) over what would have happened if the GFC did not provide the government with the political cover to protect from popping what was clear to the regulators a housing bubble presenting significant risks to financial stability (as was shown by recent FOI investigations).

That is what is concerning about the RBA under Glenn Stevens in recent years - understanding those risks, but still turning to reinflate the bubble once they realised that they had severely underestimated the longevity of the resources boom. (And in the complete absence of other growth drivers... perhaps an economic contraction was worth the price of preventing a much greater one once the housing bubble pops, even if our politicians could no longer brag at the G20 about how our economy is the envy of the world!)

At least enough dwellings have been built this time - mostly apartments - to ensure the end of affordability issues for young Australians. Others can draw their own conclusions on what channels this will occur through... nonetheless, I do prefer to think positively about people, and I recall Glenn saying on a number of occasions what a pity it was that the housing "boom" was not accompanied by more building to affordably housing our people... perhaps he leaves his post with some small degree of satisfaction in that regard...

Still I think it is wise to consider the non-trivial possibility of a disorderly unwind to our housing bubble in all risk management strategies... One can listen to the purveyors of confidence and fairy dust - and allow themselves to be blinkered - or maturely consider all risks and adjust their strategy as they themselves deem necessary...


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