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Will house prices crash?

Apart from “what will home prices do?" and "where are the best places to buy a property?" the main debate around the Australian housing market has been about poor housing affordability, occasionally interspersed with a scare that home prices will crash. The most recent example of the latter was on 60 Minutes last week with a call by US demographer and economist Harry S Dent that Australian house prices could fall “as much as 50% in the coming years”. But how serious should we take forecasts for a crash? And more fundamentally, how do we fix affordability?

Basic facts on the Australian property market

The basic facts regarding the Australian housing market are well known:

First, after strong gains in home prices over many years, it’s expensive relative to income, rents and its long-term trend and by global standards.

Second, flowing from this, housing affordability is poor:

  • The ratio of average dwelling prices to average wages (red line in the next chart) & household income (green line) has doubled since 2000.


Source ABS, CoreLogic, AMP

  • The time taken to save for a deposit has roughly doubled over the last 30 years from five years to more than 10 years.


Source: ABS, AMP

  • The portion of income needed to service a mortgage has hit an all-time high, thanks to the combination of the high price to income ratio and the sharp rise in mortgage rates starting in 2022.

Third, the surge in prices has seen our household debt to income ratio rise to the high end of OECD countries, which exposes Australia to financial instability on the back of high rates and or unemployment.

These things arguably make calls for some sort of crash seem plausible.

Crash calls for Australian property are nothing new

US commentator Harry S Dent’s forecast for an up to 50% fall in property prices is nothing new. Calls for an Australian property crash – say a 30% or more fall - have been trotted out regularly over the last two decades.

  • In 2004, The Economist magazine described Australia as “America’s ugly sister” thanks in part to a “borrowing binge” and soaring property prices. At the time, the OECD estimated Australian housing was 51.8% overvalued.
  • Property crash calls were wheeled out repeatedly after the GFC with one commentator losing a high-profile bet that prices could fall up to 40% & having to walk to the summit of Mount Kosciuszko as a result.
  • In 2010, a US newspaper, The Philadelphia Trumpet, warned: “Pay close attention Australia. Los Angelification (referring to a 40% slump in LA home prices) is coming to a city near you.” At the same time, a US fund manager was labelling Australian housing as a “time bomb”.
  • Similar calls were made in 2016 by a hedge fund: “The Australian property market is on the verge of blowing up on a spectacular scale…The feed-through effects will be immense… the economy will go into recession".
  • Over the years, these crash calls have periodically made it on to Four Corners and 60 Minutes. The latter aired a program called “Bricks and slaughter” in 2018 with some predicting falls of as much as 40%.
  • And Harry S Dent was regularly predicting Australian property price crashes last decade that didn’t occur.

Why a crash is unlikely?

Of course, a crash can’t be ruled out, but as I have learned over the last two decades the Australia property market is a lot more complicated than many “perma property bears” allow for.

First, the property market is not just a speculative bubble fuelled by easy money and low interest rates. Sure low rates allowed us to pay each other more for homes but the key factor keeping them elevated relative to incomes has been that the supply of new dwellings has not kept up with demand due to strong population growth since the mid-2000s and more recently with record population growth resulting in an accumulated shortfall of around 200,000 dwellings at least but possibly as high as 300,000 if the reduction in average household size that occurred through the pandemic is allowed for. This partly explains why property prices have not collapsed despite the threefold rise in mortgage rates since May 2022.


Source: ABS, AMP

Second, the property market is highly diverse as evident now with strength in previously underperforming cities like Perth, Adelaide and Brisbane but weak conditions in Melbourne, Hobart and Darwin.

Thirdly, Australian households with a mortgage have proven far more resilient than many including myself would have expected in the face of the rate hikes in 2022 and 2023. This is evident in still relatively low mortgage arrears (of around 1% of total loans). This may reflect a combination of savings buffers built up through the pandemic including in mortgage pre-payments and offset accounts, access to support from the ‘bank of mum and dad’, the still strong jobs market allowing people to work extra hours and an ability to cut discretionary spending (suggesting definitions of what constitutes mortgage stress may be overstating things). Of course, arrears are starting to rise as these supports recede, so the continuation of this resilience should not be taken for granted.

Finally, the conditions for a crash are not in place. This would probably require a sharp further rise in interest rates and/or much higher unemployment. Sharply higher interest rates from the RBA are unlikely as global inflationary pressure is easing and global central banks are now cutting. Our inflation and rates went up with a lag versus other countries and are likely to follow on the way down. Higher unemployment – with jobs leading indicators pointing to less jobs growth – is the biggest risk though.

So, a property price crash is a risk, but would likely require a deep recession. Our base case for average home prices remains for modest growth ahead of a pick-up after rates start to fall.

What can be done to boost housing affordability?

Of course, a house price crash would improve housing affordability – but it’s also a case of “be careful of what you wish for” because a crash would likely also come with a deep recession and sharply higher unemployment which could see many lose their homes along with a hit to incomes. However, improving housing affordability is critical as its long-term deterioration is driving excessive debt levels and increased mortgage stress and contributing to a fall in home ownership (the blue line in the first chart). Of course, other factors have also driven falling home ownership since the 1960s including people starting work and family later in life, a decline in perceptions that owning a home is necessary for security and growth in other forms of saving beyond housing. But worsening affordability is likely a big contributor and falling home ownership due to this is something we should be concerned about as its contributing to increasing inequality and if it persists it could threaten social cohesion.

So, beyond crashing home prices, what can be done to boost housing affordability? My shopping list includes the following:

  • Build more homes - relaxing land use rules, releasing land faster and speeding up approval processes, encourage build to rent affordable housing and greater public involvement in provision of social housing.  The commitment by Australian governments to build 1.2 million homes – backed up by incentives and strong moves by at last NSW and Victoria over five years starting from this financial year is a welcome and big move down the path to boost supply. So far though approvals and commencements running at around 160,000 to 170,000 homes annually are well below the implied 240,000 target.
  • Refocus on building more units – we will need more units (which are lower cost) than houses in the mix. The only time we consistently built more than 200,000 homes per annum was in the unit building boom of the 2015-19 period. Back then unit approvals were around 50% of total approvals whereas they are now about one third.
  • Slow down infrastructure spending – home builders are now regularly complaining about the difficulty in building apartments. Apart from issues around approvals, much of this relates to cost blow outs and labour shortages and beyond the disruption caused by the pandemic an ongoing driver is the competition for resources from booming public sector infrastructure projects.


Source: Macrobond, AMP

  • Match the level of immigration to the ability of the property market to supply housing - we have clearly failed to do this since the mid-2000s and particularly following the reopening from the pandemic, and this is evident in the ongoing supply shortfalls. Of course, we need to be careful to not over-react with the crackdown on student visas and numbers risking a lasting negative impact on our education sector which is our biggest export earner after iron ore and energy.
  • Encouraging greater decentralisation to regional Australia – this should be helped along with appropriate infrastructure and of course measures to boost regional housing supply.
  • Tax reform - including replacing stamp duty with land tax (to make it easier for empty nesters to downsize) and reducing the capital gains tax discount (to remove a distortion in favour of speculation).

Policies that won’t work, but are regularly put forward by populist politicians as solutions to poor affordability, include: grants and concessions for first home buyers (as they just add to higher prices); abolishing negative gearing (which would just inject another distortion into the tax system and would adversely affect supply), although there is a case to cap excessive use of negative gearing tax benefits; banning foreign purchases altogether (as they are a small part of total demand and may make it even harder to get new unit construction off the ground); and a large scale return to public housing (as a major constraint to more units is excessive costs and delays, and just switching to public housing won’t fix this).

 

Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.

 

15 Comments
Luke
September 02, 2024

One marginal bid issue is do we know why so many immigrants on freshly minted PR are hoarding investment properties across the country. I fear they will cash in and run off with the funds back to their home country and planning to not lodge the taxable capital gains. Land value tax now is the solution. The local holiday home owners must be sacrificed.

SMSF Trustee
September 03, 2024

Any actual evidence that this is happening? Contributions to this newsletter are more helpful when they are well-argued and well-supported with data, rather than just throwing unsubstantiated insinuations out there.

Dudley
September 02, 2024

Allow real interest rates to arise.
Resulting in decreased spending, increased saving.
Resulting in more humans per home, especially the Bunk of Dad & Mom.
Resulting in reduced demand for homes & mortgages.
Resulting in reduced home prices.
Resulting in more cash only purchases of homes.

All for the want of a decent interest rate.

GeorgeB
September 04, 2024

Totally agree that interest rates in this country have been far too low for too long. No amount of sugarcoating or scapegoating will change the fact that this has been the main driver of housing unaffordability and was made worse by the reserve banks shenanigans when covid hit. Its economics 101 that when real interest rates fall to zero or negative territory borrowing capacity skyrockets as it did and drove asset prices with it.

Peter C
September 02, 2024

The other problem with expensive housing (and related expensive rent) is that too much is spent on housing costs leaving not enough to spend on other things.

One significant side effect is the baby strike amongst our young people .

You cannot bring children into this world if you cannot pay to look after them. If you are spending the majority of your take home pay to housing, and a reasonable portion on essentials such as food. utility bills and insurance, there is not much left to have and pay for the upbringing of children.

In previous generations it was the lower socio-economic populace that had the most children. Today the wealthier you are, the more likely you are to have more children.

We are in the middle of a demographic time bomb and yet we do nothing to reduce the costs of the people that have and want children, ie the young. The easiest way to help young parents and potential parents is to reduce housing costs.

Sean
September 01, 2024

Politicians have just delivered what the voting population has wanted due to a love affair with property as an investment not a roof over their heads. Once we change this perception the politicians will actually do something meaningful rather than just constantly adding to demand with new grants etc.

Stephen Wong
August 30, 2024

We are an intelligent society in Australia. It is below our dignity to create simple problems. Hence we have created an intelligent problem for which we have no answer and tied ourselves in knots.

Andrew Maroc
November 25, 2024

This is an excellent comment. But their is an answer that is obvious - what cannot go on won't go on......net result will be ugly.

CC
August 30, 2024

a miserable failure of government policy on numerous fronts

Peter taylor
August 30, 2024

Rising population and ballooning private and goverment debt has meant some Re winners but not all. We are transitioning from home ownership to renters of flats like in other crowded countries.
The unknown is how much more debt can our goverment rack up on behalf of taxpayers or couldvthe debt bubble burst in the USA.
The good news is those not winners are sucking it up with little protest. When attorney General christen porter has 1 million deposited in his blind trust account it gives a glimpse as to the extent and height if influence on goverment policy and bushes suspect the 1 million didn't come from a first home buyer.

Garry
August 30, 2024

Negative gearing should be restricted to either new builds as Labor were going to do (good policy) or restricted to the earnings from the investment.
Buying an existing house and being able to negatively gear already creates distortion by favouring investors over people buying a house to live in.

Keith
August 29, 2024

What a predicament we have. The cost of land, materials & labour involved to build a dwelling is simply out of reach for the Average wage earner & impossible for the Median wage earner. A lot of first home buyers could be our essential workers including Police , Nurses, Fire Fighters, Paramedics, school teachers etc ..which in their early years are barely getting $100k PA ……most are getting Less.
Given that banks usually lend 4/5 times salary ……would equate to a loan of maybe $500k . What can you buy with that.
And forget partnered wages….since when a baby arrives ( and we do need to breed) the sole income earner has the money feeding 3 mouths.
Basically , we can’t build dwellings at a price point that most 1st home buyers can afford…..unless they’re tiny little dumps in no man’s land.
My guess is home prices will drop back maybe 10- 15% …then plateau while wages catch up.
The wealthy cashed up buyer will NOT be looking to live in cheap suburban ghettos either. And as for Rents….you can usually only Rent for no more than 30% of gross income & for those in the Median income of $70k & Average income. $94k …that would equate to about $400 to $600 per week rental income on a property worth around the Million mark . Investors won’t want that…..and the next boom could be ages away , if at all.
It’s a different market for the Top End …..but they’re a small % of the market.
Not a good situation is it.






Dr David Arelette
August 30, 2024

All the logic is true - however, my great grandfather met Mark Twain in Melbourne in 1895, and came away with the advice to "buy land as they are not making it any more" - I purchased my first house in Noorong Avenue in Bundoora in 1977 for $45,000 on a salary of $10,500, yes I have seen relatively short periods when super crazy prices fell back somewhat, but Dr Maslow's base need for security and shelter underpins the supply and demand equation at work in the home price ever positive movement.

Disgruntled
September 02, 2024

There are many suburbs in the Capitals and then you have the regional areas. Some areas will do well, some won't do as well.

No Government wants property prices to fall too much. Affordable housing policies are not about making property cheaper but about making it possible for some to be assisted to buy what is unaffordable to them without that assistance,

This supports high prices and in some areas actually promotes higher prices.

Home ownership is in decline as affordability for many is becoming out of reach, in certain age groups the decline is large. Some have even given up on ever owning a home and have taken the live for now attitude.

The more expensive the property the smaller the pool of buyers for that property. More buyers for >$1M homes than than for <$3M

I currently rent but look at the $2M to $3M market as I am intending to buy when I retire at 60 and can access my Superannuation. Houses in this price range are often on market for a long period of time. One recently had a price drop from the $2.95M to $3.15M price range to $2.4M to $2.5M price range, motivated vendor....

Without significant wage growth and or an influx of wealth immigrants, I see property prices in those price ranges struggling for the sort of capital gain owners have been used to.

Further down the track, supply/demand ratio could switch to high supply and low demand (10 to 20 years?)

This same 10 to 20 year time frame is also going to see Baby Boomers and GenX dropping dead leaving inheritance to children. If that money is split between 3, 4 or more children, will they bother or just buy toys?

Prices in South Yarra, Brighton etc fell by as much as 30% in hard times... So large falls are not out of the question in the future. On average though I'd expect a smaller correction and a longer period of subdued growth or even no growth (loss adjusted for inflation)

Dane
August 29, 2024

Perhaps the reason RBA is trying to preserve low unemployment at the expense of inflation.. highly indebted households. Article presents a strong argument house prices won't crash. But I was always taught trees don't grow to the sky. Is it feasible that debt/disp income could double from here? How high can banks go on multiples of income they are willing to lend? Preface all this by saying I've no idea how this plays out..

 

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