In 2017, the Collins Dictionary & # 39; s Word of the Year was infamous "fake news" by then-US President Donald Trump. With real estate being Australia's most popular asset class, some commentators find it easier to gain attention by engaging in controversies and alternative facts. Titles like "bricks and slaughter" come to mind. While 2021 has seen record real estate prices and borrowing, the usual suspects will no doubt shift the conversation to a real estate bubble sooner or later. Today we're going to take a look at some of the most common claims about whether Australia is in the middle of a real estate bubble.
The Australian real estate market?
First, let's put ourselves in perspective by defining the Australian real estate market. Australia is one of the most urbanized countries in the world. So urbanized, in fact, that 40 percent of our entire population is found in the major cities of Sydney and Melbourne. To put this in perspective, 25 percent of Canadians live in Toronto or Montreal, 21 percent of the UK live in London or Manchester, and only 4 percent of the US live in New York or Los Angeles.
Sydney and Melbourne are not only the most populous parts of the country. They are also the location of the greatest concentration of expensive homes. Although 40% of home sales over the past decade have been in Sydney and Melbourne (according to ABS data), cities contain an even higher proportion of the nation's home values. Think of it this way: the median house price in Sydney is almost double that in Perth. This means that although Sydney has 2.3 times the number of homes Perth owns, it has around 4.3 times the combined price of homes.
How does it work mathematically? If Sydney's median house price fell by just one percent, Perth's would have to rise 4.31 percent to offset the national figure (assuming for the purposes of this exercise that all other markets remain unchanged). If Perth grows in place of, say, 3.5%, then the headline story would be "declining national housing values". Although the only market that saw a decline in value was Sydney.
This hypothetical scenario has actually played out in different ways recently. After Sydney passed its peak in 2017, the total value of Australia's housing stock began to decline despite regional housing prices in Victoria, Brisbane and Hobart rising. The same was true for adjoining dwellings in a number of markets.
Not all markets in a country act the same
What we have discussed so far clearly raises the problem of tarring an entire country with the same brush. It's not just a problem in Australia. Even during the most infamous housing bubble in generations – the subprime mortgage crisis in the United States – the markets behaved in stark contrast to each other. At one end of the spectrum, you have Miami. This market has followed the story pretty well. There, the house price index skyrocketed between 2004 and 2007, only to then drop. Since then, prices have recovered and passed the top of the bubble. New Haven (fame at Yale), however, did not experience such significant growth before the GFC, but still has not fully recovered from the crisis. On the other end of the spectrum, Austin experienced little more than a speed bump during the crisis and has since outperformed the other two markets.
In the case of Australia, exponents of the housing bubble typically identify one or a combination of the following: increasing levels of household debt, price / income ratios, price / income ratios rent and price per square meter. Let's describe some of them in more detail.
Household debt
According to OECD statistics, Australia has the fifth level of household debt as a percentage of net disposable income of participating countries. We are behind Denmark, Norway, the Netherlands and Switzerland. Not far behind us are South Korea, Luxembourg, Sweden and Canada. A number of these countries were featured in a 2020 report compiled by the RBA, exploring the various causes of the growth in debt-to-income ratios. These include income growth, financial deregulation, interest rates, the age structure of the population, as well as homeownership rates.
I have spoken before about the relationship between financial deregulation, income and interest rates when it comes to the future of the Sydney real estate market. In this article, therefore, I want to delve a little more into homeownership. This has been a hot topic over the past few years, serving as a catalyst for the debate over negative gears in the recent federal election. The Labor Party's argument was that the negative report made it harder for homeowners to compete in the market, thereby putting downward pressure on homeownership rates. This argument does not stand up to scrutiny. At PropertyAnalyst.net, I compare homeownership rates between multiple jurisdictions via an interactive table. You will notice that a reduced proportion of private landlords are generally replaced by social housing rather than a noticeable increase in home ownership. Apart from that, the rise in residential real estate investment funds offers institutional investors the opportunity to bypass these types of government policies – which means that once again, the losers are the real estate investors of Canada. 39; entry level, mom and dad. Take the UK for example, where house prices recently hit record highs despite constraints on tax breaks for direct property investors.
If we are to compare the levels of household debt in Australian capital cities, the differences between them are greater than the difference between Australia and many other developed liberal economies. According to the ABS Income and Housing Survey 2017-2018, the average level of household liabilities was $ 270,800 in Perth. It was just $ 118,700 in Hobart. Since the differences in disposable income between the two cities are not as large, the result is a considerable disparity in the ratio (which you can see in the graph below). Diving Perth and Hobart into the same general commentary on Australian household debt hardly makes sense from a real estate investor's or homeowner's perspective.
Housing affordability
It’s no secret that house prices in parts of Australia have skyrocketed in recent years. In 2015 and 2016, the historically working-class suburbs of western Sydney were slightly above the median house price threshold of $ 1 million and more and more people began to wonder if Australian homes were unaffordable. The main international measure of housing affordability is known as the price-to-income ratio. This is a simple division of the median house price by the median annual household income. If the median house price is six times the median annual household income, the price-to-income ratio for that region is six. The higher the price / income ratio, the less affordable housing is considered. Although this seems like a simple calculation, it is sorely misunderstood. This has led the OECD to commit to offering these statistics at the regional level from 2020, its reasoning being that there are significant variations between markets within the same country.
Australia is a classic case of price-to-income ratios varying widely between suburbs, cities and regional markets. For the purposes of this analysis, let's compare Sydney's eastern suburbs to the housing price-to-income ratio in Australia on the night of the 2016 census. East Sydney is an interesting area. It's known throughout the county as the birthplace of Australia's wealthy elite – with names like Malcolm Turnbull, Justin Hemmes, the duo Kyle and Jackie-O, as well as (formerly) James Packer. However, it is also home to a multitude of millennials, college students, and backpackers. Despite the diversity, most of Sydney's eastern suburbs have some of the most expensive and in-demand accommodation in the country. In the Vaucluse, you would expect to part with over $ 5 million to buy the middle house in this suburb. In 2016, at the last census, that figure was closer to $ 4.5 million. At that time, the suburban price / income ratio for houses was 31.6, compared to 7.2 for Australia. For comparison, I have included a few neighboring suburbs in the table below.
What is unique in the suburbs is, are the significant levels of personal wealth within some of these households, which means that the median income is not as effective as the distribution of wealth in determining l affordability of housing in this region. In addition, houses represent a considerable premium over apartments in these areas due to the stark contrasts between these two types of accommodation (you don't compare a fibro chalet with an apartment, you compare a mansion with an apartment). The occupants of each type of property will differ considerably in the distribution of income and wealth. Much like the eastern suburbs, many other Australian streets, suburbs, regions and states have unique characteristics that influence price-to-income ratios without necessarily reflecting housing affordability.
East Sydney serves as a cautionary tale of the limits of house price-to-income ratios. After all, the median household doesn't buy the middle house in many parts of Australia. In the case of eastern Sydney, almost half of all homes are rented and a quarter are held with a mortgage. Despite extremely high price-to-income ratios, mortgage stress was lower in this area than the national average. What do all these numbers mean? The large variation in wealth and income in this area distorts the ratio of house prices to income beyond all that is significant.
So, is there a real estate bubble in Australia?
There are certainly pockets of Australia pushing house prices into bubble territory. For these markets, it is likely that they will experience prolonged stagnation in price performance once price growth catches up with reduced mortgage interest rates. Areas of particular concern to me are the high-debt, middle-to-low-income neighborhoods that are susceptible to any increase in mortgage interest rates throughout the life of their loan. A number of them can be found inside Greater Sydney. When it comes to everywhere else, keep in mind that this is probably different from the national numbers you hear about online and in the news.
In summary, instead of thinking of an Australian real estate bubble per se, we should be thinking of specific areas where it doesn't make sense to buy on the basis of exposure to Potential future economic events such as changes in income, employment, demographics, like as well as access to credit. As an investor, you can alleviate this problem by checking out the level of mortgage stress in the area and determining whether the local population could face a return in mortgage interest rates to historical averages to medium and high. long term.
Luke J. Graham is a real estate market and behavior analyst who is currently completing postgraduate research and study in these disciplines at the University of Oxford. Recently, this has included work on housing affordability in major cities, the future of automated assessment models, as well as the behavioral economics of environmentally sustainable housing. He is a consultant to business leaders and real estate entrepreneurs in Australia and abroad through his platform PropertyAnalyst.net.
