AUSTRALIA’S housing market is 40 per cent overvalued based on price to income measures, with one expert warning an entire generation is now praying for a property crash.
In its latest round-up of global housing, The Economist found prices have risen in 20 out of 26 countries it tracks, with San Francisco, Vancouver, Sydney and Shaghai in particular singled out.
In those four cities, prices have increased by 12 per cent a year over the past three years, “twice the average national pace”.
To determine whether homes are fairly valued, The Economist measures the relationship between prices and disposable income, and between prices and rents.
“Thanks largely to their big cities, housing appears to be more than 40 per cent overvalued in Australia, Britain and Canada, according to the average of our two measures,” it says.
AMP Capital chief economist Dr Shane Oliver said the Australian house prices had been overvalued for more than a decade, but the long-predicted crash had never eventuated.
“The Economist magazine has been worried about this since 2002, and likewise the OECD’s measures of property prices relative to incomes and rents show significant overvaluation dating back to 2003 and 2004,” he said.
“The risk is certainly there. I would see the combination of very expensive property combined with very high household debt ratios as Australia’s Achille’s Heel.
“If something is going to go wrong that’s where we’re vulnerable. The counter to all that is it’s still hard to see what will go wrong.”
Dr Oliver puts the risk of a full-blown property crash — where prices fall by 40 to 50 per cent — at about 20 per cent chance.
“To get anything like that you’d have to have either much higher interest rates, a recession in the economy or a massive oversupply problem,” he said.
“There are pockets of oversupply, but we’re not staring down the barrel of a US or European-style oversupply problem at the beginning of the GFC.”
Dr Oliver says more likely is a fall-off of about 5-10 per cent in Sydney and Melbourne over the next two years, followed by around a decade of prices “treading water” as prices fluctuate up and down in that range.
That would give wages time to catch up and, at least partly, address the affordability crisis.
“This issue is more of a social one. People are having to borrow exorbitant amounts of money to buy a home and affordability is horrible,” he said.
“It’s screening out an entire generation of people from the property market, and some of them are hoping there will be a crash because they feel they’ve been disenfranchised.”
HOUSING MARKET SLOWS
It comes as new data shows the brakes have been pulled on home value capital gains, with one industry report out today claiming growth is at its slowest pace in 31 months.
The CoreLogic RP Data March Home Value Index results confirmed the rate of value growth across Australia was moderate, driven by conditions cooling in mega markets Sydney and Melbourne.
But there is no dramatic price dip on the horizon.
“We are likely to see Sydney and Melbourne dwelling values continue to rise, at least on average over the 2016 and 2017 calendar year, however growth rates are likely to be substantially lower than what has been recorded over previous years, while some of the underperforming capitals, such as Brisbane, Canberra and Hobart may see some acceleration in their rates of capital gain by 2017,” said Tim Lawless, CoreLogic RP Data’s head of research.
Other capital cities recorded a range of outcomes from small value increases to moderate declines.
“Overall, no indicators have emerged to suggest that dwelling values are starting to show sharp declines in any of the capital cities. Perth and Darwin are the only cities to record negative value movements over the past year, and the declines from their recent peak (which was more than 12 months ago) have been modest at just 4.6 per cent,” Mr Lawless said.
He said the numbers kicking off this year look very different to figures at the beginning of 2015.
“The March quarter rise in capital city dwelling values is in stark contrast to the first quarter of 2015, when values increased by three per cent, which is almost double the current pace of quarterly growth.”
But compare that data with the final quarter of 2015, when capital city dwelling values were down 1.4 per cent, and Mr Lawless said the housing market has actually shown a “modest rebound”.
These latest results show the annual rate of capital growth across the capital cities has now reached its lowest point in 31 months. But prices are still up — dwelling values have actually risen by 6.4 per cent over the past 12 months across all capitals combined.
And after a recent wave of huge house price growth for cities like Sydney and Melbourne, it is interesting to see that today’s report showed no city recorded an annual growth rate in the double digits over the past 12 months.
Source:News Corp Australia
During the same period, Melbourne is still standing in front as the capital city with the strongest annual growth. Dwelling values in the Victorian capital increased by 9.8 per cent.
Melbourne has been much more resilient, with annual growth in home values slipping below the 10 per cent mark for the first time since May last year. It hit 9.8 per cent by the end of March 2016.
But it is in Sydney that Mr Lawless noted the greatest change in capital growth. Dwelling value growth more than halved there to 7.4 per cent for the year — that’s a drop from a high of 18.4 per cent per annum in July last year.
The report also showed that freestanding houses in most capital cities are outperforming the unit market. During the past 12 months house values rose by 6.6 per cent compared with a 4.7 per cent increase in unit values.
“The over performance by detached housing relative to units can most likely be attributed to the more efficient release of higher density housing supply together with an ongoing shortage of strategically located vacant land and new detached housing stock,” Mr Lawless said.
Where the house and unit divide is greatest is in Melbourne, where higher unit supply appears to be weighing on the rate of value growth. While Melbourne house values were up 10.7 per cent over the past 12 months, unit values were only 2.5 per cent higher over the year.
As home values slow down, the hip pocket of investors has taken a hit. Every capital city has seen a deterioration in rental yields over the past 12 months, with gross rental yields reducing from 3.7 per cent across the combined capitals 12 months ago, to 3.5 per cent by the end of March this year.
“A low rental yield scenario in Melbourne and Sydney is likely to act as a further dampener to investment demand in these markets, as the prospects for capital gains become less certain.
“We’re likely to see many investors turn towards other housing markets where the outlook for capital gains is stronger, housing is more affordable, and the yield profile is healthier,” he said.
Another contributing factor towards slowing growth is the number of new listings. Volumes have been trending higher, particularly in Sydney where listing numbers are now 19.2 per cent higher than at the same time last year.
“Higher listing numbers means buyers have more choice and vendors may need to adjust their price expectations in light of the increase in available housing stock,” Mr Lawless said.