House prices continued to climb during the March quarter but the pace of growth has slowed considerably outside Sydney. Nationally, the house price-to-income ratio reached a new high, reflecting lower interest rates and elevated investor activity.
The current scenario appears unsustainable unless income growth picks up, which remains unlikely as our terms of trade continues to fall.
According to the ABS, nominal house prices rose by 1.6 per cent in the March quarter, moderating somewhat over the past six months, to be 6.9 per cent higher over the year. Low interest rates continue to support activity in the housing market, encouraging existing homeowners and investors to bring forward their purchases, though there is mounting concern that the market has become increasingly imbalanced.
Housing multiples, which are a simplistic but reasonable proxy measure for affordability, show that housing is expensive by historical standards. Even though interest rates are low, rapid price growth has made it more difficult for first home buyers to save a deposit and enter the housing market.
Prices in Sydney rose by 3.1 per cent in the March quarter -- its eighth consecutive quarter with growth over 2 per cent -- to be 13.1 per cent higher over the year. The market continues to be driven by investor activity, which accounts for almost 60 per cent of total loan approvals.
Price growth elsewhere is more mixed and in some cases, such as Perth, genuinely weak.
In Melbourne, house prices rose by 1.6 per cent in the March quarter and are now 4.7 per cent higher over the year. More timely measures, such as the daily RP Data index, suggest that Melbourne prices have recovered somewhat over the past three months.
Prices in both Brisbane and Perth remain moderate and are broadly consistent with income growth. Over the past year, nominal house prices have increased by 3.9 per cent in Brisbane and 2.5 per cent in Adelaide.
The end of the mining boom continues to affect prices in Perth (down 0.3 per cent over the past year), which should continue over the next couple of years as mining investment deteriorates. The pain will really be felt though in those towns that flourished during the mining boom and can no longer attract buyers.
As a result, we have one property boom (some would argue ‘bubble’), another market where growth might be considered strong, and three markets that continue to be propped up by low interest rates but remain hamstrung by inadequate income growth.
Under these circumstances, it’s somewhat surprising that housing multiples have surpassed their earlier peak. Those peaks occurred during the midst of a mining boom when the unemployment rate was low and income growth was strong.
The outlook for the property sector will depend on a range of factors. Perhaps the most important is income growth since, in the long-run, property prices are tied to a household’s capacity to pay for them.
Gross disposable income per household has increased by just 1.1 per cent over the past year and has remained around that level over the past two years. More broadly speaking, Australian remains in an ‘income recession’ driven by the sharp fall in our terms of trade, which will continue to weigh on income growth over the next few years.
Furthermore, the Australian dollar has effectively reduced the purchasing power of Australian incomes, forcing households to direct a higher share of their income towards maintaining their existing living standards rather than investing or buying up residential property.
It’s easy to forget this when the national media has become obsessed with the Sydney property market. After adjusting for inflation, property prices across several cities remain well below their prior peak and have experienced several years of poor growth.
We have been conditioned to believe that housing always goes up; that property is always a sound investment. But the Australian property market has experienced three downturns over the past decade during the midst of a once-in-a-lifetime terms-of-trade boom.
As a result, it’s only a matter of time before the property market takes a turn for the worse. It’d be folly to forecast a property crisis or even a bloodbath, but our next downturn won’t have the luxury of a mining boom or the benefits of fiscal or monetary policy to keep it afloat. It will almost certainly be larger in size and scope than the three downturns that preceded it.
For now, the Sydney property market continues to rise at a rapid pace and investors continue to push the market into uncharted waters. Those buying today are taking on considerable risk and although there are still gains to be made, it remains questionable how sustainable those gains will prove to be.
The risks only mount when we remember that both the RBA and APRA are trying to organise an orderly moderation to lender activity. It raises the question: is Australian property really a great investment when capital gains are in doubt and rental yields are so poor?