The Reserve Bank believes the only thing that will bring house prices down is a recession.
Failing that (we hope), Australia (population density 3.2 per sq km) is becoming a nation of apartment dwellers.
The problem, in short, is that Australian house prices are not in a bubble, and are, instead, in a ‘new normal’ and are not going to come down on their own.
A recession is becoming more likely thanks to the slowdown in China, exacerbated in the past month by the bursting of its stockmarket bubble, but that would hardly make home ownership more affordable.
Releasing Deloitte Access Economics’ latest economic outlook yesterday, director Chris Richardson said: “The chance of a recession is higher now than it’s been for quite some time. China’s economy is the key.”
The question of the moment is: can anything be done to improve housing affordability? Short answer: not much. (Apartment affordability is another matter.)
Most of the focus on last week’s submission by the RBA to the Parliamentary Inquiry into Home Ownership was on its comments about negative gearing -- that there is a “case for” reviewing it, “but not in isolation”.
However the bank’s comments on house prices and affordability were less equivocal:
“…there are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment).”
And: “There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can -- safely and sustainably -- service the obligations involved in paying the higher price.”
Finally: “…there is no example in Australia or internationally where supply expansion on its own generated housing price declines of a similar order of magnitude to the increases in prices seen in some Australian cities in recent years.”
Given what’s happening in China there is no chance of interest rates going up, so serviceability is only likely to improve. In fact, rates are more likely to come down further to try to prevent a recession here.
In new research on housing affordability, ANZ Bank economist David Cannington says that low interest rates, which “will likely stay at or near the current low for years to come”, support house prices where they are.
“The lower discount rate that investors apply on future gains can justify a higher present value.
“Combined with strong underlying supply-demand fundamentals for housing, this indicates house prices are approaching a higher ‘new normal’ and home deposit affordability is likely to remain difficult for new entrants.”
He goes on to demonstrate that the real problem with housing affordability is the time it takes to save for a deposit -- mortgage service affordability and rental affordability are both improving.
Of course, that will change when interest rates eventually go up, or if there were a significant drop in real wages because of a recession, but the difficulty of saving for a deposit is keeping a generation of young Australians out of home ownership.
In Sydney, the time taken to save for a 20 per cent deposit, assuming 15 per cent salary is saved, is now nine years, more than double what it was 30 years ago.
The time taken to save for a deposit in Sydney was also nine years in 2003, but the difference is that the cash rate then was 4.75 per cent and heading higher, as a result of which house prices fell.
This time the cash rate is 2 per cent and probably heading lower, putting upward pressure on prices (unless there’s a recession).
The one bright spot is the big increase in the supply of apartments, which has resulted in smaller price rises among apartments than house, especially in Melbourne.
ANZ’s Cannington believes this will continue. “While deposit affordability for detached houses is expected to remain difficult, a sharp increase in the supply of new apartments in the coming years in Sydney, Melbourne and Brisbane will lift the supply of housing at a lower price point.”
In other words, those who own a house already are winners; those who don’t will have to buy a flat.