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Housing boom

Tomorrow marks the end of the financial year. From Wednesday, we start closing the books on fiscal 2015 and that will trigger a flurry of activity. Before getting too consumed with the processes that precede the publishing of our full year results, it’s appropriate to look back on the financial year that was. 

Rising house prices in parts of Australia dominated the business headlines over the past 12 months. Property prices surged in Sydney and rose to a lesser degree in Melbourne. Experts remain divided as to whether we have created a housing bubble that will shortly burst.

Some commentators blame the Reserve Bank of Australia (RBA) for fuelling a property borrowing frenzy. It twice lowered the cash rate during fiscal 2015 to an all-time record low of 2 per cent. This pushed mortgage interest rates down to levels not seen since the mid-1950s. 

Fears that low rates would stoke the already hot property markets in Sydney and Melbourne resulted in the introduction of lending restrictions last December. The RBA announced that it would work with other regulators to assess and contain risks that may arise from the housing market. 

The financial regulator (APRA) told banks to limit growth in their investment loan portfolios to less than 10 per cent per annum. Concurrently, the consumer watchdog (ASIC) began a review into the provision of interest-only loans as part of a broader review by regulators into home lending standards.

The crackdown on lending to property investors during fiscal 2015 and a “dialling up” (in APRA parlance) in the intensity of reviews of lending practices, dampened loan growth. For some lenders, this will result in subdued growth in their loan portfolios when full year results are released.

Paradoxically, at the same time that regulators were applying the brakes to lending, Federal Treasurer, Joe Hockey, was urging Australians to borrow. Speaking to reporters in Canberra last month, Hockey said:

I say to the Australian people directly, now is the time to borrow and invest whether you’re a household or small business, now is the time to have a go to borrow some money and to invest. Invest in the things that help to create jobs.

Understandably, the GFC still looms large in APRA’s rear-view mirror. Given this, the macro-prudential measures introduced were/are designed to clip the pace of house price growth. But amid all the dramatic headlines about skyrocketing home prices, did they actually soar?

Well, according to a report by CoreLogic RP Data, the current boom is moderate compared with that of 2001-04. Drawing on the CoreLogic Report, the Australian Financial Review (in a 29 May, 2015 article) stated that:

Since the latest upswing started, three years ago in May 2012, Sydney house values have risen 38.8 per cent according to CoreLogic. In the three years after 2000, the rise was 60.2 per cent. Similarly in Melbourne, the latest rise is 23.6 per cent over the last three years compared to 58 per cent in the three years after 2000.

The Australian Financial Review went on to say that the current growth in house prices is also much less than the boom of the late 1980s. During that period, Sydney house prices nearly doubled in a year. From an historical perspective, therefore, it seems that the recent house price growth is not as rampant as claimed. 

While Sydney and Melbourne have outperformed the rest of the Australian property market, house prices in most other parts of the nation have been decidedly modest. In fact, Hobart and Darwin recorded falls in average dwelling values according to CoreLogic. Also, for most of the past decade, Sydney home values have been relatively flat, averaging just 3.5 per cent growth a year.

Against this background, it’s clear that some of the commentary about out-of-control house prices across the nation has been self-serving and/or sensationalist. Leading economist, Dr Andrew Wilson, recently scoffed at suggestions of a housing bloodbath saying: “It doesn’t reflect logic, it doesn’t reflect history and it doesn’t reflect the current macroeconomic environment”. 

As reported in Mortgage Business, Dr Wilson underscored that Australia’s housing markets are characterised by orderly growth-and-correction phases. He also stated that it was wrong to draw comparisons with the US housing crash of 2007 as the US had much looser lending standards.

So, the message is clear: Beware of those who follow the mantra - never let the facts get in the way of a good story!


Paul J. Thomas, CEO

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Posted Monday, June 29, 2015    View Comments 0 Comments    Make a Comment Make a comment  

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