Australian house prices aren't likely to crash based on this metric

Photo by Spencer Platt/Getty Images

Australia is building a lot of houses right now. According to figures released by the ABS, approximately 57,025 new residential dwellings were completed in the June quarter this year, the largest number on record.

While there are signs that the building boom is approaching the peak for this cycle with new home sales falling to a two-year low in October and building approvals also rolling over, there’s still plenty of construction to come over the next two years.

However, even with all that new housing hitting the market, and more on the way, it has not yet pushed demand and supply out of balance, according to Fitch Ratings, with the group playing down concerns expressed by some other analysts over the potential for overbuilding.

The factor underpinning this view, says Fitch, is the ratio of new houses being completed to the increase in population.

“When comparing new houses completed to new citizens, Australia had a ratio of 0.57 at June 2016, the highest level in 10 years,” said James Zanesi and Hai Duong Le, directors of structured finance at Fitch.

“This equates to 1.75 people per new house completed.. (a rate) well below Australia’s previous peak in 2002-2006, and the peaks seen in Great Britain, Spain and Ireland, when more than one house was completed for every new citizen.”

So, based on that metric, Australia looks in the clear for the moment, but what could change that in the future, possibly leading to a similar scenario seen in Europe prior to the global financial crisis?

Zanesi and Le suggest that “changes in population are a good guide to current and future housing demand”.

Given the solid pipeline of residential construction work still to come, the pair say that “changes in population growth most likely to endanger the balance of supply and demand”, noting that “oversupply could result if the increase in home completions outpaces population

While the analysis from Fitch is a top-down approach, taking a holistic view of Australia’s entire property market, that’s not to say that oversupply won’t impact some specific markets.

In particular, there’s heightened concern that some inner city apartment markets on Australia’s east coast, particularly in Brisbane and Melbourne and to a lesser degree Sydney, may already be in oversupply, potentially leading to price declines in the years ahead.

In it’s semi-annual Financial Stability Review released last month, the Reserve Bank of Australia warned that “risks around the projected large increases in supply in some inner-city apartment markets are coming to the fore, especially in Brisbane and Melbourne”.

It also added that “there are signs that some settlements are taking longer and lending valuations are coming in below their contract price, though settlement failures to date remain low”.

A not-so-subtle warning that price declines could be on the way.

Paul Bloxham, Australia and New Zealand chief economist at HSBC, is one analyst who thinks that prices will fall in these markets next year, forecasting earlier this month that apartment prices in both Brisbane and Melbourne will fall by 0-4% and 0-0.5% respectively.

In Sydney, Bloxham says that apartment prices will be flat to 4% higher over the same period.

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