There’s been a lot of talk lately about how Australia should rein in lending to dampen the housing market.
Perhaps making it more difficult to borrow for investors or even, the horror, raising interest rates earlier than really needed.
The Reserve Bank of Australia (RBA) is worried that a too-heated housing investment market could mean a hard fall later.
There’s no doubt that much of the housing lending is going to property investors rather than those who will live in their purchases.
But is the Australian market overheated?
Let’s look at how Australia sits against the rest of the world.
This chart from the International Monetary Fund (IMF) in its latest economic outlook report shows that housing prices globally have been flat for about five years.
Nothing to indicate a housing bubble or even a smallish boom.
The IMF’s Global House Price Index, which is an average of real house prices in 50 countries, has barely budged during the last two years after a sharp drop during the GFC.
The recovery in house prices has been anaemic relative to other financial assets such as equities which have rebounded strongly.
Of course, the overall house price index masks the fact that some economies are doing better than others.
A group of 33 economies have housing markets which are still recovering. Prices dropped sharply at the start of the GFC and the recovery has been slow.
Another 17 economies, including Australia, have seen housing markets rebound. The drop in house prices in 2007–08 was more modest and was followed by a quick recovery. On average, across this group of countries, prices are now 25% higher.
The IMF places Australia alongside Germany where the local house price boom is restricted to particular cities.
This is Sydney and Melbourne, and to a lesser extent Perth, which are experiencing a house price “boom”, according to the IMF. The rest of the country has been flat for some time.
The IMF says:
“The rise in prices is concentrated in Sydney, Melbourne and Perth. It has not been accompanied by an overall increase in leverage. Credit growth is moderate, and many households continue to pay down debt.”
The IMF assessments point to modest over-valuations in Canada and Israel and more substantial overvaluations in Norway and Sweden.
Australia is on the moderate end.
The Housing Industry Association says it’s important to remember that significant price growth is largely confined to the Sydney and Melbourne markets.
In the case of Sydney, this follows a decade during which home prices were flat relative to inflation.
The geographic reach of the current price upturn is markedly narrower than during 2002-03 and 2007.
Apart from Sydney, price to income ratios are within normal ranges in the capital cities, although Melbourne is creeping towards the high end.
According to the Housing Industry Association, one of the key metrics of sustainability in home price growth is the ratio of prices to household income.
The price to earnings ratio in Sydney reached a decade-high during May 2014 and, the HIA says, a further significant increase in the ratio would be of some concern.
Melbourne’s price to income ratio has declined over the past few years, from a peak of 5.86 in November 2010. The other capital cities have seen largely stable price to earnings multiples over the past few years and are lower than the 5.28 recorded in May 2010.
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