This spectacular chart by NAB Chief Economist Alan Oster shows the relationship between house prices and borrowing capacity, the ability to service loans, of Australians in the six capital cities.
Oster, as an econometrician, has built a model with the hypothesis that Australians love property and want to borrow as much as possible to buy a home. This would drive prices.
Not much room for argument there.
The model that results measures the deviation of house prices on average from a borrowing ability embedded in average lending standards across the market.
Prices are currently way below household borrowing capacity, so no stretched conditions or bubble here.
The chart shows a lot of room for rises. House prices could be at the start of what could be an explosive move upwards.
Business Insider asked Oster what he thought the chart signalled and he said that there was no housing bubble, and:
It suggests if anything house prices could go up 12% on average across Australia (or 20% in Sydney) and it would just bring relationships back to historical norms (as per the early 1980s)
But he added an important caveat: a move like that “supposes consumers want to gear up like they used to. Clearly they don’t.”
Australian consumer behaviour has, at least for the moment, changed.
At the Customer Owned Banking Association conference in Melbourne, Oster also showed a chart of the stickiness of the household savings rate since the GFC which, taken with this housing story, paints a picture of Australian households still hunkered down and wary of debt and spending.
Once the economic sunshine comes out again – or at least if Australian families feel more relaxed about borrowing more – that’s when house prices might really rocket.