Australian house prices, as we learnt earlier today following the release of the CoreLogic RP Data capital city house price index for June, are continuing to push higher.
According to the report the median Australian house price rose 2.1% to $565,000 in June, leaving the annual increase at 14.1%.
The rapid increase, largely driven by a 16.2% surge in the Sydney’s median property price to $772,200, has seen the national house price-to-income ratio rise to 5.5 times. According to George Tharenou, economist at UBS, the level is now the highest on record.
With the ratio now stretched compared to historic standards, Tharenou, suggests property is displaying some “bubble-like features” and, unlike previous property price cycles that have peaked whenever prices have become this stretched compared to incomes, there may be room for further price appreciation yet.
“We still expect growth to moderate ahead, but remain positive. That said, given household income growth is just 2½% y/y, the house price-income ratio now lifted to a record (bubble-like) 5½x. This is similar to prior peaks in 2003, 2007 & 2010 that were followed by price falls. But those downturns were only triggered when the RBA hiked. So amid record low interest rates, the mortgage repayment share of income (i.e. housing affordability) remains ~average. Nonetheless, the record high ~50% investor/medium-density share in this cycle is a risk, but is suppressing rents rather than prices, given unemployment is not spiking. Indeed, the 4¼% rental yield remains relatively attractive, with the vacancy rate steady at its ~2¾% average. Regulation is also unlikely to be a material negative ahead”.
What Tharenou is suggesting is that while the property market is looking bubbly with price-to-incomes at a record high, with the RBA likely to keep interest rates on hold for a considerable period of time – or potentially lower them further – and a lack of regulatory reforms such as the removal of negative gearing and capital gain discounts, property prices are likely to remain well supported.
The chart below, from UBS, shows the relationship between mortgage rates, repayments as a percentage of household income, and Australia’s dwelling price-to-income ratio.
As you can see, while house prices as a multiple of household income are at a record high, with interest rates at record lows, overall affordability remains around average levels at present. Given affordability remains around average with rates so low, this could support further gains in house prices ahead. Indeed, as Tharenou points out, despite Australia’s housing market showing some bubble-like features, without interest rate increases or regulatory reforms, there is currently no trigger to stop them from growing.
Based on the trend seen in recent months, if Tharenou is correct, expect the debate surrounding housing affordability to intensify even further in the months ahead.