Little sign of housing market bubble in Australia, says Reserve Bank chief
Predictions of an imminent collapse in house prices in Australia drag on, despite negligible mortgage arrears and low unemployment
Argument over whether Australian housing is in a bubble has dragged on for over a decade. A Google search on the subject draws 600,000 returns. It even has its own Wikipedia page.
Three years after the global financial crisis hammered prices in the United States and Britain, Australian home values are just 5 per cent below their lifetime highs. Recently, prices have begun to tick up again thanks to lower interest rates and a sound banking system still able and willing to lend.
Yet mortgage arrears are negligible, household debt has stabilised, savings are up sharply and unemployment is low, suggesting the housing market represents a modest threat to the economy.
The head of the country's central bank certainly wonders what all the fuss is about.
"It has to be said that the housing market bubble, if that's what it is, seems to be taking quite a long time to pop - if that's what it is going to do," observed Reserve Bank of Australia (RBA) governor Glenn Stevens.
"The ingredients we would look for as signalling an imminent crash seem, if anything, less in evidence now than five years ago."
And the RBA is no defender of rising home prices. As long ago as 1995 then-governor Ian Macfarlane was preaching that ever-higher home costs were a social ill that made some people better off "at the expense of their children".
In 2002 and 2003 the bank ran a verbal campaign against an overheating housing market that played a big part in restraining prices for a couple of years.
And restraint was certainly needed. By one measure, between 1995 and 2002 house prices climbed 82 per cent. After a period of calm in 2004 and 2005 prices took off again, getting frothy in 2009 and 2010 when interest rates were slashed in the wake of the global financial crisis.
Like many Western countries, the ascent of home prices was fuelled by debt. Since 1995 mortgage loans outstanding have risen from A$154 billion (HK$1.25 trillion) to A$1.2 trillion, only just shy of the country's A$1.4 trillion in annual gross domestic product.
Total household debt went from 68 per cent of disposable income in 1995 to a peak of 156 per cent in 2007. If it had gone on like that it very likely would have ended badly. However, in one of those strange twists of fate, the global financial crisis short-circuited the cycle.
Australians almost instantly turned much more cautious on debt and decided to save money rather than relying on everappreciating home values.
As a result, the ratio of debt to disposable income has stabilised around 150 per cent, where it has been for seven years now. Likewise, annual growth in outstanding home loans has slowed to just 5 per cent, the lowest since records began in 1976 and far short of the double-digit pace of the past decade.
Much of this debt is held by high-wealth households, meaning the people most able to afford it. Seventy per cent of owneroccupied mortgages are held by higher-income households - the top 40 per cent of earners.
As a result mortgage debt is equal to around 30 per cent of household assets - half of the proportion of the United States.
Australians also have a habit of paying off mortgages faster. Almost half of owner-occupiers are ahead on their mortgage payments, so there is more room for prices to fall before owners start to get into negative equity.
Neither was there the sort of lax lending practices that led to so much bad debt in the United States, while Australia has what is widely considered to be one of the toughest banking regulators on the planet. The list of the world's 50 safest banks released this month by Global Finance magazine put Australia's four main banks at between 18 and 21 in the rankings.
Subprime debt was rare in Australia and low documentation loans, mainly for the self-employed and considered higher risk, currently amount to just 5 per cent of mortgage debt outstanding.
Since the financial crisis, banks have got stricter so that two-thirds of new borrowers had an initial loan-to-valuation ratio below 80 per cent.
As a result home loan arrears, those more than 90 days overdue, amount to an unthreatening 0.6 per cent of all loans. That is pretty much where it was in 1995 and compares to more than 3 per cent in the United States.
Repossessions are running at 0.15 per cent of all dwellings, compared to a peak of 2 per cent in the United States.
The lack of real debt stress is one reason home prices are only 5 per cent below their all-time peak. They fell by almost a third in the United States and by 15 per cent to 20 per cent in Britain.