Australia’s property market is falling, with some pundits predicting an unprecedented crash as Chinese buying dries up and easy money lending is shut down.
While the doomsayers may be overstating the risk of a full-blown collapse, declining house prices are exposing some uncomfortable vulnerabilities in Australia’s economy.
In a nation where home ownership is high in global terms at 65%, property has proven a route to wealth and a comfortable retirement for many middle class Australians.
At the same time, a surge in foreign property buying driven by Chinese investors has driven up prices in recent years and become politicized as many Australians have been priced out of the market.
In the popular view reinforced by the mainstream media, Australia’s house prices are either in the midst of an unstoppable boom or teetering towards an imminent wealth-destroying crash.
After booming for several years in the early part of the decade, the property market has gone off the boil in 2018. Most recent data shows that on a national basis Australian house prices are 2.7% off their peak hit last September.
The falls have been more pronounced in Sydney, typically the country’s hottest housing market, where the median price is down 7.6% off its high point.
Prices in Sydney spiked by 84% in five years to 2016, so there is a long way to go before those gains are erased. That surge has helped many Australians to retire securely by selling the family home, downsizing to a smaller dwelling and pocketing the difference.
Perhaps because of this sentiment on the property market tends to be bi-polar. That’s been seen in a new rash of dire predictions and doomsday headlines forecasting even bigger price falls on the horizon.
For now, those claims are likely hyperbolic, but there is something of a perfect storm at work in Australian property.
Firstly, Asian and particularly Chinese investors who fuelled the boom in key markets such as Sydney are now no longer such big players.
Where the Chinese spent A$4.6 billion (US$3.3 billion) on Australian houses and apartments in 2014, last year’s figure was down to A$1.3 billion (US$936,670) amid a rising political furore over China’s influence in Australia.
At the same time, fears of investor speculation undermining the stability of the housing market saw regulators clamp down on banks funding home purchases on an interest only basis and to buyers who make little or no deposit.
At the height of the boom, the market was full of property spruikers offering no interest and no deposit loans to investors who were sold the dream an easy road to wealth through price appreciation.
Now, the banks have been restricted in offering these kinds of easy loans and have been cowed by a Royal Commission into their misconduct, which has unveiled a shocking litany of customer abuses by the financial industry.
In this tightening environment, the lenient home loans on offer to people with minimal deposits have dried up and put a further damper on the market.
This has left many people who bought at the height of the boom dangerously exposed. Many of them are already facing “negative equity”, where the houses they purchased are now worth less than the debt they owe.
This is particularly the case in the apartment market, which is now suffering from excess capacity after developers threw up new blocks to cash in on the boom.
The nightmare scenario is that negative equity investors will simultaneously rush for the exits, dumping more stock on the market and bringing on a property market rout.
In this scenario, buyers will also struggle to obtain loans in a credit squeeze and there will be a rash of mortgage defaults as distressed developers struggle to make payments.
Interest rates are key to market outcomes. The Reserve Bank of Australia has kept its official rate at a historically low 1.5% for the last two years, and is so far showing little inclination for a rise despite recent hikes in the US benchmark rate.
Even so, mortgage lenders who source their funds on global capital markets are paying more for their funding out of major markets like the US, and mortgage rates have started to tick upwards.
If the Reserve Bank were to hike official rates, this could exacerbate the interest rate environment and make things uncomfortable for many highly leveraged property owners.
So far the market appears to be holding without a desperation sell-off and could yet rebalance in a more sustainable way without a collapse, some analysts suggest.
The more considered and evidenced based view is that there will be a soft landing for the housing market as the speculative heat comes off. Indeed, continued population growth in major cities such as Melbourne and Sydney point to sustained strong demand.
But that is not preventing a chorus of voices all forecasting a bubble poised to burst. None of this is new in for the Australian property market, where certain economic forecasters have been predicting a crash for many years.
In 2010, economics professor Steve Keen walked 200 kilometers from Canberra to the top of Australia’s tallest mountain after losing a bet with a Macquarie Bank analyst that house prices would fall 40%.
As part of the bet, Keen wore a tee-shirt that said: “I was hopelessly wrong on home prices! Ask me how.”
Keen still claims that high rates of indebtedness will bring on a housing downturn, but the difference this time is that he is not taking on any mountain-climbing wagers.