A pox on all our houses?

We’ve got two very interesting pieces on the Australian residential housing market today.

The first comes from noted housing bear and economist at Morgan Stanley, Gerard Minack, who claims Australia still has a housing bubble and mortgage holders have become like investors in a Ponzi scheme.

“Owner-occupiers have played a game of financial chicken, competing for property by taking on increasingly imprudent amounts of debt,” Minack said in a research note for clients.

“Investors have become Ponzi borrowers – Hyman Minsky’s term for borrowers who rely on capital gains to repay debt and interest – in the belief that housing is a sure-fire long-term investment. History shows that it isn’t.”

The other important story involves housing affordability, which slid to the lowest point since September 2008 thanks to rising interest rates and rising house prices.

Just when we thought the heat was coming out of the housing market very nicely, these two articles paint quite a different picture.

So how should home owners react?

While Minack is a noted pessimist on the housing industry, and a number of commentators were quick to dismiss his claims as being over the top, these two bits of information should make all property owners at least stop and think about how the market is travelling – and more importantly, how potential housing scenarios might affect them personally.

For me, that’s the important thing when it comes to property. Economy-wide comparisons of debt to equity ratios, income to house prices, and metropolitan and regional prices are important to watch, particularly where they may impact economic growth.

But they need to be considered in personal context too.

For example, if you and all your family lives in Sydney and you’re looking to buy a new house in Sydney, then national house price measures that include regional areas and other states are probably not that useful.

And a $500,000 mortgage can look very different depending on your household income and job security.

When you read about the potential for a housing bubble, think about how it might impact you.

If house prices were to crash 10% (yes, it looks very unlikely) how would that affect your equity position. If mortgage rates were to rise 2% or even 5%, would happen to your ability to service debt? If your household income was to fall, what would happen to your financial position?

A bit of personal stress testing will go a long way.