Westpac dismisses housing bubble talk, home prices remain flat in September quarter

The Australian housing market is not experiencing a bubble and prices are still within reach of most buyers, according to a new report from Westpac that attempts to dispel the “myth” of unaffordable housing.

The data comes as new figures from Australian Property Monitors shows prices remained flat during the September quarter, with national prices increasing only 0.1%. The research house also noted that in all cities bar Sydney and Melbourne, prices have actually decreased.

The new Westpac report states that housing affordability is not as stretched as some would suggest, and that taking into account all dwelling types, prices have “broadly tracked” income growth since 2003.

And while the bank admits the housing industry is drastically undersupplied and this is causing problems for affordability, such a situation does not represent a speculative bubble.

“Although we accept that Australian housing is expensive, we see this as mostly a consequence of a major supply-demand imbalance rather than speculative activity. The excess of demand over supply is expected to increase over the next few years. Affordability has deteriorated but not as badly as price-income measures indicate.”

In fact, the report argues that the country’s average national repayment-to-income ratio comes in at 27.8%, above the 30-year average of 21.9% but below the 2008 peak of 32.7%. Furthermore, it says investor activity peaked during 2003, and that rising interest rates should keep house prices steady over the next two years.

The report says that a key metric in the debate over housing prices is the price-to-income ratio, which is often used as a method for determining the affordability of housing. However, the bank says the first issue in using such a metric is that there is often a mismatch between incomes and prices.

“Price data is usually provided on a capital city basis, yet income data in Australia is more often provided on a broader state basis. Our estimates suggest that in the case of Sydney, this bias alone lifts the ratio by 0.9pts.”

“More importantly for major capital cities, the price measures used are typically for detached houses only. In Sydney, detached housing accounts for just 60% of the housing stock. Our estimates suggest that using a median unit price instead of a median house price reduces the ratio by 2.4pts.”

The second issue, it argues, is that price-to-income ratios “completely ignore” the cost of finance, given that interest rates have fallen by a substantial amount over the past 30 years. And the third problem is that price-to-income ratios ignore the growth of dual-income households.

“ABS data on the distribution of household incomes shows those with more than one person employed have gross incomes 55-70% higher than average and 75-80% higher than those with just one person employed.”

“This is not to say there isn’t an affordability problem – clearly there still is, particularly for single income families seeking to enter the market for a detached house in the main capital cities.”

However, Westpac notes the figures cast doubt on the “prevalence and severity” of affordability strains. As a result, price-to-income ratios are more likely to have been in the sustainable range of between 3.9-4.4 over the past seven years.

Westpac also argues the housing market experienced a substantial shock during the financial crisis, and says this period represented a “severe stress test” of the industry – “A test that argues strongly against the existence of a bubble”, the bank says.

It notes that during this period interest rates were extremely high, with the variable mortgage rate reaching 9.1% in the year to September 2008, with a peak of 9.6%.

“A house price bubble could not have survived this sort of test. Key features of a speculative bubble typically include: the availability of credit on ‘easy’ terms, embedded expectations of continued strong capital gains and heightened investor activity.”

And given the housing market survived this test, Westpac argues, the threat of an imminent “bubble style collapse” in Australian house prices is unlikely. It argues that with defaults running at about 0.6%, markets are not showing signs of speculative excess.

Instead, Westpac says the biggest threat for housing prices is the lack of supply, and argues there is a very real risk that supply will continue to fall behind demand “for years to come”.

“The root causes of Australia’s housing supply problems are complex and relate to the cost and availability of readily developable land – both greenfield and infill sites. Rigidities in planning and development processes and physical limits to land availability in most major cities appear likely to continue restricting the availability of desirably located new dwellings.”

The Housing Industry Association has echoed those concerns for some time, with the organisation claiming that household construction is falling behind population growth, with a shortfall of thousands of dwellings every year.

Meanwhile, new figures from Australian Property Monitors show prices remained effectively unchanged during the September quarter, with a 0.1% increase.

The figures show Melbourne prices increased by just 1.2%, while Sydney prices increased by 0.7% during the quarter. APM says the slight increases in these two cities offset the negative results in the other cities.

Adelaide prices fell by 1.6% during the quarter, while Brisbane prices fell by 1.7%; Darwin prices dropped by 1.9%, Perth by 1.5% and Canberra by 1.6%. Hobart prices remained flat at 0%.

APM head of research Yvonne Chan says the results clearly show the market is beginning to slow and that the moderation of prices over the June and September quarters offset the growth experienced during the same period in 2009.

“This quarter’s results show the effect on prices of increased borrowing costs following the normalising of interest rates, together with falling auction clearance rates and lower levels of housing finance.”

“In the short term, with national house price growth at 6.1% for the nine months to September, and with expectations of rising interest rates, APM anticipates that prices will remain flat or fall slightly for the remainder of this year, with this trend to continue into 2011.”