Fresh claims of property bubble off the mark, experts say, as auctions remain steady

Local property experts have cast doubt on two new reports suggesting Australia mortgage lending is out of control and we are heading towards major price shifts, instead saying current levels of lending are sustainable and a balanced “correction” in some areas is more likely.

The two reports, one from British firm CreditSights and another from Datamonitors, say price corrections are imminent as banks become more exposed to offshore lending, which in turn drives up costs for buyers.

Much of the fear of a housing bubble has been triggered by investors overseas. RBA assistant governor Guy Debelle has said he has noted interest from international investors regarding the Australian housing market.

The reports also come after several analysts, including writers for The Economist, have said Australian housing prices are overheated.

But SQM Research director Louis Christopher says the notion that mortgage lending has outstripped business lending is nothing new. He believes international experts discussing bubbles use comparisons with international cities, and these aren’t always accurate.

“On the face of it, those comparisons might seem reasonable. If you look at The Economist, which has been made famous for its calls on the Australian market, one of their key indicators is looking at rental yields.”

“But I take issue with that because rental yields are not a good base to use to show when something is overheated, because of taxation differentials. Look at Britain, which is trading on a higher rental yield – but they don’t have negative gearing. That affects the results.”

The new Datamonitors report suggests a correction is on the cards as housing affordability continues to decline.

“The most obvious potential effect of the long-term trend in declining housing affordability is an eventual correction of prices. Given that house price growth has outstripped wage growth significantly over the last decades, this would have to entail either a significant fall in property prices or a sustained period of stagnant property prices, in order for affordability to return to historic levels.”

The report comes after the Housing Industry Association and Real Estate Institute of Australia have both said affordability is declining. The REIA in particular says families are now spending more of their income on housing repayments than in the past.

The CreditSights report, written by analyst David Marshall, claims mortgage lending has outstripped business lending and banks are overexposed. He told News.com.au lending growth has not been accompanied by savings growth, and funding pressures on banks “could lead to house prices slowing”.

CreditSights was contacted for comment, but no reply was received before publication.

Christopher agrees that banks are heavily exposed to mortgage lending, and that more families are spending more on payments, but says such exposure isn’t cause for concern unless there are triggers for a major correction, like a major increase in unemployment.

Indeed, this is the same defence used by Commonwealth Bank last week when it attempted to show investors why its exposure to the Australian property market is sound. This was released as a response to some concern that Australian houses are overheated and a major correction is imminent.

“Taking into account geographic differences, the ratio of house price to income in Australia is not that much different to most other comparable countries,” Bloomberg reports Commonwealth Bank as saying. “Population growth and excess demand relative to supply has been a key driver of Australian house price appreciation – these factors are unlikely to reverse in the near-term.”

It also said about 75% of household debt is held in the top 40% of income earners, indicating those with larger mortgages are able to pay them.

This concern from overseas investors was also recognised by RBA assistant governor Guy Debelle. He told a Sydney financial forum last week that, “It’s certainly the case that a lot of people, investors, are interested in the Australian housing market”.

But Christopher says the notion of a “bubble” is a misguided one given the strength of our economy and low unemployment.

“We do have a slowdown, that is true. But I don’t think there’s going to be a full scale crash, because our economy is too strong and at this rate it just won’t happen.”

Rismark chief executive Christopher Joye disputes the notion that housing credit growth is at dangerous levels, saying the current situation is quite the opposite.

“Any suggestions that housing credit growth has been booming in Australia are categorically ill-conceived. In actual fact, housing credit growth has been running at its weakest rate in 20 years, and has been declining since 2006,” he says.

Predictions from both Australian Property Monitors and RP Data suggest price growth will drop off over the next few months, but properties will still grow by up to 8% for the year. Christopher says as long as unemployment remains low and the economy continues to grow, the predicted “significant fall” in prices will not occur.

Meanwhile, auction results for the second week of the spring season reveals sales have remained steady. According to the Real Estate Institute of Victoria, Melbourne recorded a clearance rate of 70% off 612 properties on the market.

“This level of demand is consistent with recent results and suggests that the market has found a reasonable balance, and outcome that is in contrast to the past few years,” chief executive Enzo Raimondo said in a statement.

In Sydney, 171 properties sold resulting in a clearance rate of 72%, with total sales at $159 million. Three properties sold out of seven in Brisbane at $1.6 million total, while in Adelaide, 13 properties sold out of 17, with total sales at $6.3 million.