Clancy Yeates| Sydney Morning Herald| February 26, 2016
Contrarian economist Jonathan Tepper this week re-ignited an age-old debate about whether we are in a property bubble, after raising the alarm bell about Australian house prices.
He pointed to data including a surge in household debt, a boom in interest-only lending, and much higher house price to income ratios, and predicted a plunge of up to 50 per cent in Sydney and Melbourne property prices.
The economic trends he identified are all true. They have been repeatedly highlighted by bodies such as the Reserve Bank, the Australian Prudential Regulation Authority, and the International Monetary Fund.
Alarming as his claims are, however, it is worth setting them against some other economic trends, which analysts say should dampen some of the fears about the property market.
Average home loan payments look manageable
Westpac senior economist Matthew Hassan points out that as a proportion of household income, the cost of paying off a typical mortgage for an existing home owner or someone looking to buy is well below previous peaks.
“Both figures highlight that the burden is not really high, but there’s a sensitivity around future interest rates,” Hassan says.
Mortgage ‘buffers’ keep growing
Households with home loans are, on average, paying off their home loans ahead of schedule.
No one disputes household debt is high in Australia, but this graphic shows that many borrowers have a “buffer” that could help protect them if they were, for example, to lose their job.
The total value of these buffers is equal to 16 per cent of all loan balances, or more than two years of scheduled loan repayments.
Credit growth is not extreme
Economists say a tell-tale sign of a bubble brewing is is rapid credit growth.
Housing credit has picked up, without doubt, but it is still a long way from previous highs.
Mortgage arrears are low
If there is a housing crisis coming, the banks have not yet seen a lot of evidence of borrowers falling behind on their home loans.
This chart from Standard and Poor’s shows the percentage of borrowers in arrears is lower than a few years ago.
Of course, that would probably change if interest rates or unemployment rose sharply.
‘Low-doc’ lending has fallen
A key reason for the meltdown in the United States housing market that precipitated the global financial crisis was rapid growth in lending to risky borrowers.
While the banks’ lending standards have been criticised, the value of low-documentation (“low-doc”) mortgage lending in Australia has been falling for several years.
Sydney’s market has been playing catch-up
Sydney prices are up a whopping 75 per cent since 2009.
But growth in the city’s house prices was much softer than other cities for much of the 2000s.
That game of catch-up is reflected in this graph, which shows the ratio of Sydney homes to those in other cities was below-average for much of the decade.