Latest NewsHousing Bubble a 'myth' : WestpacWednesday, 12 April 2017

Australia's housing market is not in the grip of a bubble, although an acute shortage in housing is continuing to support prices, which are set to rise further over the medium term, a report by Westpac Economics has found.

The report, Australian housing: the bubble myth, follows concerns raised by global investors that Australian banks are too exposed to an overheated property market. A recent Fitch Ratings 'stress test' on Australian housing found local banks would be able to withstand a severe fall in local residential property values.

"There is little evidence of excessive speculative activity by investors in recent years and we see little risk of disruption from investors selling properties - residential property has outperformed other assets and continues to offer a stable, secure source of income," Westpac chief economist Bill Evans and senior economist Matthew Hassan said.

"The housing shortage also means markets should be able to absorb any increase in investor selling reasonably easily."

The global financial downturn from 2008 to 2009 was itself a severe 'stress test' which a genuine speculative bubble would not have been able to survive, the report says, adding that a bubble is unlikely to have developed since.

Rather, migration-driven rise in population growth, as well as an increase in dual-income households and the ability of households to manage larger levels of debt, is responsible for rising prices since the 1980s, it says.

Meanwhile, house prices will remain largely constant over the next two years, but are set to rise in the medium-term, the report says.

"With interest rates likely to rise through 2011, credit constrained and affordability below long run averages, house prices are likely to remain broadly steady over the next two years," it says.

"At the same time a strong labour market and solid wages growth should see household incomes rising by over seven per cent a year. These dynamics will improve affordability, setting a basis for higher house prices in the medium term."

And supply shortages are set to worsen, as demographic changes continue to drive demand growth, Westpac said.

"The migration-led population surge has stepped up a notch over the last three years with an acceleration in population growth to 425,000 a year. Meanwhile, we estimate net additions to the dwelling stock have averaged just 100,000 a year."

But many of the current measures "greatly distort" the picture of Australian housing affordability, Mr Hassan said. Price to income ratios of around 7.5 per cent to 9 per cent quoted by some analysts for the Sydney market are "greatly skewed" as they only look at detached housed, which make up around 60 per cent of the Sydney market, Mr Hassan said.

In comparison, the median price to income ration for units in Sydney is four or five, a "much more reasonable ratio" which reflects the on-the-ground reality of lending rates, he added. "We're not saying affordability is not stretched, but it's much less than some measures would indicate."

Meanwhile, global economic conditions are expected to support Australia's housing market, as commodity demand from China and other developing countries continues to build. A fall in commodity prices large enough to unsettle global investors remains unlikely, Westpac said.

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