Those who have long, long argued Australian house prices are mental appear to be enjoying the correction. For instance, Bronte Capital's John Hempton:

Will the housing bubble go the way of all others?

The turn has been well documented. The Australian Bureau of Statistics put out a helpful infographic last month, showing some price declines in the eight capital cities in the first three months of the year, although Tasmania's Hobart is still going strong:

The bureau said in a press release:

Through the year growth in residential property prices continued to moderate (2.0 per cent) in the March quarter 2018. Most capital cities have shown declines in annual growth rates since September quarter 2017, except Hobart (+14.1 per cent), which has continued to see strong rises in residential property prices. 

It also put the overall decline in context, a mere $22.5bn drop set against the $6.9tn value of the 10m residential dwellings in the country. The mean price of a dwelling was $687, 700.

(In sterling, that works out to £393,000. For reference, the average UK home price in June was £228,000. Feel free to debate the relative merits of Perth, Scotland, and Perth, Western Australia, in the comments).

Australians have plenty of room, as there were only 24m people living there at last count. Average weekly wages for full time employed adults were $1,585 in May, which works out to about $82,000 a year, or about one-eighth of an average house.

However, the headline price to income ratio isn't as bad as all that. The Reserve Bank of Australia put the ratio of household disposable income to house prices at about five times in December:

The paper that chart came from also shed some light on the underpinnings of the bottom of the market, where first home buyers (FHBs) get in:

To take an example, the purchasing capacity of the median potential FHB in Sydney in 2016 is estimated to have been around $474,000. By comparison, the median home price was $800,000, while the housing price at the 10th percentile was $465,000 and at the 90th percentile was almost $1,900,000. Therefore, the estimates indicate that the median potential FHB in Sydney could afford just over 10 per cent of homes sold there in 2016.

Prospective first time buyers are clinging on to the lowest of the steep upward slopes. The apartments in that bottom bucket are located 30km or so from Sydney's central business district, on average.

The consensus, however, appears to be that the price decline is moderate, and not going to cause problems, as it follows restrictions on lending to investors on racy terms.

Here, for example, is a heatmap of mortage areas from a S&P Global Ratings report collecting comments from an Australian property seminar, which suggest little mortgage payment stress in the data:

The conclusion of attendees at the seminar was largely that taking some of the heat out of the property market was welcome, and a good thing for credit risk generally.

For instance, here's Erin Kitson on arrears in residential mortgage backed security portfolios:

We expect the arrears uptrend to continue given the large proportion of variable rate mortgages. Households' high debt and low wage growth do not provide much of a buffer for borrowers to absorb rising interest rates. This indicates borrowers' greater sensitivity to interest rate movements.

Still, we don't expect materially higher defaults given improving employment conditions. Loss of income is a key cause of default. Borrowers' ability to absorb higher interest rates depends on their financial profile, level of seasoning, loan-to-value (LTV) position, and refinancing prospects. The tightening in lending conditions will affect refinancing conditions, though. This will have more of an impact on borrowers with high LTV loans and interest-only loans. Our current outlook is for continued ratings stability for Australian RMBS.

Andrew Ling of BlackRock also argued at the seminar that tighter regulations on mortgage lending will be a net positive for financial stability and credit quality, and said “we don't expect a doomsday scenario. So long as unemployment remains robust, the property price unwinding should be orderly.”

Policymakers also seem to share that view. Here's Goldman Sachs on testimony from Reserve Bank of Australia Governor Philip Lowe to parliament last week:

On the housing market, Governor Lowe struck a generally positive tone in several respects. Firstly, he stressed that while prices had “clearly slowed... we need to keep things in perspective”, and described the “pull-back as a welcome development”. (We note that house prices have only retraced ~4% of a +48% rise over the past since 2012). Secondly, Governor Lowe characterised the slowing in housing credit as mainly “a story of reduced demand” than a supply shock – offering evidence of a -10bp fall in in mortgage rates over the past year in support of this.

The investment bank's economists put it in the context of a generally positive assessment of the economy, and expect higher interest rates some time late next year.

So, not a crash unfolding, just the orderly first stages of a correction almost three decades into an Australian economic miracle. Good to know.

Related links:
Eight questions every first-time buyer should ask
- FT Alphaville
Australia banking probe has tightened credit supply - RBA governor - FT
New Zealand bans foreigners from buying homes - FT
Opinion today: Demented by the housing crisis - FT
Australia’s collapsing yield curve - FT Alphaville
Australian RMBS grabs Moody’s attention - FT Alphaville
Australia raises rates - FT Alphaville

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