Australians like to refer to the global financial crisis as the “GFC”, as if it’s a remote phenomenon, happening to other people. Indeed, you might consider yourself charmed if your house seemed immune to the price deflation dogging other developed economies. After a wobble last year, Australian house prices in the first eight months rose almost 8 per cent, according to RP Data-Rismark; the average home value is now 4 per cent higher than the February 2008 peak.
So far, buyers have had both the will and the ability to lever up. As most mortgages are on a floating rate, savage cuts to the central bank’s cash rate – 425 basis points between September and April, to a 49-year low of 3 per cent – have rapidly fed through to borrowing costs. Banks, largely untroubled by writedowns and boasting some of the best capital positions in the world, are still building their loan books.
But the effects of the stimulus are subsiding. The government started to phase out a large grants programme for first-time buyers last month; homebuilding approvals in August fell 0.1 per cent from July, when they gained 6.6 per cent. When interest rates rise – Australia seems likely to lead the global tightening cycle, perhaps as early as this month – incomes will not rise in tandem; unemployment is still climbing.
Furthermore, the underpin of a growing population, often trotted out by brokers and underwriters as a reason why house prices will do likewise, is unlikely to help much. As Morgan Stanley points out, there has been an almost perfect inverse relationship between real house prices and population growth for the past two decades.
Meanwhile, median value first homes are changing hands at 4.5 times average household disposable income, according to Commonwealth Bank of Australia – well above the long-run 3 to 1 mean. The GFC could soon become more than just another three-letter acronym.