So today I wanted to talk about australian house prices with the perfect storm of factors
to create this inflated market and when that’s going to come to an end.
So firstly, house prices were already unaffordable for most and was on the rise just before corona
hit, it started rising as soon as liberal gov won the election again and came to power
and was climbing right up until feb 2020 when suddenly covid put the brakes on everything,
and pretty much the entire housing market dropped about 5% or so, but since then, in
the second half of 2020, house prices has really started to pick up.
The median house price has reached 1.1 million in Sydney, and Melbourne’s not far behind
at $860,000.
In March alone, house prices increased by 50000 for the month which is almost $1600
a day.
On an average Australian salary of 70000 per year, after tax you’ll get around $400 per
day.
So just purely trying to save enough money for a deposit, you’ll be falling behind
by $1200, a day.
Huh, that’s depressing when you think about it that way.
And I think this latest boom in house prices is all due to quite a few factors that have
come together at the right time.
Have a look at this graph of interest rate for the last 30 years.
We have gone from a high of 17% in 1990 to just 0.1% now.
Let’s just call it for what it is, it's basically zero percent.
So since money is so cheap and easy to get access to, there are much bigger pockets when
people go to auction, and that’s why houses are selling for 300 400 500 thousand over
the reserve.
Check out this house in West Ryde Sydney which made the investor more than $415,000 just
by holding it for 9 months with no renovation.
He would have incurred some stamp duty and land tax but gosh that’s the power of selling
in a low interest market with plenty of people fomoing.
The second thing that’s causing the housing boom is the low inventory of houses that are
for sale.
This happens because when the housing market is expected to rise in price over the next
few years, owners will hold out for longer before selling to get a better price for it
later.
And we can see this happening as well because the total number of listings on websites such
as realestate and domain.com are well down this year.
This dark blue line here is the number of listings this year in 2021, and all the other
colourful lines are the previous years.
Couple that with a consistent 80% auction clearance rate and you have the formula for
a house price rocket.
The next big factor in house prices is the government incentives for first home buyers,
which includes the first home owners grant, and the 5% deposit guarantee scheme that’s
available for 10,000 first home buyers every year.
And this is working well because first home buyers are making the majority of the purchases
at the moment.
Take a look at this report from a mortgage aggregator.
You can see that for the first time ever, first home buyers have overtaken investors
for mortgage applications, whereas previously, investors were outnumbering first home buyers
to a ratio of 3 to 1.
And the last factor which really supercharged this housing boom is the relaxing of the responsible
lending laws in Australia.
This was a pretty famous wine and shiraz court case between the ASIC and Westpac where the
judge said to them, I may eat Wagyu beef everyday washed down with the finest shiraz, but if
I really want my new home, I can make do on much more modest fare.
Which basically shifts the onus of responsible lending from the bank to the homeowner, meaning
that credit is much easier to get than before when you would’ve had to cut down on spending
months beforehand to show the bank that you’re responsible, compared to now when you can
cut down once you get the mortgage.
It’s still pretty contentious about who is really responsible when defaults happen
but for our purposes, it was the latest development which leads us to this boom.
So all of these factors have combined to create the perfect storm of the housing boom.
But there are factors that also put the boom in a bit of an overinflated bubble.
The first and most publicised factor is wage growth in Australia which are at record lows
and grew just over 2% a year for the private sector and completely frozen for the public
sector.
If we look at this graph, the red line is the inflation rate, and the blue bars are
the wage growth index.
And you can see that we are just pretty much just keeping up with inflation at the moment
and so net growth is zero.
So what does that mean?
Well it means that house prices are rising without the market being able to fund that
increase.
And so we are in a situation where the house prices are considered unstable like a house
of cards and theoretically should normalise to something more in line with wage growth.
And this brings me to the next point which is the...
Now because wage growth isn’t keeping up with house price growth, that means that the
houses become more and more unaffordable for the average person.
Have you ever had a dream of chasing someone as fast as you could, only for them to get
even further away?
That is the reality of saving for a house at the moment.
Everyone is feeling that by saving as much as you can, it only makes you feel more and
more left behind when you see headlines like median house prices increasing by $1600 per
day.
At the moment Sydney housing price has a factor of 11.8 times the household income, placing
them 3rd in the world after Hong Kong and Vancouver.
That’s not a title that we should be proud to keep, and I don’t think it is sustainable
to have such a big gap between house price and income.
Lastly, our population has shrunk for the first time since World War 1 thanks mostly
to the covid situation closing our borders and therefore our immigration tap.
This has been felt in rental returns mostly for units and to a lesser extent free standing
houses as well, but it hasn’t reduced their asking price at all.
That means that for investors it isn’t really worth buying either units or houses as an
income producing asset because there are so much better returns out there.
So they’ve left it to first home buyers to fight it out on the basis of FOMO which
again isn’t a sustainable way to value things.
So at this stage, the factors for house price growth are outweighing the factors against
growth, but what’s going to happen in the near future?
The truth is, no one knows.
It's as good as asking what the weather will be like in the next few years.
But we have a fairly good idea of the upcoming trend based on what the economic conditions
look like right now.
And this is what I think house prices will do in the next few years, but feel free to
disagree with me on any points in the comments below, I’m more than happy to start a conversation
on it.
First, house prices will continue to go up in the short term.
No question about it.
The combination of low interest rate, low inventory, and high first home buyer demand
thanks to the government incentives will drive the market up.
Especially if the first home buyer deposit scheme continues for another year, which there’s
no reason to think that it won’t at this stage.
Then, it's likely our borders will start to progressively open in small travel bubbles
which will turn on the immigration tap again and cause rents to go up, and drive prices
upwards.
But it's also likely that may take longer than expected so that’s going to be a bit
of a variable.
What will curb house prices though is the explosion of mortgage sizes and credit that
the APRA was seeking to control.
I think that even though responsible lending laws were relaxed, the banks will be pressured
to tighten lending criterias at least and control house prices somewhat.
The main hurdle for the housing market is the federal election that will happen around
mid to late 2022.
If the ALP continues to push the removal of negative gearing benefits and capital gains
tax concessions and then somehow manages to win the election, then the housing market
will flip and likely start the correction.
But if the libs win again, then investors will be reassured of the next 3-4 years again
and that assurance should keep prices to continue rising.
And then between 2023 and 2024, the RBA has indicated that that’s when they’ll start
to flex their muscles and raise interest rates again.
That will have a strong effect on house prices and very likely be the final necessary correction.
Of course all of this depends on the progress of the economic recovery as well, because
it seems like the economy and the housing market are completely separated at the moment,
and we only have 1 tool to control them both.
And we are obviously going to favour growing the economy.
So that’s the state of the Australian housing market recently and in the foreseeable future.
Let me know your thoughts in the comments below, hit the like button if this was helpful
and as always, I’ll see you in the next video.