Headlines involving housing bubbles and busts, mortgage stress or real estate forecasting of any form remain sure-fire clickbait. Given Australians' love affair with bricks 'n' plasterboard, is there a week without one or all of the aforementioned?
After a couple of prominent examples last week, releases on new home sales, building approvals and housing prices should provoke a few more over the next five days. And they are as likely as the last lot to be overblown.
Fortunately, there are a few level heads around trying to hose down the worst excesses, be they on the up or down side. Whether it's been Glenn Stevens reminding people that housing prices can fall as well as rise, or Rory Robertson wagering Professor Doom, Steve Keen, to a long walk, perspective is out there. They just don't attract nearly as many eyeballs.
Illustration: John Spooner
And thus to AMP chief economist Shane Oliver neatly taking just four paragraphs to shoot down the latest fears of a mortgage crisis about to erupt as soon as interest rates rise. But his rebuttal also provides a reason for the chase for yield on the stock market to continue and to underline the folly of retirees hoping to live off income from term deposits.
Oliver took aim on Twitter at an attention-grabbing Credit Suisse line (mortgagebusiness.com.au/breaking-news/7529-mortgage-repayments-unsustainable-if-rates-) that borrowers would face global financial crisis-like stress levels if the Reserve Bank lifts rates by just 100 points. He then demolished it as overblown in his weekly market rap.
For a start, Oliver noted there were similar warnings at the bottom of the 2009 cycle that didn't amount to problems when rates tightened. He gave four succinct reasons:
Keeping a lid on things: Glenn Stevens has consistently reminded people that housing prices can fall as well as rise. Photo: Glenn Hunt
"First, just as Australians have sped up principle repayments as rates have come down, they will likely slow them as rates go up. In fact, debt interest payments are at a 10-year low. (A view confirmed by the latest National Australia Bank figures (smh.com.au/business/nab-says-mortgages-well-under-control-20140727-3cnut.html).
"Second, the household debt to income ratio has been basically flat since the GFC so it's not the case that Australians have been rapidly taking on more debt.
"Third, interest rates won't rise unless household income is also on the rise and this will provide some offset to higher interest rates.
"Finally, the rise in household debt ratios over the last 20 years has left households a lot more sensitive to higher interest rates. But this is not new and it explains why the peak in the cycle for interest rates has been trending down. The RBA is well aware of the issue and knows that it doesn't need to raise rates as much as in times past to have the same impact."
Oliver suggested that, just as the 2010 cash rate peak of 4.75 per cent was below the 2008 peak of 7.25 per cent, the next peak will likely be lower again, "maybe around 4 per cent".
And that has implications well beyond our housing fixation. If there's only an eventual upside of about 150 points from here, it would be a disappointed retiree who is hanging out for rate rises to make much difference to their income from fixed interest investments. They will continue to discover that, for all the supposed "safety" of term deposits, they end up being very costly over time as capital is eroded by even relatively low inflation and interest rates wallow.
The corollary is that the search for yield from the stock market rolls on unchallenged. The dividend-seeking SMSF army Charlie Aitken belled will continue to reward boards that hand over the fully franked stuff and punish those that don't. And with valuations no longer cheap and a track record of underperforming the average SMSF, more institutional investors will be forced to join in.
The outlook of no rate rise on the horizon and then not much of a rise anyway plays to Aitken's prediction of P/E expansion.
"The P/E expansion will be greatest in the sectors that offer sustainable income streams," the super-bull Bell Potter managing director wrote a year ago (smh.com.au/business/markets/the-big-bull-bellows-again--and-catches-a-political-rba-moment-20130806-2rawe.html).
"Therefore I expect a disproportionate amount of the flow to head towards income funds, buy/write funds, pure industrial funds and individual stocks that have income attributes. A wall of income-seeking money will be heading down a relatively narrow street and when that happens you do get P/E expansion beyond expectations."
In Oliver's monetary scenario, it doesn't require much profit growth to maintain the superiority of dividend yield. The looming profit reporting season should demonstrate that, albeit through productivity gains rather than increased sales.
As for those worried about servicing their mortgages, Oliver says it's still a bit academic as the first rate increase is still a way off. In the meantime, the cut in fixed rate mortgages to less than 5 per cent provides another opportunity for home buyers wanting to lock in low mortgage rates.
Michael Pascoe is a BusinessDay contributing editor.