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Australia's house prices 'flashing red', debt to income ratio at record levels

Date

Christopher Joye

Sky is not the limit: Barclays chief economist Kieran Davies has concerns about Australia's housing market.

Sky is not the limit: Barclays chief economist Kieran Davies has concerns about Australia's housing market. Photo: Nic Walker

Australian household debt has hit a record 177 per cent of annual disposable income while housing valuations are "flashing red", according to Barclay's chief economist, Kieran Davies.

"House prices now equate to 4.3 times annual income and 28 times annual rent, both within a fraction of their historic highs," Mr Davies said.

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The respected former treasury economist believes the RBA is "worried about the strength of the housing market, where the evolution from recovery to boom has brought jawboning by the governor into play."

"We're paying more attention to house prices and credit than the currency to see if the RBA changes its mind on macro-prudential tools [which limit lending growth] to gauge if housing strength could trigger a rate rise this year."

In March RBA governor Glenn Stevens warned "we need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm".

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"Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market ... that would be unwelcome," Mr Stevens said.

Australian house prices leapt almost 11 per cent over the 12 months to 31 March to record levels in absolute terms, with capital gains of 15 per cent experienced in the nation's largest city, Sydney.

Using ABS data on total Australian household liabilities and incomes, including small business debts that are excluded from similar RBA metrics, Barclays found that the ratio of household debt to disposable incomes has hit a record of 177 per cent.

"This is up from a recent low of 173 per cent and exceeds the previous high of 175 per cent reached in 2010," Mr Davies noted.

In striking contrast to consumers in the US and UK, Australian families have boosted debt relative to incomes since the 2008 crisis. The RBA put the household debt to income ratio at 149 per cent in December, just a touch off its 153 per cent peak in 2006.

Christopher Joye writes a blog for AFR.com. You can find it here

245 comments

  • Who is this alien that has taken over Chris Joye's body?

    Commenter
    NT
    Date and time
    April 04, 2014, 10:31AM
    • Reasons house prices will fall:
      1. Interest rates will soon rise from current historic lows (per forward rates, IMF, most experts)
      2. Private investment falls off a cliff over next 24 months (end of mining construction boom)
      3. Economy is weak with unemployment rising (manufacturing etc uncompetitive)
      4. Continued fears of global credit crunch due to unsustainable debt / fake growth from stimulus
      5. Tough budgets / spending cuts needed to reign in the deficit
      6. Iron ore and coal prices have plummeted, meaning lower taxes, profits, investment, jobs
      7. Flood of new apartments etc in East Coast capitals
      8. Amongst the highest and most unaffordable house prices in the world

      Reasons house prices will keep rising:
      - High immigration

      Commenter
      James
      Date and time
      April 04, 2014, 11:34AM
    • Invalid reasons house prices will keep rising:
      - "Demand greater than supply". People are only demanding property for fear of missing out as prices rise. As soon as prices expected to fall (as my above reasons bite), who will be wanting to buy an asset expected to fall in value? Most buyers are investors and speculative demand can go to zero overnight.
      - "Interest rates can't rise unless economy strengthens". Wrong. Interest rates must rise when inflation rises irrespective of economic growth. Inflation already in top half of RBA target band 2-3% and rising (due to low interest rates). The RBA is also saying they're concerned low interest rates are causing excessive house price rises and might act for that reason alone

      China is looking wobllier by the day. If they continue to slow then Australians are in for a rude reminder of the perils of building an economy based on exhorbitant debt, which isn't invested productively, but rather in a house price ponzi scheme.

      Commenter
      James
      Date and time
      April 04, 2014, 11:45AM
    • Argh, here we go AGAIN! So what if prices fall James? They have fallen before, recovered, and then some and have fallen again etc etc. The general trend though is gently up (barely noticeable actually on the first graph, after that infamous 90s-early noughties boom). Maybe we should be pleased that the trend line (if you draw it through the peaks and troughs) is gentle in the last decade. We seem to be stabilising at a new normal. Indeed, we need some sort of price rise over time, just to beat inflation. House prices have a big psychological effect on our economy and a slow rise would be ideal.

      But given human nature, both the housing market and stock market don't operate in some neat gentle trend. There are bouts of exuberance and pessimism. Thanks to the latter, I snared my dream home! I just couldn't believe the fear and lack of interest in late 2011. Hallelujah! The only disappointment was selling my old home in a similar market (albeit cheaper places were discounted less). Heck, I've bought and sold several times since 1997 and the hysteria over the "swings and roundabouts" is amusing...but increasingly boring.

      Commenter
      Passionfruit
      Location
      Sydney
      Date and time
      April 04, 2014, 12:11PM
    • We need our prices to fall.. we are such an expensive country. People like overseas should be able to afford their own home. Something needs to be done.

      Commenter
      The Other Guy1
      Date and time
      April 04, 2014, 12:13PM
    • To add to James comment:

      How do you keep GDP going up? High immigration.
      How do you keep people feeling rich? high property value.

      "That's right! the economy is growing".

      The is dodgier than a house of (credit)cards.

      The govt is addicted to stamp duty, they are addicted to growth (even it is only due to growth of population).
      They can't see that WE don't want this.

      Commenter
      cranky
      Location
      pants
      Date and time
      April 04, 2014, 12:17PM
    • Stevens is constantly trying to cover for his own mistake of taking too long to lower interest rates and then bringing them down too quickly. He should have moved at least 18 months earlier than he did to try and bring the dollar down but this would have been helpful to the ALP government which he didn't want. This guy is public enemy number one f the Australian economy. His job shouldn't really be to pontificate but rather to act effectively at least occasionally.

      Commenter
      GOV
      Location
      Sydney
      Date and time
      April 04, 2014, 12:18PM
    • I'd say housing price will continue upwards overall. Worst case scenario is that Sydney's housing market will slowdown or pause for a while and pick up again after a few years. As an investor, I see that the risk-return in Sydney is no longer acceptable (by my standard anyway) and that is why I am having my sight on Brisbane and Gold Coast.

      Commenter
      Pomato
      Date and time
      April 04, 2014, 12:29PM
    • @James, your "reason" why property prices will fall is conventional theory.
      The reason the properties (major cities) will hold their value or may keep on rising:
      1) Most mum & dad investors are spooked with the stock market. The only "safe" investment
      they know and comfortable with is property.
      2) SMSF who holds billions in funds are now allowed to invest in properties. They don't really care about the short term return as long as their money is invested in "safe" assets. They don't care about high purchase price either because their investment view is very long term - say 20 to 30 to retirement.
      3) These rising property prices has created lots of budding property investors who realised that they can purchase their next property using their current prop. equity. (very scary at this time).
      4) Low interest rate will hold as long as the overall economy is weak. The RBA is stuck- between-a-rock-and-a-hard-place - Can't raise it and can't lower it either. All Stevens can do is talk down (scare buyers), the prop market and hope that it will cool down.
      5) Newly cashed-up Asians are diversifying. They wanted to "spirit away" part of their wealth to more stable western countries like the US, Canada and Australia. They find properties in Australian major cities are still relatively CHEAP.
      ..continued....

      Commenter
      hammer
      Date and time
      April 04, 2014, 12:34PM
    • @James
      hammer comment continued....
      6) The US central banks has been printing trillions of dollars, and the EU central banks will print more to prop up the economy. But sadly, most of the money end up in stock market. When stock market rises, property prices usually follow suit.
      7) It is very expensive to build houses in Australian major cities. From tradies to builders, councils to service providers, they all wanted their hands in the property cookie jar. Not to mention State govts hoarding land releases to prop up land prices even more.
      8) First Home Buyers - non existent. they cant afford to buy.
      There you have it. (Disclosure: I am a property investor and a "bear" at the moment).

      Commenter
      hammer
      Date and time
      April 04, 2014, 12:36PM

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