Aussie housing stock is not too expensive

As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.

One of the perennial puzzles tossed around Australian dinner tables is whether our bricks and mortar is expensively priced.

Despite the steady ascent of national dwelling prices at an inflation-plus pace over the last few decades, one has never had to look far to find an “expert” declaring that the world was about to end. Predictions of catastrophic falls in house prices have always been good for garnering a few media headlines.

And, regrettably, the media is not great at holding purported experts to account. A classic example appears in the Australian Financial Review today. AMP’s Shane Oliver is reported as claiming that Sydney housing is overvalued because the representative dwelling price is an unacceptably high $634,000. Shane also contends that since his home’s capital gains have outstripped his personal income growth, this is likely true of all Sydney housing.

Unfortunately, the facts do not fit with this fiction. Shane’s estimate is actually off by $119,000 (or 23%). According to the biggest database of home sales in Australia, which covers all transactions, the median dwelling price in Sydney is currently $515,000. Furthermore, Sydney dwelling prices have only risen by a compound annual growth rate of 2.7% over the last eight years. That means Sydney dwelling prices have declined in “inflation-adjusted” terms (after a very strong run-up before 2003). If we look at Sydney detached houses – as opposed to all dwellings – the compound annual growth rate falls to just 2.3%.

In income-adjusted terms, the comparison is even more stark: the ABS reports that average disposable household incomes have advanced by 6.3% per annum since March 2003. This is a massive difference. It means that while disposable household incomes across Australia have risen by 63.4%, Sydney dwelling prices have expanded by only 24.6%. That is, incomes have outpaced Sydney dwelling prices by an extraordinary 38.8 percentage points over the period March 2003 to March 2011.

In sympathy with the boom-bust business cycle, asset prices tend to also rise and fall.

The housing market is a little different to other asset-classes insofar as you can typically obtain more debt against a property – more than 90% in some cases – and for longer terms – up to 30 years – than alternative investments. This means that there are latent risks that can build up if credit growth is unnecessarily lubricated and used to fuel house price inflation, which can stimulate more credit creation until the Ponzi pattern is undone by a shock.

The point is that policymakers need to be attuned to these interdependencies if they are to avoid the sorts of problems we saw emerge in the US.

Across the $3.5 trillion worth of private housing in Australia, the amount of debt secured against it is actually quite low, at circa 29%. For those home owners with a mortgage, the value of their loan as a proportion of their home is, on average, also pretty low, at 50 to 60%. That means house prices would have to fall by about 40% before the typical person suffered “negative equity”.

Clearly, there are also folks sitting in the tails of this distribution who are more vulnerable. But they are a small percentage of the total. The RBA estimates that only 2.5% of all borrowers have a loan-to-property-value ratio equal to or greater than 90% and are paying away more than 50% of their disposable income to service their repayments.