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Is the house price bubble about to be pricked?

Paul Rickard
1 April 2021

Talk to anyone who has attended a home auction recently and they will tell you that it is a bidding frenzy. Houses are selling for tens of thousands of dollars in excess of their expected range. Statistically, auction clearance rates are well over 80%. CoreLogic reported that in February: “house prices posted their sharpest monthly increase since August 2003”. Today, we will get the figures for March which will probably top the February surge. And just last week, ANZ economists lifted their forecast for housing prices saying that they expected prices to rise by 17% around the country this year.

The market is booming!

Of course, the housing market is not one homogenous market and not all areas are booming. But many are, including large chunks of Sydney, Melbourne, Brisbane, Hobart and Adelaide, as well as “sea change” regional areas.

Driving the boom are three factors. Firstly, ultra-low interest rates, sometimes starting with a big figure of “1”, have made housing more affordable. Young adults, in particular, are doing the sums and working out that when interest rates are low and can be fixed, monthly loan repayments are less than what they currently pay in rent. The “bank of mum and dad” is doing great business helping with the deposit gap.

The top and middle ends of the market are being supported by the return of expats. Since Covid hit, tens of thousands of expats have returned to Australia. Coming from well paid jobs, they are typically “cashed up” and ready to spend.

And while some Australians are doing it tough due to Covid, many others are enjoying the booming economy. Billions of dollars have been spent by Government to stimulate the economy, and billions of dollars have been accessed from superannuation savings to pay off the mortgage or help with the deposit gap. Consumer confidence is high, the sharemarket is near record highs and many Australians are feeling pretty comfortable. The “wealth effect” is spilling over to the housing market, fuelling demand for bigger and more desirable homes.

Across the Tasman, our Kiwi friends are experiencing a similar boom. If anything, it is even more frenzied because the return of expats has been a bigger driver and they haven’t been hit by the withdrawal of the Asian investor.

Last week, the NZ Government announced a number of measures to dampen housing prices, with carrots for first home buyers and sticks for investors and speculators. On the supply side, a NZ$3.8bn fund will be established to unlock more land for housing and provide infrastructure for developments. There will also be higher income caps for first home buyers to receive government support.

Investors will no longer be able to claim a tax deduction for the interest expense on a loan (in other words, offset the interest cost against the rent). This will apply immediately to new properties acquired on or after 27 March 2021 and be phased out over the next four years to already acquired properties. This measure effectively kills both positive and negative gearing.

The so called ‘bright-line’ period has been doubled from 5 years to 10 years, meaning that investors who own a property will pay income tax on the gain if they have owned the property for less than 10 years. New Zealand’s central bank, the equivalent of our Reserve Bank and APRA (Australian Prudential Regulation Authority), has been asked to review debt to income and other loan servicing ratios, with a view to tightening lending standards and making credit harder to get.

Back in Australia, APRA Chairman Wayne Byres said on Tuesday that “while certain risks were rising, there was no need for intervention yet”. According to the Australian Financial Review, he went on to say that: “should risks materialise, we have a range of tools we could employ”.

One thing the Government will not be doing is to follow the NZ Government’s lead to kill negative gearing and widen the tax net on property gains. Along with franking credits, these were the policies that caused Bill Shorten to lose the “unlosable” election in 2019.

So with tax policy off the agenda, APRA will have to come to the party to put a break on house prices. The pressure to do so will become substantial, as politicians from all sides seek to respond to growing concerns in the community about rising house prices. While many homeowners secretly enjoy rising prices, this is one of those issues that seems to fire up the community. If it is not already, it will become a burning issue.

APRA will respond in the next few months, most likely in the form of further restrictions on interest only loans, tougher loan servicing ratios, lower LVRs and other measures to make credit harder to get. Variable interest rates might not go up, but there will be pressure on fixed rate loans.

Will this be enough to prick the housing price boom? My guess is that it might temper it and slow the rate of increase, but unless we see a big pick up in unemployment or the Reserve Bank starts to increase interest rates, this boom has quite a way to play out.

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