Over the weekend, the house price Armageddon Army (or AA as I call them) ripped into me on twitter when I dared to question their certainty that house prices will crash in Sydney and Melbourne. Of course, just like an old-fashioned street fight, once a donnybrook has started, all those with anger management issues tend to get stuck into the blue like an old western bar fight!
And some of the swings thrown at me came from all quarters of the AA faction — from those concerned about first home buyers, who want a crash to help out young battlers, to ‘market experts’ using stock market analysis to explain why a bubble must burst, to others who think I’m the Minister for High House Prices and the Filthy Rich! There were even people in Chatswood complaining about Chinese buyers pushing up prices and then the Chinese Government, which is now stopping Aussie house purchases, explaining some potential big price falls.
Property and prices is a national obsession and we’re all ‘experts’. But what has got me into trouble is my insistence that the 40% price fall scare headline, which started on a 60 Minutes programme, has been totally discredited by every credible expert imaginable.
Of course, this brought out the expert haters, who I guess prefer to hear the views of non-experts or guess merchants. That one perplexes me because when I’m sick, I like to speak to an expert doctor, even though he/she can be wrong. When my car stops, I need an expert mechanic. And if I was being sued, I’d talk to a lawyer. But for some of my critics, expert economists, who have spent decades studying the Australian economy, the real estate market and their reactions to interest rates, wages, Government policies, consumer confidence, etc., are just dumb hot air merchants worthy of no respect.
What do you do with bush economists like that?
Anyway, just to make my position clear, I thought I’d outline the main reasons I think the house price collapse scenario for the country generally, and Sydney and Melbourne specifically, looks a tad over-the-top.
That’s why I’m putting forward 10 reasons not to be too spooked about a house price Armageddon:
1. Experts from the likes of BIS Oxford Economics and Deloitte Access Economics have predictions that Sydney and Melbourne property prices will fall from top to bottom by 10-15%. BISOE are closer to 10%, while Access’s Chris Richardson might be closer to 15%. AMP Capital’s Shane Oliver was at 10-15% but has moved to 15-20% but say for Sydney, there has already been a 7-8% fall. As you can see, these numbers are a long way from 40% and Armageddon-ville.
2. The Aussie economy is actually growing faster than 3% and when that happens, unemployment falls. Even the IMF thinks we have two years of 3% plus growth ahead. If people don’t lose their jobs, then they should be able to pay off their home loans. And as growth leads to more jobs, this should create more buyers at auctions and open houses.
3. The US economic outlook is strong and the earliest credible prediction of a US recession is 2020, which implies Wall Street should avoid crashing for at least a year, possibly two. And of course, a stock market collapse could rock consumer confidence and feed on to house prices locally. That said, market crashes can spark a flight to quality and property fits that bill. This happened with the 1987 stock market crash.
4. This chart showing how we get corrections but not crashes:
Note, even when unemployment went to 10.4% in the 1990-91 recession, our price fall was around 5%. That said, the 10% fall with the end of negative gearing in 1985 is a worry and I hope Labor checks out this chart!
5. Interest rate rises from the Reserve Bank are expected until late 2019 or even 2020, so the likelihood of mortgage repayments scaring off homeowners and homebuyers is unlikely for at least two to three years.
6. There’s a lot of scary stories around about people going off interest only loans and being forced into principal and interest loans but my research shows that these loan rates are actually lower than interest only loans and the monthly repayments can be lower! That shocked me and we don’t know how many people are involved and it isn’t likely they’ll be kicked off their interest only loan all in one go. And the RBA, who should know about this, aren’t stressed about this.
7. Those worried about our exposure to home loans always point to our household-debt-to-income number, which is very high, even on global standards. But we were really high when the GFC started and we got through those bad economic times without real estate devastation. The Reserve Bank of Australia’s Assistant Governor, Michele Bullock, who heads the bank's financial stability department, in September this year, explained the surge in household debt since 1990. The ratio of household-debt-to-income has climbed to 190%, from around 160% five years ago, and from 70% 30 years ago. In the early 1990s, Australia had debt-to-income ratio lower than two thirds of countries in her sample; now we’re among the top 25%. Ms Bullock points out that a lot of households have a buffer after over-paying their mortgages because rates are so low. Also, as a country, we have more households as landlords, compared to similar countries where companies hold most of the rental stock. That means a lot of these indebted households are helped by the tax office. All up, our household-to-income numbers are not quite as internationally scary as they look when we’re compared to similar countries.
8. The RBA’s Assistant Governor said this five days ago: “Australian banks are well capitalised and profitable, and have sound lending standards and plenty of liquid assets. The major banks are already very close to meeting the Australian Prudential Regulation Authority's unquestionably strong capital benchmarks. This is good for the resilience of the banking sector in the face of any downturn.” If the banks looked dodgy, that could be a trigger for a house price problem but the RBA says the opposite is the case.
9. A doomsday merchant mob, Moody’s, which always looks for reasons to downgrade governments and banks, in June predicted that the worst was over for house price falls in Sydney and Melbourne. I think they’re wrong and we’ll see some more falls but I can’t see them being terribly wrong. Moody’s Analytics housing economist, Alaistair Chan, said dwelling values in Australia's Housing Market are seeing slower growth as a result of past value increases. “Which has exceeded income and rental growth, past supply increases, and actual or expected increases in borrowing costs,” Chan said. “That said, the worst is over, as less housing supply and Australia’s strengthening economy will support income and rental growth, and this dwelling values, beginning next year.” Also, as Chris Richardson from Deloitte points out, our population growth will also help stop prices falling too heavily.
10. Finally, Australians can’t easily be compared to other countries when it comes to home ownership. Our full recourse loans and our passion for property make it hard to look at price-to-income ratios like you might for stocks and say what we’re paying is irrational. We are irrational when it comes to property, like those who have been buying Amazon, Netflix and Facebook on ridiculous values. But many of the people who have overpaid will stick with their properties, as long as they can make their payments. Many who have negative equity won’t know it unless they try to sell it. Being economically rational about what we’ve paid for property shows you don’t understand we Aussies when it comes to our beloved quarter acre block or trendy inner-city apartment.
If my view on the Oz economy was negative and I believed a big global recession and stock market washout was near, I’d be in the AA camp but I think time is on our side.
I learnt from the great Max Walsh, the former boss of the AFR that with most crises or potential crises, we generally muddle through and the economic Armageddon commentators usually get proved wrong.
I stuck with that with my GFC commentary and it’s why I was advising to go long stocks in late 2008. Sure, it took to March 2009 to be proved right but the ‘muddle through’ view proved right, though it was helped by pretty heavy-duty rescue plans created by the Yanks.
Of course, I could be wrong but in all honesty, not one of my critics has the credibility runs on the board for me to dump the likes of the RBA, BIS Oxford Economics, the Economist Intelligence Unit, Moody’s, et al, as well as the history of property prices in this weird country of ours.
Interestingly, I did ask my tweeting critics this question: When have we had a national crash of property prices? One expert came up with 1895 but that was a Great Depression, so it suggests that maybe we need a Great Depression for us to be rocked out of our housing hysteria!
I can’t wish that on us and one reason I rail against excessive headlining of house price collapses is that it spooks consumers and then it could be self-fulfilling.
As Franklin D. Roosevelt once warned: “The only thing to fear is fear itself.”