House prices in Sydney and Melbourne have risen by 60 and 40 per cent respectively over the past four years, said AMP Capital chief economist Shane Oliver – and the median house price in Sydney is now 12.2 times household income.
Additionally, Mr Oliver explained that the rise in house prices has “gone hand-in-hand” with increasing levels of household debt, making the debt to income ratio for Australian households one of the biggest among OECD countries.
“The surge in prices and debt has led many to conclude a crash is imminent, but we have heard that lots of times over the last 10-15 years. Several considerations suggest a crash is unlikely,” Mr Oliver commented.
Mr Oliver explained that debt interest payments relative to income are around 2004 levels, and lending standards in Australia have not dropped to levels seen in other countries.
The risk of housing oversupply is also unlikely to cause a price crash, as “this would require the current construction boom to continue for several years”, Mr Oliver said.
Mr Oliver added that the risks on the “supply front” are clearly rising in relation to apartments, where approvals to build additional units are running at more than double normal levels.
Altair Asset Management chief economist Stephen Roberts also cited rising levels of housing inequality in China as a risk factor to Australian house prices, explaining that the Chinese government’s recent focus on excessive house price speculation could have a flow-on effect on Australian prices.
“It is reasonable to assume that policy moves to contain house price inflation in China will increase and will reverberate through to investment demand for housing overseas too,” Mr Roberts said.
Both Mr Oliver and Mr Robertson commented that housing construction is likely to ease in 2017, however Mr Oliver remarked such easing would be unlikely to affect the economy as “this is likely to coincide with a fading in the detraction from growth due to falling mining investment and commodity prices”, where Mr Robertson said otherwise.
“The contribution to economic growth from housing will be less in 2017 than in 2016 and will probably lessen the contribution to growth from housing related consumer spending too,” Mr Robertson said.
“In time, policymakers will respond to the weakening outlook, probably with the RBA resuming its cash interest rate cutting program around the middle of 2017.”
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