Multi-Asset

Australian House Prices

It is no fresh revelation that house prices in Australia have streaked to astronomical levels.
January 2019

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

It is no fresh revelation that house prices in Australia – particularly in Sydney and Melbourne – have streaked to astronomical levels. If measured in terms of median price to median household gross income they are simply unaffordable. Only Hong Kong shades them on those metrics – although Vancouver isn’t too far away. But now, finally, gravity is asserting itself. A combination of restrained credit availability, excessive leverage, increasing supply, fewer foreign buyers, threats to negative gearing, general economic uncertainty and simple exhaustion are having an impact.

According to the Australian Bureau of Statistics Sydney prices fell by 1.9% in the September quarter and 4.4% in the year to September. Melbourne prices were down 2.6% and 1.5% respectively. Prices in Sydney commenced their fall in the September quarter of 2017 – down by 1.4% in that quarter.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Use our handy glossary to look up any technical jargon you are unfamiliar with.

More up-to-date data supplied by private survey groups suggest the price decline has steepened. For example, the CoreLogic group claims the Sydney median house price was down 8.9% in the year to December and 11.1% from its peak in July 2017. In the 1989-1991 period Sydney prices fell by a record 9.6% so it appears that the record has now been broken. Melbourne prices are claimed to be down 5.8% in the 12 months to December and 7.2% since their peak in November 2017. The median house value in Sydney is now AU$808,495 whilst the Melbourne median value is AU$645,123. Perth and Darwin have suffered far more with cumulative falls of 15.6% and 24.5% since their respective peaks.

Housing in Australia is a sacrosanct topic. To suggest that prices may fall is to be considered a fifth columnist – or at best, simply foolish. Everyone owns their few square metres of paradise and that is their nest egg that must do nothing but go up in value. Of course a great many have taken it much further and used negative gearing to buy a property investment portfolio that is their path to great riches. Negative gearing is a perfectly legal rort whereby investment properties are sufficiently leveraged to ensure that rental returns do not cover interest payments and outgoings. The loss may then be offset ordinary income such as salary. It means that Australia’s diminishing supply of net taxpayers help fund that path to riches – provided, of course, that prices continue to rise. And that is clearly a very significant “provided”.

We simply look at the fundamentals. The Australian public (and the banks) are extremely leveraged into property at a time when real income growth is static and the personal savings ratio is plunging (8% in 2014, 5% in 2017 and in the September quarter this year just 2.4%). On an international scale householders top the indebted list – relative to disposable income.

Moreover, many Australians entered into interest-only loan arrangements for a period of (usually) five years – after which they revert to principal and interest. The bulk of these arrangements run-off between now and 2020. That will financially stress many borrowers.

In terms of the relationship between median incomes and median house prices Sydney values should fall by around 50% from their 2017 peak – and that would only take them to the equivalent of current prices in New York or Seattle (based upon median income and price data). Of course a fall of 50% is another one of Pyrford’s outrageous suggestions as it would result in an extremely severe recession in Australia. But fundamentals are fundamentals. If things get too far out of whack in one direction they need a period of adjustment in another. The tiny percentage to-date falls are just that – tiny. We expect bigger things.