Aussie Housing: The unburstable bubble?
With Australia’s economic growth stumbling at its slowest pace since the GFC; our two largest export partners, China and Japan, decelerating and contracting respectively; and Coronavirus now going global, Australia’s resurgent residential property market is starting to look the like the 'unburstable bubble'.
We asked Tim Hannon, Co-CIO from Lucerne Investment Partners for his take when he was in the Melbourne studio recently. Tim cited a few potential causes for the current fillip in housing and restated his view that credit growth is the long-term driver investors should watch:
“All the signals are there for the housing market to continue to decline. But what we need to see is negative credit growth... and we are not there yet”.
Watch now for his full view on this critical $6 trillion market central to Australia's economic prosperity.
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One of the interesting things we're observing right now is a fill up in housing loan approvals and house prices that is going against what you think should occur in a weakening economic environment. There's a few reasons for that, purportedly, and they're just suppositions. One is the Hong Kong and Chinese capital coming down. One is low interest rates coming from some of these FinTech companies, but it has created a short-term fill up. We don't think that is the end of the housing downturn. We don't think it's a sign of a strong recovery coming.
One of the issues with the housing market in Australia is its disequilibrium. And the disequilibrium has been created over 20, 30 years and it's not going to be fixed in a year or two.
One of the reasons for the disequilibrium is in banks back in the early nineties used to have about 20% of their loans to the residential market. It's around 60% now. And the reason for that is because the RBA and APRA have allowed banks to make the highest return on equity from lending into the housing market. So naturally, they've lent more to the housing market. And so what we've seen is credit growth to the housing market growing at 14 to 15% per annum for decades. That compounds. If you've got wages growth at 3 or 4% per annum, naturally you get to a situation where house prices compared to wages are way out of equilibrium and will take some time to come back into equilibrium again.
When we look at some of the key metrics of the housing market, our debt to GDP in Australia is 200%. That is an absolute global record, and it's well in excess of where the US was prior to the global financial crisis there, which we avoided.
So all of the signals are there for the housing market to continue to decline. But what we need to see is negative credit growth. And we're not there yet. It used to grow 10 to 15% per annum, as I mentioned. It's slowing now down to 3 to 4% per annum. So it's still positive and growing. If it moves in a negative territory, we've got issues.
There's been a lot of academic work done on this in a terrific book by Reinhart and Rogoff. It's called “This Time It's Different”. And you can go over through and read that book and statistically see how Australia meets all the criteria of a housing market that could move into crisis. But the one thing it needs is negative credit growth, and we don't have that yet. So no alarm needed as yet.
Now, one of the interesting things about housing markets is they don't crash like the stock market. The average decline is 4 to 5% per annum over five years. In Japan, it's been negative 1% per annum for 20 years, so they go very slightly. They fall very slowly. Now, one of the reasons the RBA and APRA and the like don't want that to happen is the housing market's a huge component of the economy. It's about 6 trillion in assets. Now you compare that to our GDP of 1.7 trillion. The stock market around 1.5 trillion, and all commercial real estate at 0.7 trillion. That 6 trillion number is a big, big number, and there's borrowings against that.
So it's very important that the housing market doesn't decline significantly. And if it does fall, you will see interest rates fall further in Australia.
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