When it comes to the price of housing, Australia is not high up on the global list of affordable places to buy a home, and unfortunately there doesn’t appear to be much relief in sight for home buyers. Statistics show that the number of home buyers who spend more than 30% of their gross incomes on housing costs has more than doubled since 1982. To add insult to injury, last week The Economist released the results of its global housing affordability audit, which revealed that housing looks to be more than 40% over-valued in Australia, Britain and Canada. This figure is arrived at by considering the relationship between prices and disposable income (reflecting affordability) and between prices and rents (which offer an alternative to buying your own home). Whilst the property market has cooled slightly in the first quarter of 2016, the likelihood of any significant price drop across the board does not seem to be on the cards.
What economists seem to be most worried about is the amount of debt that Australians are taking on. The Australian Population Research Institute released a report at the beginning of March that warns that ‘Australia’s mortgage debt level has reached “dangerous territory” hitting $1.45 trillion and growing by $100 billion a year’. When the Australian Prudential Regulatory Authority began compiling statistics in 2008 that figure was $638 million, revealing a staggering growth rate in the amount of debt Australians hold. The APRI report also points out that the average debt level of Australian households, of which the vast majority is mortgage debt, is equivalent to 160% of the mean annual income of each household, which is higher than almost all of the world’s developed countries.
Experts warn that the high level of mortgage debt in Australia leaves Australians very vulnerable if the property market were to crash, or interest rates were to rise significantly. AMP Capital chief economist Dr Shane Oliver however says this is not likely. He confidently puts the likelihood of a property crash where prices drop suddenly by 40-50% or so as being at about a 20% chance. Economist Professor Keen isn’t quite as optimistic. He recently noted in the Australian Business Review that Australia has ‘the highest levels of mortgage debt and total household debt, in the world – more than 120% of GDP compared to under 80% in the USA, which is a concern when you consider calamity that occurred in the US during the GFC. In contrast, Dr Oliver cites the most concerning risk to be more of a ‘social’ one around the issue of housing affordability; and the fact that people need to borrow ‘exorbitant amounts of money to buy a home’ having led to the ‘screening out an entire generation of people from the property market’.
The CoreLogic RP data March Home Value Index results have confirmed a moderate value growth rate across the country, driven mainly by the cooling of conditions in the major markets of Sydney and Melbourne. But it is important to remain objective, and consider that nobody has predicted a dramatic price dip. Of course, it is impossible to be able to predict the future with absolute certainty, and so in the end it is important to remember that well maintained homes in popular high-value areas will always be in demand, and it is best to buy carefully and consider the volatility of the property market when making property decisions.