Australia s Housing Market

Transcription

1 Australia s Housing Market March 2016 Update

2 In August 2015 we investigated the notion that a bubble is developing in the Australian housing market. We concluded that these fears seem to be justified; that house prices are on an unsustainable path and are increasingly detached from Australia s economic fundamentals. Seven months on, we ve revisited our housing bubble assessment criteria to determine the current state of the market. Our updated findings are featured in this report.

3 With regard to Australia s general macroeconomic situation, little has changed since last August. The Reserve Bank of Australia s year-average growth forecast for 2015 at that time 2.25% was very close to the mark 2.35%. Growth is stable but remains behind the long term target rate of 3.25%. Unemployment has fallen slightly from 6.3%, but at 6% (February 2016), it remains high. Government debt as percentage of GDP has risen, at 43.32% for 2015 according to Reuters latest estimate. Inflation remains below target, at 1.7%. The currency has been stable, with the AUD/USD currently at 0.74, the same rate as last August. This lack of change is unsurprising, given that last summer s headwinds persist. Worries of slowing growth in China and the slump in global commodity prices continue to weigh down on the Australian economy. While not a terrible situation for Australia, the country is facing tougher economic times than it has known in recent years. Turning now to the housing market, we ve revisited the seven key bubble indicators used to draw our conclusions last August. They give an indication as to the state of the market and the relationship between prices and fundamentals. Both our previous and our updated assessments are shown in the table below. Indicator August 2015 March House prices House prices have been rising for some time and are at an all-time high. They are rising at a rate that s rapid, persistent and out of step with fundamentals. Prices have continued to rise rapidly. Across Australia s capital cities, house prices grew 7.83% YoY in February 2016, and continue to increase month on month. Although still very high, this is a slower rate than 11.1% last July. This indicates that we may be approaching the top of the bubble. 2. House price to income ratio House price to income ratios are currently higher in Australia than they were in the US prior to 2008, and are still rising. House price to income ratios have risen significantly further, from 7.92 in mid-year 2015 to 8.43 at the beginning of Prices are becoming increasingly detached from incomes. With regard to its long term average, there has been further deviation and Australia remains far above other similar economies. At almost 143 on The Economist s index, not only does it surpass the US pre-2008, but it is catching up to the range, which is where both Spain and Ireland were when their bubbles burst. 3. Mania There are clear signs of mania in the Australian housing market. Signs of mania continue to surface. In late February 2016, a story of a 24-year old woman who was loaned AUD 6.4 million and purchased 10 properties made the news. 4. Prevalence of cheap mortgages Demand for interest-only period mortgage loans has grown by 80% since In terms of nominal amounts, new interest-only (I-O) period loans increased significantly in just one year, from AUD 29.1 billion in 1Q14 to AUD 34.8 in 1Q15. These trends have continued, with the value of outstanding mortgages with I-O periods increasing by almost 12% YoY according to the latest APRA data, from December The I-O share of the total outstanding mortgage loan balance increased by almost 5% YoY.

4 5. Ability to pay Homeowners ability to make repayments is under threat, with 31% already experiencing mortgage stress due to unemployment. Interest rates are currently low, but they won t stay this way in perpetuity. 6. Household debt High and rising levels of debt make Australian households vulnerable, while mortgage repayments constitute an unsustainably high percentage of incomes. This remains true. Unemployment is still too high. The percentage of new mortgage loans with an LVR of between 80-90% rose YoY in December Australian households overtook the Danes as the most indebted in the world in January 2016, with debt having continued to rise over 3Q15. Mortgages as a percentage of incomes rose further between mid-year 2015 (64%) and the start of 2016 (66%); far above the recommended 28/36 Rule. 7. Mortgage market regulation Conclusions Regulators attempts to tighten lending standards seem to be too little, too late. Ultimately, fears over the Australian housing market are indeed founded. Our indicators overwhelmingly suggest that there s a bubble, and that it will be damaging to the broader economy when it bursts. House prices are on a concerning and unsustainable path and are out of step with economic fundamentals. There are no catalysts for a healthy slow-down on the horizon. No significant change here; on the whole, macroprudential controls remain insufficient. Seeing as the bubble has now well and truly developed, any change would be too late to cool the market anyway, and may trigger the correction. Essentially, our conclusions remain the same as seven months ago. With many of the negative trends having continued, the situation has further deteriorated. Not only have prices continued to rise from already dangerously high levels, but key indicators such as household debt as a percentage of GDP, house price to income ratios, and mortgages to incomes, have also worsened. We looked at the additional indicator of house price to rents, and found it to be high and rising; a further clear sign that property is seriously overvalued. Our indicators suggest, based on historical comparisons, that the top of the bubble is nearing. We believe we are likely to see the market correct during 2016.

5 HONG KONG Level 19 Two International Financial Centre 8 Finance Street Central Hong Kong Tel: Fax: SINGAPORE Level 39 Marina Bay Financial Centre Tower 2 10 Marina Boulevard Singapore Tel: Fax: AUSTRALIA Level Collins Street Melbourne Victoria 3000 Australia Tel: Fax: For further information on this report or our other research, please contact: STRATEGIST Amy Reynolds amyreynolds@aptcapitalmanagement.com Other contacts: CHIEF INVESTMENT OFFICER Simon David Allen simonallen@aptcapitalmanagement.com MEDIA ENQUIRIES mediarelations@aptcapitalmanagement.com INVESTOR RELATIONS MANAGER Amy Chen amychen@aptcapitalmanagement.com Copyright 2016 Apt Capital Management Limited. All rights reserved. This report was prepared by Apt Capital Management Limited from sources believed to be reliable. No warranties are made to the accuracy of information contained in this report. The content of this report is provided as general information only and should not be taken as investment advice. All content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed in this report are solely the opinions of the author(s) and do not necessarily represent the opinions of Apt Capital Management Limited. Apt Capital Management group companies may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis in this report is your responsibility. Consult your investment adviser before making any investment decisions.