House prices to crash? Ask your barber!
Writing for Finsia’s InFinance daily report, Robin Christie has quoted the Big Four banks’ head economists speaking at the AB+F Breakfast with the Economists event in Sydney late last week.
Some key excerpts from the article are:
NAB Group Chief Economist Alan Oster noted that a lot of the bubble talk centres on Sydney and Melbourne markets, which are the only two cities in Australia where people who bought at the peak of the previous cycle would be able to sell now and make a big profit.
He added that the Sydney market still has capacity to grow.
“If you wanted to gear up like you used to, house prices in Sydney could probably go another 20 to 30 per cent. But they’re not going to, unless the consumer suddenly says ‘I’m happy and I’m spending’,” he said.
On this point ANZ Global Chief Economist Warren Hogan, albeit in a semi-serious tone, noted that if you believe suggestions that Sydney houses are already undervalued by 20 to 30 per cent, then the market could in fact increase by another 50 to 60 per cent.
Hogan said that despite investors and upgraders driving strong growth in new mortgages, the overall stock of housing credit has shrunk: “That’s because the rest of us who have got a mortgage are paying off our loans at an historically unprecedented rate,” he said.
In defence of Australia’s property market, Commonwealth Bank of Australia (CBA) Chief Economist Michael Blythe said that there are three key signs of a property bubble.
First, the bubble needs to be debt-ridden. However, pointing to Hogan’s comments on conservatism among homeowners and the country’s shrinking housing credit stock, he said that this isn’t the case in Australia.
Second, he added, “you need greedy banks to ease their lending standards and chase ever more dubious borrowers”. This, too, he said was not the case in Australia.
Finally, Blythe said that you need a general expectation that house prices are going to rise forever. On this point he conceded that there could be a smattering of “bubble-type behaviour” coming through, but his overall outlook for the property market was confident.”
Here on the blog, we have regularly defined a bubble for you. Michael Blythe has erred by suggesting bubbles need to be debt-ridden. The truth is that the level of debt will drive how toxic the subsequent bust is. Although it has been a regular feature of previous bubbles, debt itself however is not a prerequisite for a bubble.
And don’t forget, asking the country’s biggest house lenders whether or not you should borrow (or whether there’s a bubble), is a little like asking a barber whether you need a haircut.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Dan Baillie
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Perhaps it could be said it is a housing investor bubble, with 35% of new loans interest only investor loans and first home buyers at historic lows. I think the final stage of the bubble will be when first home grants come back and access to super is granted for a deposit.