Bloxo warns of property bubble

Ah the irony! From Bloxo:

 

– We expect continued strong national housing price growth, of 7-8% in 2015, driven by record low mortgage rates
– Housing construction is also set to pick-up strongly, with a new record of 200k dwellings approved in the past year
– Given the recent RBA cut, the risk of a housing bubble is increasing, particularly in Sydney: efforts by the prudential regulator to tame investor activity bear watching closely

A tricky balancing act
Monetary policy is being pushed to its extremes as Australian policymakers seek to rebalance growth following the mining boom. Last week the RBA cut its cash rate to a new record low of 2.25% and markets are pricing in a further cut to come.

An area that is getting clear support is the housing market. Housing prices have risen by 23% over the past 2½ years and are currently growing at 8% y-o-y. In Sydney, they are up 33% and are rising at 13% y-o-y. Building activity is also booming, with national residential approvals reaching record highs of over 200,000 dwellings over the past year. Low interest rates are the main driver of the upswing, although foreign demand remains strong and the recent fall in the AUD/RMB exchange rate could give it a further boost.

In general, this is a positive story. When the mining boom was at its height, in 2011 and 2012, tight monetary policy saw housing prices fall, such that there has been room for prices to increase, simply to catch up with previous levels. Also, when mine construction was booming, too few houses were being built to meet demand from a rapidly growing population, creating a housing undersupply. Now is a good time to boost housing supply.

But it is also possible to have too much of a good thing. Construction of new housing is welcome, but further housing price gains may present challenges. Recent cuts in mortgage rates to new all-time lows increase the risk of the housing market over-inflating.

In response, the prudential regulator announced new mortgage guidelines in December 2014, to attempt to tighten lending standards. But since then, mortgage rates have fallen further as the RBA cut again. New prudential measures seem designed to allow the RBA room to cut rates further without excessive house price growth, but they remain untested.

We expect national housing prices to rise by 7-8% in 2015, once again well ahead of household incomes. We see Sydney prices rising by 9-10% in 2015 and expect that, when rates do eventually rise, there is now a high risk that Sydney will see price falls.

A bubble now, Bloxo? It’s been a raging bubble for fifteen years, slowly but surely twisting the entire economy around it. Look at the chart (arrows added)! Full report.