Australia’s last property boom?

By Leith van Onselen

Bank of America Merrill Lynch has released a note today arguing that this could be Australia’s last property boom for many years as investors second guess their love affair with property. From The Canberra Times:

“A period of weaker price growth or outright modest declines is likely to become entrenched over coming years,” said Merrill Lynch in a note to clients. “We’d expect that such a period could severely test Australians’ long love affair with property investment”…

Record low interest rates have been in place for some time, and while this initially prompted new entrants into the property market, the extended period of these conditions has left few marginal buyers, who are more cautious than at the beginning of the cycle.

While diminishing house price growth has not overly knocked household spending or confidence, the bank sees significant oversupply exacerbating the apartment sector in the coming 12-18 months, particularly in Brisbane and Melbourne’s central districts…

“In addition, over this period, they are likely to face regulatory risks from both sides of politics,” said the bank, referring to taxation statistics suggesting that among the two million landlords in 2013-2014, one in six individuals were eligible to pay tax, a potential target for government tax policy.

After the 2010 bubble peak, I never though Australia’s housing market would reach such lofty highs again. And yet fast forward to 2016, and Australian housing is sitting at a record high valuation against incomes, rents and GDP.

But there are good reasons to believe that the level of this peak will not be exceeded for a long time.

First, mortgage rates are at or near their bottom. Although the RBA has room to cut the cash rate another 1.5% or so, the banks will be unable to pass much of this on given rising funding costs due, in part, to their unprecedented offshore exposures.

Second, bank capital rules will be progressively tightened over coming years, which could act to ration mortgage credit.

Third, unlike in 2010, there is a big apartment oversupply developing across most markets, which will place downward pressure on both prices and rents sooner or later.

Fourth, income growth is the lowest on record just as household debt has hit all-time highs. Hence, there is not a lot of headroom for future house price growth.

Finally, the economy is facing structural headwinds on multiple fronts including: manufacturing closures, ongoing falls in commodity prices and mining-related capex, and falling dwelling investment itself, which will likely send unemployment significantly higher into 2017.

In short, the Australian housing market has already passed peak growth in this cycle, and it will likely continue to slow before outright value declines commence either late this year or in early 2017.

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