Over the past 25 years, Australian house prices have risen around sixfold, compared to a fourfold rise in British prices between 1986 and 2007. While many countries have seen their housing markets slump, in Australia prices have barely slid at all.
The Economist calculates that the ratio of prices to rents is 57% above its long-term average. Economist Steve Keen estimates that the value of the average first mortgage has jumped almost fourfold since 1992. What’s more, mortgage payments on an average first-home loan account for 64% of after-tax income for the average earner, up from 40% in the 1990s.
All this points to a housing bubble that has yet to pop. But air is beginning to leak out. As Nicola Saminather points out on Bloomberg.com, house prices slid by 1.7% in the three months to March, the worst slide since the third quarter of 2008. Back then, the central bank slashed interest rates and the government enticed first-time buyers into the market with incentives. But these have ended and interest rates have since “normalised”, says JPMorgan’s Ben Jarman. Now first-time buyers are “all but absent” from the market.
Conditions won’t get any easier for housing. “More rate hikes are only a matter of time”, given how little spare capacity there is in the economy and the recent rise in core inflation, says Capital Economics. That implies less lending and hence less fuel for the housing bubble, which, as elsewhere, has been based on debt.
Mortgage debt as a percentage of GDP has risen sevenfold in 20 years, notes Keen. Banks’ exposure to housing is at a record high, accounting for 57% of all advances on Australian banks’ balance sheets.
So the danger is that rather than dodging the housing, credit and banking turmoil that engulfed much of the world two years ago, Australia merely put it off.