Why The RBA Is Wrong About House Prices
If we’re not careful the nervous nellies that continually worry about Australian house prices risk talking the economy into an even more serious downturn. In repeated public speeches in recent weeks, Reserve Bank officials have hinted that – along with ASIC – it is considering imposing credit lending controls for investors, especially in Sydney and Melbourne.
According to the RBA, the housing market is “imbalanced”, with too many investors buying up properties, and not enough first home buyers. The killer statistic in this debate is that investor lending as a share of total monthly home borrowing has increased to around 40% - equal to the share during the great housing boom of 2003.
Another often quoted statistic is the fact that rental yields are falling, i.e. rents are not keeping pace with the growth in house prices. A casual observer might conclude property investors are stupidly paying above the odds for property – especially those attracted to the leverage opportunities available by buying through a self managed super fund (SMSF).
But what’s the reality? For starters, even the Australian Bureau of Statistics has recently admitted it does no longer has a good handle on the degree to which home lending data can be split between investors and first home buyers. It turns out the ABS has relied on lenders to tell then who were first home buyers, which in turn depended on whether borrowers were accessing first home owner grants.
But with the change in government incentives – such that these grants are now only available for new and not existing properties – many first home buyers are still just buying existing properties, but without the aid of grants. Many of these buyers, in turn, may well be buying their first properties for investment purposes – while continuing to rent elsewhere - but we simply don’t know at this stage.
In short, the market may not be as imbalanced as the RBA presumes – as many first home buyers may be unreported and they be both first home buyers and investors.
Of course, this begs the question whether first home buyers are wise buying property for investment purposes. Maybe this in itself is a new bubble?
Again, a careful look at the data suggests otherwise. Indeed, rental markets are a lot tighter today and during the last worrying boom in 2003, and rental yields don’t seem too out far of line with today’s low level of interest rates.
According to the latest data from the Real Estate Institute of Australia, for example, Sydney’s rental vacancy rate in March was only 1.4% - or well below is average over the past 25 years of 2.3%. When Sydney house prices peaks in September 2003, the rental vacancy rate was 3.7%.
Sydney Vacancy Rate
Source: NIEIR, ABS, REIA
The average rental yield on a 3-bedroom Sydney home, moreover, was around 2.4% in the June quarter, still a bit higher than the 1.8% yield in December 2003. Note, moreover, the 3-year fixed mortgage rate is now around 5%, compared with whopping 7.2% in December 2003. So relative to interest rates, rental returns are much better than during 2003.
After-tax average weekly earnings for a fully employed dual income male and female New South Wales household in the June quarter was around $117,000 compared with a median house price calculated by the ABS of around $787,000. The house price to income ratio of 6.7 is a little above its average over the past decade, but still at little below its peak of 7.4 in December 2003. And due to lower interest rates over the period, the mortgage servicing burden as a per cent of income in Sydney was still a little below its decade average in the June quarter.
Owner Home Valuations - Sydney
Source: NIEIR, ABS
Lastly, population growth in New South Wales has picked up in the past few years, and is still faster than the growth in dwelling units – notwithstanding some lift in home building of late. The population per dwelling in the State is still rising – a tentative sign of insufficient supply, which is consistent with the still low rental vacancy rate.
Supply vs. Demand - NSW
Source: NIEIR, ABS, REIA
I’ve focused on Sydney here because this is where house price growth over the past year or so has been strongest, and where most concern stems about a potential property price bubble. A deeper analysis, however, suggests Sydney house prices are simply coming out of the multi-year slumber, thanks to previous declines in prices relative to household incomes, the drop in interest rates, and pick-up in population growth relative to new construction.
Note, moreover, there are already tentative signs that the lift in home building approvals is topping out – suggest the boost to growth from home building could already be close to a peak. It so, it will deny the economy one of the few clear growth drivers it has as it enters a period of even steeper declines in mining investment in 2015.
To my mind, it seems premature and dangerous to seek talking down the housing sector at this stage.
David is one of Australia's leading economic and financial market analysts. His is Chief Economist with BetaShares, and an Economic Advisor to the National Institute for Economic and Industry Research (NIEIR). His has held former roles as senior commentator with The Australian Financial Review, Macquarie Bank interest rate strategist and Federal Treasury economist. He is also author of the online e-book, TheAustralian ETF Guide.