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Modest risk of mini-bubble in house prices, but gains likely to be in line with household income: David Bassanese

By Alistair Walsh
Monday, 26 August 2013

Economic commentator David Bassanese says the Reserve Bank of Australia policies will likely push up property prices, possibly into a "mini-bubble" but not into any sort of major boom.

“Although the RBA naturally does not want to see a speculative bubble develop, it probably concedes that further nearer-term house price gains will help the economy’s transition – by improving household wealth and consumer spending propensity and making it more profitable for developers to build new homes,” Bassanese wrote in the Australian Financial Review.

“That said, further strong house price gains are not assured. Unlike in 2009-10, for example, one major headwind in the coming year should be higher unemployment. After all, the key reason interest rates are so low is because the economy is growing at a below-trend pace, and even the Rudd government recently conceded in its pre-election economic statement that the unemployment rate was likely to rise from 5.7% to 6.25% by June 2014.

Bassanese says the property market is strengthening with clearance rates up in Sydney and Melbourne up as well as increased lending to investors.

He says despite recent house price gains the trend will continue, driven by cheap home loans.

“Despite concerns about high Australian house prices, it may surprise some to know that the share of household disposable income required to meet monthly mortgage repayments on an average-priced Australian home is lower than its 20-year average,” he wrote.

“That’s because interest rates are very low and house prices – at least over the past decade – have only broadly matched growth in household income.”

He says recent RBA statements suggest a leaning towards another rate cut which presents the risk of a mini bubble.

“There’s a modest risk that a mini-bubble in house prices could reappear if the RBA keeps interest rates low enough for long enough to support the economy.”

“With mining investment turning down and prospects for non-mining business investment – such as office construction – still quite subdued, the RBA is counting on a decent upturn in the housing sector to keep the economy afloat over the next year or so.”

But he says if house prices do rise it’s more in the nature of a cyclical trend rather than any sort of boom.

“Doomsayers will warn of a property bust as and when prices edge lower, and spruikers will talk of a new boom whenever prices rise. But the reality is that house prices are likely to continue to move broadly in line with household income (that is, 3 to 4 per cent a year), albeit with modest cycles around this trend in line with cyclical shifts in interest rates and unemployment.”

Read more: http://www.propertyobserver.com.au/news/modest-risk-of-mini-bubble-in-house-prices-but-house-price-gains-are-likely-to-be-in-line-with-household-income-david-bassanese/2013082564506

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Blowing bubbles in property market

Karina Barrymore
August 24, 2013 12:00AM



BOOM, price surge, recovery, strong market, call it anything you like, just don't call it a housing bubble - not yet, anyway.

But one thing is sure, there's plenty of action in the property market and for some buyers it could be a case of getting in before prices rise even higher.

Yes, residential property prices are rising. Yes, households are willing to carry high debt levels and, yes, property prices are historically expensive.

But that's where the similarity between a bubble and the current market increases end.

According to the experts, most property markets are just in a typical bull-market phase, before an expected return to more modest price growth.

However, if you are a keen investor or want to get a first toehold in the market, now may be your best chance for a while. Bubble or just hot air, prices are heading up and are unlikely to fall.

"Next year house prices will go up a fairly solid rate -- we're looking at about 5 to 10 per cent over the year ahead but after that price increases will settle back down to more modest gains," AMP chief economist Shane Oliver says.

Investment bank UBS is of a similar mind, lifting its residential price rise forecast to 10 per cent this year and another 5 per cent next year.

For would-be first home buyers, a 10 per cent increase could mean scraping together an extra $4000 to $7000 to meet the deposit requirements just to buy the same type of house.

For investors, it will mean jacking up the rental income by at least half that amount each year just to achieve the same return.

Either way -- owner-occupier or investor -- a 10 per cent jump, followed by another 5 per cent will mean an extra big mortgage burden, regardless of current low interest rates, compared with prices today.

According to Dr Oliver, house prices are already expensive in most markets, with the average cost now equal to six times annual net household income.

This compares with a traditional level of house prices at three times after-tax household income. But he says that doesn't mean the market is in a bubble.

"Yes, house prices are overvalued and prices are still rising but they are not rising at bubble pace," Dr Oliver says.

"In cities like Melbourne and Sydney, auction clearance rates are high but then we still don't have a high number of transactions. The volumes are still a bit low and nowhere near boom-time levels. And most of all, I don't see any of the frenzy that you have when a bubble is on."

However, a flurry, if not quite a frenzy, may not be far away.

Stockbroker Bell Potter Wholesale managing director Charlie Aitken says there is a fair degree of "fear of missing out" going on around the nation.

With cash deposits sitting at a record $560 billion, investors and savers are starting to realise the pain from low interest rates.

This money is expected to come roaring out of term deposits and low-interest accounts in the year ahead and rolled in to higher risk assets.

"There is no country in the world where the man in the street gets greater FOMO (fear of missing out) than Australia," Mr Aitken says.

"Keeping up with the Joneses is a national pastime and as it gets more and more reported in the mainstream press that risk asset prices are rising, the rotation from cash will become self-sustaining," Mr Aitken says.

"We have seen the infancy of this great rotation from cash starting, in the performance of high-income shares and rising residential auction clearance rates.

"However, analysis of total term deposit holdings and household savings rates suggests that rotation so far has been a 'trickle'.

"I believe in spring you are going to see all the anecdotal and hard data evidence of a genuine residential property boom being underway in east coast Australia.

"The supply-demand, funding and employment settings are right. The missing piece has been confidence."

THE election result is expected to be the main trigger for a surge in confidence, with the key to the outcome being a decisive result for one party and not a minority government.

David Morrell, director of buyers advocacy firm Morrell and Koren, also says the election is holding back momentum.

"Talk of a bubble pre-election is rubbish. Everyone is clearly cooling their jets at the moment. There are no runaway results or evidence of a bubble," Mr Morrell says.

"Most vendors, or would-be vendors, are waiting for the election to get some direction. And in my view there will be a window of confidence post-election but how long that's going to last is not known.

"However, we have seen evidence of investors and self-managed super funds shying away from equities and that's likely to cause a stir in the property markets.

"Obviously, if you're buying as an investor out of a super fund then you've got a bit more fire power than a young couple gearing themselves up. But anyone talking of a bubble now is taking rubbish, they're delusional."

Lisa Montgomery, chief executive of mortgage broker Resi, is on the front line of the housing market and sees activity heating up.

But she believes these price rises are sustainable and not a bubble in danger of bursting.



Read more: http://www.heraldsun.com.au/business/blowing-bubbles-in-property-market/story-fni0dcne-1226703136856

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"I certainly don't see a bubble": property veteran Lang Walker

By Alistair Walsh
Sunday, 01 September 2013

Property developer Lang Walker sees no sign of a property bubble in the east coast capitals and says predictions of a bubble are incorrect and annoying.

"I don't think any of those markets are ever going to get to be a bubble for varying reasons," Walker told The Weekend Australian.

"Infrastructure costs in Brisbane, in Sydney the planning (restrictions) and pent-up demand and Melbourne probably has gone through the worst of what might have been a drastic situation before, but that seems to be working through the pipeline.

"I certainly don't see a bubble."

He said those predicting a bubble risk prompting the Reserve Bank of Australia into action.

"The Reserve Bank might say 'Oh my god, we better put up interest rates'," Walker says.

"The only reason that a lot of these sales are coming through now is the state governments have put incentives in place with stamp duty, breaks for first-home buyers."

He says growth in the market will come from bargain one-bedroom plus study, or two-bedroom, apartments.

"The three-bedroom and expensive stock in all those cities is very, very slow," Walker says. "It's not the luxury end that's really going, it's just the budget end, the affordable end."

The president of the Real Estate Institute of Australia, Peter Bushby, said last week recent house price rises are not indicative of an Australia-wide price bubble.

The Walker Corporation, of which Walker is the executive chairman, has 12 office towers in some phase of development, 25,000 lots of land and four industrial estates.

The company will begin construction of the 277-unit Westmark residential towers in Brisbane’s Milton next year.

It is currently developing the $400 million Main Drive Kew development on the former Kew Cottages site in Melbourne.

It is selling sites at its 53 hectare Appin Valley development in Appin NSW, its 400 lot Wallis Creek development in Gillieston Heights NSW, its 625 lot Bluestone Mt Barker development in South Australia, its 918 lot Forest Springs development Gladstone , its 3000 lot Banksia Grove development in Perth, its 500+ lot North Sapphire Beach development in NSW, its Reflections Barlings Beach development in NSW, and its Buckland Park Development in Adelaide.

Its commercial projects include Melbourne’s Collins Square commercial development, Brisbane’s 150 Charlotte Street, Sydney’s 12 O’Connell Street, Sydney’s 66 Hunter Street, Melbourne Axis development at South Morang and Canberra’s Northbourne Square.

It also has industrial estates in Canberra, Brisbane, Adelaide and Gladstone.

Read more: http://www.propertyobserver.com.au/news/i-certainly-don-t-see-a-bubble-property-veteran-lang-walker/2013090164708