Australian house prices: The boom in the real estate market is unsustainable, banks are scared and may soon cause problems

Housing prices across Australia continue to rise to insane levels despite lockdowns, and unlikely voices warn that it is out of control.

In the early days of the coronavirus pandemic, when the world was on the brink of unprecedented uncertainty, economists made a terrible prediction for Australia’s housing market.

It would experience huge losses unlike anything we have seen in modern history, with estimates ranging from a decline of 10 percent all the way up to a devastating collapse of 30 percent.

Despite large job losses, extensive shutdowns, the economic downturn and a subsequent recession and trade disruptions, these forecasts never occurred.

Actual median values ​​for homes across Australia has increased by 15.8 percent during the first eight months of 2021and is 18.4 percent more than in the past year.

Prices are higher than they were before anyone knew what Covid-19 was and has grown at the fastest annual rate since 1989.

“In dollars, the annual increase in national housing values ​​equates to about $ 103,400, or $ 1990 per week,” said CoreLogic Research Director Tim Lawless.

Apart from those who are trying to get on the real estate ladder and are struggling, most of the other players in the market would celebrate the historic upward movement in the market … right?

This week, an unlikely voice joined the growing concern of concerns about the continued boom, which has continued under lockdown in the two largest markets in Sydney and Melbourne.

Commonwealth Bank CEO Matt Comyn said he was “increasingly concerned” about the rapid price growth in virtually all cities, as well as in larger regional areas.

Although he is the country’s largest bank and largest lender of loans for home purchases, which means that it takes in money, Comyn told a parliamentary hearing that the bank wanted to see measures taken to “remove some of the heat from the housing market”.

Prices are still growing, but declining

National housing values ​​road again by 1.5 percent in August, with the largest market in Sydney up 1.8 percent, the CoreLogics index reported.

The growth rate of the capital of New South Wales is despite the fact that the city is in a long period of closure, with property inspections only available by appointment and limited to one person at a time, and auctions are conducted only online.

Similarly, in Melbourne, also in the midst of yet another lockdown, prices still rose by 1.2 per cent – a modest increase, but in conjunction with the covid landscape, impressive nonetheless.

“During the significant lockout period in Sydney, Melbourne, we have seen large declines in consumer and business confidence, as you would expect,” Comyn said on Thursday.

“I do not see much slowdown when it comes to (mortgage) applications and financing. You can see that the market is still very active. ”

Elsewhere, the strongest gains were seen in August in Hobart, up 2.3 percent, Canberra, up 2.2 percent and Brisbane, up 2.0 percent.

“Australian home values continued to note a broad-based upturn despite the break from shutdowns, Lawless says.

However, the August results show further signs that price growth is starting to slow after reaching a peak in March, he said.

“At that time, national home values ​​had risen 2.8 percent in one month, led by Sydney where home values ​​rose by 3.7 percent.”

That the slowdown in recent months probably has more to do with affordable prices than it does with Covid-19 restrictions or significant uncertainty.

“Housing prices have risen almost 11 times faster than the wage increase over the past year, which has created a more significant entry barrier for those who do not yet own a home,” says Lawless.

“Lockdowns have a clear impact on consumers’ opinions, but so far the restrictions have resulted in declining advertised ads and to a lesser extent fewer household sales, with less impact on price growth.

“It is likely that the ongoing shortage of properties available for purchase is central to the upward pressure on home values.”

Despite lock-in and restrictions for the real estate industry, the auction clearance rate – that is, the proportion of lists to be sold under the hammer – is still high.

According to CoreLogic, 1835 homes were put up for auction across each capital last weekend, a sharp increase over the previous week and almost twice as many at the same time 12 months ago.

The national auction clearance rate was 74 percent, while Sydney led the individual market fee with 82 percent profit.

However, volumes are low, especially in Melbourne where 56 percent of the 560-odd properties that went under the hammer were sold successfully, indicating that many sellers are sitting tight at the moment.

A sign of problems in the future

The head of a large four bank that talks down house price growth and even demands measures to slow it down is obviously significant.

And it is an indication of what may await the real estate sector – a critically important pillar of the economy – if it continues unabated.

At a parliamentary debate on Thursday, Comyn was asked about the price increase for residential properties when he said: “We think it would be important to take some modest steps sooner rather than later to remove some of the heat from the housing market.

“I think it would be wise to act sooner rather than later.”

What just happened – an almost 20 percent explosion in national house prices – is not, however, what gives him reason to pause.

“I am not worried about the period that has just passed. But when it comes to increasing the housing debt and raising house prices, we are increasingly worried. ”

ANZ chief Shayne Elliott also appeared at the parliamentary debate, who also expressed his concern about Aussies who can bite off more than they can chew.

“There has been an increase in the number of people taking on more debt relative to their income,” Elliott said.

“We take more time to be careful, to ask more questions, to really assess whether people have the capacity to take on the debt they would like (and) we have lost some market share because of it.”

The Reserve Bank has also indicated its growing concern, saying that rising house prices and subsequent household debt see “risks to financial stability … construction”.

In a speech this week, the RBA’s Deputy Governor Michelle Bullock, who is responsible for monitoring the nation’s fiscal stability, said that the level of debtors is enormous thanks to house prices.

This means that a major event such as a decline in employment may be worse as a result.

“For example, in a recession where a large number of indebted households are affected by declining incomes, such as job losses or reduced hours, they may choose to reduce their consumption,” says Bullock.

“It can only be a precautionary measure. However, if households are limited, in the sense that they do not have much income left after meeting their debt requirements and the basics of their lifestyle, they are more likely to reduce consumption.

“This will amplify the initial effect of the economic shock.”

She said that the RBA constantly assessed whether intervention was needed to manage the risk.

“Even if banks have strong balance sheets and lending standards are maintained, there is a risk that households in this environment will become increasingly indebted,” Bullock said.

“A high level of debt can pose risks to the economy in the event of a shock to household income or a sharp fall in house prices. It is these macroeconomic risks that require careful consideration. ”

The CBA is taking proactive steps

Another bomb that Comyn dropped on Thursday was that his bank had lifted its service floor in its own attempt to cool the market.

This means that the interest rate at which a bank tests a person’s ability to continue repaying their mortgages if interest rates rise has been raised for Commonwealth Bank customers.

At present, the official interest rate in Australia is at a minimum of 0.10 percent, which makes the cost of borrowing money extremely cheap.

These low lending rates contribute to the urgency of real estate, as well as a faster-than-expected recovery in consumer confidence, the FOMO (fear of missing out) factor and pent-up demand.

Although there is no immediate indication that prices will start to rise, they will eventually.

“I think we should all have our share of concerns about ensuring that Australia’s households are in a strong position to continue to repay, but also supporting wider consumption in the economy in the second half of this decade if interest rates rise, and if possible. they would rise faster, ”said Comyn.

At present, few people are losing out as a result of sky-high prices in virtually all parts of the country – except for a significant group.

Younger Australians are facing conditions that “make it harder to enter the housing market,” Elliott said.

Being fully priced will lead to long-term economic difference in the future, he warned.

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