According to the 2016 Demographia Housing Affordability Survey, the median multiple of house prices (in cities with over 1 million people) to household income is 6.4 times in Australia versus 3.7 in the US and 4.6 in the UK. In Sydney it’s 12.2 times and Melbourne is 9.7 times.
We see the boom in Sydney and Melbourne is slowing largely due to APRA’s measures to slow lending to property investors. However, house price growth is likely to remain positive this year with a cyclical 5-10% price downswing around 2017-18. Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind. Hobart & Adelaide are likely to see continued moderate property growth, but Brisbane may pick up a bit. Nationwide price falls are unlikely until the RBA starts to raise interest rates and this is unlikely before 2017. And then in the absence of a recession or rapid interest rate hikes price falls are more likely to be 5-10% as was seen in the 2009 and 2011 down cycles rather than anything worse.
Source: CoreLogic RP Data, AMP Capital
To see a property crash – say a 20% average fall or more – we probably need to see one or more of the following:
While housing has a long term role to play in investment portfolios it is looking somewhat less attractive as a medium term investment. It is expensive, offers very low income (rental) yields compared to all other assets except bank deposits and Government bonds and it’s vulnerable to possible changes to taxation arrangements around property. However, there are pockets of value, eg in regional areas.
As Australians already have a high exposure to residential property, there is a case to maintain exposure to other asset classes because it could provide an offset to a Australian property market correction.