Real estate prices in Australia: property market boom is unsustainable, banks fear and could soon trigger problems

It would suffer huge losses unlike anything we’ve seen in modern history, with estimates ranging from a 10% collapse to a devastating 30% collapse.

And yet, despite massive job losses, widespread shutdowns, the shutdown of the economy and a resulting recession, and disruption to trade, those predictions never materialized.

In fact, the median home value in Australia has jumped 15.8% in the first eight months of 2021 and 18.4% in the past year.

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

“In dollar terms, the annual increase in national home values ​​equates to about $ 103,400, or $ 1,990 per week,” said CoreLogic research director Tim Lawless.

Aside from those trying to climb the real estate ladder and struggling, most other market participants would celebrate the historic bullish movement in the market… right?

This week, an unlikely voice joined the growing chorus of concerns over the continuing boom, which continued during the closures of the two largest markets in Sydney and Melbourne.

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

Despite being the largest bank in the country and the largest lender of home purchase loans, which means it is hoarding money, Mr Comyn said at a hearing parliamentarian that the bank wanted measures to be taken to “alleviate some of the heat in the housing market”.

Prices still rising, but slowing down

National Housing values ​​the road 1.5% again in August, with Sydney’s largest market up 1.8%, the CoreLogic Index reported.

This growth rate for the capital of New South Wales is although the city is in an extended period of foreclosure, with property inspections only available by appointment and limited to one person at a time, and auctions conducted online only.

Likewise, in Melbourne, also in the midst of yet another foreclosure, prices rose another 1.2% – a modest, but nonetheless impressive increase against the backdrop of the covid landscape.

“During the significant foreclosure period in Sydney, Melbourne, we have seen a sharp drop in consumer and business confidence, as you would expect,” Mr Comyn said Thursday.

“I don’t see much of a slowdown in terms of (mortgage) applications and funding. You can see that the market is still very active.

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

“Australian home values ​​have continued to experience widespread gains despite the disruption caused by the closures,” Lawless said.

However, the August results provide further signs that the rate of price growth is starting to slow after peaking in March, he said.

“By this time, the value of national homes had risen 2.8% in one month, led by Sydney where home values ​​were up 3.7%.”

This slowdown in recent months probably has more to do with affordability than restrictions from Covid-19 or significant uncertainty.

“Housing prices have increased almost 11 times faster than wage growth over the past year, creating a greater barrier to entry for those who do not yet own a home,” Lawless said. .

“The closings are having a clear impact on consumer sentiment, but to date the restrictions have resulted in fewer listings and, to a lesser extent, fewer home sales, with less impact on the growth dynamics of homes. price.

“It is likely that the continuing shortage of properties available for purchase is at the heart of the upward pressure on home values.”

Despite the bottlenecks and restrictions imposed on the real estate sector, auction liquidation rates – that is, the proportion of listings for sale under the hammer – remain high.

According to CoreLogic, 1,835 homes were auctioned in each capital last weekend, up sharply from the previous week and almost double the number at the same time 12 months ago.

The domestic auction liquidation rate was 74 percent, while Sydney led individual market fees with an 82 percent result.

Volumes are low, however, particularly in Melbourne, where 56% of the roughly 560 properties that have come under the hammer have sold successfully, indicating that many sellers are on the cusp of not budging at the moment.

A sign of trouble to come

The head of a big bank who talks about the growth in house prices and even calls for measures to slow it down is obviously significant.

And it’s an indication of what could happen to the real estate sector – a vital pillar of the economy – if things go on unabated.

Speaking at a parliamentary hearing on Thursday, Mr Comyn was asked about the growth in residential property prices when he said: ‘We believe it would be important to take modest steps as soon as possible to alleviate some of the heat in the housing market.

“I think it would be prudent to act as soon as possible.”

What just happened – a nearly 20% explosion in national house prices – isn’t what makes him think so.

“I am not concerned about the period that has just passed. But in terms of rising real estate debt and rising house prices, we are increasingly concerned. “

ANZ boss Shayne Elliott also appeared at the parliamentary hearing, who also expressed concern over Australians who might bite more than they can chew.

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

“We’re taking more time to be careful, to ask more questions, to really assess whether people have the capacity to take on the debt they want (and) we’ve lost a bit of market share because of it. “

The Reserve Bank has also expressed its growing unease, saying that ever higher house prices and the resulting household debt see “risks to financial stability … growing”.

In a speech this week, RBA Deputy Governor Michelle Bullock, responsible for overseeing the country’s fiscal stability, said homeowners’ debt levels were huge thanks to house prices.

This means that a major event like a downturn in employment could be worse as a result.

“For example, in a recession in which a large number of indebted households suffer from reduced income, such as job loss or reduced hours, they might choose to reduce their consumption,” Ms. Bullock said.

“Maybe it’s just as a precaution. But if households are constrained, in the sense that they don’t have much income left after having satisfied their debt service and the basics of their way of life, they are likely to reduce their consumption.

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

She said the RBA is constantly assessing whether intervention is needed to address the risk.

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

“A high level of debt could pose risks to the economy in the event of a shock to household income or a sharp drop in house prices. It is these macro-financial risks that deserve close monitoring. “

ABC takes proactive action

Another bomb thrown by Mr Comyn on Thursday was that his bank had raised its service floor in its own attempt to cool the market.

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

Currently, the official interest rate in Australia is at an all-time low of 0.10%, making the cost of borrowing extremely low.

These low borrowing rates are contributing to the real estate rush, as well as a faster-than-expected rebound in consumer confidence, the FOMO factor (fear of running out) and pent-up demand.

While there is no immediate indication that rates will start to rise, they will eventually.

“I think we would all have our share of concern to ensure that Australian households are in a strong position to continue repaying, but also to support wider consumption in the economy in the second half of this decade if rates d ‘Interest is increasing, and if potentially, they would increase faster, ”Mr. Comyn said.

So far, few people are losing out from soaring prices in virtually every part of the country except one large group.

Young Australians face conditions that “make it more difficult to enter the housing market,” said Mr Elliott.

Being completely overpriced will lead to long-term economic disparities in the future, he warned.