Australia’s housing market vulnerabilities: State by state lessons from Moody’s

Discussion around Australia’s overvalued housing market, as a result of the propping up from negative gearing statistics from Moody’s, suggesting that nationally 9% is added to property prices, or some $44,000, from these tax breaks.

This isn’t something that has recently dawned on Moody’s, and in their Stress-Testing Australia’s Housing Market report from earlier this year Glenn Levine and Fred Gibson from Moody’s used the study to explore the possible impacts for each state and territory’s housing market should potential significant, plus plausible, national and international “shocks” occur.

“Investors should beware of the state’s vulnerability to international shocks, especially a scenario that results in lower commodity prices such as downturn in the Chinese economy.”

They note that each state performs differently in their modelling when looking at the vulnerabilities of the markets to the different possibilities.

They also note that Australia’s favourable tax regime for property investors – and in particular negative gearing – as well as stringent bankruptcy laws, lack of available development land, together lending and prudential requirement all help keep risk levels relatively low.

They used international scenarios of a global slowdown, and a global recession similar to the GFC, as well as domestic shocks such as interest rates and supply changes, to identify the sensitivities of the markets.

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Here are the key takeaways from the experiment:

• National rental increase average: 89%
  
  
• National income increase average: 61%

KEY CHARTS

Victoria

• “House prices are overvalued relative to Victoria’s long-run drivers and fall by more than the national average under four of the five shocks, suggesting that the market is vulnerable.”
  
  
• Negative gearing offset well below national average.
  
  
• Highly sensitive to rising unemployment.
  
  
• Exposed to export-facing manufacturing industry.
  
  
• Least supply-constrained of all the states.
  
  
• Low rental return, high sensitivity to adverse demand shock.
  
  
• “Victoria stands out as one of the most vulnerable of all the states.”

Tasmania

• “Tasmania’s housing market went from highly overvalued in 2005 to close to fairly valued today, according to our long-term measure, as incomes have continued to rise and prices have flatlined.”
  
  
• Moderately responsive to supply.
  
  
• Data generally less robust than other states.

Western Australia

• “Western Australia’s housing market was highly overvalued in 2005, but surging incomes linked to the mining boom, rising rents, the country’s highest negative gearing offset, and falling interest rates have pushed it into undervalued territory.”
  
  
• House prices have risen 206% since 2001, and rents have increased 191%.
  
  
• Under a global recession scenario, prices would be expected to fall 30%.
  
  
• Sensitive to changes in global GDP and commodity prices.
  
  
• “Investors should beware of the state’s vulnerability to international shocks, especially a scenario that results in lower commodity prices such as downturn in the Chinese economy.”
  
  
• Sensitive to interest rate changes and the unemployment rate.
  
  
• Not overly sensitive to supply changes.

Please turn over page for the other states and territories

Northern Territory

• “House prices in the Northern Territory are close to fair value and the least vulnerable to shocks.”
  
  
• Prices sensitive to commodity prices, but are otherwise uncorrelated with the global economy.
  
  
• Data generally less robust than other states.

Australian Capital Territory

• “[It] remains close to fair value and relatively insulated from international shocks.”
  
  
• Little reaction to changes in commodity prices or global GDP.
  
  
• Unemployment rate is less responsive.

South Australia

• “Houses in South Australia are the most undervalued of any state relative to long-term drivers and under normalized interest rates, and are the cheapest of any state after Tasmania.”
  
  
• Baseline outlook has been for modest growth.
  
  
• Prices are sensitive to global GDP but less so to commodities markets, despite their growing mining sector.
  
  
• Only moderately vulnerable to shocks.

New South Wales

• “The effective tax rate in New South Wales is among the highest in the country, providing greater benefits through negative gearing, which lifts the equilibrium house price.”
  
  
• Large and diversified economy.
  
  
• House prices in this state are among the most sensitive to interest rates and the unemployment rate.
  
  
• Also among the most sensitive to changes in housing supply, with a current chronic shortage.