Three reasons why there is no Australian housing price bubble: HSBC's Paul Bloxham

?There is little chance of a housing market crash this year, says HSBC chief economist Paul Bloxham as part of his macro-economic outlook for 2012. 

Bloxham says there are three main reasons why prices won’t plummet: the majority of households can service their debt; the undersupply of housing is growing at a greater rate than the decline in population growth; and there is strong demand for housing close to major urban areas. 

Bloxham expects these three broad factors to underpin the housing sector and remains “unconcerned about the possibility of a large decline in housing prices this year”. 

Expanding on the first of these factors, Bloxham says that while aggregate household debt is high in Australia, “it is well-allocated to households that can afford to service it”.

“Around three-quarters of household debt in Australia is held by the top two income quintiles. These households also typically have significant equity built up in their properties and assets. 

“Indeed, a significant proportion of this debt is held against a second property, to take advantage of the mortgage deductibility on investment properties. 

“Around one-fifth of Australian households have a second dwelling,” he says, adding that the tax system favours these investment properties. 

“Around one-quarter of all household credit is for the purpose of holding an investment property. Indeed, when making international comparisons of household debt levels, this is a critical point to keep in mind.”

He also notes that the debt-to-income rate has been broadly steady for the past five years, and has been declining modestly over the past year.

“Despite the decline in housing prices last year, non-performing housing loans also remained a very small share of total loans and significantly lower than in other developed countries.”

On the second point of housing supply, Bloxham says construction of housing is still “well below the cumulative demand that exists”.

“Most industry estimates suggest a shortage of around 100,000 homes, which is over two-thirds of one year’s production. While population growth has slowed to be in line with growth in the number of dwellings, construction has yet to catch up with the demand overhang.”

Lastly, he says there are significant constraints in the supply of additional dwellings close to the urban centres, and thus within a reasonable distance to employment in the urban centres.

“For these ‘high-quality’ dwellings there is strong demand and limited supply. Supply is constrained by zoning regulations, a lack of willingness of local governments to allow further urban infill in the major cities, and the lack of quality transport infrastructure.

“Despite its artificial nature, this is still a constraint. Unless this constraint is lifted – which seems unlikely to occur rapidly – the supply of dwellings close to urban centres will remain low relative to demand, supporting prices,” he says.

Bloxham says the main risk to the housing market is a sharper increase in unemployment, which he says is the “typical trigger of rising loan arrears”.

But, he says, the RBA has a powerful tool for providing support for the housing market and employment. 

“While we expect the unemployment rate to rise further from here, we expect it to peak around the middle of the year, before falling as expected RBA rate cuts provide support for the economy.” 

Bloxham expects the trend of households increasing their savings and reducing their borrowings to continue in 2012, but says lower interest rates should put a floor under house prices. 

“While increased savings can often be seen as a bad thing for the economy, especially when everyone does it at once, in Australia’s case it has occurred just at the right time: that is, at a time when household income growth has been strong,” he says. 

Bloxham forecasts housing credit growth to remain subdued in 2012, with household consumption slowing in response to a further modest weakening in the labour market, “though this should be partly offset by lower interest rates”.