Australian housing market crash unlikely: Credit Suisse

Australian housing market crash unlikely: Credit Suisse
Australian housing market crash unlikely: Credit Suisse

Australian houses are not overvalued, according to a report into the current state of housing and mortgages by investment bank Credit Suisse.

The report questions the likelihood of a house price crash and says households can manage their debt obligations. 

Australian houses appear to be fully priced according to the authors of the report, analysts Jarrod Martin and James Ellis along with Omkar Joshi.

They base this view “on a range of usual metrics for assessing house price levels”, including house prices to income, house prices to rents, house prices to GDP, per capita value of the housing stock to household income

The report notes that housing affordability has deteriorated.

However it questions the argument that an improvement in the ratio of income to house prices will be achieved through a “a sharp and disorderly retracement of house prices” (a house price crash) rather than a “slow re-balancing of this ratio through real house price erosion or flat nominal house prices combined with on-going growth in household income”.

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Source: Credit Suisse

According to Credit Suisse, Australian household leverage is relatively high in both an Australian historical and in an international context – above that of both the US and UK.

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Source: Credit Suisse

However, it notes that as the RBA has previously stated household debt in Australia is mainly held by higher income households, with households in the top two income quintiles holding almost three-quarters of household debt. 

While the report says there is a risk that the relative resilience of Australian house prices will not be sustained in the future, it says there are “numerous arguments” cited as to why Australian house prices “are (and presumably should be) relatively high by international standards”. 

Some of these include: 

  • Australia is a highly urban society by international standards with a cultural preference towards living close to central business districts / coastal cities (limiting desirable land area in an otherwise large land mass country) such that Australia’s capital city house prices to income ratio is comparable with coastal city metrics globally; 
  • Australian housing stock is relatively of high quality in nature and both relatively large and land-intensive by international standards; 
  • the supply of housing stock in Australia has been excessively constrained in long-term by land zoning and development restrictions (concurrently in some recent years by accelerating population growth); and 
  • the Australian taxation system is unusually generous with respect to residential dwelling investment, reinforced by a cultural personal investment bias towards the residential real estate.

Due to Australian banks being so heavily exposed to the residential lending market (59% of bank loans are residential mortgages), Credit Suisse says there is a strong connection between house prices and financial stability, noting “house prices have the scope to create financial system instability, and financial crises have scope to exacerbate house price declines”. 

But it says factors in favour of a stable mortgage and housing market include the overall strength of the macro economy and an apparently “increased consideration of house price inflation in RBA monetary policy deliberations in the wake of the financial crisis” and the extent to which “mortgage interest rate changes are being undertaken outside of cash rate changes”. 

It also notes the stable rates of home ownership in recent years in Australia compared with rising home ownership rate in the US, “widely seen as a factor exacerbating the subsequent delinquencies crisis”.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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