RBA housing bubble alarm bells should be ringing despite May price correction: Christopher Joye
Reserve Bank of Australia analysis recently put the national residential property market at just 1.9% off prior records set in the 2007 and 2010.
The RBA supplied the Australian Financial Review columnist Christopher Joye with its price-to-income ratio estimates after an information request.
The data was as at 31 March, with Joye noting that since March, home values across the capital cities have corrected modestly by 0.9%, according to RP Data-Rismark’s index.
"While this apparent improvement in affordability is welcome news, it does not necessarily mean alarm bells should stop ringing," Joye advised.
Some optimistic pundits claim that the softening in auction clearance rates and prices heralds a moderation in activity where capital gains will not exceed Australia’s 3% household income growth rate (to avoid heading into bona fide “bubble” territory)."
Joye says Australian household debt relative to incomes is 28% above the level that prevailed in December 2002 (based on the RBA’s numbers).
"And the dwelling price-to-income ratio is 15% more expensive than it was a decade ago."
Joye says there are some reasons to think that the current May slowdown is a "seasonal air pocket".
He says analysis shows that during the months of April through June, inclusive, house price growth is normally about 1% weaker than it is over the rest of the year.
"If there are no rate hikes this year and the marginal buyer supposes (irrationally) that the record low 4.8% mortgage rates they can get are here to stay, there is scope for them to bid up prices another 5 to 10%," he tipped.
"My own perspective is that we are unlikely to see any real correction in prices until borrowing rates normalise.
"That in turn requires hikes from the RBA, which is currently entrenched on the sidelines."
His concern is that when the RBA does recalibrate rates, home values could decline "sharply."
"Investors must therefore focus maniacally on getting value for money."