Aussie housing obsession – with a dangerous degree of complacency

Australian housing obsession recession debt interest rates dwellings

After 25 years without a recession, it appears that a worrying number of Australians have forgotten that the country’s enviable growth track record doesn’t make us immune from future shocks – this is becoming increasingly relevant in the housing market, where regulators are having a difficult time reigning in euphoric house price growth.

Dr Greg Schwann, Associate Professor of Finance at the University of Melbourne states that many factors are now locking out first home buyers. “Australian cities are growing more rapidly, more than any other cities in the world” says Dr Schwann.

“Combine that with historically low interest rates, a growth in incomes, and immigration flows from rural and regional areas – and you have a huge boost in demand for dwellings in capital cities”

Australia’s cultural fixation around owning a home, combined with the taxation system that incentivises buyers with negative gearing and capital gains tax concessions adds to this surging demand.

In a world that is increasingly investing in new technology, a majority of Australian investors still prefer to buy a 2nd, 3rd or 4th home, before they even think about investing in different asset classes.

Dr Greg Schwann Associate Professor of Finance at the University of Melbourne
Dr Greg Schwann Associate Professor of Finance at the University of Melbourne.

After 25 years of constant growth and a more resilient housing market than most other developed countries, many Australians believe that we live in a unique lucky country, or treasure island, immune from risk and downturns!

This complacency breeds an expectation of continued gains, and a lack of appreciation for the risks that comes from a highly cyclical market.

Australian housing market expectations vs reality

This expectation of continued gains, leads to a dangerous mindset that quickly multiplies the value of homes.

Let us consider a young couple who are extending themselves (taking on too much debt) to bid for a $1m home – Before the auction they tell themselves that $1m is their limit, but after months and months of being out-bid on their favourite houses, they lose patience – what is an extra $100k they think?!

There is every chance the house will be worth $1.2m in 12 months’ time. Arguably this type of mindset and mentality has been occurring for years, with no repercussions as yet for the buyers who pay up – To the contrary, the only people who have been punished are those who have stayed disciplined and bought within their means.

When considering the debate of whether this is a bubble, it is worthwhile considering how it would be analysed after say a 30% decline driven by economic weakness from a Chinese slow-down.

Record consumer debt levels, record price/income ratios, mortgage stress at the bottom of interest rate cycle, mortgage fraud, un-sustainable policies around tax, capital gains and other incentives. Not forgetting huge immigration levels, that have started to create other issues such as a lack of income growth.

It would look pretty clear in hindsight after a 30% decline that this was an un-sustainable bubble that was always going to end badly.

One way to remove complacency is considering a scenario where house prices are declining but the RBA’s hand is forced to lift interest rates because of out of control inflation, or keeping up with overseas markets that are rapidly increasing interest rates.