Booming property boosts wealth, but at what cost?

Can property-loving Australians have too much of a good thing?

It is a question being asked by many now, even after rocketing property prices propelled Australia to the top of the heap with net household wealth surging $735 billion in the June quarter to $13.3 trillion – $522,032 for every man, woman and child.

Surging property prices along with rising share prices were the biggest contributors to that impressive result which saw Australia soar to the top of global wealth measures, but the property boom is starting to get plenty of attention of a more negative type.

Research firm CoreLogic has found house prices have climbed by between 15.6% and 26% across Melbourne and Sydney over the year to August.

Price of entry is becoming too high

With dismal wages growth, the flying prices of property are only worsening housing affordability and make paying off a housing loan more difficult – even with interest rates at record lows.

It used to be back in the 1990s that you could buy a property for four times the median income – now that will take seven times the median income – eight if you live in Sydney.

The other thing to note is that averages can be very misleading, and a lot of people will have a lot less wealth than the suggested $522,032 per head – up to two thirds of people, in fact – because a few very wealthy people can easily skew the averages much higher.

That suggests one of the big problems with such a high-flying property boom that is proceeding without wages growth – it is extremely unequal for those who don’t own real estate.

Housing affordability and mortgage stress increasing rapidly

Housing affordability is in the toilet and quickly getting worse, with mortgage stress also a growing issue despite incredibly low interest rates.

That’s not to say the property boom won’t continue despite the huge affordability problems it creates for those trying to break into the market but there have been a range of fairly influential voices lately warning about the dangers of this particular boom.

That includes the Reserve Bank assistant governor Michele Bullock, the International Monetary Fund (IMF) and Commonwealth Bank chief executive officer Matt Comyn.

“Rapid price rises can increase the likelihood that some new borrowers will overstretch their financial capacity in order to obtain a new loan, making them more likely to reduce their consumption in response to a shock to their incomes,” Ms Bullock said.

“If rapid price rises ultimately prove to be unsustainable, they could lead to sharp declines in price and turnover in the future,” she added.

In other words, the boom could be followed by a bust and plenty of pain as those who have stretched beyond their limits to get into property become forced sellers.

When bankers are worried, it’s time to take notice

Mr Comyn is also concerned about the boom which is significant given bank profits rely on selling lots of home loans.

While stressing that he was happy with the risks within the bank’s home loan portfolio at the moment, he expressed concerns about “increasing housing debt and increasing housing prices.”

“We would all have a shared concern about making sure Australia’s households are in a strong position to continue to repay but also to support broader consumption in the economy in the second half of this decade if interest rates are rising, and if they were to rise more quickly,” Mr Comyn said.

In other words, Mr Comyn is also worried about families growing wealth through their property but being so income strapped that they have little left over to spend in the economy.

IMF calls for drastic action

Of all of the warnings, the IMF’s was probably the most stark, which is understandable given they are essentially a disinterested observer looking from the outside.

IMF Australia mission chief Harald Finger said increasing interest rates was not the right action to cool the property market but that tightening regulations on lending was required to prevent a big risk to Australia’s economic stability.

Other measures the IMF suggested were ramping up home building and reforming generous housing-related tax benefits – code for much-debated measures such as negative gearing and capital gains tax discounts.

Some of the economic risks the IMF identified included the spread of the Delta strain of COVID-19, geopolitical tensions, climate change and a housing market correction.

Will APRA crimp loans in an election run-up?

Some of the regulations that could be fiddled with include requiring banks to reduce lending to particular sectors, such as investors, or to require higher deposits and even to impose credit restrictions if risks keep rising.

So far there has not been any sign of the Australian Prudential Regulation Authority (APRA) showing any enthusiasm for this sort of regulation and it would be controversial, coming in the lead up to a federal election.

However, Mr Finger was insistent that such macroprudential measures would be the best way to keep the economic recovery going by keeping interest rates low but to reduce stability risks.

“We think that setting macroprudential measures would be the right thing to do now, to rein in the possible build-up of financial stability risks in housing,” he said.