Australian house prices: Real estate market boom unsustainable, banks fear, and could spark problems soon

House prices across Australia continue to climb insane levels despite lockdowns, and unlikely voices warn it is getting out of hand.

At the start of the coronavirus pandemic, when the world was on the verge of unprecedented uncertainty, economists issued a dire forecast for the Australian real estate market.

It would suffer tremendous losses like we have never seen in modern history, with estimates ranging from a 10 percent drop to a devastating 30 percent drop.

Despite massive job losses, widespread lockdowns, the shutdown of the economy and a resulting recession, as well as the interruption in trade, these forecasts have never been fulfilled.

In fact, average property values ​​across Australia rose 15.8 percent in the first eight months of 2021 and rose 18.4 percent last year.

Prices are higher than they were before anyone knew what Covid-19 was and have grown at the fastest annual pace since 1989.

“In dollars, the annual increase in national housing values ​​is roughly $ 103,400 or $ 1,990 per week,” said Tim Lawless, research director at CoreLogic.

Aside from those trying to get on the real estate ladder and fight, most of the other market players would be celebrating the historic upturn in the market … right?

This week, an unlikely voice joined the growing chorus of concern over the ongoing boom that continued during the lockdown in two of the largest markets, Sydney and Melbourne.

Commonwealth Bank chief executive Matt Comyn said he was “increasingly concerned” about rapid price growth in virtually every city, as well as in key regional areas.

Although the bank is the country’s largest bank and the largest home purchase lender, which means it raises cash, Mr Comyn said at a parliamentary hearing that the bank wanted to take steps to “take some of the heat out of the housing market” .

Prices are still rising, but are slowing down

The national property market again rates the street 1.5 percent in August, with Sydney’s largest market up 1.8 percent, the CoreLogic Index reported.

This growth rate for the capital of New South Wales is limited to one person at a time, despite a prolonged lockdown in the city with real estate inspections and auctions that are conducted online only.

Even in Melbourne, even in the midst of another lockdown, prices still rose 1.2 percent – a modest increase, but still impressive in the context of the Covid landscape.

“As expected, during the significant phase of the lockdown in Sydney, Melbourne, we saw a sharp drop in consumer and business confidence,” Comyn said Thursday.

“I don’t see any major slowdown in (mortgage) applications or funding. You can see that the market is still very active. “

The strongest increases in August were recorded in Hobart with an increase of 2.3 percent, Canberra with an increase of 2.2 percent and Brisbane with an increase of 2.0 percent.

“Australian real estate values ​​continued to surge across the board despite the disruption from the lockdown,” Lawless said.

However, the August results provide further evidence that price growth is slowing after peaking in March, he said.

“At the time, national home values ​​were up 2.8 percent in a month, led by Sydney, where home values ​​were up 3.7 percent.”

That slowdown in recent months has likely more to do with affordability than Covid-19’s restrictions or significant uncertainty.

“House prices have risen almost 11 times faster than wage growth over the past year, which has created a greater barrier to entry for those who don’t already own a home,” Lawless said.

“Bans have a clear impact on consumer sentiment, but to date the restrictions have resulted in falling offers and, to a lesser extent, fewer home sales, which has less impacted the dynamics of price growth.

“It is likely that the ongoing shortage of real estate for sale is central to the upward pressure on property values.”

Despite lockdowns and restrictions for the real estate industry, the auction dissolution rates – i.e. the proportion of offers that go under the hammer – remain high.

According to CoreLogic, 1,835 houses were auctioned in every capital last weekend, a sharp increase over the previous week and almost twice as many as 12 months ago.

The national auction clearance rate was 74 percent, while Sydney led the individual market fee with a score of 82 percent.

Volumes are low, however, especially in Melbourne, where 56 percent of the roughly 560 properties that went under the hammer have been sold successfully, suggesting that many sellers are stuck right now.

A sign of anger ahead of us

The head of a big four bank, who talks down house price growth and even calls for action to slow it down, is obviously important.

And it is an indication of what the real estate industry – a crucial pillar of the economy – could face if it continues unabated.

In a speech at a parliamentary hearing on Thursday, Mr Comyn was asked about the growth in residential property prices when he said: “We feel it is important to take some humble steps sooner rather than later to take some of the heat out of the housing market.

“I think it would be wise to act sooner rather than later.”

What just happened – a nearly 20 percent explosion in national property prices – doesn’t give him any reason to pause.

“I’m not worried about the time that has just passed. But we are increasingly concerned about rising real estate debt and rising real estate prices. “

ANZ boss Shayne Elliott also appeared at the parliamentary hearing, who also voiced his concern about Aussies who may bite off more than they can chew.

“The number of people taking on more debt for their income has increased,” Elliott said.

“We’re taking more time to be careful, to ask more questions, to really judge whether people have the ability to take on the debt they’d like (and) we’ve lost a bit of market share as a result.”

The Reserve Bank has also expressed growing unease by saying that rising house prices and subsequent household indebtedness see “risks to financial stability … building.”

In a speech this week, RBA Assistant Governor Michelle Bullock, who oversees the country’s fiscal stability, said homeowners’ debt was huge thanks to house prices.

This means that a bigger event like a decline in employment may be felt worse by it.

“For example, in a recession where a large number of indebted households are suffering from income losses, such as job losses or reduced working hours, they might choose to cut back on their consumption,” said Ms. Bullock.

“It can only be a precaution. However, when households are constrained by running out of much income after completing their debt servicing and lifestyle basics, they are more likely to cut back on their consumption.

“This will amplify the initial impact of the economic shock.”

She said the RBA is constantly reviewing whether action is needed to address the risk.

“Even if banks have strong balance sheets and lending standards are adhered to, there is a risk that households will become increasingly indebted in this environment,” said Bullock.

“High levels of debt could pose risks to the economy in the event of a household income shock or a sharp drop in house prices. It is these macro-financial risks that require close monitoring. “

CBA is taking proactive steps

Another bombshell Mr Comyn dropped on Thursday was that his bank had raised its operational floor to cool the market.

That is, the rate at which a bank tests a person’s ability to keep repaying their mortgage when interest rates rise has been cited for Commonwealth Bank clients.

Currently, the official rate in Australia is at an all-time low of 0.10 percent, making the cost of borrowing extremely low.

These low lending rates are adding to the real estate rush, as well as a faster than expected recovery in consumer confidence, FOMO (fear of missing out) and backlog.

While there are no immediate signs that rates will rise, they will eventually.

“I think we all have our part in ensuring that 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 when and when rates go up they might go up faster, ”said Comyn.

Right now, few people are losing due to skyrocketing prices in virtually every part of the country – with the exception of a significant group.

Younger Australians are facing conditions that “make it difficult to enter the housing market,” Elliott said.

Full pricing out will lead to long-term economic inequalities in the future, he warned.

source https://www.bisayanews.com/2021/09/24/australian-house-prices-real-estate-market-boom-unsustainable-banks-fear-and-could-spark-problems-soon/