The Australian housing market is in a more precarious position than the United States was before the global financial crisis (GFC), according to a new analysis from AMP Capital which shows households have frittered away record income rises by taking on debt to buy housing.
Our mortgage-related debt is higher, property gross rental yields lower (suggesting over-valuation) and our prevailing interest rates are much lower leaving less buffer for interest rate cuts.
Between 2000 and 2016, Australian household disposable income increased by 75 per cent, faster than almost anywhere in the world, as the first chart below shows. But households have used that higher income to take on more debt, leaving debt servicing levels very high.
“We had a massive once in a century jump in disposable income… but we used that to take out a lot of debt and sell houses to each other,” said Dermot Ryan, portfolio manager of Australian Equities at AMP Capital. “We’re in a worse position on housing than the US was leading into the GFC.”
Source: OECD (% of disposable income used for debt servicing)
Home prices in Sydney have fallen 11.1 per cent since their peak in July 2017, data from industry tracker CoreLogic shows, and beating their worst peak-to-trough decline of 9.6 per cent set during the last recession in 1991. Melbourne prices, which peaked later, are down 7.2 per cent.1
Prices are expected to continue the downward trend. Recently-built apartments are still coming to market while financing conditions are getting tighter. Rents in the key markets of Sydney and Melbourne are also falling, leaving investors without income supporting their investments.
The downturn comes ahead of the prospect of a federal Labor government coming to power in 2019 with proposed policies that could further deflate the property market. This includes a proposed change to negative gearing to stop home buyers making a tax deduction against other income for losses on their real estate investments.
“Even if negative gearing policy is grandfathered, it will still impact the market for re-selling property to new property investors,” Mr Ryan said. So in effect, if the return characteristics of buy-to-let property investments change adversely then this class of investor will be more reluctant to buy at the low gross rental yields available in most Australian property markets today.
“People will take a haircut on the capital value of those investment properties.”
Labor is also proposing to remove the existing 50 per cent discount on capital gains tax payable on assets held for more than a year.
1Core Logic Hedonic Home Value Index, December 2018.
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Original Source: Produced by AMP Capital Ltd and published on 15 January 2019. Original article.