Housing bubble fears are overblown

Housing bubble fears are overblown

Soaring home prices in Australia’s biggest cities are driven by strong demand and a lack of supply, rather than indicating a “bubble,” according to HSBC’s local chief cconomist Paul Bloxham.

“At a national level, a key reason for rising housing prices has been housing under-supply,” Bloxham writes. “This also suggests that a significant fall in prices, as occurred in the US and Spain during the global financial crisis, is unlikely.”

Five years of red-hot growth have left prices in Sydney and Melbourne up 80 and 60 per cent since mid-2012, fueling bubble concerns. In June, Moody’s cut the long-term credit ratings of Australia’s four biggest banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders.

Bloxham, a former staffer at the RBA, said that “fundamental factors” largely explain the price boom and, “as a result, we do not judge it to be a bubble.”

Demand for housing in Melbourne and Sydney has been supported by domestic and international migration, foreign investment and a lack of new supply, he said. Price increases have been much smaller in places such as Perth, where demand has been weaker amid the waning of a mining boom.

The Australian Prudential Regulation Authority has gradually been ratcheting up restrictions on riskier loans and in recent months the big lenders have all raised interest rates charged on interest-only loans. Bloxham said he believes these regulatory measures will help cool the market, along with lower demand from overseas and increased supply. He also believes the RBA will lift its cash rate from early 2018.

“We see national housing price growth slowing from 8-10 per cent in 2017 to 3-6 per cent in 2018,” Bloxham says. He adds: “Boosting supply is likely to be the best solution to improving housing affordability in Australia’s major cities.”

The national housing deficit is shrinking. This chart shows the cumulative housing surplus/deficit assuming current rate ...

Article Source – www.smh.com.au