Uh-Oh. Is this the beginning of the end of our property boom With Dr. Andrew Wilson

Is this the beginning of the end of the property boom?

If you’ve been following the property news lately you be forgiven for thinking so.

The Chiefs of two of the biggest banks have suggested that regulators should step in and introduce macro-prudential controls to slow down our booming housing markets.

In the closing statements of the ‘Housing Market and Financial Stability’ speech delivered by the RBA’s Assistant Governor Michele Bullock on Wednesday, Bullock hinted at the possibility that the RBA could intervene in Australia’s housing market.

The International Monetary Fund has issued warning about Australian house prices and Digital Finance Analytics principal Martin North gave a chilling forecast that home prices in Sydney and Melbourne outer suburbs could fall a staggering $200,000 while the crash could be even worse for apartments when lending rules were tightened.

So, should we be scared?

That’s what I’m going to be chatting about with Australia’s leading housing economist Dr. Andrew Wilson today.

And here’s a spoiler alert – NO you don’t need to worry!

Now if you have been a subscriber to this podcast for a while or followed my blogs or YouTube videos, you’d know for the last 3 years I have recorded a weekly Property Insiders video chat with Dr Andrew Wilson.

And his assessment of and forecasts for our economy and property markets have been remarkably accurate so whether you’re a beginning property investor or an experienced I’m sure you’ll benefit from my chat with Andrew today which is the audio of one of our recent Property Insider videos.

However, since we recorded this video Federal Treasurer Josh Frydenberg has given the green light to introducing macroprudential curbs to mortgage lending.

The last time lending restrictions were implemented in 2017, the focus was on dampening investor lending and the high percentage of interest-only mortgages.

However, this time around the main concern seems to be an increasing share of loans on a high debt-to-income ratio.

22 percent of new mortgage holders now have debt that exceeds their income by more than six times, up from 16 percent a year ago.

But, as you’ll hear Andrew Wilson explain in our chat, regulators should be aware of unintended consequences. Their crackdown is likely to hit first home buyers rather than Australia’s wealthy.

Targeting debt-to-income ratios will have a limited impact on higher-wealth households, who often have multiple streams of income. However, it will affect lower-income households and those purchasing property for the first time.

There are several reasons the debt-to-income ratios have risen over the past year.

Firstly, low interest rates by their nature allow people to service more debt as repayments fall.

And second, the share of lending to first-home buyers has increased significantly on the back of HomeBuilder, the federal government’s First Home Loan Deposit Scheme, and individual state government incentives. First-home buyers tend to be more indebted as they stretch to get into the market.

Given improving homeownership rates is the goal of these government schemes, it seems counterproductive to limit first-home buyers by reducing their ability to borrow.

And another reason that debt to income ratios have increased is that many established homeowners have upgraded their homes over the last year or two, partly because of the low-cost borrowing, partly because the value of the home has increased considerably given them equity to upgrade and also because of the increased requirements for more space such as a zoom room, etc.

My Property Update Chat with Andrew Wilson

Looking back over the first 9 months of this year, our property markets have performed even more strongly than anyone ever expected, with the rates of house price growth at levels not seen for a number of decades.

In fact, all capital city markets have already experienced double-digit capital growth so far this year and many locations will experience growth of more than 20% over 2021.

Of course, it must be remembered that the last peak for our property markets was in 2017, and in many locations, housing prices remain stagnant over the ensuing couple of years and it was really only earlier this year that new highs were reached.

Meaning that average price growth was unexceptional over the long term.

But over the last week or two, there seems to have been a sudden change of sentiment about our booming housing markets.

A sense of urgency has crept into the tone of those at the helm of our big banks, as the CEOs of two of Australia’s largest banks have sounded off about emerging lending risks.

Topics We Discuss on Today’s Show:

• Whether or not the high debt-to-income ratios of home buyers is really a problem
• Price growth has averaged a modest 4% per annum since 2017 – despite record falls in mortgage rates over that period
• Monthly house price growth in most capital cities has halved over the past three months and continues to track downwards
• The Reserve Bank does not have a role in setting house prices.
  • The RBA’s mandate to stimulate employment which currently means keeping interest rates low
• The Australian Prudential Regulatory Authority, and its purpose of making sure the banks are operating soundly and there is no deterioration in lending standards.
• There seems little to be concerned about current lending practices as interest-only loans are essentially a non-issue these days, and with rental vacancies at near-record lows, the market needs property investors.
• Why more Aussies are joining the millionaire club as Australian household wealth reaches record levels, and what that means

Resources:

Michael Yardney

Dr. Andrew Wilson, chief economist My Housing Market

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Shownotes plus more here: Uh-Oh. Is this the beginning of the end of our property boom With Dr. Andrew Wilson

Some of our favorite quotes from the show:

“You see, targeting debt to income ratios will have limited impact on higher wealth households.” – Michael Yardney

“We’re doing our homework, we’re doing our research, we’re doing a lot online, and we’re just making quick decisions.” –  Michael Yardney

“I’ve seen it over and over again that unless you grow out to where it is, you end up going back to where you are.” – Michael Yardney

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