Home prices jump to new record amid surging supply and declining real wages.
“The government, opposition, central bank (RBA), prudential regulator (APRA), FIRE sector (finance, insurance, and real estate industries) and their economists predictably deny the existence of a housing bubble. They firmly assert a severe downturn in the residential property market cannot and will not occur” — LF Economics.
So when home prices sagged on a monthly basis in May, the fretting began. But now it is ascribed to a seasonal quirk because in June home prices jumped again, according to CoreLogic:
- In Sydney, home prices rose 12% in June year-over-year to A$880,000, with house prices up 13% and prices of condos (“units,” as they’re unceremoniously called Down Under) up 9%. On a monthly basis, they rose 2.2% from May.
- In Melbourne, home prices surged 14% year-over-year, with house prices up 15%, and condo prices up 1.5% (more on that measly increase in a moment).
- Since January 2009, home prices in Sydney have skyrocketed 111%, and in Melbourne 95%.
- For the five capital cities – Sydney, Melbourne, Brisbane, Adelaide, and Perth – home prices rose nearly 10% in June year-over-year and are up 70% since January 2009.
- Home prices fell 1.7% year-over-year in Perth, which is impacted by the mining bust, and 7% in Darwin.
And Sydney and Melbourne “are seeing rents rising at around 4-5% per annum,” CoreLogic research director Tim Lawless told ABC News.
So how can people afford it all? Through soaring incomes? Hardly.
Nominal wages (not adjusted for inflation) are now experiencing record low growth. And real wages (adjusted for inflation) are declining. This chart by LF Economics shows those miserable trends in wage growth rates. Note how real-wage “growth” (red line) has now become a decline:
This real-wage problem arrives at a time of:
Surging housing construction, particularly of condos. CoreLogic’s Tim Lawless pointed out that these “higher supply levels in the unit market appear to be creating a drag on the performance of the unit sector in specific segments.” Hence the measly increase in condo prices in Melbourne.
Rising mortgage rates, just “when household debt levels have never been this high,” Lawless warned. “It suggests households are becoming much more sensitive to these rate rises.”
A crackdown by lenders on investors. Banks are now fretting over risks and record low rental yields in Sydney and Melbourne. Under pressure from regulators, they’ve raised rates for investors and are curtailing interest-only mortgages. “We are likely to see further tightening and repricing around investment lending and interest only lending over the coming months,” Lawless said.
And there have been some wobbles in home prices over the past few months, including the month-over-month decline of 1.1% in May for the five capital cities, now largely brushed off as seasonality, since the 1.7% rise in June.
The price increases of 12% and 14% in Sydney and Melbourne in June are down from the year-over-year surges in March of 19% and 16% respectively.
And homes are sold via auctions, and the auction results in terms of clearance rates have deteriorated. In Sydney and Melbourne, clearances rates in March were still in the high 70-percent to low 80-percent range. In June, clearance rates in Melbourne were barely above 70%, and in Sydney, they dropped into the 60-percent range.
“Although growth conditions have lost momentum across the largest housing markets, we are yet to see any signs of a material downturn,” Lawless said. The key drivers of the slowdown are gradual, he said, and they include “housing affordability – which remains a significant barrier for many prospective buyers.”
The combination of record low wage growth and surging home prices has created a nightmare in terms of affordability. The home-price-to-income ratio is one aspect of this affordability problem. For the country overall, the P/I ratio has more than doubled over the past 20 years, from 1996 when the median home price was 4 times median income, to Q1 2017 when the median home price hit 9 times income, as LF Economics points out in its new report on housing affordability:
While the P/I ratio for most cities is in the mid- to upper single digits, it has surged to 10x for Melbourne and to 13.7x for Sydney.
Declining mortgage rates have been credited for making everything possible, but now mortgage rates are unlikely to fall further, and there are pressures for mortgage rates to head the other way. The P/I ratio also ignores a number of other factors, such as high transportation costs, as people are pushed further out into the suburbs and commutes lengthen.
Then there’s the problem of down payments, which are increasingly difficult to scrape together for first-time buyers, who are hobbled by low wage increases and high costs of living, such as surging rents.
So what options do first-time buyers have? Their parents. With consequences for their parents. LF Economics:
Many First Home Buyers (FHBs) are dependent on their parents for financial assistance for deposits, mortgage payments, co-buying and using the family home as collateral (guarantees). This fast-tracks ownership for the children of the more affluent regardless of their ability to meet mortgage repayments over the long term. These forms of parental assistance allow some FHBs to enter the market dangerously over-leveraged with minimal equity and savings.
The parents’ financial future is at risk should their children experience difficulties meeting mortgage payments, let alone defaulting and suffering foreclosure.
“Buy property in Sydney and you’re ‘pretty well set for life’”: Government to first-time buyers. Read… Housing Bubble in Sydney Soars to New High, Politicians Promote Scheme to Bitter End