Australia's Housing Bubble Fears Stem From `Superficial' Views, CBA Says
Commonwealth Bank of Australia, the nation’s biggest mortgage lender, said concerns about a housing bubble in Australia are driven by a “superficial or incomplete analysis” of the nation’s property market.
Australian homes are no less affordable than those in other comparable countries, the Sydney-based lender said in slides prepared for upcoming meetings with overseas investors. The bank refutes recent commentary from Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., and Gerard Minack, chief strategist for global developed markets at Morgan Stanley’s Australian unit, that the nation’s housing market is in a bubble.
“Taking into account geographic differences, the ratio of house price to income in Australia is not that much different to most other comparable countries,” the bank said. “Population growth and excess demand relative to supply has been a key driver of Australian house price appreciation -- these factors are unlikely to reverse in the near term.”
Reports published since late July showing Australian home price growth has slowed, after rising 20 percent in the year to March, have led to concerns the housing market is on the verge of collapse. The Australian economy’s “strong fundamentals,” an undersupply of housing, and population growth of about 2 percent a year help to guard against the risk of a sudden drop in house prices, Commonwealth Bank said in its presentation.
Comparing homes in global coastal cities -- which are generally priced higher than those in inland areas -- shows homes in Australian metropolitan areas are in line with other countries, Commonwealth Bank said. House price to income ratio in Sydney and Melbourne is at 6.2 and 5.7 respectively, compared with 7 in New York and San Francisco, 9.3 in Vancouver and 6.7 in Auckland, it said.
“Australia’s population concentration in capital/coastal cities distorts comparisons to other, more densely-settled countries,” the bank said.
Australia has a house price to income ratio of 4.3 when regional areas are included, compared with 5.6 in the U.K. and 4.1 in Canada, according to the presentation
Stringent lending standards and lack of speculative buying have helped keep home loan losses in check, the bank said. Even under a “high-stress scenario,” with interest rates at 14 percent, unemployment at 10 percent and property values down 30 percent, Commonwealth Bank would see losses of only A$740 million, or 0.2 percent of its total book, not including additional insured losses, it said.
Household debt in Australia is also not much higher than many similar countries, the bank said. Australia’s household debt to disposable income ratio was 158 percent as of March 31, based on RBA data. That compares with 133 percent in the U.S. as of 2007, prior to the housing collapse there, according to Federal Reserve Bank of San Francisco figures.
Much of this debt is held by those in the strongest position to service it, Commonwealth Bank said. About 75 percent of household debt is in the hands of the top 40 percent of income earners and almost half with the top 20 percent, it said. Households with the bottom 20 percent of income have only 3.4 percent of outstanding debt.
Still, investors remain concerned about the future of the market. The central bank’s Assistant Governor Guy Debelle said foreign investors continue to question him about the nation’s housing market.
“It’s certainly the case that a lot of people, investors, are interested in the Australian housing market,” he said at a financial industry forum in Sydney today.
The extra yield investors demand to hold Australian-dollar bonds sold by banks has climbed 41 basis points to 218 basis points from this year’s low of 177 basis points on April 23, Bank of America Merrill Lynch index data show.
Grantham said in June that Australian home prices need to fall by 42 percent to “return to trend.”
Morgan Stanley’s Minack said Australia’s “debt-fuelled housing market remains a major macro risk,” in a report last month. “Dodging the worst of the global financial crisis didn’t demonstrate that there’s no bubble, in my view it just showed we dodged the prick.”