Speaking at the BIS Oxford Economics forecasting conference in Sydney yesterday, managing director Kim Hawtrey emphasised that since 2012 through to today, Australia is experiencing a property boom “like no other”.
He explained that there have been 12 bull markets since the 1950s, and the current one is “phenomenal”.
“Commencements were languishing at around 135,000 per year just a few years back, now we're building 230,000 dwellings a year. And it's been pandemonium,” he elaborated.
“This current boom has had a number of drivers. Population growth, low interest rates, strong foreign investor interests, baby boomers living longer and needing normal housing rather than aged care hospices. New caps in superannuation, which are redirecting money towards property.”
“[There is] a preference for bricks and mortar by ordinary investors after the GFC, and so on. These are the factors which have driven this extraordinary boom.”
Mr Hawtrey noted that another contributing factor is that the country’s banking system is too reliant on property loans in its business model, highlighting that 62 per cent of Australian bank assets are housing loans.
“We've been talking a pretty good game for a few years now, but the question it poses is, do we need to jog our memory about what happens next? What is history's guide to how bull markets usually end?”
According to Mr Hawtrey’s analysis of property cycles, the total bull market gain for residential commencements is typically 42 per cent on average, and their upswings usually last for 33 months after which there is a bear market, which usually has a fall of approximately 24 per cent.
“A typical bull phase roughly lasts for three years and the average dwelling commencements go up by a ratio of four to 10. One of the upshots of this is that we're in unchartered waters, looking at the latest cycle,” he explained. “A historic boom is going to mean a historic reversal too.”
“We've seen this bull market go up 60 per cent which is a good deal higher than the average, it's the largest on record, and it's lasted 45 months, which is the equal longest on record. We're expecting in our forecasts over the next few years, that the bear market that follows this bull market will be a reduction of 33 per cent in commencements and will take 48 months to complete the decline.”
Mr Hawtrey added that the current cycle in apartment building in particular has lasted the longest “by far”, with an upswing of 54 months compared to the usual 32 months.
“Apartments are the volatile and dangerous ingredient in the situation that we find ourselves in now, and we need to be less confident that we'll see an orderly and contained bear phase following this boom because of the sheer eyewatering size of this cycle,” he concluded.
‘Trumpflation’ could lead to mortgage stress
Australia’s household debt to income ratio is higher than that of the USA, Canada, and the Eurozone according to Mr Hawtrey, who pointed out that interest only loans account for about 40 per cent of the country’s mortgages, which will “go underwater” if house prices decline. “This raises the question of what would happen if interest rates were to rise,” he said.
“The election of Donald Trump is likely to see higher interest rates in the US and the world economy, higher inflation is also likely due to ‘Trumpanomics’, and ‘Trumpflation’ is almost certain to mean that interest rates around the world, after eight years after the GFC of being subnormal, are now going to normalise.
“Australia will eventually need to fall into line with that, and given the size of our loans in this boom, to have underwritten this boom, it's going to see an increase in mortgage stress.”
Mr Hawtrey emphasised that Australia is making a “big” policy mistake by relying too much on “easy money” to support economic activity.
“A boom bust volatile cycle is not really good for our industry. We need a steadier, smoother approach, not one that relies on huge run-ups and huge run-downs,” he concluded.
[Related: Sydney property market still booming]