Brad Husband, a partner specialising in property finance at Corrs Chambers Westgarth, made the comments at the Informa Credit Law Conference last week, during a panel session looking at the housing market.
When asked by moderator and fellow financial lawyer Jon Denovan what he thought could be the “trigger to bursting the housing bubble”, Mr Husband rejected the premise of the question.
He said: “I’m going to go out on a limb and say I don’t think there is a bubble. I prefer to think of it as frothy. A bubble implies that if the bubble [were to] burst, we would be seeing massive capital falls in the house prices. I don’t really see that happening, not in the current interest rate environment with strong net migrations, etc. But that said, we certainly will see developments where the sales are not going through. And that is almost always specific to the location of that development itself.
“So, I can certainly see some issues for particular locations and particular developments, but that's why I think of it as frothy; in a sense that there might be lots of little bubbles, but I don’t see it as being a big bubble that’s going to burst right across the country leading to massive price falls.”
Likewise, fellow panelist and the CEO and founder of HashChing, Mandeep Sodhi, said that he believed there would “not be a huge drop” in house prices. But he did note that he thought there would be a continuing downward trend in houses, particularly in Sydney.
While Mr Sodhi added that he was not an economist, and that he was speaking from personal belief, he suggested that he did “not think that it’s a bubble at all”.
Mr Sodhi said: “The employment rate is healthy, there is no major economic depression at this point. I think the last three depressions or recessions that we had actually taught us a lot of lessons and the lending criteria has changed… the policies are a lot stronger as well.
“So, I agree with Brad as well — there are some postcode areas that banks are now restricting their lending; for example, where they now ask for a 20 per cent deposit, instead of 5 per cent… But there has [been] a drop in Sydney [median house prices] this quarter of 1.9 per cent. But Sydney has been having a massive growth period — 70 per cent in the last five years. So, it is just not sustainable. I think what's happening now is a correction, and not a huge drop. And that will continue for a couple of years.”
When asked what the government could be doing to make housing more affordable in Australia, Mr Husband said that he believed that “government action is not always super helpful”.
The Corrs Chambers Westgarth lawyer said: “At the end of the day, the housing market is still subject to demand and supply. I’m not an economist, but demand and supply I [do] get. I think that, quite often, what we see is government action where, for example, they want to help first home buyers so they give them some more money. Does that help demand or supply? What is that actually going to do to house prices? In all likelihood, it’s going to be a windfall for developers and existing owners, at the expense of the public. It’s probably not going to change the underlying dynamics.
“The other thing is that, what regulators are doing with the banks is direct action to limit access to credit. That’s all very well, but while it might temper demand, it will actually restrict supply as well. Because at the end of the day, when you can’t be confident that your purchases, whether domestic or foreign, will be able to settle at pre-sales, you don’t start the project. So, you don’t build the new house and then there is no supply.”
He continued: “We're in the market where we have relatively stable interest rates, and one thing that seemingly does drive the market is this net migration of 180,000-a-year-plus population growth, so there is a baseload of demand which has to be kept up with whatever happens, or else prices keep going up.”
Mr Husband emphasised that housing was different from other financial products due to the emotional response it triggers in people. He explained: “You don’t get shelter from the bitcoin. But you do [from a house] and people do have an emotional attachment to their properties.”
He added that from a purely financial point of view, it seems unlikely that people would invest in such expensive property, but they do — because they are emotionally invested in owning their own home.
“You can tinker with things like land tax… but are you actually encouraging new supply or are you simply encouraging more speculation in existing supply? So, I think there are a lot of unintended consequences from well-meaning regulation which actually does the opposite of what it’s trying to do — by either just pumping up demand or restricting supply. And supply is the much more difficult side of the equation, particularly in NSW.”
Mr Husband concluded: “I think interest rates are a massive factor on the nominal price, but as long as the government isn’t prepared to increase interest rates — and I think for good reason — to control housing and, as we've said, there is no international rate shock, then I don’t think prices are going to change.”
Annie Kane is the editor of Mortgage Business.
As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also a regular contributor to the Mortgage Business Uncut podcast.
Before joining Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.