Investors warned: ‘We are in a property bubble’

Speaking on a panel at the Australian Securitisation Forum in Sydney this week, Fitch Ratings managing director Ben McCarthy said the ratings agency’s view is that the Australian property market is in a bubble, adding that the group has seen an increasing number of questions from international investors about the risks of Australian property.

“Our view is we are in a bubble. Our view is that investors should be well aware of the possibility that property prices could fall by 25 per cent, and should factor that in,” Mr McCarthy said.

“One of the numbers that strikes me is that CoreLogic RP Data values total Australian housing at $6.3 trillion. Per person that is $260,000. The US number is $21 trillion. Our housing is worth three times what theirs is,” he said. “When you weigh that up you can understand why people overseas are asking us questions about the Australian housing market.”

Also on the panel was Smart Money Investment director and the AFR’s contributing editor Christopher Joye, who agreed that we are in a bubble, but said it not a “massive concern”.

“I think there is a bubble. I don’t think it is a massive concern,” Mr Joye said explaining that two capital cities are driving the bubble in the Australian housing market.

“Sydney and Melbourne are almost 60 per cent of the urban population. Within every bubble you always have sectors driving that asset class. In 2008 we had leveraged finance driving equities bubbles, in 2001 it was technology, and in 2013 to 2015 it has been Sydney and Melbourne,” he said. “You could have 10 to 20 per cent adjustments.”

Commenting on the recent cooling of property prices, Mr Joye said he doesn’t believe we are seeing an adjustment as a result of natural forces of supply and demand.

“I think this is almost exclusively an artefact of pricing and quantity effects through the banks’ unilateral rate hikes of investment and owner-occupied borrowers rates, and that is obviously a function of the huge increase in CET1,” he said.

“Secondly, a quantity effect with APRA effectively crushing that investment credit growth down below that 10 per cent ceiling that was imposed, and also forcing the banks to enforce much more prudent lending standards.

“For example, the new seven per cent interest rate level for testing borrower repayment capacity, which half of all ADIs were not applying, even after APRA had announced that macroprudential rule in December last year.”

Mr Joye pointed to RBA data to provide an overview of the economics behind his views.

“We’ve got a house-price-to-income ratio that is now above any previous recorded peak. The two prior peaks were in 2007 and 2010. We’ve got the largest share of speculative investors as a proportion of investor flows that has been recorded.”

Mr Joye remarked that he sees Australian property as “about 15 to 25 per cent overvalued”.

He added that we could see an “expectation-driven” adjustment in prices without seeing a big increase in arrears or a big increase in unemployment.

“The drawdown is likely to be in the range of 10 to 20 per cent. I don’t think it will be catastrophic at all.

“I think the recapitalisation of the banks, which is the biggest deleveraging of Australian banks in modern history, will put them in good stead to absorb any modest increase in arrears. It will be an expectation-driven adjustment in prices,” Mr Joye said.

[Related: Housing bubble warnings 'nonsense']