A new report from ANZ claims residential properties aren’t overvalued and has taken aim at traditional methods of evaluating affordability, including price-to-income ratios, saying they don’t take into account more complicated and less-quantifiable factors including historic declines in interest rates.

Senior economist Ange Montalti also says the current short-term trends affecting housing prices, including a decline in demand and the lack of first-home buyer stimulus, won’t last for more than a year, predicting stronger growth in 2011-12.

“We’ve had a few rate rises, but these are temporary reactions, we believe, and are not significant in the long-term. Our view is that with the housing market being quite tight, we should see some support for prices over the next 12-18 months.”

Montalti says the new report was written in order to bring into consideration pricing factors that are not recognised, including those that are less quantifiable such as deregulation which has caused credit to become more widely available.

“So what happens is that people tend to look at main pricing measures including house to income ratios to determine the affordability of the market. But those are only okay as a starting point and don’t take into account bigger movements over long periods of time.”

“In the late 1980s you had very high mortgage payments, which meant for any given dollar of debt you had to pay 15 cents in the dollar. Any dollar in debt today only costs you seven cents – you can sustain double the debt levels for the same burden.”

The ANZ report lists a number of measuring ratios including the actual price level, house price to income ratio, debt-servicing ratio and purchasing affordability.

But these are all flawed in providing a sense of the how the market overall is holding up, Montalti argues. For example, the house price to income ratio mode is listed as “ignoring shifts in cost of funding, other structuring shifts, housing market conditions and credit availability”.

The debt-servicing ratio is, “Okay as a guide…[but] little direct insight offered to house price analysis”. The purchasing affordability ratio, which is listed as the “interaction of interest rates, incomes and house prices”, is labelled as “useful for typical first-time buyers” but otherwise takes no account of affordability for investors and upgraders.

More importantly, Montalti says, is how the market is performing now and where those prices are actually moving. He points out the country has quite a low delinquency rate, which is evidence of a largely affordable market that is valued correctly.

“Critically, the persistence of very low housing loan delinquency rates over several decades (including through the most recent GFC) is the greatest testament to the sustainability of debt levels and house prices in Australia,” the report points out.

“That lenders continue to adhere to tough eligibility criteria minimises the probability that any event shock will emanate from ‘over-provision’ of credit.”

Montalti says buyers need to look at the “bigger picture” when it comes to house prices.

“That ability to service the mortgage is critical to this whole discussion, and that on its own explains a big chunk of where prices are at the moment.”

“For instance, if you only considered income, then prices would need to fall 48%. That’s a big number, but if you consider income, along with the decline in interest rates over the past 20 years, then prices only need to fall about 13%. The same interest rates are what determines serviceability.”

Then, he says, that remaining 13% can be attributed to financial regulation and less-quantifiable examples including changes in tax conditions and “the overall impact of deregulation which moves from a system of rationed credit… to one that uses debt facilities to use credit”

Montalti says the question of affordability is not irrelevant, but at the same time, “is not an easy one to answer”.

“What you have to look at is whether or not conditions are going to change moving forward that stabilise the market or use the opposite effect. We use these measures of tools.”

So what’s going to happen in the future? Montalti says the current low level of delinquencies right now means affordability is on track, but warns that “a substantial increase” in interest rates over a short period of time could threaten to destabilise the market.

“But having said that, that’s not something the Reserve Bank is going to do without giving a considerable amount of thought to, and it’s not on the cards. There would need to be certain circumstances which require that.”

“There are always swings and roundabouts in the housing market, with regard to interest rates. But it would take a substantial swing upwards to disrupt the market.”

Looking forward, Montalti believes a shortage of properties in certain areas, based on the population growth models, will keep prices moving in the second half of 2011, moving on into 2012.

“Worst case scenario is that we get some more flatness for a bit longer. But we have pent up demand, and there aren’t enough homes, so we suspect there will be upward movements in prices going into 2012 and 2013.”

The report also points out that in a risk scenario based around a major collapse in the terms of trade, could likely prompt policy settings “that can only be favourable for house prices, particularly if house price momentum has been restrained”.

“Policy-makers intent on preparing for a ‘post-terms of trade collapse’ environment are likely to shift settings to a more accommodating stance. While the economy is likely to slow, the interest rate-sensitive sectors such as housing will benefit considerably and swiftly.”

Related Items :

• Drop in first home buyers keeps property prices under pressure, experts say
• 44% jump in property listings points to price falls in 2011: Expert
• IMF claims housing market overheated but locals predict growth in 2011
• Property prices will fall as unsold stock levels soar, experts warn
• John McGrath tips Sydney property growth of up to 10% in next 12 months, but experts cautious

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written by Nexus123,
January 17, 2011

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written by PityTheFool,
January 17, 2011
“What you have to look at is whether or not conditions are going to change moving forward that stabilise the market or use the opposite effect. We use these measures of tools.” – don’t you mean “we use these measures of fools” – there are no greater fools Mr Stafford – and no shortage or property either – hence the property listings up 44% and no-one buying for obvious reasons.

I think it is quite irresponsible to be spruiking when property has already hit a downturn, do you feel nothing for the taxi driver trying to support his wife and 3 kids and just bought a 350K home in the burbs at 95% LVR and in a year’s time it will be worth 250K, he’ll probably default on his payments due to interest rate rises and will have to declare bankruptcy because he can’t sell his house for what he bought it for.

The current state: credit is tight and getting more expensive, capital gains will be negative in next 1-2 years and then at least flat for the following 5 years so investors are selling up to go elsewhere. They can’t increase rents as middle-class is already stretched on their mortgage (retail sales show this), interest rates will rise further increasing the pain on investors as bank interest greatly overshadows rental yield forcing them to sell, as it will force mortgage-stressed first home buyers to sell, baby boomer (investors) wanting to retire in next 1-7 years are trying to cash out now before price drop kills their nest egg. All this is true in all capital cities – not just sunshine coast. Expect 40% price drop like those in-the-know have been saying for over a year. See bubblepedia.net.au

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written by Nick Christian,
January 17, 2011
Ditto Plaingreeds comments on Alan Kolhers article today:

Coming to a country near you – Australia! It’s not different here.

n explanation:
1. Negative gearing introduced in the 80s brought on an ever-increasing wave of Mum and Dad investors looking to minimise their tax and somehow feeling good about themselves that they were “providing a roof for renters”. However, each investment property purchased had the effect of taking a home off the market that would have otherwise been available for kids leaving home to buy, and forced to rent.

2. Introduction and increases of first home owners grants in recent decade fuelled the price increases, as well as the rise of the mega-housing developers dictating the new McMansion lifestyle.

3. Cheap credit and relaxed lending conditions saw prices rise even further this last 5 years (bigger and riskier loans enabled first home buyers to bid higher – but still lost out in auctions as investor speculators could always pay more).

4. Changes in government policy made it easier for cashed-up overseas investors to enter the market, driving prices even higher.

The current state: credit is tight and getting more expensive, capital gains will be negative in next 1-2 years and then at least flat for the following 5 years so investors are selling up to go elsewhere. They can’t increase rents as middle-class is already stretched on their mortgage (retail sales show this), interest rates will rise further increasing the pain on investors as bank interest greatly overshadows rental yield forcing them to sell, as it will force mortgage-stressed first home buyers to sell, baby boomer (investors) wanting to retire in next 1-7 years are trying to cash out now before price drop kills their nest egg. All this is true in all capital cities – not just sunshine coast. Expect 40% price drop like those in-the-know have been saying for over a year. See bubblepedia.net.au

BTW, if any of you commentator’s try to contest that we are in a property bubble, please also give an economically sound explanation of what I was able to achieve. I bought a property in 2008, and sold it in 2010 for 60% more – with absolutely NO renovation. This kind of growth not only is unsustainable, but is proof housing is massively overvalued and MUST return to normal pre-boom prices in line with average inflation/wage ratios.

Note: I did not buy and sell the place for capital gain, I bought and sold it for non-financial reasons – but am now aware of this bubble and am NOT going to re-enter the market any time soon.

MY COMMENTS:

Why does Patrick and the media play continued creedence to this topic?
Because so many people, SME’s, wealthy smart business owners have such a big vested interest in thier residential property prices going up?

This is exactly the reason you should be getting out of it! Your blindly following the ‘herd’ like a flock of sheep. Continuing to try and catch a ‘rising tide’

Why would you listen to someone propoting to be a ‘professional’ about the state of the Australian housing market who has a vested interest in seeing continuing rising prices?

I will also add one more thing to your comments ‘Plaingreed’. A multi-layered stifiling of suppy by ‘prescriptive planning’ instead of pro-active or ‘reactive’ planning by all levels of government.

C’mon media team put this issue to bed. stop this to-and-fro from people with vested interests.

It’s a clear winner, WE DO HAVE THE HIGHEST HOUSE PRICES IN THE ENGLISH SPEAKING WORLD!

And they said the Brisbane river will never flood again!!!!!!!

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written by Dan8,
January 17, 2011
fair call Nexus, and this was information from the bank… but the flipside must also be an option
ie interest rates rise to historical rates maybe the highs in the 80s, China slows down, credit availability decreases, employment and incomes decline, inflation is an issue….etc. All downside and no upside so it must not be a good time to invest.

This is all crystal ball stuff and in truth no one really has a clue. The data streams are so complex that they defy definitive analysis (art not science). People need to take on the advice of the experts and raw data available then be responsible for their own decisions in life.

40% drops? i don’t thinks so, make your own decisions and jump in (or not). game on.

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written by dlovep,
January 17, 2011
It’s not overvalued, it’s not worth to value when your house going underwater. The QLD effects will halt the economic growth, if one state in trouble, will other states un-affected ? Think about foods, fruits, petrols,.. will you see that 30% cheaper in some states than QLD.

Our dollar go very strong, it’s telling you to sell your properties than exchange to US dollars or buy house in US, keep for some time and get some interests, later on when AU dollar drop back, you earn the gap, that will be much bigger and quicker than the AU’s properties market.

Our government still dreaming about their policies, it’s a shame that government cant even manage the total citizens size of around 23 millions, what if 200 millions like US, it must be a diaster. Dont even compare to China, at least they show they can manage it.

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written by Hercc130,
January 17, 2011
Well the Anz report would say that would’nt it. As they are the ones trying to sell debt. The bigger the debt the more money made for the bank. They would have all, your after tax income, if you were willing to give it. House prices need to fall 48% to where they should be valued at. So we can all afford a house, without signing all the family income over to the bank for the next 30 years or so. So theres money left to spend on the family (holidays the kids, invest? etc). Where does the economy come from (the population having disposable income to spend). Right now, probably most folks have got non, having payed too much for their house. The banks are getting all the money (no economy)

The Truth is you can only afford a house safely, with a value, at a level your income can sustain (afford), with interest rates up to 17%. Maxing out your income at such low interest rates in order to offer MORE MONEY to the seller is asking to lose your home. The banks can and do move the goal posts once you have signed up. Even if it does mean removing you from your home. Remember also, they all love it the more you pay the more they all gain, not just the seller. The selling agent has doubled his income over the last few years. Have you? Government stamp duty must have doubled if the home value has, so they love it. By the time you finish paying the bank back the home probably cost 2.5 times what you offered for it (and more). Well if the home price doubled so did the banks MASSIVE PROFITS.

Why do people complain about hikes, when its what they signed up to. Having done the budgeting before hand. Yes the manager should have told you about 17% rate, but that may put you off signing up if thinking straight. Remember they are a business and want ALL your money.

They operate like loan sharks i.e. offer you a loan you can’t afford (flexible rates, potential 17%) To allow you to borrow more, so they can make more money (from you) So you can pay more for a house thats not worth it (home prices double in 5 years? not realistic). After signup on moving the goalposts (interest rates) the threat of reposession if you don’t pay

NOTE if you can’t borrow the ammount at a higher interest rate, because your income won’t allow. You can’t offer it the seller for that house. The seller can’t sell it, prices stay stable.

Question – Why does the bank manager not assess your income to loan requirements at 17%. – ANS. Because you can’t afford it and they can’t sell you the loan

DON’T YOU FEEL WE ARE ALL BEING FLEECED. TIME TO WISE UP. If you want affordable homes stop buying. Watch the prices come down and leave them to come down. As soon as you start buying again. They are going up again.

House prices only stopped going up because the average persons wages won’t allow you to borrow MORE MONEY (can’t afford)

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written by Hercc130,
January 17, 2011
Oh! forgot to mention anyone ever heard of negative equity in property?

Not a safe place to be at the mercy of the interest rates. You have no control. If the rates keep going up, the reposessions start. House prices fall massively = negative equity

I’ve seen it before. Trouble is these cycles take so long to go around that theres allways a new generation (who have not been through it) waiting to bid up the prices of property, until they bid themselves out of the game.

Until the reposessions start and the wealthy come in to snap up the bargains and the wealth is cycled back to the top.

Don’t you think its organised that way?

Been some good reading today (comments) As you said above, the media hypes it up for those with a vested interest. Everyone believes and follows the herd.

The daily news tell you what bargains are to be had, as soon as theres a halt to the market and suggest you go out and buy now while you can. Instead of wait Don’t buy, and they will come down even more with even bigger bargains.

As I have said before the house is worth, what you will go out and borrow to pay for it. TIME TO FIGHT BACK. Don’t people want income left over to spend on the family. Or rather just hand it over to the banks. BORROW LESS/OFFER LESS