Depending on what you read, Australia’s housing market is headed for a steep correction or a soft landing or perhaps neither.
Hardly a day goes by without some public commentary on the outlook for property prices.
The uncertainty is no doubt playing on the minds of owner occupiers and landlords, particularly along the eastern states, not to mention the next generation of mortgage holders.
That uncertainty can also extend to investors with heavy share portfolio exposure to the banking sector, which by its very nature, is closely aligned to the housing market.
Add to that the still reasonably fresh memories of the housing crash in the United States that spawned the Global Financial Crisis in the late 2000’s, and some people are understandably twitchy.
But is it right to fear a repeat of that financial meltdown?
First, it is important to make a distinction between our circumstances and those in the US.
The American housing crash was largely caused by lending to ‘sub-prime’ borrowers who could not afford to make repayments when the times got tough. The existence of non-recourse loans in the United States, whereby borrowers unable to make repayments could simply hand back the keys and walk away, added fuel to the fire and exposed the banking sector to greater risk.
Importantly, Australia has recourse on loans, meaning banks can generally gather other assets if someone fails to make their mortgage repayments.
We can also take some comfort in that Australian lending standards are somewhat tighter and the loan application process is far more thorough than may be overseas.
However, that’s not to say our banking system is perfect, and we are seeing financial institutions now making investment lending harder with higher interest rates charged on investment loans and lower borrowing levels allowed.
Yes, Australian house prices are indeed too high in some areas.
In announcing the Reserve Bank of Australia Board’s decision to keep the official cash rate unchanged at 1.50% in October, the Governor Philip Lowe, noted conditions in the national housing market continue to vary considerably around the country with prices rising briskly in some markets while declining in others.
“In Sydney, where prices have increased significantly, there have been further signs that conditions are easing. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities,” Mr Lowe said.
In terms of the outlook for house prices, I side with the “soft-landing” school of thought.
Property has been a proven performer for generations of Australians and it’s likely to remain a staple of long-term wealth management strategies for many years to come.
However, if there is to be a lesson learnt from recent global financial market experiences, it’s the critical importance of diversification in wealth creation strategies.
Constructing a well-balanced portfolio across a variety of investments is a prudent path to financial success.
But with so many external global and national factors at play that can impact investment performance, navigating this path requires professional guidance from your adviser.
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation.