Property bubble threat popped by HSBC

by Miklos Bolza07 Jul 2017
While the Australian housing market is expected to cool down in 2018, there is no indication of a bubble, according to economists from HSBC.

The RBA’s decision to maintain a low cash rate has been the driving force behind a housing construction and price boom, senior economist Paul Bloxham and economist Daniel Smith said in a research note released yesterday (6 July).

While this has brought positives such as filling a gap caused by the mining downturn and reducing a housing undersupply, it has also presented some challenges, they said.

“National housing prices have risen 50% since mid-2012 and much of the rise has been driven by rising household debt. This has reduced housing affordability and also raised questions about whether Australia has a housing bubble.”

However, increasing house prices and levels of household debt did not necessarily mean that there will be a property bubble, they added, especially if these trends were in line with the basic economic fundamentals.

“In our view, to a large degree, it has been. Housing prices have risen very little in regions where housing demand has been weak, or supply has been boosted. In contrast, where supply has not kept up with demand, house price growth has been strong.”

For instance, they pointed to areas of low demand such as Perth and Adelaide where prices have risen by 6% and 11% respectively. In contrast, high demand areas such as Sydney and Melbourne have seen prices skyrocket by 80% and 60% respectively.

Factors such as international and domestic migration as well as foreign investment have also bolstered demand, predominantly in Sydney and Melbourne, they said.

“These fundamental factors largely explain the price boom and, as a result, we do not judge it to be a bubble,” Bloxham and Smith wrote.

“Nonetheless, we expect these markets to cool in 2018 as we forecast supply to gradually catch up to demand, continued tight prudential settings, a pullback in the foreign bid (partly due to new taxes), and the RBA to lift its cash rate from early 2018.”

The national house price growth is expected to slow from 8-10% in 2017 to 3-6% in 2018, they said.

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