Citi Research Economics has released its latest Global Economics Focus
report, Global House Prices: Trends, Consequences & Risks,
which states that for a serious correction to occur in the Australian property market, unemployment would need to increase dramatically, most likely as a result of an interest rate tightening cycle.
The report, released last week, covers key global housing markets and includes a focus on the Australian property market, outlining its overall “health”, the state of the investor market and the housing price debate.
For those concerned that increasing rates in 2017 could put mortgage holders under financial stress
, Citi's view is that on average, households have “substantial positive equity in their residential properties and mortgage repayment buffers that would take some time to unwind before forced selling occurred.”
The bank's research suggests that as a result of these risk buffers, property prices in Sydney are likely to plateau, not plummet as some are fearing.
“So the most likely scenario is that Sydney prices plateau and remain expensive unless there are some large external negative shocks to the economy,” the report states.
While Citi’s research does address inner-city oversupply as a factor that is increasing vulnerability in the market, the overall feeling is that given lending to these areas makes up only a small portion of banks’ loan books – less than 10% - their exposure to risk is minimal.
“The main area of vulnerability is the outsized rise in inner city high rise apartment construction which already has seen price falls on some projects in Melbourne and Brisbane. Mortgage lending by banks for these inner city apartments is a relatively small portion of their mortgage books (less than 10%) and direct loan exposure to developers is substantially smaller,” Citi says.
The report also states that there “are risks in the investor segment (buy to let) of the market”, but cites APRA’s continuing prudential measures and tightening of mortgage lending as sufficient precaution to protect from macroeconomic risks from the housing market.
“Based on past experience we would expect banks to comply with the spirit of the guidelines from this point, which should help assure the RBA
about financial and macroeconomic risks from the housing market.”
On the widely reported topic of sky-high property prices that have been seen in Sydney and Melbourne for the past five years, Citi states these two markets are not representative of the broader Australian property market and suggests they could almost be viewed in isolation.
“Our view is that valuations are only really high for established dwelling prices in Sydney and to a lesser extent in Melbourne,” Citi says in the report. “Prices in other capital cities have mostly trended sideways or experienced low single digit growth rates per annum over the five years."
Citi considers the main reasons for Sydney’s exceptional price growth over the last few years to be:
- It has benefited more from the low interest rate cycle than other capital cities (apart from Melbourne) with little exposure to the structurally declining manufacturing sector (unlike Melbourne and Adelaide) and cyclically declining mining sector (unlike Brisbane, Perth and Darwin)
- It has benefited from the fall in exchange rate that has boosted international service exports (in common with Melbourne)
- It has been main beneficiary of foreign real estate investment demand (followed by Melbourne), which, while slowing, remains positive
- It has the lowest capital city unemployment rate and a large proportion of high wage jobs
- It experiences an excess demand for property
This excess demand is a result of strong population growth and a fixed supply of land, according to Citi, thanks to a metropolitan “locked on all sides by natural barriers such as the Sydney Harbour (east), Blue Mountains (west) and two national parks (north and south).”