Rise in property prices threatens to grow bubbles

The combination of very cheap debt and buoyant auction results has breathed new life into an age-old debate: are Australian house prices at risk of entering bubble territory?

The combination of very cheap debt and buoyant auction results has breathed new life into an age-old debate: are Australian house prices at risk of entering bubble territory?

Even some real estate agents appear a tad concerned. John McGrath, who runs a large NSW real estate chain, this month said the most recent time things were this strong was during the previous real estate boom.

In the unlikely event that it continued quarter after quarter, we'd be in "trouble", he said. With average prices in some cities rising more than 5 per cent in the past six months alone, and Sydney's auction clearance rates hovering near boom-time levels of 80 per cent, it's a valid debate.

UBS analysts recently tipped national house prices would rise by 10 per cent this year - a rate of growth that most would agree cannot be sustained year after year.

There's a big difference, however, between unsustainable rates of growth and the dreaded "b-word".

Throughout history, "bubbles" have had a few key characteristics, most of which are not occurring today.

What makes bubbles dangerous is not just price growth, but the fact they are driven by rapid growth in credit, especially to speculative investors.

Yet despite the plunge in interest rates, new lending is not booming.

Investor housing credit is growing by 5.7 per cent a year - a small fraction of the record high of more than 30 per cent reached in 2004.

Among owner-occupiers, the annual growth rate is just 4.6 per cent - marginally above a record low.

Also, banks are being much more cautious than they were about their lending.

The Commonwealth Bank says the average mortgage on its books is worth about 48 per cent of the property value. In 2006, the average mortgage in Australia was worth 67 per cent of the property value - reflecting more risk.

Borrowers, too, are racing to get on top of their debts, with 80 per cent of the Commonwealth Bank's customers paying more than the minimum monthly repayment.

So while prices are rising quickly in some areas, it seems premature to be warning of bubbles.

None of this means Australian housing is not overvalued, however.

By most conventional measures for valuing property assets - such as comparing prices with rental yields or median incomes - Australian properties are expensive.

AMP chief economist Shane Oliver reports that the ratio of house prices to incomes is 21 per cent above its long-term average, making Aussie houses towards the upper end of overpriced markets in the wealthy world.

Oliver concludes that it could eventually turn into a bubble, but we're "a long way from that".

While credit growth remains so tame, it seems fair to say housing is expensive, but not a bubble waiting to pop.

Heating up