But while there is “good reason to be concerned”, a crash still remains unlikely in the absence of dramatically increased housing supply, much higher interest rates or a surge in unemployment, none of which are expected, according to AMP Capital chief economist Dr Shane Oliver.
CoreLogic figures last week showed capital city house prices fell 0.2 per cent in March, their fifth monthly fall in a row, bringing the annual growth rate down to 0.8 per cent from 11.4 per cent in May last year.
“This is unusual in that property price downturns are usually preceded by significant interest rate increases,” Dr Oliver said.
“Consistent with the fall in Sydney and Melbourne property prices, auction clearance rates and home sales have also fallen. With prices falling in Sydney and Melbourne some see this as the start of a crash. There is good reason to be concerned.”
Among the warning signs are the fact that real capital city house prices are 27 per cent above their long-term trend, the surge in household debt to income, a deterioration in lending standards and the surge in apartments, particularly in Sydney, raising concerns about oversupply.
“However, a crash — say a 20 per cent national average price fall — remains unlikely,” Dr Oliver said. “First, the real driver of high home prices and their persistence has been that, thanks to tight development controls and lagging infrastructure, the supply of dwellings has not kept pace with population-driven demand.
“Secondly, while mortgage stress is a risk … there has been a sharp reduction in interest-only loans since APRA strengthened lending standards, [and] debt servicing payments as a share of income have actually fallen slightly over the last decade.
“Census data shows that the share of owner occupier households with a mortgage for which debt servicing is above 30 per cent of income has fallen from 28 per cent in 2011 to around 20 per cent.
“A significant number of households with a mortgage are ahead on their repayments, and banks’ non-performing loans remain low.
“While there has been some deterioration in lending standards it does not appear to be anything like that seen with NINJA (no income, no job, no assets) loans in the US prior to the GFC.”
Dr Oliver said falls in Sydney and Melbourne would be driven by a “further tightening in lending standards as banks get tougher on borrowers’ income and living expense levels along with rising supply and more realistic capital growth expectations by home buyers”.
“By contrast, home prices in Perth and Darwin are either at or close to the bottom, price growth is likely to be moderate in Adelaide and Canberra, but it may pick up a bit in Brisbane thanks to stronger population growth and the boom in Hobart has a way to go yet,” he said.
For investors, over the very long term housing has a similar return to Australian shares, but Dr Oliver said there “remains a case to be cautious” regarding housing as an investment for now.
“It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth.”