Many Australians have become overnight millionaires with the increase in house prices in recent years. It is almost too easy. The media is full of speculation of a housing bubble, and bolder observers have suggested Australia is facing a US-style housing crash.

Much of this commentary is unfounded, but the question remains: is Australia in a housing bubble?

We don’t believe this is this case. Australia has not built the homes needed for our growing population in recent decades. The fact that we’re still facing an undersupply of homes means it is unlikely we’re in a housing bubble.

Housing bubble aside, we see risks for the Australian dream of home ownership and the broader housing sector for years to come.

Rising house prices are being driven by growing demand from years of positive net migration. While the country has been too slow to cater for its own population growth, we have also failed to accommodate those who have settled here from other parts of the world.

Australia is now at a cyclical high point for housing fuelled by low interest rates and low unemployment. Recent commencement figures show we are close to reaching peak construction capacity.

In the country’s strongest real estate market, Sydney, the median house price is approaching $1 million. In 2014, Sydney house prices grew 12.3 per cent while in the last quarter they were up another 3 per cent.

This suggests it is far too easy to make money from real estate at the moment and that feeling generally doesn’t last. However, the bond market is implying that Australian interest rates will stay low for a very long time, adding fuel to the fire.

This is translating to incredibly low mortgage rates. In recent weeks we’ve seen some financial institutions offering fixed loans below 4 per cent, the lowest we’ve seen in decades ‚Ästif not ever. It follows that the current housing cycle will likely last for longer compared with¬†previous cycles.

While loose monetary policy is boosting both the real estate and equities markets, the broader Australian economy faces significant challenges including poor consumer sentiment, stunted wage growth, a depressed commodities sector and a subsequent fiscal drag.

Nation of renters
Against this backdrop, home ownership will become even more unattainable for the next generation. It is likely Australia will follow the European path and become a nation of renters.

Parochial co-ownership will also become more common. Over the weekend a friend of mine, a single professional in his 30s, lamented over his struggle to enter the property market. To overcome the high barrier to entry he plans to buy a property jointly with a relative.

For the Generation Y’s looking to move out of home and into the property market, good luck.¬†High property prices coupled with low wage growth mean lifestyle adjustments will become the norm for many young people, which could mean living with parents for longer, or moving interstate. This might be happening already; last month data from the Australian Bureau of Statistics showed more people are moving into Melbourne and Brisbane than leaving. The opposite is true for Sydney, Adelaide and Darwin.

Given Australia’s obsession with home ownership, issues of this reach rarely go unnoticed or unchecked by government.¬†Amendment or removal of negative gearing has been touted as a coolant for the housing market, but the federal government appears to have taken this off the table.

Alternative policy levers exist. In October 2013 the Reserve Bank of New Zealand announced it would restrict residential mortgage lending of loan-to-valuation ratios of 80 per cent to no more than 10 per cent of the total dollar value of new housing flows.

At the time,¬†RBNZ governor Graeme Wheeler said:¬†“The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy.”

Back home, Reserve Bank of Australia governor Glenn Stevens¬†said this month that the central bank¬†“is working with other regulators to assess and contain risks that may arise from the housing market”.

Whether or not we will go down the path of tinkering with the loan-to-valuation ratio remains to be seen. It must be noted that, given the outlook for the housing market, there is a high probability regulatory intervention will be needed to achieve sustainable levels of growth.

Despite the current shortage of supply, in the medium term the risk of oversupply will emerge, particularly in the apartment space. This brings to mind Mark Twain’s¬†adage: “Buy land; they’re not making it any more.”

As we struggle to provide housing supply it’s hard to agree we’re in a bubble. A fall away in the macroeconomic conditions, reduced migration or regulatory intervention could slow current price growth and present issues over the medium to longer term.

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