Key takeaways
RBA Governor Philip Lowe has warned that inflation will persist and there are extra rate of interest hikes to return.
Some have claimed that the Australian housing market is a Ponzi scheme pushed by hypothesis, debt, and migration, however this isn’t correct.
The Australian housing market is underpinned by sturdy fundamentals, together with a excessive fee of owner-occupancy, low ranges of debt, a robust economic system, and inhabitants development.
There have been housing Ponzi schemes previously, however this happens when there’s a speculative bubble pushed by investor demand somewhat than a real want for lodging.
It’s endorsed to put money into places which might be dominated by prosperous owner-occupiers who do not promote up when the property market slows down.
We began the 12 months with excessive hopes, however not too long ago RBA Governor Philip Lowe advised us that inflation will hold round longer than he had hoped and it will not fall into the RBA’s most well-liked band of 2-3% till 2025.
He additionally advised warned that there are a number of extra rates of interest to return.
Not surprisingly this introduced out the same old suspects predicting a massacre for Australian actual property likening our housing markets to a speculative Ponzi scheme.
Is that this actually true?
So what’s a Ponzi Scheme?
A Ponzi scheme is a fraudulent funding scheme the place returns are paid to earlier buyers utilizing the capital contributed by newer buyers, somewhat than from official income generated by the scheme.
The scheme’s operators usually entice buyers with guarantees of excessive returns which might be too good to be true and infrequently use numerous ways to create the phantasm of a worthwhile funding alternative, akin to falsifying monetary statements, creating pretend funding portfolios, or utilizing high-pressure gross sales ways.
The Ponzi scheme usually collapses when it turns into unimaginable to search out sufficient new buyers to pay returns to earlier buyers, or when buyers begin to withdraw their funds.
At this level, the scheme’s operators could abscond with the remaining funds or face authorized motion.
The Ponzi scheme is called after Charles Ponzi, who within the early twentieth century, perpetrated a rip-off that concerned shopping for and promoting worldwide reply coupons for postage stamps.
Ponzi promised buyers excessive returns of fifty% in 90 days, however in actuality, he was utilizing the funds of newer buyers to repay earlier buyers.
The scheme finally collapsed, and Ponzi was convicted of fraud and sentenced to jail.
So is the Australian housing market a giant Ponzi scheme?
As I stated, there are some claiming that our housing market is a Ponzi scheme created by speculative buyers, debt, and migration.
Nevertheless, that’s not proper!
The reality is that the Australian housing market is underpinned by sturdy fundamentals.
1. Our housing markets are underpinned by a excessive proportion of owner-occupiers.
One of many key components that help the Australian housing market is the excessive fee of owner-occupancy within the Australian housing market.
In keeping with the Australian Bureau of Statistics, at present, round 70% of all residential properties in Australia have been owner-occupied.
Which means the vast majority of houses are owned by people and households who’re residing in them, somewhat than by buyers who’re buying properties for the aim of hypothesis.
This excessive fee of owner-occupancy creates a secure base of demand for housing that’s not pushed solely by hypothesis.
In distinction, in another nations, akin to america, there’s a a lot decrease fee of owner-occupancy, which has led to greater ranges of hypothesis within the housing market.
One other necessary issue that helps the Australian housing market is the low ranges of debt held by owner-occupiers.
Round half of all owner-occupied properties in Australia don’t have any debt in opposition to them.
Which means a big portion of the housing market just isn’t reliant on excessive ranges of debt, which is usually a main concern in discussions about Ponzi schemes.
In reality, the Australian Prudential Regulation Authority (APRA) has carried out strict lending requirements to stop extreme ranges of debt within the housing market.
For instance, in 2017, APRA launched limits on interest-only lending, which had change into more and more widespread amongst buyers.
This helped to scale back the extent of danger related to excessive ranges of debt within the housing market.
In reality, it’s estimated that the full worth of the residential property market of 10.9 million dwellings in Australia is $9.4 trillion and there may be solely $2.2 trillion in debt in opposition to this.
That’s a snug 24% Mortgage to Worth Ratio.
2. Australia’s sturdy economic system
One other key issue that underpins the Australian housing market is our nation’s sturdy financial development and excessive employment charges.
In keeping with the World Financial institution, Australia has skilled constant financial development for effectively over 20 years, with a mean annual development fee of round 2.7% between 1993 and 2019.
Australia additionally has one of many lowest unemployment charges on the earth, which creates a secure atmosphere for the housing market and helps the demand for housing.
It additionally implies that regardless of rising rates of interest most Aussies can afford to pay their mortgage and financial institution mortgage default charges are at extraordinarily low ranges.
3. Immigration
Lastly, the Australian housing market is underpinned by a rising inhabitants, which is pushed by each pure inhabitants development and migration.
Whereas migration is usually a concern for some and has been cited as feeding “the Ponzi scheme”, it stays a basic driver of financial development and demand for housing.
Particularly, expert migration has been a key issue within the development of our economic system.
However there have been housing Ponzi schemes previously
Property booms normally begin with a real rise in demand for housing, however generally they’ll flip into speculative bubbles pushed by the expectation of upper costs, somewhat than being primarily based on a real want for lodging.
When this occurs, we’ve the makings of a property market Ponzi.
This was clearly evident within the property mining growth over a decade in the past which was primarily based on hypothesis by buyers for property in faraway locations with the expectation of frequently rising rents and costs.
In fact when the mining growth completed the property Ponzi collapsed.
Any such crash can solely happen in markets managed by buyers.
That’s the reason I solely suggest investing in places which might be dominated by prosperous owner-occupiers who do not promote up when the property market slows down.
In reality, they’d somewhat eat Maggi Noodles than promote up their houses.
The underside line
It’s encouraging to know that Australia’s housing markets are underpinned by the soundness of a giant share of householders who’ve bought a house to stay in somewhat than chasing money circulation or capital development.
Our housing markets are resilient as a result of they’re underpinned by sturdy fundamentals, together with a majority of owner-occupied properties, low ranges of debt, sturdy financial development and employment, and a rising inhabitants.
As with every market, there are dangers and issues that must be addressed, however general, the Australian housing market stays a secure and engaging funding alternative for strategic buyers with a long-term focus.
