Sydney homeowner Tony Abbott pops bubble talk: Three reasons why the PM might be wrong on rising house prices

Sydney homeowner Tony Abbott pops bubble talk: Three reasons why the PM might be wrong on rising house prices

Treasury secretary John Fraser has conceded parts of Australia’s property market are “unequivocally” in a housing price bubble, but Prime Minister Tony Abbott has brushed off the concerns.

Fraser yesterday told the Senate Estimates Committee there appeared to be a “feeding frenzy” in the current Sydney property market, and certain parts of Melbourne.

But asked in Parliament to comment on the statements made earlier that morning by the Treasury secretary, the Prime Minister said, as a homeowner, he embraces a continued rise in prices.

“As someone who, along with a bank, owns a house in Sydney, I do hope that our housing prices are increasing,” Abbott said.

Abbott said he welcomed Fraser’s comments and reiterated the government’s efforts to try “to make housing more affordable”.

“I do want housing to be affordable, but nevertheless I also want house prices to be modestly increasing,” the PM continued.

“The best way to make housing more affordable is to keep interest rates low and stable, and that is exactly what is happening, and to try to ensure that the economy is strong, and that is what we are doing with the instant asset write-off and the other measures associated with this budget.”

Read More: Why the economists keep misreading the real estate market

Meanwhile, Fraser told the Senate estimates committee he thinks the Australian Prudential Regulation Authority (APRA) had the issue of the property bubble “well in hand”, according to Fairfax, and believes the banks are tightening internal controls to address the issue.

Tim Harcourt, University of New South Wales economics professor, told SmartCompany it was concerning to see a split in opinion on the state of the housing market from within the government.

“A Treasury secretary normally provides free and fearless advice to the government, so it is unusual for the Prime Minister to contradict that – they usually get their lines right,” Harcourt says.

“The fact that the Treasury secretary thinks a housing bubble is ‘unequivocal’ is a concern… He would have good information and a fair degree of research behind him given he is the architect of fiscal policy in the country.”

Harcourt believes there are certainly “structural” housing issues to address but does not go so far as to term those issues a “bubble”.

Stephen Koukoulas, managing director of Market Economics and economic adviser to Dun & Bradstreet, agrees there is “clearly a problem” in house prices particularly in Sydney and Melbourne, but also stops short of the phrase.

“I try not to get too caught up in emotive language of the ‘bubble’, crash and boom, and all those terms,” Koukoulas told SmartCompany.

But Koukoulas says current house prices are “a real problem”, not just for first homebuyers, but because they can lead to an imbalance in the economy.

“If you own a house or two or three and you bought more than six months ago, you’re probably feeling very wealthy at the moment. But to some extent you need to be careful, because if or when it ends, it could be nasty,” he says.

Harcourt and Koukoulas share three reasons why the Prime Minister might be wrong if he’s banking on rising prices lining his – and Australia’s – pockets.

 

1. Current price growth is unsustainable

 

Both Harcourt and Koukoulas say current price growth, as high as 10% per annum is some areas, is not realistically sustainable for years to come.

“If you get 10% growth on a $1.5 million property, that’s $150,000 a year,” Koukoulas says.

“But the real question is, is this growth sustainable? Because if not, we will find banks tightening their credit and very unseemly things occurring,” he says. 

Koukoulas says he believes Fraser was touching on the issue of unsustainability.

“It’s like a good bottle of wine – one glass is good, two glasses is better, but once you start to get to five, ten glasses, you’re really in trouble,” he says.

Harcourt agrees sustainable, steady house prices are much more preferable to the economy than the current rate of growth.

“Of course it’s alright for house prices to rise, it’s preferable than falling, but the rate at which they grow is important and needs to be sustainable,” he says.

 

2. Intergenerational “robbery”

 

Harcourt says years of negative gearing has “pretty much robbed future generations of access to affordable housing in the future”.

He says especially in Sydney and Melbourne, younger homebuyers are being increasingly forced out of the market, leading to a real danger Sydney could become to Australia what Tokyo is to Japan.

 

3. It may not be a problem now…

 

Koukoulas says while there may not be a manifest ‘bubble’ currently, rising property prices inevitably leave the country open to greater risk.

“When something does go wrong, the economic consequences could be serious,” he says.

“Imagine a scenario in a few years, we don’t know how long, but a scenario where the US hikes interest rates and we follow with a lag of nine or ten months,” he says.

“Or say the unemployment rate goes up to 7% [and] people have trouble repaying their ever increasing debt.”

“If there is a housing boom, or a ‘bubble’, it really just leaves you more vulnerable to those external pressures,” he adds.

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