Experts have been predicting a house price crash in Australia for at least the past ten years that I can remember. So far, nothing, not a hint of a crash, no massive downturn and certainly nothing of the 40% magnitude that Professor Steve Keen predicted a few years ago.
But it seems the calls are getting louder, with Fairfax journalist Christopher Joye calling for a 10% -20% correction.
With the RBA's official cash rate at the all-time low of 2.5%, Mr Joye says it opened the door to never before seen 4.8% mortgage rates, and has led to double-digit housing price inflation. Melbourne's property market has risen by an astonishing 15% in just the last twelve months, and across the nation, capital city prices have increased by more than 10%.
The concern says Mr Joye, is that disposable income over the same period has risen just 1.7% over 2013. He says the $4 trillion Australian housing market is now overvalued by at least 10%, and is just months away from having the most expensive residential property market in history.
What is also concerning is that the boom shows no sign of slowing down, says Mr Joye. Auction clearance rates are consistently above 70% – echoing the situation in 2009 thanks to low rates and the government's first home buyers' scheme. To get the mortgage rate back to normal rates of around 6.6%, the RBA would need to lift borrower repayments by 30%, or if inflation takes hold, rates of 8% or higher are a distinct possibility.
Mr Joye says this has major ramifications for bank shareholders and home owners. Either of those scenarios would likely see significant housing price reductions. The big four banks, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) are estimated to be leveraged 25 times, and only need around a 5% fall in the value of their assets to wipe out their equity capital.
With 60% of their assets held as home loans, Mr Joye says 'buyer beware'.
Foolish takeaway
There's no doubt that the big four banks are expensive on almost any valuation method. Investors with holdings in bank shares and residential property may not realise how exposed they are to the risk of a fall in house prices. The signs appear to be that this time it could be different, and property prices may well suffer a decent fall within the next year or so – which could take bank shares with it.
