If you're a property investor in Sydney, you could be forgiven for thinking that house prices go up forever. If you're a young renter locked out of the market, you could be even more forgiven for thinking that was the case.
However, property prices don't rise forever. Here are 5 warning signs that could signal if the housing boom could be coming to an end:
Property is expensive
The Sydney median house price hit $1.1 million in January, around 13 times residents' median annual income of $85,000. On these metrics, the market is one of the most expensive in the world, competing with the likes of London and New York.
Australian household debt is among the highest in the world
Australian household debt is at record highs. Whichever metric you use, whether debt as a % of disposable income, or as a % of gross domestic product (GDP), Australia's debt burden is among the top 3 highest in the world.
Regulators are cracking down on interest-only loans
Data reported by Fairfax media recently shows that interest-only loans have accounted for 60%-70% of all investor loans (and ~40% of total loans) over the past 8 years. The Australian Prudential Regulatory Authority (APRA) recently wrote to all Australian banks to instruct them to:
"limit the flow of new interest-only lending to 30 per cent of new residential mortgage lending", a measure that is expected to take some of the heat out of the market. Banks have also lifted their lending standards, which is expected to have a gradual impact on the amount of money flowing into the property market.
Interest rates are at record lows
Interest rates are at record lows, and an increase of as little as 1% could be enough to place serious stress on many borrowers. The Reserve Bank recently told the market that it is unlikely to either lower or raise rates, for fear of fueling either more lending, or causing payment shocks. So, we are unlikely to see a rate change any time soon.
Bad debts are at record lows
There also hasn't been any supply shocks to the market, such as what might happen if Commonwealth Bank of Australia (ASX: CBA) loans went bad and the houses were repossessed and sold. Bad debts in general, while not quite at rock-bottom levels, are quite low in the banking industry.
With all the issues in housing, it's hard to see the advantage in an expensive loan that sees you commit the next 30 years of your life to repaying a bank. Shares require much less initial investment, don't require maintenance or loan repayments, and are easily sold if you need to raise cash.
