The basic laws of physics have seemingly ceased to exist in Australia...water is no longer wet, the sky is no longer blue and home prices are not in a "speculative bubble," at least according to some conflicted commercial banking executives who are massively long Australian housing.
Testifying before a parliamentary committee, the chief executives of National Australia Bank, Westpac Banking and Commonwealth Bank of Australia all said that while they are worried about elements of the housing market, prices aren’t over-inflated. Per Bloomberg:
“I would draw the distinction between a speculative bubble in prices and prices beyond what fundamentals would justify,” Westpac’s Brian Hartzer told the committee in Canberra Wednesday. A bubble isn’t occurring in Sydney or Melbourne, where house prices have risen the most, he said.
“There are increasing risks, but I still believe the answer is no,” National Australia Bank’s Andrew Thorburn said when asked if houses in Sydney and Melbourne are overpriced.
Commonwealth Bank, the nation’s largest mortgage lender, is “lending at levels we are comfortable with” across Australia, Chief Executive Officer Ian Narev told the committee when he testified Tuesday.
Of course, as our readers are well aware, prices in Melbourne and Sydney have skyrocketed in recent years, fueled by record-low interest rates, increased demand from overseas buyers and tax breaks for property investors. The Organization for Economic Co-operation and Development last week said the biggest threat to Australia’s economy is a hard landing in the property market.
But sure, 100%+ rallies in home prices are completely reasonable.
Of course, one persistent concern has been the risk around apartment development in Melbourne and Brisbane, with Chinese buyers getting caught by the clampdown on lending and the enforcement of capital controls.
Hartzer told the committee he is receiving a weekly email on key development projects and settlements are proceeding, albeit slowly. There are some problems in lower quality developments, he said.
“What we are seeing is a number of those foreign buyers who put the money down to buy the apartments are now having trouble settling and that is creating a bit of a glut in supply, which may or may not be what the local buyers want,” Hartzer said.
As we previously pointed out, while the banks are out talking their books, credit extension has been tightening for apartment developers because they know that Australia will face a major oversupply of multi-unit dwellings over the next 1 - 3 years from the major ramp in permits over the past several years that will flood the market with new capacity over the next 18 months.
Meanwhile, the rapid increase in approvals has been accompanied by a massive spike of cranes currently being deployed in Australia, to handle the apartment boom that is currently taking place. In fact, per the chart below, cranes deployed in Sydney and Melbourne dwarf most other major cities in the US including New York and LA.
Of course, maybe Australia's bankers are right and bubbly home prices are just the result of strong fundamentals. Although, the last time a prominent banker made a similar prediction in the U.S. he turned out to be just a bit off the mark. Ben Bernanke (July 2005):
"Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy."