By David Bassanese

A lot has been written about the Australian property market in recent months, but depending on where you live, the headlines are likely to have been entirely different. Indeed, Australia has in fact three distinct housing challenges in different parts of the country and no single policy instrument – from changes to interest rates or taxation policies – can hope to fix them all.

The good news for Australian investors in general, however, is that the disparate challenges facing the housing sector are, in some senses, offsetting – some states are very weak, while others are very strong. Collectively, that means the national housing sector is neither an overheated bubble destined to crash, or is already so cyclically depressed it is undercutting employment growth and household wealth.  

In further good news - for investors in bank stocks at least - the challenges in the housing sector, while tough for certain regions and households, don’t appear to pose undue financial stability risks for our major banks due to their high regional diversification.

So what are these problems, and why are banks so well placed?

1. Post-mining boom cyclical correction

The first and earliest problem is the deep post-mining boom cyclical correction being felt in our once booming mining regions, especially in cities such as Perth. Both house and apartment prices in Perth got ridiculously expensive during the boom and also led to a building glut. The consequence is now falling property prices and abandoned projects.  

Sadly, the solution for Perth is straight forward – the market just needs to continue doing its job of clearing excess supply and inflated prices though price cuts and the mothballing of more late-to-the-party construction projects. The high debt position of vulnerable households and investors facing either unemployment and/or negative home equity is also being resolved – through foreclosures and some increase in bank loan write-offs. If there’s any good news in Perth, it’s that – according to the minutes of the latest Reserve Bank policy meeting, “there were signs that [Perth property] prices may be stabilising.” 

2. Hot property markets: Sydney and Melbourne

At the opposite end of the cyclical spectrum are the hot property markets of Sydney and Melbourne – which have been the main beneficiaries of the post-mining boom re-direction of national economy activity. Whether we have yet reached a bubble psychology among property buyers in these cities is still debatable – especially as measure of home loan affordability, thanks to low interest rates, remains far from extreme. 

Either way, the gradual tightening in lending standards and higher interest rates faced by investors and those seeking interest-only loans could well start to correct buyer enthusiasm in these cities in the coming months. If not, regulators may well need to consider more regionally-specific buyer restraints (as tested in New Zealand and Canada) which is a better targeted response than a nation-wide lift in interest rates or a crack down on negative gearing.

3. Inner-city high rise apartment developments

The third issue is the surge in inner-city high rise apartment development in Melbourne, and to a greater degree, Brisbane. Brisbane apartment prices have already started to fall and declines may well be ahead for Melbourne as an influx of new supply hits the market. Helping Melbourne at least, however, is that population growth has been relatively strong and rental vacancy rates remains quite low. Either way, as in Perth, the market will likely deal with these supply excesses though price declines, some foreclosures, and mothballed developments. That said, RBA analysis suggests only around 2% of outstanding bank housing loans cover the inner-city Melbourne and Brisbane markets - so barring a huge spike in default rates, bank losses are likely to be relatively well contained.

As for the hysteria over national household debt in general, it’s also worth noting (based admittedly old 2014 data) around 75% of households had a debt-to-income ratio of less than 200%, with 30% of households having no household debt whatsoever. And most of the nation’s highly indebted households tend to have the highest level of income and wealth. 

All up, the regionally diverse nature of Australia’s housing challenges, and the regionally diversified operations of our major banks, suggest a major national housing boom or bust – or systemic risk to our banks - is likely to be avoided for the foreseeable future. Of course, that’s not to deny certain region and certain households won’t face challenges – for which more targeted policy responses are required.