Stephen Halmarick says the risks of a residential property crash are being exaggerated.
The chief economist at Colonial First State Global Asset Management — Australia’s biggest fund manager — has heard stories of impending doom in the property market for most of his 30-year career, but he does not see any more risk of a crash this time.
“I do find myself getting a little bit worked up sometimes when you read in the paper that there will be lots of mortgage stress in Australia if interest rates rise sharply,” Mr Halmarick tells The Australian. “But inflation would have to increase dramatically above the target range. So you ask yourself the probability of those things happening, and I think they are all pretty low.”
As regulators implement new lending limits to curb financial stability risks posed by interest-only loans and a potential oversupply of apartments in the eastern capital cities, Mr Halmarick says interest rate rises should be limited by structurally low consumer price inflation and Australia will remain attractive to offshore investors.
“I’ve seen so-called experts from overseas — usually Americans — tell me that the housing market in Australia is a bubble that’s going to burst and take the banking system with it,” he says. “They’ve been telling me that for 25 years and they’re still wrong.
“Sydney, Melbourne have a lot going for them. If you look at the most expensive cities in the world, they’re great places to live — on harbours, in well run, politically stable countries with good governance and open societies. They are very attractive compared to many parts of the world.”
While he concedes that there are pockets of concern in the eastern capital cities — as highlighted by the Reserve Bank since last year, Mr Halmarick says the Australian housing market “isn’t as vulnerable as some of the headlines would lead you to believe”.
For the past 11 months, the Reserve Bank has warned that a considerable extra supply of apartments is scheduled to come on stream over the next few years. More recently, it cautioned that growth in rents was the slowest for two decades, and growth in household borrowing for housing continued to outpace growth in household income.
In its latest policy statement this month, the central bank warned that lenders needed to ensure the serviceability metrics that they used were “appropriate for current conditions”.
The RBA said that by reinforcing strong lending standards, the recently announced supervisory measures should “help address the risks associated with high and rising levels of indebtedness” and “reduced reliance on interest-only housing loans would also be a positive development”.
But Mr Halmarick does not see much risk to the financial system from the property market.
“People just look at gross debt to income, which is high, at 190 per cent,” he says. “But if you look at net debt to income — taking account of the redraw facilities — household debt has been roughly flat since 2006 because people have used the lower interest rates to repay their mortgages faster.
“So the value of housing assets has gone up a lot, as have super funds and other investments of households. So their net wealth continues to rise and is actually close to record highs.”
Mr Halmarick began his career in the late 1980s with Westpac — at a time when the bank employed a staggering 42 economists — but his defining moment came in 1989, when he moved to investment bank Dominguez Barry Samuel Montagu.
He has witnessed some big changes in financial markets since then, including the official cash rate tumbling from 19.25 per cent to 1.5 per cent, the 10-year bond yield falling from 13.65 per cent to 1.81 per cent, the dollar swinging between US47.76c and $US1.1081 and a couple of booms and busts in shares.
Investors who started after the global financial crisis — in an era of unprecedented central bank liquidity from quantitative easing and interest rate cuts — may have built up something of a false sense of security about potential outcomes in financial markets, but Mr Halmarick is not worried.
“Cycles used to be a lot bigger — in terms of the movement in rates — but I think the low growth, low inflation, low interest rate world that we have now is a permanent change,” he says.
“Technology and demographics are part of it as both structural forces are putting downward pressure on inflation and growth, but there’s also less willingness to take leverage since the GFC. That’s part of the reason why very low and negative interest rates haven’t really seen a huge economic recovery. There was so much leverage before 2008 and when you combine that with the demographics and uncertainty in the global economy, people are less willing to take on risk.”
Australian residential property debt has surged since the GFC, but demand for property has experienced strong population growth in the period.
“Sydney and parts of Melbourne are in a completely different property market from the rest of Australia,” Mr Halmarick says. “We are in the international property market. That’s been a big change and I don’t see that coming to an end any time soon.”