• Robert Baharian

Australia's Housing Equity

Buy land, they're not making anymore of it - Mark Twain

When I was a kid, I loved played Monopoly. I don't really get a chance anymore, like many other things in life. My two boys have the Monopoly Junior boardgame. I hate it. It's too simple. What I think however, doesn't matter at all. The boys enjoy it. Simple or otherwise, the objective doesn't change. Roll the dice, and buy everything. My eldest son gets it. Whatever he lands on, he buys. My youngest son however, is very selective. He wants the Swimming Pool and not the Ice Cream Parlour. He wants the Library and not the Pizza House. You get my drift. He's picky. Before you know it, my eldest sone owns 80% of the land and my youngest son is paying rent until he's broke. It's hilarious - I think anyway.


There's a lot being spoken about at the moment about interest rates and as it relates to mortgages and its impact on housing. I recently wrote about this here.

Household debt is likely to hit record levels this year - Business Insider

This is the type of headline we see and read all too often. The problem with this headline however, is that it does not have any regard for the other side of the balance sheet. You know, the corresponding asset.


In today's chart I have plotted Australian housing debt, and I have put this into perspective with the total value of Australian housing.

The value of Australian housing currently sits at around $9.3 trillion, with a corresponding debt level of around $2 trillion. I don't know about you, but it looks like there is a bit of equity there - around 78%.


I'm not going to pretend it's all sunshine and roses in the property market, nor am I going to cherry pick this one chart. Although this equity position looks good, there is another side to all of this, which is the borrowers' ability to repay these loans - servicing (or income). So here are a number of ratios I've pulled together to put the income side of things into perspective.

You can see Housing Debt to Housing Assets (in red), although rising, is still pretty solid as I highlighted earlier. All other major ratios, Owner Occupier Housing Debt to Disposable Income, Housing Debt to Disposable Income, and Price to Income Ratio has been rising since early 2000. The one factor which I believe has driven a lot of this, is the orange line, interest rates (and the other big one is immigration which I won't get into here). Interest rates have been falling since the GFC, and you can see the impact this has had on interest payments to disposable income.


You see, there are only a two outcomes here as it relates to price declines. Price in and of itself can't fall, I don't believe anyway. Something beneath prices needs to falter for prices to fall. Either rates rise, in turn, reducing the amount of money one can borrow, and in turn less dollars in the pocket to bid up prices. Unemployment rises and we have less people who can get a loan, in turn, less people bidding up prices.


As we sit here today, Australia has strong employment, and it doesn't look this we're going to have an unemployment issue - for now anyway. On the other hand, rates are rising, we know this. We are going from having access to free money, to having access to cheap money. Although most people don't see it this way. Notwithstanding this, this is the one fact that will absolutely slow down price growth. Will prices crash? I don't think so. Could they fall 10%? Yeah sure, why not? 15%? Maybe, a bit of a stretch. 20%? Yeah maybe, but I think the cavalry will be marching in like we did during 2020 if we saw prices decline by such levels. During the GFC, Melbourne property prices fell 10%. One of the greatest financial crisis on record, and prices fell 10%. I don't even need to have you cast your mind back so far, just remember what happened during 2020.


I mean, the other thing here is that incomes can rise, helping offset some of these rising ratios. Although I suspect that if incomes continue to rise, this will drive further lending. Finally, let's not rule out the fact that prices can actually do nothing for a prolonged period of time. This is completely possible. Zero growth. So many investors think this is a binary outcome, that is, prices must either rise or fall - boom or bust. Prices don't have to do anything.


My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast. I've shared the exact chapter where we discuss this below.

You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.