Category: Home Prices

Are regulators too concerned about housing?

From Australian Broker.

Although dwelling valuations in Australia are 5-15% above historical averages, the risk of a catastrophic collapse in the housing market is low, argues Merlon Capital Partners, a Sydney-based boutique fund manager.

In its latest paper, entitled Some Thoughts on Australian House Prices, Merlon acknowledged that the nation is currently at a cyclical high point, with “house prices, housing finance activity and building approvals … all at historically elevated levels.” At the same time, interest rates are at record lows and have begun to hike, particularly for investors.

“We think the housing market is 5-15% overvalued relative to ‘mid-cycle’ levels. Contrary to recent commentary, we do not find this over-valuation to be concentrated in the Sydney market,” said Hamish Carlisle, analyst at Merlon Capital Partners.

Carlisle doesn’t find the modest system-wide overvaluation to be particularly surprising at the current point in the economic cycle, and notes that the nation is a long way off from what are considered to be “mid-cycle” interest rates. “Rising interest rates – as we are currently experiencing – are likely to be a precursor to a turn in the cycle so it is likely we will enter into a phase of more subdued house price inflation.”

Favourable tax treatment of housing, coupled with historically low interest rates and favourable fundamentals (i.e. income and rental growth), mean that it’s highly unlikely that house prices will retrace to “mid-cycle” levels in the foreseeable future.

Carlisle further asserts that regulator concerns about house prices are “overblown”. Growing regulatory restrictions, which force banks to ration lending, particularly to property investors, are probably unnecessary and will achieve little other than improving the short-term profitability of banks via higher interest rates for borrowers.

“As with all our investing, we work on the basis that, over time, interest rates will revert back to long term levels as will aggregate housing valuation metrics. Against this, we think aggregate rents and household incomes will continue to grow which will cushion the overall impact on dwelling prices and that the exposure of the household sector to higher interest rates means that the time frame over which interest rates will rise could be quite protracted. As such, we think the risk of a catastrophic collapse in the housing market is low,” he said.

Reserve Bank governor Philip Lowe zeroes in on bank lending

From The Australian Financial Review.

The Reserve Bank of Australia under governor Philip Lowe has backed the concerns of regulators about bank lending standards, seizing on the rising number of households who are a month away from missing a mortgage payment in his first major review of the financial system.

Dr Lowe has zeroed in on a rise in the percentage of households who have a buffer of less than one month’s mortgage payments, in contrast with the last review conducted under his predecessor which saw risks abating.

The RBA has put the spotlight firmly bank on the banks in its twice yearly report by noting “one-third of borrowers have either no accrued buffer or a buffer of less than one month’s payments”.

This latest study of the financial architecture adds more detail to the worrying picture emerging about the unbalanced housing market. It follows concerns from the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority about a build up of risks and warnings from credit ratings agencies that the property market could face an orderly unwinding of prices.

The RBA also noted that these risks would have consequences for the banks themselves, pointing to the prospect of additional losses on mortgage portfolios for banks with exposures to the mining sector.

Significant pivot

The focus on households and the state of their balance sheets marks a significant pivot from the previous Financial Stability Review released one month before Dr Lowe was made governor and found that risks to households had lessened.

Founder of boutique research house Digital Finance Analytics Martin North said it was about time the Reserve Bank woke up to the risks posed by higher levels of household debt and stagnant incomes.

“This situation hasn’t fundamentally worsened in six months so it stands to reason what has changed is the RBA’s perception of the world,” Mr North said.

Statistics from Digital Finance Analytics show the percentage of Australian households that are cutting back expenditure, dipping into savings or using credit facilities to meet mortgage payments has risen to 22 per cent following a series of out-of-cycle rate rises from the banks.

Mr North said the number of households experiencing some level of financial stress would rise to 26 per cent in the case of a 50 basis-point rise. If they were to rise by another 100 basis points the percentage would rise to 31.1 per cent.

Big four data supports warning

Data published by the big four banks supports the warning from the RBA with anywhere between 20 and 40 per cent of big four bank mortgage holders just a misstep away from missing a mortgage payment.

ANZ and NAB, which measure the percentage of mortgage holders who do not have buffers of one month or more, count 61 per cent and 27.7 per cent of their customers respectively in the non-buffer bracket.

Commonwealth Bank and Westpac, which use a less stringent buffer measure to include any additional repayment and factor in offset accounts, put 23 per cent and 28 per cent of customers in the RBA’s danger zone.

Annual result data from the banks shows that the percentage of customers who do not have sufficient buffers have worsened by between 2 per cent and 3 per cent over the last 12 months alone.

The worsening position of households has been attributed to rising healthcare and energy costs combined with out-of-cycle rate rises and flat incomes.

Mr North noted that much of the data on households was predicated on the HILDA data which had a lag of several years.

“We have always had households that struggle to make mortgage payments,” Mr North said. “So the intriguing question for me is why have they woken up now? It could be that the governor has taken a different view on household debt.”

‘This thing’s gonna blow’: Top economists’ interest rate warning

From The Sydney Morning Herald.

Deloitte Access Economics’ quarterly business outlook, released today, predicts the official cash rate of 1.5 per cent will climb slowly in 2018 and 2019 to reach 3 per cent in the early 2020s.

The Reserve Bank was well aware “interest rates are now a massively more potent weapon for slowing the Australian economy than they’ve ever been before”, the forecaster said.

It noted Australian families have overtaken the Danish in recent months to become the world’s second most indebted households after the Swiss, relative to income – a consequence of “dangerously dumb” house prices.

Director Chris Richardson told Fairfax Media a crisis could be averted if, as he predicted, interest rates rose slowly and steadily. But cheap credit and high leverage still posed risks.

“In global terms our housing prices are asking for trouble,” Mr Richardson said, arguing many workers have found their homes make more money each day than they do. “That’s kind of God’s way of saying: this thing’s gonna blow.”

Sydneysiders were particularly vulnerable, Deloitte found, having benefited enormously from low interest rates but now witnessing “silly prices” that continued to grow – a “rather worrying development” in Deloitte’s eyes.

“The seeds of future slowdown are already well and truly sown. The better that NSW looks now, the greater the troubles that this state is storing up for the future,” the outlook warned.

“The joy of rising wealth eventually gives way to the pain of servicing gargantuan mortgages. Interest rates are beginning to rise around the world and although official interest rates in Australia may not follow suit until 2018, that augurs badly for the disposable incomes of Sydneysiders.”

Martin North, principal of Digital Finance Analytics, expressed concern Australia could be heading for a version of the US sub-prime mortgage crisis that preceded the Global Financial Crisis.

The parallels involve spiralling household debt, stalled incomes, rising levels of mortgage stress and interest rates that are on the way up.

Mr North’s modelling shows 669,000 families (or 22 per cent of borrowing households) are in mortgage stress. That would rise to 1 million households, or one third of borrowers, if interest rates rose by 3 percentage points.

But the main factors in Mr North’s reckoning are the static nature of wages and the rising tide of under-employment.

“This falling real income scenario is the thing that people haven’t got their heads around,” he told Fairfax Media.

“Unless we see incomes rising ahead of inflation and under-utilisation dropping, any increase in interest rates is going to have a severe impact on [people’s] wallets and therefore in discretionary spending and therefore on growth.

“I have a feeling we are meandering our way, perhaps a little bit blindly, into a rather similar scenario to the US.”

Mr North said mortgage stress was not only an issue for battlers and people on the urban fringe, but increasingly affected more affluent, highly leveraged households.

He dismissed the possible solutions put forth by Treasurer Scott Morrison as “political theatre” and invoked former prime minister Paul Keating by arguing Australia may be heading for “the correction we have to have”.

“I’m not sure that there are other levers that are available,” he said.

The Deloitte report also poured scorn on cutting immigration to boost housing affordability, an idea backed by former prime minister Tony Abbott among others.

London Housing Market Takes A Bath

At the end of 2016 we reported that the formerly invincible London home market had suffered its biggest crack in years, when home prices plunged the most in six years according to Rightmove via Zero Hedge.

Asking prices in London dropped 4.3% in December with inner London down 6%.  Meanwhile, the most exclusive neighborhoods, like Kensington and Chelsea, recorded even sharper declines at nearly 10% as home buyers migrated to cheaper areas of the city.

While it was unclear what was the catalyst: whether post-Brexit nerves, China’s crackdown on capital outflows, the ongoing depressed commodity market, or reduced migrations by wealthy Russian and Arab oligarchs, what is obvious is that the slump has continued, and according to the Royal Institution of Chartered Surveyors, its price balance for the city fell to the lowest since February 2009 last month, plunging to minus 49, which means that a greater percentage of agents reported drops in March.

Still, as Bloomberg reports, more respondents than not still expect prices in London to rise over the next year, the report showed. they may be disappointed.

Speaking to Bloomberg, Samuel Tombs at Pantheon Macroeconomics said that the London measure tends to represent the prime market rather than the city as a whole. The slump in the gauge tallies with other reports of sellers in central London having to cut prices to close deals.  Nationally, the RICS price index stayed at 22 in March, though the expectations for both values and sales over the next year weakened. New buyer inquiries and sales were stagnant, with the most expensive properties among the worst performers, according to report.

While buyers – especially those relying on mortgages – remain largely locked out of the market because of high prices, nervousness about Brexit and the U.K. outlook, price downside according to realtors may be “limited because of the continued shortage in the supply of property to buy, with estate agents’ listings reportedly at a record low.”

Which is odd because a cursory check reveals not only that there is a glut of high end properties, many of which have been on the market as long as a year, but that despite huge discounts as high as 40%, nothing is moving, and just this one listing service has no less than 124 pages of properties – at 15 properties per page – with price declines in Kensington and Chelsea alone, up from “only” 53 pages when we last looked at the same website back in December.

“High end sale properties in central London remain under pressure, while the wider residential market continues to be underpinned by a lack of stock,” said Simon Rubinsohn, RICS chief economist. “For the time being it is hard to see any major impetus for change in the market, something also being reflected in the flat trend in transaction levels.”

Tracing The Rise Of Mortgage Stress

We updated our mortgage stress models recently, which showed that around 669,000 households are in stress, which represents 21.8% of borrowing households.  Those results are a point in time view of households finances. The RBA also said that one third of households have no mortgage buffer.

Today we take a longer term view of the rise of mortgage stress, which is driven by a combination of larger mortgages, flat incomes, higher living costs and rising debt.

The first chart tracks household debt to disposable income from the RBA, as well as mortgage rates, the cash rate and both CPI and wage growth.

Stress levels rose consistently through the  early 2000’s as debt and mortgage rates rose, to reach a peak of 19%, when the cash rate was 7.25%, the average variable mortgage rate was 9.35% and the household debt to disposable income sat at around 170. Those with a long memory may remember that we were warning about this trend in the 2000’s.

But then the GFC hit, rates were cut, and mortgages rates fell sharply to 5.8%. However the debt to disposable income ratio only fell a little to 168.

Lower rates stoked demand for property, so prices started to rise, and mortgage rates moved higher, then lower as the RBA used housing to try to fill the gap left by the mining sector moving into the production phases.  Household debt to disposable income has since moved higher to a new high of 189 and is still rising.

During more recent times, mortgage stress and household debt has been moving up – and the latest stress data shows an acceleration as income growth all but stalls, and costs of living keep going, mortgage rates are rising.

To look at this in more detail, here is the same data, but with CPI and wage growth now mapped to stress and the cash rate. The fall in wage growth is significant, and this has now become one of the main drivers of stress.

My point is, nothing has suddenly changed. The inexorable rise in household debt, especially in a low wage growth scenario was obviously going to lead to issues (see our posts from 3 years back!) and so the RBA’s apparent volte-face is a welcome paradigm shift, but late to the party. Perhaps the New Governor had a different perspective from the previous incumbant!

Of course the question now is, can this be managed without a property correction?  Probably not.  Read our definitive guide to mortgage stress here.

One final point. In the recent Financial Stability report, the RBA used HILDA data to argue that household financial stress was not too bad.  But the data is not that recent, latest from 2014 and 2015, and since then our surveys highlight that some more affluent households are also being squeezed, especially as mortgage rates rise, and their incomes stall; they are highly leveraged.

The HILDA Survey also includes questions on financial stress experienced by households over the previous year.  There was a broad-based decline in the share of households experiencing episodes of financial stress between 2001 and 2015 (the time span available in the HILDA Survey). Nonetheless, households that were highly indebted in a particular year had a greater
propensity to experience financial stress. For instance, households that were highly indebted in 2002 were more likely to experience at least one incidence of financial stress in all other years compared with households that were less indebted in 2002 (Graph C5, right panel). The result also holds true for other cohorts. This suggests that a greater share of highly indebted households face financial difficulties and are more likely to be vulnerable to events that affect their ability to repay their debt, such as income declines or increases in interest rates.

Overall, these data highlight that highly indebted households can be more vulnerable to negative economic shocks and pose risks to financial stability. In particular, highly indebted households are less likely to be ahead of schedule on their mortgage repayments and they are more likely to experience financial stress, hence could be more vulnerable to adverse macroeconomic shocks. The consequent effects of this stress on the broader economy may be exacerbated by the disproportionately large share of investor housing debt owed by highly indebted households. Hightened investor demand can contribute to the amplification of the cycles in borrowing and housing prices, particularly when this investment is highly leveraged. Nonetheless, HILDA data also show that much of the debt held by highly indebted households is owed by households with high income and wealth, who are typically better placed to service larger amounts of debt.

 

HIA Housing Affordability

Turning falling home prices into good news is quite an art, but one which HIA managed in their release today!

The latest HIA Affordability Report indicates that there has been a steady improvement in housing affordability during the opening months of 2017.

The largest improvement in housing affordability during the March 2017 quarter occurred in Perth (+5.6 per cent), followed by Hobart (+5.3 per cent) and Sydney (+5.0 per cent). Smaller gains in affordability affected the markets of Brisbane (+0.6 per cent) and Melbourne (+0.4 per cent). Of the capitals where affordability declined, the biggest fall was in Canberra (-7.2 per cent) followed by Adelaide (-4.0 per cent) and Darwin (-0.1 per cent).

The HIA Affordability Index results for the March 2017 quarter indicate that conditions are most challenging in Sydney, which has the lowest score (57.5), followed by Melbourne (70.7) and Canberra (78.5). The fourth most difficult capital city for affordability is Brisbane (86.8) with Darwin in fifth place (89.5) and Adelaide in sixth (90.5). By a wide margin, Hobart (113.9) remains the most affordable capital city in Australia followed by Perth (99.5).

“During the March 2017 quarter, the HIA Affordability Index improved by 1.9 per cent – and is 1.2 per cent better than this time last year,” commented HIA Senior Economist, Shane Garrett.

“The improvement in affordability is mostly due to a reduction in the national median dwelling price during the March 2017 quarter,” said Shane Garrett.

“Despite these latest results, housing affordability remains a significant challenge. There are good ways to improve affordability – and bad ways. The right approach to tackling affordability is through continuing
to secure the delivery of an appropriate supply of new homes and to reduce the barriers and costs involved in doing this,” explained Shane Garrett.

“With respect to delivering better housing affordability outcomes over the longer term, this week’s comments by the Treasurer in relation to leveraging private investment for affordable housing stock are very welcome,” concluded Shane Garrett.

‘Sledgehammer’ approach to risky lending could hurt economy: REIA

Interesting statements from the REIA today, highlighting the risks, in their eyes, to the economy if regulators tighten credit on home lending.

Here is the problem, do nothing, and home prices will continue to spiral higher with households ever more exposed, leading to a bigger future correction, and so economic damage, as rates rise or other events wash over us; or tighten investment lending controls now to cool the market, perhaps leading to reduced demand, home price correction, and so economic damage.

I am not sure there is now a middle way – all roads take us to a crunch, its just a matter of timing – a correction we have to have?

From The Real Estate Conversation.

Malcolm Gunning, president of the REIA, has warned that the combined actions of APRA, ASIC and the banks could decrease demand for new properties to such an extent that housing supply dwindles and the construction sector weakens.

The Real Estate Institute of Australia has urged regulators and banks to take caution when restricting bank lending to dampen investor demand for property in Sydney and Melbourne.

“Whilst warnings about interest-only loans and over committed borrowers might be justified in some circumstances, it does not mean all interest only loan borrowers should be penalised and outlawed,” REIA president Malcolm Gunning said.

He warned that the combined actions of APRA, ASIC and the banks could decrease demand for new properties to such an extent that supply dwindles, worsening housing affordability, and the construction sector weakens, damaging the overall strength of the economy.

“The cumulative impact of the collective action of APRA, ASIC and individual banks could well be sledgehammer, when only some fine tuning was required,” he said.

“We need to be careful that we don’t constrain the building and construction sector that has kept the Australian economy growing following the decline in the mining sector.”

Gunning said that talk of weakness and lack of confidence on the future strength of the economy, can become a self-fulfilling prophecy.

Being exposed to negative “expert opinions” daily can quickly become a “doomsday prophecy”, warned Gunning.

Gunning said agents working at the coal face are already seeing signs of a slow down.

“Market information from our Sydney and Melbourne member agents suggests that there are signs of a slow down.  The leading indicators tell a very different story to the lagged historical data,” cautioned Gunning.

“We need to be careful that an overreaction to the investor led Sydney and Melbourne property markets doesn’t threaten the health of the national economy”, he concluded.

Housing correction ‘won’t be orderly’

From The AFR.

Ask respected property analyst Martin North what form the coming downturn in the housing market might take and “orderly” is not the description he uses.

Instead North anticipates a much more significant downturn in the investor-driven, debt-laden markets like Sydney and Melbourne.

“Orderly” is how S&P Global Ratings director Sharad Jain described the likely unwinding of the overheated housing market, where annualised house price growth is running close to 20 per cent in Sydney and Melbourne.

“It could unwind in an orderly manner as we are seeing in parts of Western Australia and Queensland,” Mr Jain said at the Australian Financial Review Banking and Wealth Summit this week.

But according to Mr North, whose says his view on the housing market has turned increasingly gloomier, Australia could be at the very early stages of where the US housing market was in 2008 before it crashed.

“Regulators have come to the party three or four years too late. They should have tackled negative gearing, not cut rates as much and focused on mortgage underwriting standards. Had they done so we would be in a position to manage the situation,” said Mr North, who runs research house Digital Finance Analytics.

“I have a nasty feeling we are passed the point of being able to manage this. There are not enough levers available to regulators to pull it back in line. I can’t see anything other than a significant correction. It’s not a question of if, but when.”

But SQM Research managing director Louis Christopher, the country’s most accurate forecaster of house price growth, said it was “too early to call what type of correction we will have”.

“The last downturn in Sydney was in 2004, where the market did correct a little bit that year and then stayed flat for an extended period of time.

“On balance you would say the odds favour a similar type of downturn, where the market corrects by 4-5 per cent and thereafter does not do anything for a long time.

“Perth’s correction has been kind of orderly. Not in its rental market where rents are down 20 per cent, but orderly for prices,” he said.

According to Mr Christopher, continued strong population growth in Sydney and Melbourne will continue to drive underlying demand for housing and should act as a buffer against any major correction.

But, he cautioned, the longer house prices continued to rise, the less likely any unwinding will be orderly. “If prices rise another 20 per cent, that increases the risk of a sharper correction,” he said.

CoreLogic figures going back to 2000 show that most housing booms have been followed by shorter periods of correction and then followed by elongated periods of little or no growth.

Even in Perth, where house prices have been correcting since late 2014 and have hardly moved in the past four years, they are still up more than 200 per cent since 2000.

Corelogic’s head of research, Cameron Kusher, said the “great unknown” in how the current house price cycle will play out is what investors will do when the growth is no longer there.

“If investors stay, the correction should not be too bad. But if they go away like they did in Adelaide, Brisbane and Perth and dump property for other asset classes, it could be much worse.”

Were that situation to play out, Mr Kusher said the Brisbane and Melbourne unit markets – where investors have dominated – could be the worst affected.

Based on the latest NAB Residential Property Survey of 250 property professionals, most investors appear to have no intention to quit the market.

The latest quarterly survey shows a surprise rise in housing market confidence despite mortgage rates going up and APRA turning the screws on lending to investors.

NAB chief economist Alan Oster believes an orderly unwinding of the current boom is the most likely outcome, pointing to the bank’s own forecasts of a slowdown later this year with annualised house price growth halving to about 7 per cent and then dropping to 4 per cent in 2018.

With the demand still strong and interest rates to remain low, Mr Oster said unemployment was the critical factor.

“We don’t see an unorderly correction unless unemployment hits 8.5 per cent and that would take a major global shock most likely coming out of the US or China,” Mr Oster said.

Having witnessed numerous housing cycles in his 30 years in real estate, John McGrath says he does not subscribe to the “housing bubble theory”.

Mr McGrath believes that if there is a correction it is likely to be modest with the recent tightening of lending acting as a “natural economic firebreak” to any collapse in prices.

“Historically if and when there is a correction the market gives back about half of the prior years growth which would suggest that when prices stop rising we are likely to see either a stabilisation at that point or perhaps a 5 per cent correction.

“Sydney and Melbourne are now major international cities and an ideal alternate address for those living or doing business in Asia. Compared to values in other great cities of the world, many overseas buyers and expats still see our two biggest cities as good value globally and a very safe place to invest,” he says.

But, Mr North sees things differently: “We have about 22 per cent of households in mortgage stress, which will continue to rise. There’s flat employment growth and no wages growth. I can’t see how you can hold all those elements together.”

And he believes the wealthier end of town could be most at risk: “My data shows the highest levels of immediate problems are not in the suburban fringe, but in the affluent suburbs, where people are really geared up with multiple properties.”

First Scramble the NBN, Now Housing

The AFR reports today that Scott Morrison is advocating increasing supply as the recipe to solve the current housing issues, and is standing firm against a crescendo of calls to curb negative gearing tax breaks (though may be more amenable to capital gains changes).

I was reflecting on the current state of play, given RBA, APRA, ASIC (three members of the Council of Financial Regulators – the Treasury being the fourth) are all underscoring the risks in the housing sector. Investors are in the firing line.  Logically, negative gearing should be curbed.

But then I started to consider the political agenda, and wondered if there are parallels with the second class service the current NBN solution is delivering; at least to me. Essentially, Turnbull wound back Labor’s fibre to the end-point solution by arguing that there was a better, cheaper, quicker way. It became do anything BUT what Labor proposed. The result, in my case at least is a slow, unreliable NBN solution, unable to deliver acceptable bandwidth at peak times, and no upgrade path. The political battle may have been won, but the end outcome is frankly horrid. As a digital business we suffer the result every day! The cabinets on the local street corners (now daubed with tags and grafiti) will be a lasting tangible monument to a politically catalysed outcome.

But, now, are we seeing the same with Negative Gearing changes, which Labor proposed, and which have been opposed by the Government ever since?  Has it become caught in the same trap as the NBN? Had Labor kept it’s power dry, would we have seen changes to negative gearing already?

Could it be that on principle, the Government won’t concede this to Labor, and so will literally go round the houses to avoid changes to negative gearing?

This despite the many calls, from responsible and well informed sources who say that it is the tax breaks which are driving the investment property sector. This is also confirmed in our surveys.

Will the legacy of the unwillingness to tackle such a core element in the landscape cost us a housing crash? As we argued recently, it is looking more likely that we will need a correction to defuse the current heady trends.

But if the needs for a political wins outweighs good policy, it is highly likely we will get the housing equivalent of the NBN. We think Australia deserves better.

 

House price growth could create ‘systemic risk’

Australian bank hybrids, equities, term deposits and residential investment properties are all essentially one big bet on Australian housing.

From InvestorDaily.

The housing sector has supported the Australian economy for several years, but further increases to house prices without increases in wage growth will increase the possibility of systemic risks, says Pimco.

Housing has been the “main domestic growth engine” in Australia since the economy shifted away from mining in 2012, said Pimco co-head of Asia portfolio management Robert Mead, which improved headline economic growth but increased household debt at lower interest rates.

Mr Mead noted that average lending rates for standard housing loans as measured by the Reserve Bank of Australia (RBA) fell from 7.3 per cent in 2012 to 5.25 currently, while the RBA policy rate fell from 4.25 per cent to 1.5 per cent in the same period of time.

“This demonstrates a highly effective transmission mechanism of monetary policy: more than 76 per cent of RBA policy rate reductions have flowed directly through to the main consumer borrowing rate,” Mr Mead said.

“However, during this same period wage growth fell from over 3.5 per cent per annum to less than 2 per cent, and the unemployment rate increased from 5.1 per cent to 5.9 per cent. This suggests that the capacity of the average Australian borrower to take on additional debt was actually weakening, not improving.”

While the RBA’s monetary policy regime was “highly effective” as the economy weakened, Mr Mead cautioned the bank’s implementation of policy is likely to be made more difficult by the “significant” increase in household debt at a lower borrowing rate.

“Looking forward, we believe the current economic backdrop accompanied by some recent increases in mortgage rates by the Australian banks will keep the RBA on the sidelines for all of 2017,” he said.

“We also expect increasing reliance on macro–prudential policies to limit the upside in property prices. While housing has definitely helped support the economy over the past four to five years, any further increases in house prices that are in excess of wage growth will represent potential systemic risks for the economy.”

Mr Mead said diversification was critical to investors, and should be a key theme for portfolios.

“Australian bank hybrids, equities, term deposits and residential investment properties are all essentially one big bet on Australian housing,” he said.