Tim Carleton, principal and portfolio manager, Auscap Asset Management, has told the Australian Mortgage Innovation Summit 2017 that it’s a mugs game to predict the outcome when leverage-happy Sydneysiders start “panicking into property".
A day after RBA governor Dr Philip Lowe warned further record-high increases in household debt could bite “sharply” into consumption, Carleton cast a long shadow over Australia’s $7 trillion property market, describing an over-leveraged market, past-prime and already at full stretch.
“What we’ve seen is debt relative to a level of household income has absolutely gone through the roof. And we know for a fact that households borrow to the limit of interest repayments," he said.
Citing a 2016 UBS study, Carleton said, if interest rates were to rise just two per cent, 50 per cent of Australian borrowers “would be in trouble".
“That’s a lot. Because interest rates can move two percent very quickly," he said. “When we look at the data, our concern is that Australia has too much leverage. And if we can’t add leverage at this point then the best outcome is that house prices continue to grow in line with wage growth. And if that happens it’s going to be very slow."
The downside of that scenario, Carleton said, is “obviously a little bit scary".
“In Australia we have this belief that property doubles in every ten years. It implies property growth of around 7.4 per cent per annum," he added. “What I’m suggesting is the reason that’s happened for the last 20 years is because while income growth has been solid (3.7 per cent), the flipside is leverage has increased considerably (at 3.3 per cent) and has driven almost half the property price growth over the last 20 years.
“We know the percentage of income that’s currently being used to finance interest repayments and once you get above the 35-40 per cent mark it becomes very difficult for people to add further leverage.”
Close to critical
Carleton suggested that, from an asset management perspective, the property market mass was close to critical.
“I’m just looking at things how I’d look at them if it were a stock - and its flashing warning signs to me. Unless we see interest rates decline, I suspect we’re very, very close to peak.”
While Carleton wouldn’t be drawn on peak property pricing, he suggested things often get worse at the pointy end.
“It is a bit of a mug's game to predict that because, ultimately, particularly when people get to the panicky end of the market and feel like they’re missing out, the envelope is pushed further than if they hadn’t seen their mates make a truckload more money than anyone would ever hope to actually save from employment,” he said.
“We would have some caution in encouraging people to highly 'lev up' in this market and believe you me I have the same conversation with my friends.
“The doctors and lawyers of Sydney, when they’re panicking into property, its dangerous to predict the end … but you can probably predict it when behavior that shouldn’t be happening is occurring.”
So, while the signals are there, the tipping point remains anyone’s guess, although it might be worth keeping an eye out for any silks running full tilt down Macquarie Street.