Why Australian home prices are not about to crash and burn

James Kirby
October 10, 2010

IS THE value of your house about to plunge? Macquarie Bank has tipped a 20 per cent drop in housing construction next year while commentators say the smallest lift in interest rates will pop the ''home price bubble''.

House prices have been sliding for months. Industry estimates suggest that over the past quarter Melbourne prices are down 2 per cent and Sydney is off by 0.5 per cent. But these figures are nothing compared with those for Britain and the US, or Ireland, where home prices are down 40 per cent and falling.

So it is no surprise that every time anything remotely negative happens in the wider economy - this week it was the mere threat the Reserve Bank might lift interest rates - there are suggestions home prices are about to go over a cliff.

The doomsayers' arguments have been well aired. They pivot mainly on the sheer price of our real estate in relation to average income. There is also a lot of credence given to household debt levels and the presence of incentives that prop up the market, such as negative gearing.

Invariably the doomsayers are economists, especially offshore, while the bulls are linked to the success of the property industry (mortgage financiers, builders, developers and real estate agents).

Associate Professor Steve Keen, of the University of Western Sydney, for example, who has gained national prominence for his dire warnings on house prices, is still talking about a sharp home-price downturn. On Friday he told the ABC that property investors on average incomes would not be able to endure even flat prices in the coming years. Keen estimated property investors earning less than $80,000 a year make up 20 per cent of the market and the slightest pinch in the market would prompt this sector to sell out, causing ''the bubble to burst''.

Alternatively, we get experts such as ANZ economist Paul Braddick, who made his name with a presentation he took round the country called ''the mother of all housing booms''. Braddick believes the outlook for house price appreciation is now ''soft'', but he is convinced the momentum is strongly upwards over the long term.

Fresh voices are rare in the debate. But in recent days a new perspective emerged from John Wilson, the Australian chief executive at Pimco, the world's biggest bond fund. Wilson, in a paper on Australia's housing market, argues forcefully that our market is no bubble.

He begins with some obvious points - worrying that Australia may follow the US or Britain is pointless because we have an utterly different economy with relatively strong growth and high employment. Likewise, where the US and other nations built too many houses in recent years, we have not built enough.

He follows with a range of points:

■ We have relatively high mortgage repayments but the ratio of housing costs to household disposable income (a key indicator of people's ability to finance mortgages) has remained unchanged at 30 per cent for more than a decade.

■ Australians pay a relatively high amount in cash for their homes, but a closer look shows that one-third of repayments go on principal, not interest - that's saving and investment, and because housing has risen steadily (6 per cent a year) the situation is better than you think.

■ Our household debt figures are high, but the debt relates to bricks and mortar - we are not spending any more on cars or credit cards. What's more, the average equity we have in our homes is 60 per cent and that has remained steady.

Wilson also suggests the worst of the interest rate rises may be over: a view that is gaining momentum.

Add it all up, and though it is clear home prices may be experiencing a weak patch, the merchants of doom have got it wrong so far and there's little reason to believe the local fundamentals have changed.

http://www.smh.com.au/business/why-home-prices-are-not-about-to-crash-and-burn-20101009-16d3p.html