Housing bubble deflates with a slow, steady leak

No longer the hot topic around office water coolers, interest in our property markets has started to wane as housing values take a breather from their recent mammoth upward climbs.

Don Stammer reports, in The Australian, the current cooling of our housing market is no surprise given rising interest rates and ongoing affordability issues. Here’s a summary of what he had to say:

Growth in bank lending for owner-occupied housing has fallen away sharply and auction clearance rates have eased.

The debate is now on: will house prices collapse, as they did in Japan in the early 1990s and in the US recently, or is there a prospect of a long run of years with house prices moving mainly sideways?

The Economist magazine, which estimates the ratios of house prices to rents in 20 countries, reckons Australian house prices are the most over-priced, with our ratio now a massive 56.1 per cent above its long-term trend.

In recent presentations in Australia Jeremy Grantham, co-founder of the GMO investment house in the US and an experienced researcher on the ups and downs in investment markets, suggested that our median house price needs to fall by 42 per cent to return the relationship between house prices and family incomes to its long-term trend.

But what is “normal” for movements in Australian house prices after the boom has peaked? [Consider] house prices following the collapse of the bubble of the late 1980s.

Despite housing interest rates of 17 per cent, the median house price did not fall away sharply. Moreover, even with the marked fall in interest rates that followed, the earlier excesses were worked off slowly.

Looking back on earlier housing bubbles, such as those of 1960, the early and late 1970s, the experience was broadly similar: house prices corrected mainly by remaining flat for a half dozen or more years.

In international comparisons of whether house prices here are excessive, account needs to be taken of the high proportion of Australians who live in the main cities.

As the deputy governor of the Reserve bank observed recently, most statistics “measure house prices in the city and express [the median house price as calculated] as a proportion of income in the whole country . . . if you do have prices relative to the incomes of people living in those areas, then the prices in the cities are quite reasonable.”

My guess is that house prices will generally repeat their earlier experiences and unwind from their recent excesses slowly and over time; a collapse in house prices seems unlikely.

I agree with Stammer and think regardless of suggestions that the bubble is about to burst, it is more likely that we will see an easing of prices rather than a catastrophic decline.


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