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No bubble, but property prices are still too high say experts

From one moment to the next, experts seem to be changing their minds about the state of Australia’s property markets; is our housing over-priced or not? Are we experiencing a property bubble or normal cyclical conditions? Does the future of local real estate look bright or are we in for a bone crunching crash in values?

While many agree that we are not in the midst of a property bubble, according to a recent article published on Domain, property prices in Australia are over-inflated by up to 35%.In a 70-page analysis of our housing market, Goldman Sach’s chief economist Tim Toohey emphatically denies that we are experiencing a speculative housing bubble, but says Australian homes are overpriced. He claims that if this affordability issue is not addressed within the next three years, we could face significant price deflation that could hit some home owners and investors hard.

In the report, Toohey suggests there are a number of “what if” scenarios that could cause a price correction in Australian real estate. He says a number of factors, including refinancing levels remaining in check and loan to value ratios sitting at a relatively “safe” level for the majority of borrowers, indicate a housing bubble is not an issue for our markets.

”We think that the behaviour of house prices over the past year, and indeed the past decade, does not resemble a speculative bubble,” Mr Toohey said.

Mr Toohey argues that rather than a speculative bubble, what we are witnessing is an extended “period of overvaluation” caused by things like sustained population growth, a continuing undersupply, strong demand and relatively low interest rates.

Data from the Australian Bureau of Statistics indicates an 18.4% increase in Australian house prices over the past year, 50% over the past five years, a whopping 165% over the last decade, 246% over the past 15 years and 289% over the past 20 years; leading Mr Toohey to conclude that dwelling prices are overvalued by between 24 and 35%.

Mr Toohey adds however, that nationwide dwelling prices appear ”far more restrained in 2010 and are currently demonstrating signs of moderation”.

However the current cooler markets may not last much longer, according to Mr Toohey; ”By the end of 2012 we estimate the national housing shortage will be 250,000 – nine times the size of the next largest shortage in our database back to the mid-1970s,” he says.

Toohey claims this critical housing shortage and a predicted resurgence in first home buyer demand will mean continued upward pressure on Australian house prices.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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