Westpac chief economist Bill Evans put the banks view about the ongoing debate of the future of Australian property markets by saying: “We believe the Australian housing market does not represent a speculative bubble… While we accept that housing is relatively expensive, issues about prices, incomes and affordability are more complex than the simple measures used to show over-valuation.”
The strongest evidence against an asset bubble in the housing market was the performance of the market in the period 2008-09, Westpac said. But the combined pressure of rising interest rates, a material tightening in credit availability because of the credit crunch, moderate joblessness, and eroding sentiment on house prices failed to prick a pre-existing bubble.
“That markets recorded only a mild price correction and a comparatively benign rise in mortgage arrears argues strongly against the existence of a bubble at the time,” Mr Evans said.The average capital city house price fell as much as 5.5 per cent in the year to March 2009, before rocketing up by double digits to record 18.4 per cent growth in the year to June quarter.
The Westpac report said Australia’s high house prices are a consequence of a shortfall in business construction, rather than speculative activity.
“Affordability may have deteriorated, but it still appears to be predominantly those that can ‘afford’ market pricing that are entering the market,” the report said.
The Westpac report also downplayed the effect of the Reserve Bank’s sharp rate cuts, and the first-home buyers’ grant boost in averting deeper house prices in 2008-09.
“The notion that aggressive rate cuts and first-home buyer incentives could have ‘rescued’ a falling market just as the bubble was bursting is not compelling,” said Mr Evans. “As seen during both the ‘dot-com’ and US housing market collapses, policy is usually powerless to arrest an unwinding speculative price bubble.”
The RBA cut 4.25 percentage points from the cash rate between September 2008 and April 2009, in order to spur borrowing in the economy. In October 2008, the federal government enacted a boost to first-home Buyers, increasing the grant three-fold to $21,000 for new houses until the end of 2009.
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