Aussie house prices set for big slide: leading academic
Australian house prices have started a substantial decline, a senior academic economist at the Australian School of Business says.
“It is likely that this is the beginning of a substantial housing correction, because the stimulus effects are continuing to fade,” Jonathan Reeves says.
Dr Reeves says that in contrast to other developed countries, Australian house prices rose in 2009 and 2010 – due to the government stimulus package that included specific housing measures.
He noted the impact an increase in interest rates may have on Australian house prices.
“The magnitude of a fall in Australian house prices will most likely be influenced by overseas events, and the most immediate threat may come from the European sovereign debt crisis and the impact this could have on raising mortgage interest rates in Australia.”
He noted the deputy governor of the Bank of England, Charlie Bean, said at a conference in Australia yesterday that there may be little option for policy makers other than to clamp down on house price growth, even though it would be politically difficult and economically costly.
Dr Reeves also highlighted the impact of events in other overseas countries on Australian house prices.
“Business cycles transmitted by China are also a high concern, along with the performance of the US economy. In addition, falling house prices in New Zealand, with a weak New Zealand economy, may have substantial impacts on Australian banks operating in New Zealand.”
He says most Australian forecasters of house prices rely on Australian house price index returns, rather than overseas figures, which could lead to a fundamental problem in forecasting.
“There is simply insufficient historical Australian data available for reliable models to be constructed.
“In house price modelling with US and European data over the last century, the simple model of long-run average house prices being a multiple of four times the average gross household salary, has proved to be a reliable guide.
“The economic rationale behind long-run house prices not staying above a multiple of four for long periods is that households simply cannot afford this through all phases of the business cycle.
“Currently in Australia the multiple is over six and therefore they are very likely to fall considerably in value,” Dr Reeves said.
