There is quite a debate going on about whether house prices in Australia are at risk of a precipitous drop.
Factors involved are the rise in household debt prospect for further growth in the debt-to-income ratio the potential implications of slower household debt growth supply of property in relation to population demand the risk from an external shock internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction the fundamentals (low interest rates unemployment financial deregulation).
Prices rose 50-60% in 3-4 years in the early 2000s with largely unchanged fundamentals. House prices do have a life of their own. Phil Garton of Treasury argues this was because of a lagged response to improvements in fundamentals. How could Australia have maintained a bubble (if there was one in housing prices) for more than 6 years? Steve Morling of the Domestic Economy division saays other bubbles have lasted that long and fundamentals are often used to justify price rises. There was debate over lack of supply in Britain just before the property prices plummeted.
Average house prices doubled in the 2000s despite the global financial crisis and are 20% higher than 3 years ago. They fell in the September quarter here but are still 11.5% up on a year ago.
Treasurer Wayne Swan says it is the considered position of the Treasurer and Treasury that our housing market reflects the fundamentals of supply and demand and not a bubble – specifically that Australia is simply not building enough new houses.
The RBA doesn’t think there is a bubble either – they pull apart claims there is a bubble made by the IMF Morgan Stanley economist Gerard Minack US investor Jeremy Grantham and The Economist magazine. The RBA’s deputy governor Ric Battellino says the current picture is one where borrowing for housing is broadly growing in line with income house prices are stable and there is little appetite for other forms of debt.
The OECD warned that house prices could not keep rising faster than household incomes.
What does this mean for us? Debt is one of the critical factors that can reduce resilience. If our children cannot afford to buy a home that is also a serious resilience issue. Rapidly rising housing prices are very destabilising and they seduce us into regarding our homes as investments to trade rather than as our home where we live long term and become part of our community. Rapid turnover in community residents makes it very difficult to build and preserve a strong community identity and resilience. A high proportion of rental properties also mitigates against building strong community identity and resilience. A community where residents own their homes debt-free and are stably settled long-term has an opportunity to channel its energies into social quality of life wealth building not simply working long hours to pay off mortgage debt.