House prices to grow at 5% over coming years - ex 12yr RBA veteran

Really good post today on Aussie Macro Moments that summarises HSBC’s Paul Bloxham’s views on the property market from his recently published report on the Australian economy called “Australia’s place in the world”.

Paul Bloxham is HSBC’s chief economist for Australia and New Zealand, and a former RBA economist.

In a nutshell, Bloxham’s view is that “overall, with strong prospects for the Australian economy, on the back of high commodity prices driving a mining investment boom and rising incomes, we expect that housing prices will continue to grow at a modest pace over the next few years. We view the risk of a sharp fall in housing prices as very low.”

Key take outs for me are:

  • he expects prices to track sideways in the short term and then rise in line with household disposable incomes – consistent with recent history.
  • Since late 2003 the dwelling price to income ratio has been broadly stable at between 3½ and 4½ and has averaged 4. See chart below:

House prices & income growth_1993 to 2011

  • he is forecasting growth in household disposable income per household of around 5% per annum over the next couple of years (as a result of strong employment and wages growth) and also have in mind that house prices will grow at this pace over the next couple of years.

The rationale for this forecast is that:

  • since 2006, population growth has exceeded new supply of dwellings, which is the first time this has happened in the postwar era. This will put a floor under housing prices and is a key reason why we have little concern about a sharp (or large) house price decline.
  • despite relatively high levels of household debt in Australia, the households that hold this debt can still service mortgages. Less than 1% of mortgages are in arrears in Australia, which is internationally low.
  • levels of household debt are sustainable as 75% of all household debt in Australia is held by the top two-fifths of income earners. Vulnerable households – in this case, ones that have a loan-to-valuation ratio of 90% or above and also use more than 50% of their disposable income to service their mortgages – constitute less than 2% of all owneroccupied households with debt in Australia.