Why extreme predictions on house prices will continue to be wrong: Macquarie economist

There has been lots of noise in the media recently about a housing bubble forming in Australia. Many of these pieces point to Australia's high price-to-income ratio compared to the past and other global housing markets.

For instance, Jeremy Grantham, who runs a leading investment firm, was recently in Australia and generated a lot of coverage off the back of his assertion that Australian house prices were “7.5 times family income” and would have to deflate by 42% to return to their long-term trend.

However, as Christopher Joye points out the best estimate of Australia’s dwelling price-to-income ratio suggests that the correct ratio is  actually 4.6 times. Moreover, the Deputy Governor of the RBA, Ric Battelino is quoted as observing that “People feel that house prices in Australia are quite high…But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”

So I read with interest a piece titled "Rule Out A Housing Collapse" from Rory Robertson (Macquarie Bank economist) in the weekend Australian last week. Rory Robertson is the guy who won his well-publicised wager over housing prices against the gloomy assessment by Steven Keen of the University of Western Sydney.

Robertson provides some compelling arguments around the assertion that "average prices could rise a bit further or fall a bit over the coming year, but they will not collapse, as happened in the US & Japan."

If you don't want to read the full article I've summarised what I think are his main points below...

  • the sharp rise in Australian property prices in recent times has largely been driven by the sharp drops in inflation and interest rates after the 1990s recession and these changes are structural rather than cyclical - so higher price-to-income ratios are here to stay
  • for those that worry that mortgage debt is too high the RBA estimates that ~75% of all mortgage debt is held by the  top 40% of income earners - which implies the majority of Australia's mortgage debt is held by borrowers that have the capacity to service that debt
  • home ownership has been steady near 70% for decades, yet the home ownership rate for heads aged under 35 years is just 40%, down from 50% in the late 80s - implying that young people are finding it harder to buy where they want to live
  • 60% of younger households do not have a mortgage at all - so not everyone is geared (or over geared)
  • across all households mortgage debt amounts to ~30% of total housing assets - which does not indicate that as a nation we are over geared
  • our growing economy and limited new housing supply despite rapid population growth point to positive house price inflation. Higher mortgage rates, funding stresses and delveraging in local and global financial systems point to risks around continued house price inflation - these are the key factors for us all to keep an eye on and make up our own minds about the pace of future house price growth...

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