One of many reasons there will be solid price growth in Australian property markets this year is that current prices are at sensible levels.
Australian house prices make sense in an international context, based on the relationship between household incomes and typical prices. They make even more sense when you factor in culture and tradition, elements economists can’t put into an equation but important nevertheless.
Reserve Bank Governor Glenn Stevens does not think Australian house prices are unreasonably high and does not believe they will drop. Nor does he agree that we have a price bubble.
A transcript of a recent interview with the Australian Financial Review shows that AFR editor-in-chief Michael Stutchbury and economics editor Alan Mitchell (why did it take two senior execubots to interview one public servant?) worked pretty hard to get Stevens to agree that Australia was vulnerable to a US-style collapse in property values – but they were unsuccessful.
I’m always curious as to why doomsayers expect Australia to follow the pattern of the United States, to the exclusion of all other countries. Why would one of the strongest markets on the planet follow the example of the worst?
The impression created by bad journalism is that most of the nations of the world suffered a US-style collapse in prices, and Australia was one of the few to unreasonably resist the trend.
In fact, only a handful of countries had property crashes: the United States, Ireland, Spain and, to a lesser extent, the UK. Those declines happened for specific reasons. In the US these included a recessed economy, high unemployment, a major oversupply of dwellings and an unregulated lending sector (pretty much the opposite of Australia on every count).
The vast majority of nations, even some with weak economies, have escaped decimation of their property values. Many have continued to show growth since the onset of the GFC. Australia is, in fact, reacting in line with most of the world’s nations.
In his interview with the poorly researched AFR boffins, Stevens repeated his consistent position that Australian house prices are high but relative to other countries they are not overpriced.
“When you put if fully into international perspective – that is, you don’t just compare us with the US but compare us with a whole range of countries – it’s actually a lot harder to make the case that we’re grossly overpriced and due for a crash,” he said.
“We’ve been around this level of house prices/incomes for 10 years. It’s taking a long time to burst if it’s a bubble. So, I’m not so much concerned about a crash.”
However, Stevens said he would be concerned if there was another major rise in prices, such as increase of 10% to 20% seen in some recent years.
“We have seen some gain in house prices over the past year or so, which is reversing a little bit of an earlier decline. That doesn’t trouble me. I think that’s probably part of the cyclical transmission mechanism working.
“But it would be, I think, troubling if you saw a return to very strong 10-20% persistent rates of growth of housing prices, especially if that was accompanied by a return of rising leverage.
“I don’t think that’s going to happen, by the way.”
Stevens, it seems, shares my view that house prices are at comfortable levels relative to incomes and that we will see solid growth in the near future, without a return to boom levels – with the exception of selected markets with specific dynamics, such as Darwin and Gladstone.