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Housing not a bubble

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by Peter Switzer

The judgement is in on the housing bubble in Australia and the decision is that there is no bubble but we are “uniquely positioned” with house prices 25 to 35 per cent overvalued. But the question is when will this be reversed?

These intriguing hip pocket questions were answered in a report by Goldman Sachs called: 'A Study On Australian Housing: Uniquely Positioned Or A Bubble?'

But the price rises seen in many areas of Australia won’t go on forever.

The team at GS concluded that our strong population growth, the first homebuyer boom and the critical undersupply of houses have pushed up prices.

The shortage

To understand how critical the shortage is, in 1997, the second biggest period of shortage, the shortfall was 28,000. By 2010, GS estimated the shortage was 210,000. However, at the end of 2012, they predicted undersupply will be 250,000!

Affordability, mainly driven by rising interest rates, will work against more construction but GS assumes interest rate stabilisation will eventually happen and constriction will start again in 2012 and 2013.

This will be a prelude to a downward swing in house prices as some residential investors leave the market as tenants chase newly-built properties,

But this won’t lead to a big dive in house prices. The GS team have come up with the event that will eventually shake out the sector.

“We believe the prospect of an abrupt and sustained decline in Australia’s terms of trade would be the key catalyst,” the researcher concluded.

Now this could coincide with a Chinese recession but it could simply happen with a decline in demand for iron ore and coal, whose prices are at stratospheric levels right now.

So, a significant China and Indian economic slowdown, possibly coinciding with a period of slower global economic growth, as debt-laden countries deal with their debt as well as their chronic deficits, could cause a house price fall.

Interest rates outlook

The GS team say this would be more likely around 2013-14 but I would add, provided you hold your job or your business remains profitable, there will be some respite for homeowners with debt — interest rates will fall.

In economics, for every good story there is a downside — for example, big economic growth often brings higher interest rates — but fortunately this relationship also works in reverse as well.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Wednesday, March 23, 2011

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