澳洲House price falls will continue: OECD

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House price falls will continue: OECD
November 29, 2005 - 9:54PM

Australia has beaten the world in over-valuing its homes - and property owners should prepare for price falls until late next year.

A special Organisation for Economic Cooperation and Development (OECD) report into housing markets in the world's richest nations has found Australia is the most over-valued property market.

The report was prompted by sharp spikes in property prices in developed nations in recent years.

The OECD found the estimated over-valuation of Australian homes in 2004 was 51.8 per cent. The next highest over-valuation was in Britain at 32.8 per cent.

That over-valuation was coupled with the second highest mortgage rates in the developed world, at an average of 7.1 per cent - only eclipsed by New Zealand where they were eight per cent.

There have been plenty of signs of the slowing property and housing market since prices peaked early last year.

But the OECD believes prices are likely to fall for some time.

Since 1970, Australia has had six upturns in the property market - the highest number of the developed world. Those upturns have averaged 14.3 quarters, or about 43 months.

During those upturns, average prices have increased 31.6 per cent.

But between the first quarter of 1996 and the first quarter of 2004 Australian real house prices climbed 84.7 per cent.

Downturns in the Australian house market have averaged around 10 quarters, or 30 months, with an average price fall of 10.1 per cent.

The current downturn started in Sydney and Melbourne early last year, which means on the OECD's figures, prices are likely to fall - or not rise - until the fourth quarter of 2006.

The OECD said the strong growth in house prices in developed nations was unprecedented, partly because of how it has not mirrored the global economy.

"The current house price boom is strikingly out of step with the business cycle," it found.

The OECD pins down several factors for the way people had bid up the price of houses across the developed world.

It suggests a lack of housing stock, higher migration levels, low interest rates and more competition from lenders have all contributed to the strong rises in prices.

"A combination of generalised low interest rates across OECD economies, coupled with the development of new and innovative financial products, have no doubt played an important role," it said.

"In Australia, increased competition among credit providers has contributed to the doubling of the number of products provided by lenders."

Another factor with special importance to Australia is the growth in people investing in property specifically to rent.

Buy-to-let mortgages, as they are called internationally, have grown in most nations. Around seven per cent of loans in Britain are for investment, while in the US 15 per cent of home sales last year were for investment.

But in Australia, around 30 per cent of mortgages (by late 2003) were for investment. In NSW the rate was 42 per cent of all mortgages, and in Victoria it was 35 per cent.

The OECD said even a small rise in interest rates could prove problematic for the housing sector.

"If house prices were to adjust downward, possibly in response to an increase in interest rates or for other reasons, the historical record suggests that the drops might be large and the process could be protracted," it found.

© 2005 AAP

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Sep 9th 2004
From The Economist print edition



Never before have real house prices been rising so fast in so many countries



SYDNEY HARBOUR is one of the most stunning sights in the world. Over the next year, it may also provide a reflection of global property markets. In recent years the prices of waterfront homes, like the whole Australian housing market, have soared. Now the national boom seems to be over. The only question for Australia—and for many other countries—is whether prices will fall.

Average house prices, as reported by the Australian Bureau of Statistics, fell by 1.2% in the second quarter; prices in Sydney dropped by 5.4%. Other sources suggest a steeper decline. The Commonwealth Bank of Australia reckons that house prices nationwide fell at an annual rate of 13% in the first half of 2004. Even so, by all measures Australian homes are still worth more than a year ago. But whereas Australia topped The Economist's global house-price league last year, it has now dropped to about half-way down the list.




Since launching our global house-price indicators in 2002 we have focused on OECD countries, but in our latest quarterly update we have added China, Hong Kong, Singapore and South Africa. Home prices are rising at double-digit rates in 11 of our 20 countries. Hong Kong is top of the table, with an average gain of 28.7% in the year to the second quarter, a dramatic turnaround from a decline of 17% in the previous 12 months. The price of apartments on Hong Kong island has leapt by 40% in the past year. However, following the bursting of a mid-1990s bubble, average prices are still 55% lower than in 1997.

In second place is South Africa (with a gain of 25.5%), followed by New Zealand (22.1%). In both countries prices have been rising rapidly for several years. Property markets have also been climbing briskly in China. Speculation has been rampant in Shanghai, pushing prices up by 21% over the past year. Nationwide, however, city prices have risen by a more modest 10.4%.



Booming America, partying Europe

American house-price inflation quickened to 9.4% in the year to the second quarter, the highest since the 1970s. American prices have risen by less in recent years than those in Australia or Britain, but this is still by far the biggest boom in American history. Since the mid-1990s prices have increased more than twice as much in real terms (ie, after adjusting for inflation) as in the 1970s or the 1980s.

In the euro area, more countries have joined the party. Housing markets have long been at dizzy heights in Ireland, the Netherlands and Spain, but recently they have spurted in France, Italy and Belgium. French prices have jumped by 14.5% in the past year; by contrast, prices have fallen in Germany, which largely explains why consumer spending has been so much weaker there. In Asia, prices have also continued to fall in Japan and Singapore.

Many people now reckon that British house prices could fall in the next year. According to figures published by the Office of the Deputy Prime Minister, prices in Britain rose by 13.8% in the year to July, down from 25% at the end of 2002. Other surveys suggest that prices are already edging down, and estate agents have reported an abrupt drop in interest from buyers.









Calculations by The Economist show that home prices are now at record levels in relation to average incomes in America, Australia, Britain, France, Ireland, the Netherlands, New Zealand and Spain; on current trends, Italy will join this group by the end of the year. In other words, houses are more overvalued today than at previous peaks, from which prices typically fell sharply in real terms. Add in China and South Africa, and two-thirds (by economic weight) of the world that we track now has a potential housing bubble.

A year ago, most economic commentators in Britain and Australia denied that homes were seriously overvalued; today many more admit that markets do look frothy. America, though, is still in denial about house prices, judging by our favourite measure of whether homes are fairly valued, the ratio of house prices to rents. This is a sort of price-earnings ratio for housing. Just as the value of a company's shares should equal the discounted present value of its future profits, so the price of a house should reflect the future benefits of ownership, either as rental income or in the rent saved by an owner-occupier. America's ratio of house prices to rents is at a record high, 26% above its average over the 25 years to 2000 (see chart). To bring the market back to fair value, prices need to fall; alternatively, if rents continue to rise at their recent pace, prices will have to stagnate for as long as eight years.

Most American commentators, however, insist that their housing market is different and does not suffer from British or Australian irrational exuberance. Alan Greenspan, chairman of the Federal Reserve, has argued that while America has regional housing hotspots, such as in California and New York, a national bubble is highly unlikely because prices are determined largely by local factors. However, a recent study of America's housing market by Ian Morris, an economist at HSBC, concludes that home prices look overvalued in 20 states that account for over half of America's population.

A second myth is that rising house prices reflect America's strong immigration and population growth. However, the supply of housing has also been rising fast. Vacancy rates are at their highest since at least 1965. If house prices were being driven up mainly by population growth, then rents should also be rising rapidly. In fact, they have lagged far behind.









A third argument is that, unlike in Britain and Australia, most American mortgages are at fixed interest rates, so the housing market is immune to a tightening of monetary policy. But the British and Australian markets have stalled not because homeowners cannot afford to pay their mortgages, but mainly because first-time buyers have been priced out of the market. The same may happen in America.

It is true that house prices in America are less overvalued than in Britain or Australia, so that any fall is likely to be more modest. Still, it could harm the economy. A recent study by Goldman Sachs finds that swings in house prices lead to much bigger changes in consumer spending in America than in Britain. Furthermore, America already has much lower short-term interest rates and a bigger budget deficit than Australia or Britain, so if the housing market did take a tumble, policymakers would be less capable of fending off an economic downturn.

Even a mere levelling-off of house prices could trigger a sharp slowdown in consumer spending, as the recent experience of the Netherlands shows. The rate of Dutch house-price inflation slowed from 20% in 2000 to virtually zero by 2003. This appeared to be the perfect soft landing; prices did not fall. Yet consumer spending dropped by 1.2% last year, the biggest fall in any developed country in the past decade, pushing the economy into recession.

Although house prices did not fall, borrowing against the capital gains on homes to finance other spending, which had surged in step with rising prices, declined after 2001. This removed a powerful stimulus to spending. Since such borrowing has provided similar support to consumer spending in America, as well as in Britain and Australia, economists—and policymakers—would be wise to take heed.

[ Last edited by Happybanana on 2005-11-30 at 01:26 PM ]

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