House prices are high, but we shouldn’t fear a bubble
There has been much discussion over a number of years about whether Australia's house prices are too high, and indeed whether there is a house price ‘bubble'. Experts suggest that the metrics used for these predictions are indeed too naive to be useful.
Typically these are a measure of housing prices to income or to rents and compare the current level to a 15 or 20 year average. This ignores a large structural adjustment that occurred in the Australian housing market between 1997 and 2003 associated with lower interest rates, better-anchored inflation expectations, and increased availability of housing credit.
Experts do not expect Australian housing prices to fall. Indeed, they expect them to track sideways in the short-term and then rise in line with household disposable incomes - consistent with recent history.
Supply features of the housing market support this assessment. Most forecasters, including official agencies, suggest that Australia has an undersupply of housing.
More fundamentally, recognition that housing is fairly expensive in Australia is based on good reasons.
1. The quality and size of the housing stock is high. Australia has the largest dwellings in the world, and they are of high quality.
2. Well-located dwellings are in particularly limited supply i.e. there are fewer apartments in Australia than in many other nations (particularly in the suburbs close to city centres).
3. Public transport from outer suburbs in most cities is generally of fairly low quality, limiting the distance which people can productively live from the city centres and further enhancing demand for property in the centre of the cities.
4. There is a lack of affordable land at the fringes of major cities.
Importantly, despite relatively high levels of household debt in Australia, less than 1% of mortgages are in arrears in Australia, which is internationally low. Other reasons why levels of household debt should not be a large concern includes a key one - that 75% of all household debt in Australia is held by the top two-fifths of income earners.
The structure of the Australian mortgage market and tax system is also such that most households are ahead of schedule in their mortgage repayments which would provide a buffer in the case of a negative income shock to households, such as increased unemployment.
Overall, with strong prospects for the Australian economy, on the back of high commodity prices driving a mining investment boom and rising incomes, it is predicted that housing prices will continue to grow at a modest pace over the next few years. The risk of a sharp fall in housing prices is very low.
[Based on comments by Paul Bloxham, HSBC bank's chief economist for Australia and New Zealand and a former RBA economist. This draws on an edited extract from a recent research note, Australia's place in the world. Source: Smartcompany.com.au]