The outlook isn't that grim

Low activity in the market is fuelling concerns about long‑term growth, but are those concerns justified?

The naysayers may have you believe that the Australian housing market is in a state of disarray, characterised by falling house prices and a housing bubble hanging over our heads, threatening to cause havoc within the market.

Well, yes, the market is softening slightly, but the state of the housing market is not quite as drastic as some may believe – and the Real Estate Institute of Australia (REIA) has the research to prove it. So, what are we seeing in the market? It is important to understand that house prices, while increasing over time, have periods when price growth either subsides or decreases.

However, the fundamentals are there for continued growth. The drivers of this growth will come from lack of supply, population growth and changes in the household formation rate. Current lower activity levels in the market have to be seen in the context of the increased buyer levels of 2009 and the earlier part of 2010. Post-GFC lower interest rates stimulated interest in house buyers. The temporary slowdown in housing price growth can be attributed to several factors, including: A more conservative outlook in home buyers, reflecting concerns about economic growth in the two-speed economy Increased savings, reflecting an aversion to debt in current economic circumstances Affordability reaching a record low Seven consecutive interest rate increases A retreat from the market of first home buyers, the group which provides the catalyst for other buyers to trade up It is important to note that the house price growth rate, although slowing, is at the ten-year annual average of 6.1 per cent. Compared with the same quarter of the previous year, house prices increased 6.1 per cent nationally.

House prices increase and decrease in phases, and a good example was evident between December 1996 and December 2009. From December 1996 to September 2000, the house price quarterly average growth rate was 2.1 percent; From September 2000 to December 2003, the house price quarterly growth rate accelerated to 3.9 percent; From December 2003 to December 2008, the house price quarterly growth rate decelerated to 0.8 percent; and From December 2008 to December 2009, the house price quarterly growth rate accelerated again to 2.9 percent.
The Australian housing market is currently in the phase where the average growth rate for house prices is evident. The slight softening is not what some people believe is the crash in the housing market that was ‘waiting to happen’.
The notion that a housing bubble was evident in Australia stemmed from speculation by some analysts in the aftermath of the US housing crisis. These analysts focused their attention on the house price-to-income ratio in Australia, generally observing that it is high compared to other countries. Prompting such speculation was the observation that, since 2003, the price-toincome ratio in Australia has been more than 40 per cent higher than the long-term average.

What is important to understand is that the house price-to-income ratio, which is generally calculated using average income, is not an accurate and sufficient indicator of housing overvaluation. This is because it is an average measure that covers the whole population, whereas house prices are determined by a set
of buyers whose incomes are most likely to be higher than the average income. The REIA has written an in-depth analysis on the limitations of the price-to-income ratio as an indicator of a possible housing bubble.

The report is available at www.reia.com.au.

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