Australia | Apr 10 2008
By Rudi Filapek-Vandyck
Never say never, but it’s very hard to come up with a credible scenario that would see house prices in Australia drop, apart from some regional pockets of temporary weakness. Such a bold statement looks a lot less brazen if one realises the factors presently in play in the Australian housing market. To put it very simple: if the Australian housing market was a listed commodity investors would have long jumped on the occasion and screamed “Super Cycle”!
It’s a story, in its core, of not enough supply and continuous strong demand. A comparison with coal or iron ore seems but appropriate. In fact, the story of Australian housing is even “better” (from the view point of those who are able to supply) as within the current climate of high interest rates (officially with a further tightening bias) and declining economic growth the odds simply don’t favour much more supply coming into the market anytime soon. Australia is not building enough houses. It hasn’t been doing so for quite a few years now. Renters will be paying the price over the next few years, but so too will those on a rather moderate income who cling on to the dream of owning their own home.
In a general update on the Australian housing market, ANZ economists Alex Joiner and Stephanie Wayne readily admit housing affordability is an issue at the moment and it will remain an issue in the years ahead. They too believe that house prices in Australia simply cannot fall.
Of course, we all at least heard about someone who actually bought a house and who’s now unable to sell because he/she will not receive as much as they paid for it. What ANZ is talking about is house prices in aggregate, which means it is always possible that in certain regional pockets house prices actually decline at certain points in time, but as a whole throughout Australia this is simply not feasible.
Making matters worse is that Australians are now being confronted with a market situation which is seriously out of balance (and we’re not even including the annual immigrants who enter on a 457 visa and need somewhere to sleep as well) with the problem contributing to inflation building up and therefore forcing the Reserve Bank to stay firm on the issue of high interest rates. ANZ sums it up as follows: “The housing market is a causality of the RBA’s war on inflation, exacerbating the affordability problem but also deterring investment in the building of residential stock.” In layman’s terms this means: there is no light in the tunnel, things are only getting worse.
So expect house prices, and rents, to continue increasing. As demand strongly outnumbers supply plus availability, ANZ believes it is a fairly safe assumption the “housing market will reach a record level of imbalance in coming years”.
What could distort this picture? A significant increase in unemployment as at the end of the day any market will be driven down by forced selling, even one as tight as the Australian house market. But since ANZ doesn’t believe Australia is facing a recession, and with ongoing strong global demand for resources likely to keep investments and business activity levels at relatively high levels in the years ahead, unemployment should remain low, thinks ANZ.
On the economists’ calculations, underlying demand for homes throughout Australia will exceed 180,000 in 2007-08 while supply will be restricted to 145,000. By 2009 the shortfall in the housing market should “approach an unprecedented 200,000 dwellings”.
Thus the outlook is for increasing affordability issues, increasing mortgage stress, and higher rents; all in combination with moderately growing house prices. Says ANZ: “It is expected that house price growth will moderate over 2008 under pressure from higher rates, yet in aggregate prices will continue to rise.”
We let some charts, supplied by ANZ, do the rest of the talking:
