This will end in tears
27 July 2011
The AMP/NATSEM report on housing affordability released today draws a clear picture of Australia’s house price dilemma. It fails, however, in concluding house prices will remain stable for a decade while real incomes catch up.
“This survey ignores the contradictions within this wildly overheated market,” Prosper Australia Campaign Manager David Collyer said today.
“First Home Buyers have abandoned the dream of home ownership. Though excluded from home ownership, they remain economic players: they get up in the morning, go to work and think very hard about how to improve their lot. They still have options, and will exercise them. They will not spend a decade with their noses pressed against the glass.
“A decade of steady house prices means 1.25 million taxpayers with negatively geared properties have no incentive to stay in the market and subsidise renters’ incomes and lifestyles. Many will sell.
“Their grim exit guarantees market disorder and serious losses for those who persist with the negative gearing model.
“NATSEM assumes this roaring bull market in property will correct in an orderly manner. Anyone with even a passing knowledge of fundamental analysis recognises bear markets are typically a third of the duration of bull markets. They are characterized by sudden and dramatic price falls, periods of seeming stability then further price plunges.
“Thus, this twenty year bull market ought be reversed over around six and a half years.
Prosper and the Land Values Research Group affirm their earlier forecasts of steep falls in Australian house prices – made as early as October 2010.
“The estimate, made by Dr Gavin Putland of the LVRG, was that prices are overvalued by 45 per cent relative to per capita GDP. A reversal of that scale would return prices to the long term trend.
“The risks in our forecast are probably on the downside, that the correction will overshoot and go considerably lower than this marker,” Collyer said. “We may face a cultural change and lose all faith in property.
“Accurately predicting the scale and timing of any overshoot is extremely difficult – this would depend on opaque measures like the scale of government intervention in the market, the extent of damage to buyers ‘animal spirits’ and global economic developments. ENDS