The ANZ property economics team is out in the AFR today with a bold prediction of a rise in house prices.

ANZ’s David Cannington is one of the most clear-eyed economists in Australian property and this forecast must be taken seriously. As usual, the devil is in the detail.

He sees no pick up in building: “Despite an unprecedented shortage of physical housing stock. . . and an expected 15 to 20 per cent lift in home prices over the next 2½ years; we are likely to experience the most modest cyclical upturn in housing construction in the past 30 years.”

Housing construction is currently at woeful levels. The federal government’s migration policies will add millions to our population yet little is being done to accommodate them, in either housing or infrastructure.

The Housing Industry Association has shouted itself hoarse on the employment and economic activity consequences of weak housing starts. They are even prepared to talk about a tax switch from Stamp Duty to State Land Tax to remove a key barrier to buying and selling.

Carrington points to a troubling reality for the perma-bulls around interest rates. ANZ modelling suggests wages account for less than half the growth in of house prices over the last 30 years – with the lion’s share generated by falling interest rates, which has allowed and prompted borrowers to take out larger mortgages relative to their incomes.


This trend is probably now complete. The fall in mortgage interest rates from 17 per cent in 1989 to 5 per cent today cannot be repeated. Mortgage interest rates have never been this low and have only one way to go, and that is up. They may bump along at these low levels for quite a while if economic conditions remain weak, but a 25 year housing mortgage can only become more expensive – much more expensive – in coming years. You do not want to be long and geared real estate in a time of rising rates. Capitalization retreats and repayments rise. It is as futile as swimming against an undertow. That is how strong swimmers drown, exhausting themselves metres from the beach.

The rent v buy equation points sharply to renting as the cheaper housing option at this time. With wage growth likely subdued for the foreseeable future, chasing Cannington’s price prediction is a fool’s game.

Renters have options. They can move for a better job. Blocked sewers are the landlord’s problem.

This is an era to Invest in yourself. Education, travel or the share market all offer superior returns to property.

Don’t Buy Now!