House price crash unlikely – economist

AUSTRALIAN house prices are not headed for a crash, however premium properties in expensive suburbs could experience large declines, according to ANZ Bank's chief economist Saul Eslake.

Eslake said predictions from Associate Professor Steve Keen of the University of Western Sydney and Morgan Stanley’s Gerard Minack that house prices could fall by up 40% to 50% could be proved wrong.

He believes the predictions are based on comparisons with the United Kingdom and United States housing market where house prices have already fallen significantly.

But Eslake said there are nonetheless some important differences.

“First, Australia does not have a physical excess supply of housing. America does, because unlike us, it actually built more new dwellings than it required to meet growth in underlying demand.

“In Australia, the reverse has happened: we haven’t built enough dwellings to meet underlying demand, which has been pushed up by rising levels of immigration. As a result, we actually have a significant backlog of unmet underlying demand for housing (as also indicated by the upward pressure on rents in recent years),” he added.

“Second, Australia does not have a huge supply of existing dwellings for sale at any price hanging over the market because of the huge increase in foreclosures that has been the primary source of downward pressure on American house prices.

“Mortgagees in possession will sell at any price because they don’t want to keep the house, they want to get at least some of their money back as soon as possible. That is now happening on an unprecedented scale in America. But it isn’t happening, and in my view is unlikely to happen, in Australia,” he continued.

Eslake also pointed that Australia has far less imprudent lending than in America, adding that “Non-conforming” loans (the closest thing to sub-prime in Australia) represent around 1% of all mortgages outstanding in Australia, as against around 15% in the US; while “low-doc” and “no-doc” loans account for around another 7% in Australia compared with about 15-20% of American mortgages being “Alt-A” which is their equivalent of “low-doc” or “no-doc”.

Eslake said house prices will only fall significantly if lots of owners have to sell them for whatever price that they can get.

“It is increasingly true that vendors are finding that they can’t get the prices they would like. But the more common reaction, among the vast majority vendors who are not selling because they have to, is not to sell, and to remain in the property for longer,”

But Eslake said prices of premium properties in the most expensive suburbs of Australia‘s major cities could experience large declines.

He pointed out that the premium housing sector is often determined by how much money a particular purchaser who desperately wants to live in a particular house or in one of those suburbs has access to and is willing to throw at it, rather than reflecting any objective assessment of its intrinsic value.

“There are clearly going to be fewer people in that position now, as a result of the global financial crisis.

“And some people who were in that position and who have also had large debts secured against share portfolios or their business interests may be forced sellers,”

Eslake said provided unemployment does not spike sharply higher as it did in the early 90s this is likely to remain the case – especially now that interest rates are falling, and falling a lot.

“If mortgage defaults rose only a little while interest rates were high and rising, provided unemployment remains low, why should mortgage defaults start rising when interest rates are falling?

“Of course, it may also be a long time before house prices start rising again. The key proviso in all of this is that unemployment doesn’t rise sharply, so that a large number of home borrowers don’t find themselves unable to keep up their mortgage repayments despite their wish to do so,” he concluded.

Australian Property Journal