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Why Australian house prices are unlikely to fall

24/10/2008

While the merchants of doom have been busy peddling their gloomy views of a massive drop in housing prices, one of Australia's leading economists said the dire prediction is unlikely to happen.

Saul Eslake, chief economist with ANZ, noted in his report that a number of analysts have for some time been predicting that Australian house prices would drop substantially. He cited the suggestion made by associate professor Steve Keen of the University of Western Sydney in an interview with the Sunday Age that house prices in Australia could drop by as much as 40%. Another prominent bear, Gerard Minack of Morgan Stanley, also warned during an interview with the ABC in March that house prices could fall by 50%.

"Not only do I hope these predictions will be proved wrong, I also think they will be," Eslake wrote in a report. "They (and others) are of course wholly correct in pointing out that Australian house prices are very high (relative incomes), both by historical and international standards, and that Australians have accumulated a lot of debt (again relative to incomes) in the process of pushing house prices to where they are. And house prices have already fallen significantly in some other countries - notably the US and Britain - where both house prices and household debt have previously risen by similar proportions as they have in Australia.

Eslake pointed out that despite these similarities, there are crucial differences between the Australian and American housing and mortgage markets.

"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," he said. "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, Eslake said that there is now a significant backlog of unmet underlying demand for housing.

"Australia also doesn't 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. 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

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