Overvalued, yes, property bubble, no
A new research paper compiled by staff at the International Monetary Fund (IMF) has found what many of us already guessed – Australian house prices are overvalued. But while Australian house prices might be extravagant, a dramatic correction is unlikely, the paper concluded.
You only have to cast a glance at the daily paper or the evening news to observe the recent and somewhat growing concern that Australia faces a house price bubble.
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Indeed, housing affordability in Australia is somewhat depressing, and the cost of purchasing property remains significantly out of tune with our incomes.
Average home prices in Australia are 6.8 times the annual median household income, compared to just 2.9 times in the United States for instance, according to the annual Demographia International Housing Affordability Survey. Just recently an American who has recently set up camp in Australia contacted me to voice his incredulousness at this very point.
But while international property figures have been quick to label the Australian market as a bubble waiting to pop, most Australian industry leaders have been quick to rebuke such claims. And the IMF’s report comes as a welcome pillar to the argument that Australian house prices do not face a dramatic collapse.
According to the IMF report, Australian house prices are overvalued by 5 to 10 per cent. In the past 20 years, prices have increased by almost 120 per cent, faster than most international counterparts, authors Patrizia Tumbarello and Shengzu Wong wrote.
Following the 2008 downturn, the housing market rebounded between the second half of 2009 and mid-2010, the report said, with house prices continuing to record double digit growth. Since then house prices have indeed been flat, the report found.
Strong population growth and rising incomes, among other things however, will continue to underpin the market, according to Tumbarello and Wong.
“Looking ahead, some country-specific mitigating factors suggest that any house price correction in Australia is likely to be orderly,” they said.
Australia’s strong terms of trade was also included as a key supporting factor of our market as well as the ongoing insufficient supply of dwellings.
"The increasing scarcity of land in main urban centres in Australia is an important factor,'' the authors said.
"The fact that such a high proportion of Australia's population live in two major cities tends to drive up average house prices.''