http://www.abc.net.au/pm/content/2008/s2286039.htm'Overvalued'...

http://www.abc.net.au/pm/content/2008/s2286039.htm

'Overvalued' house prices tipped to fall PRINT FRIENDLY EMAIL STORY
PM - Wednesday, 25 June , 2008 18:22:00
Reporter: Stephen Long
MARK COLVIN: The credit crunch isn't over yet, abroad or in Australia, and there are new signs today that it could get worse.

An analysis published today argues that house prices in Australia are overvalued by at least 20 per cent. It says that at some stage they must fall.

Already the nation's most reliable index shows record falls in house prices over the year to April, with American real estate down by an average of more than 15 per cent.

Economics correspondent Stephen Long

STEPHEN LONG: Karl Case and Robert Shiller are the brains behind the most reliable house price index in the United States, and they know a fair bit about bubbles.

Professor Shiller of Yale, famously predicted the tech wreck in a book called "Irrational Exuberance".

And years before the current crash, he and Professor Case, of Wellesley College, were arguing that the US housing market was in the grip of an absurd mania.

Karl Case made this wry observation on the PM program five years ago.

KARL CASE: Here's the way housing bubbles start. Somebody blows a whistle that only dogs and buyers hear.

STEPHEN LONG: The whistle sounded about a year ago amid the sub-prime mortgage meltdown.

The Case-Shiller Index tracks family house prices in 20 cities across the continent. In the year to April, all 20 fell, 13 of them by record margins.

The survey is showing by far the worst declines in its 20 year history and you need to look a long way further back than that to find a parallel.

ROGER BOOTLE: Oh, I think this is looking like the most serious housing slump in the States since the Great Depression. This just looks frankly horrific.

STEPHEN LONG: Roger Bootle is one of the renowned economists in the city of London, and London is also in the grip of a housing slump.

He thinks the US market has a lot further to fall.

ROGER BOOTLE: I think prices in the States on average have got quite a lot further to fall. And no one knows that answer to this of course, but having looked at the various metrics of value and affordability in the States and having looked at how far house prices has risen a decade or so, I've come to the conclusion that I think probably American house prices at the peak were between 30 and 40 per cent overvalued. So for down roughly 15 per cent now maybe, maybe we're approaching half-way through.

STEPHEN LONG: But Karl Case sees some cause for optimism in the latest numbers.

KARL CASE: There's no secret that house prices are down. But this month, meaning April and over March, eight cities, eight of our metropolitan areas out of 20, actually went up.

STEPHEN LONG: And although annual prices fell everywhere there were big regional differences.

KARL CASE: The ones that are doing the worst are Las Vegas, Phoenix, Miami - that's just dramatically over-built. If you take Cleveland, Boston, Chicago, Denver, New York, Atlanta, Seattle, Portland, Dallas and Charlotte, all of those cities are down below 10 per cent or below.

STEPHEN LONG: Some cities maybe worse than others but with house prices down everywhere in America, Roger Bottle Roger Bootle says he can only draw one conclusion.

ROGER BOOTLE: These economic processes take quite some while to work their way through and what's happening in the housing market is so dire that I still think that the outlook the American economy is pretty poor.

STEPHEN LONG: Property prices have suffered big falls in Sydney's south-west but elsewhere in Australia, many think real estate prices only ever go up.

Steve Johnson at the Intelligent Investor says, tell 'em they're dreaming.

STEVE JOHNSON: There is a serious correction that has to take place. Whether that takes place over a short period of time or a long period of time is anyone's guess.

STEPHEN LONG: Twenty years ago, an average house in Australia cost four times an average wage. Now it costs more than seven times and prices can't keep on outpacing wages over the long haul.

STEVE JOHNSON: It can't go on forever but who knows when it's going to stop. At some point, house prices and incomes have to have some relationship between the two.

STEPHEN LONG: Steve Johnson says the rental returns don't justify Australia's house prices either.

STEVE JOHNSON: Prices have been running up much quicker than rent on those properties for a very long period of time, and we're now at a situation where rental yields are around three per cent a year and interest rates are around 9.5 per cent a year, and we just don't think that gap is justified.

STEPHEN LONG: Doesn't that just say that rents are going to sky-rocket?

STEVE JOHNSON: We've done a lot of research on this fact and what that research has shown is that over a very, very long periods of time, the percentage of people's income that they spend on rent has been very consistent. It was 29.9 per cent of their income in 1901, and 30.1 per cent in 2001. So, we don't see that changing, we expect rents will grow in line with people's incomes over a long period of time and that will be a restricting factor on how quickly rents can grow.

STEPHEN LONG: So how much on the fundamentals are house prices overvalued in Australia?

STEVE JOHNSON: We've been very conservative in our assumptions and come up with a number that's 20 per cent. We think it's 20 per cent too expensive. But you can mount a fairly convincing argument that if prices feel by 50 per cent, you still wouldn't have a screamingly cheap property market in Australia.

STEPHEN LONG: Gerard Minack at Morgan Stanley comes up with similar figures.

And, for what it's worth, when he visited these shores, Professor Karl Case also though the Aussie housing market looked like a bubble set to burst.

KARL CASE: Well, anytime you see a market running way ahead of the rest of the economy, it can't go on forever.

MARK COLVIN: Professor Karl Case ending Stephen Long's report.