houses overpriced, and stuck

Houses overpriced, and stuck
By Turi Condon and David Uren
June 09, 2005
From: AAP


HOUSE prices are at least 25 per cent overvalued and may not start to rise again for another decade.
The nation's biggest fund manager said yesterday it would take until 2015 for rents and wages to catch up with the boom in house prices, and warned there would be no rise in the housing market until they did so.

"The ratio of house prices to wages is running at record levels at the moment compared with every other country on the planet," AMP Capital Investors chief economist Shane Oliver said.

As the Reserve Bank yesterday confirmed it would keep interest rates steady for another month, Dr Oliver said Australian houses in relation to wages were more than 2.5 times more expensive than houses in the US and 1.4 times more expensive than in Britain.

"We don't have bigger houses and we don't have more holiday homes -- the price difference is simply because we have more expensive homes," Dr Oliver said.

"While our tendency to congregate in large cities may be a factor, the expensive nature of Australian housing is more likely due to the fact that our housing is very over-valued after an extended bubble."

Dr Oliver likened the current bubble to those in the 1920s and mid-1970s, but said it was unlikely the property market would face any severe downturn.

"In the absence of sharply higher interest rates or unemployment, both of which seem unlikely, Australian house prices are now in for a decade or so of stagnation as rents and wages catch up to justify current prices," he said.

With most analysts now expecting there will be no change in interest rates for the rest of the year, figures released yesterday show the housing market cooled in April, following the 0.25 percentage point increase in interest rates in March.

New loans for home purchases dropped by 1.7 per cent in April, bringing to a halt a rally in new home lending that had been under way since October last year.

Lending to investors has dropped a long way below the monthly peak of $7.1 billion reached in October 2003, but has been holding up well for the past six months and appears unaffected by the March rate rise.

Investors borrowed $5.8 billion in April, 1.9 per cent more than in the previous month and 10.6 per cent above the low reached last October.

The resilience of investment lending includes commercial developers building apartment blocks and individual investors buying established houses to rent.

Individual investors borrowed $4.8 billion for property in April, level with the lending for the past five months, while investment in new apartment blocks hit a five-month high of $623 million.

Macquarie Bank's head of research, Rod Cornish, said the market would be slow, "but I can't see it being stagnant for the next 10 years".

"The early 90s was associated with one of the worst recessions in 60 years and we didn't see a decade of flat house prices," he said.

Real Estate Institute of Australia president Ian Wells said the market was stabilising.

With the Reserve Bank decision to keep interest rates on hold, the market was in for more of the same, he said.

"We don't see any major upswing, but there is no sign of a more significant downturn, either."

Some economists expect lending to individual investors to ease over coming months as the increase in the top tax threshold will make negative gearing less attractive for many higher-income earners.

But an expectation that rates may rise no further will give the market support.

"We don't expect the recent levelling off in home lending to persist for long, given the risk of near-term rate hikes seems to have passed," UBS chief economist Scott Haslem said.

The fall in lending in April was concentrated in the market for established homes, which dipped 2.5 per cent. Loans for new construction rose by 2 per cent and are now 4 per cent higher than they were a year ago.

Australian Property Monitors research director Louis Christopher said it was difficult to anticipate the trend in prices over the next decade. "More than likely we will see growth in line with inflation or just slightly above inflation."