The property doomsayers are back. Not that they ever truly left...

The property doomsayers are back. Not that they ever truly left – in fact they’ve now been around for years in Australia. The predictions remain dire and keep on getting wheeled out, all the while regularly scaring the living daylights out of Australian households because of the concerns that theories about large dwelling price corrections inevitably create. Perhaps it’s a bit like backing the Cronulla Sharks to win a rugby league premiership – it’s never happened before but maybe if you predict it for long enough you may eventually get one call right. But that doesn’t make it any more likely!

And the calls seem to be getting more outlandish, with the latest prediction being for a 20 per cent drop in Australian house prices between now and the end of 2013 (House price hit yet to come, October 20). What is much more likely is that the property doomsayers are going to call it incorrectly yet again. Indeed, their renewed pessimistic hopes for a property collapse already look dashed as there are emerging signs of a return to price growth in Australia’s largest housing market, Sydney.

The truth is that many of the doomsayers have carved a niche for themselves by decrying Australian housing. However, they should, on occasion, be held to account. Their gloomy predictions are often accompanied by theories of economics such as debt-dynamics and go hand-in-hand with criticism of the top-tier economic institutions (and economists) who still believe in the role of supply and demand in setting prices. The reality is that the property doomsayers are likely to be wrong for a long time yet. It is the long-term trends in underlying demand and supply that drive housing prices.

We may experience wobbles around longer-term price growth and there will be some markets which experience significant dwelling price corrections, such as the Gold Coast at the current time and parts of Western Sydney in the mid to late 2000s. Overall, however, Australian housing is underpinned by very strong fundamentals.

First, at both the national and state levels, we have a substantial and growing housing shortage. Alongside the HIA Economics Group’s estimates of annual dwelling shortfalls and a large cumulative housing shortage are comparable estimates from Goldman Sachs, BIS Shrapnel, most of the trading banks, the National Housing Supply Council, the Reserve Bank and numerous other highly reputable sources. It doesn’t matter which way the numbers are cut, at best Australia adds to the nation’s housing shortage by around 20,000 dwellings per year. The competition from households for far too few dwellings has been a major driver of escalating house prices – and the situation will take years, and potentially decades, to reverse.

Second, despite various attempts to paint Australia’s house price-to-income ratio as growing rapidly, it has in fact been stable over the period since 2003, tracking at an average of just above four. Increases in the ratio prior to 2003 were due in large part to structural changes in the economy which increased the availability of housing credit. More importantly, Australian households remain highly able to service their housing debt, with arrears still at low levels when compared internationally.

Third, Australia’s economy is sound and the labour market relatively healthy. Even with the current volatility in the world economy we need to remember that, despite misconceptions to the contrary, it is China’s domestic economy that has been the Asian giant’s engine of growth rather than its exports. And China’s demand for iron ore has not been on a stable upwards trend but rather it has been growing exponentially. Basically, the amount of iron ore the country sucks in has been doubling every three years. The investment in Australia’s largest resource projects to help meet this and other demand is in the main locked in. In other words, no matter what happens in Europe, we have roughly a two-year period where business investment will contribute strongly to our growth.

Lastly, if all else fails, then Australia’s policy setters have always shown a willingness to adjust monetary and fiscal settings as required. In other words, we don’t live in a policy vacuum. Doomsayers have often used this factor as an excuse when their predictions have turned out to be wrong: the attitude seems to be 'oh yeah, I would’ve been right but the government put in place a stimulus package”. Using fiscal and monetary policy to stimulate the economy when needed is entirely appropriate and the prospect should not be ignored when expressing a future outlook.

A couple of years ago talk of an impending (at one point the term ‘imminent’ was bandied around) price crash was rife, yet it didn’t materialise. Justification as to why the crash didn’t happen has subsequently been far from convincing. What such talk does achieve is to spook households who value their home not only for its material worth, but for the fact that it is a roof over their heads under which they base their work, rest and play as part of the Australian way of life.

A claim of a 20 per cent fall in Australian house prices (assumedly the prediction refers to a 20 per cent fall in the nation-wide median house price) between now and the end of 2013 is, in the vernacular, 'way out there'. In economic terms the claim can be shot down on both theoretical and empirical grounds, but there is a risk that doing so gives more oxygen to such a claim when instead it should be doused.

Everybody is entitled to their opinion, but individuals should refrain from frightening people with opinions that by their very nature generate scary headlines, but that fail to transpire. For mine, if Australian house prices do fall by 20 per cent between now and the end of 2013, then you can sign me up for five of them!

Andrew Harvey is a senior economist at HIA Economics Group.