Australian house prices are unlikely to slump, says economist

The chief economist at ANZ Bank, Saul Eslake, has provided a ray of sunshine for property owners with his bold pronouncement that Australia is unlikely to experience an across-the-board fall in house prices as has occurred in the United States.

The chief economist at ANZ Bank, Saul Eslake, has provided a ray of sunshine for property owners with his bold pronouncement that Australia is unlikely to experience an across-the-board fall in house prices as has occurred in the United States.

While some particularly bearish economists have tipped local house prices falling between 30% and 40%, Eslake says concerns about how high house prices are relative to income have been overdone.

“First, 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,” Eslake writes. “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.

“Second, Australia does not 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.”

Eslake believes the key to averting a widespread collapse in house prices is to avoid a situation where a large number of home owners are forced to sell their properties. This situation usually occurs when unemployment rises sharply, but Eslake believes there are two main reasons that the jobless rate won’t get out of control.

First, businesses are not under the same pressure from high debt, interest rates and labour costs as they were in the early 1980s or early 1990s. And second, Australia’s ageing population means there is a shortage of skilled workers.

There are a few areas that Eslake is worried about, including:

• Areas where non-traditional mortgage lenders made large amounts of low-doc loans, which are more likely to go into default. This is already happening in western Sydney.
• Prestige property in Australia’s most expensive suburbs. Homebuyers just won’t throw money around like they used to.
• Areas that have a high concentration of investment properties, as mum and dad investors decide to exit the market.

“Here’s the simple but critical point; house prices will only fall significantly if lots of owners have to sell them for whatever price that they can get,” Eslake writes.

He says that provided unemployment in Australia does not spike sharply higher, that situation should not arise, “especially now that interest rates are falling, and falling a lot”.

Let’s hope he is right.

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