Whither house prices?

Death of the McMansion?

Want to hear some good news? Amid the sharemarket turmoil, street riots and other portents of impending apocalypse, relative calm has descended on the Australian housing market. Home affordability has improved.

The Reserve Bank’s latest statement on monetary policy says house prices fell by about 1 per cent in the June quarter and 2 per cent over 2010-11. Sydney was the only capital to eke out positive annual growth in prices – just – while prices in Perth and Brisbane fell by 5 or 6 per cent, to be no higher than they were in 2007.

The national median house price is now about five times average household disposable income on the Reserve Bank’s preferred (but hotly-contested) ratio, down from a peak of nearly six times in the early to mid-2000s.

House prices have defied the predictions of property bulls, who peddle property as the best get-rich-quick scheme in town, and property bears, who have forecast an imminent 40 per cent decline in house prices. We have seen nothing like the mass destruction of wealth in the US and other countries, including Britain. But nor are rising prices continuing to push housing further beyond the reach of young people.

For now at least, property is treading a middle path, in which prices move sideways or down, and affordability improves with each wage rise. Australians, it seems, are slowly but surely unwinding their debt-fuelled property obsession.

Why the change of heart? The frenzied love affair with bricks and mortar from the 1990s to mid-2000s was based on a halving of nominal interest rates, which allowed us to borrow twice as much. Rates have now stabilised and households are up to their eyeballs in debt. This one-off adjustment complete, there is not much further households can go to push up prices and still service their debts. In the long run, house price increases should broadly match income rises and this is likely to be the case from now on.

The vast majority of us will continue to aspire to property ownership. But we’ve become more realistic about the lengths we will go to attain it. The property developer Stocklands has sounded the bell on McMansions, saying the size of new houses has peaked. Bigger houses were one reason higher home prices could be justified. Now that has plateaued too.

The Reserve Bank has house price growth right where it wants it – not too hot, not too cold, but just right. But could this goldilocks scenario turn sour? What would it take to see the bears rampaging home?

A significant slowdown in economic conditions is one possible, if remote, threat. A sharp rise in joblessness would mean more forced property sales at depressed prices. But yesterday’s jump in the jobless rate from 4.93 per cent to 5.07 per cent, rather than signalling the beginning of a trend, arguably supports steady house prices.

It does not provide the Reserve Bank with the immediate trigger for an interest rate cut, as some excited sharemarket souls envisage. But importantly, it does push us above the 5 per cent jobless rate that economists say is compatible with low inflation. This slight slackening in the labour market means less pressure on the Reserve Bank to increase interest rates to stop wages rising too fast. And that makes life easier for home borrowers.

Another potential disturber of the property peace would be if investors were to suddenly lose confidence in property as an investment. Frustrated by the lack of growth, they could decide to sell at a loss. But the present sharemarket volatility makes this less likely – where else are they going to put their money? Housing remains by far the most tax-preferred investment in Australia and this is not likely to change any time soon. For now at least, it looks as though investors are sitting on their assets, collecting rent and deducting losses and waiting for the storm to pass.

Finally, it is possible a freezing of the international financial system could squeeze Australian banks’ funding costs and force interest rates higher. But as things stand, the banks remain well-funded and extremely profitable, as shown by the Commonwealth Bank’s latest record $6.8 billion annual profit. Even if borrowing costs did rise, the Reserve Bank could quickly step in with lower interest rates, as it would also do if economic conditions deteriorated quickly.

So, for now at least, property remains in a deep slumber and the dream of home ownership takes a step back from the realm of fantasy.

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