Wednesday, June 11, 2014

IMF says our Housing Costs Are Out Of Wack

Interesting story in The Australian 12-06-2014

House prices to income ratios.
House prices to income ratios. Source: TheAustralian
HOUSING is less affordable in Australia than in any other country except Belgium, the International Monetary Fund says, warning that rising prices might point to an unsustainable boom. 

The IMF is stepping up its analysis of housing markets around the world, having concluded that property booms and busts were implicated in two-thirds of the past 50 banking crises. “The era of benign neglect of housing booms is over,” deputy managing director Min Zhu said.

House prices, rents and incomes should, in theory, all move in tandem.

On this basis, the Australian real estate market is one of the most exposed in the world.

The ratio of prices to individual incomes is one-third more than its long-term average, the IMF estimates.

Canadian house prices are similarly inflated, while prices in Belgium are almost 50 per cent higher, relative to incomes, than average.

“In the long run, the price of houses cannot stray too far from people’s ability to afford them,” the IMF says. 

If ratios between house prices and rent get too far out of line, people will switch between buying and renting, eventually bringing the two into balance, it notes.

Presently, the ratio between house prices and rents is 50 per cent more than the long-term average in Australia.

Such indicators provide only a broad indication of housing market valuations, with issues such as credit growth, household indebtedness and the nature of housing finance in a country also having an effect.

The fund says there is no single indicator for when a housing market is set for a fall but if a range of indicators, such as credit growth and housing affordability, are all pointing to an overheated market, authorities should take action.

The IMF argues for regulatory intervention to slow house price booms, such as demanding that banks hold more capital against any housing loans, or imposing limits on how much people can borrow against the value of their house or their income.

The Reserve Bank has been sceptical about these strategies, arguing that regulation has limited effectiveness. If interest rates are too low, people will find ways to borrow excessively.