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.

1 comment:

  1. I think it's pretty clear to all with sense that house prices are grossly overvalued. I was particularly disappointed/disgusted with McGowan during the State election when he tried to capitalise on the issue, but his only contribution was to ease some restrictions on builders labourers. It ignores the whole issue of Government meddling in land releases, specifically the disgraceful record of his own political mentor, Geoff Gallop (and Gallop's puppet meister McGinty) in creating this mess here in WA.

    The truth be told, no government will do much to remedy the situation now it has gotten out of hand. It was even too late by the time Carpenter became Premier. If they release sufficient amounts of land on the periphery of Perth to cause a reduction in prices, it could well cause a true real estate crash. No government will dare do this, at least not now. Firstly, it would destroy their standing with existing home owners, who will suddenly feel poorer (and certainly all those who bought since 2005 will be staring at negative equity). But secondly, most MPs own investment properties, and hence have a vested interest in high and rising property prices. That just makes things so much worse, as they will not try for a "soft landing" but try to put off any price correction until panic really starts.

    Gorgon has already reached it's peak employment, and numbers will decline from now. Wheatstone is likewise close to it's peak. With other mining/resource developments either on hold, or stalling, the employment "bonanza" which is supposed to attract all these immigrants to the West to keep prices up has been fading for the last 12 months. Not only are there fewer jobs, but the rates and salaries are lower, and the contract periods are shorter. I work with a number of Americans, and they all tell me they used to hear the old mantra "house prices never, ever fall" repeated ad nausium until they crashed! Only Travs seems to think that Australian's have a special right to be exempt from this.

    The main issue the IMF has only touched on is the way that a housing boom destroys a productive economy. Japan is the most obvious example. We keep being told about the "Dutch disease" in that our resources boom was going to destroy manufacturing and the rest of the economy. However the housing boom has been more destructive. Why the dangers of run away house prices forcing up costs, forcing down living standards (most house owners are owner/occupiers rather than investors), and distorting investment have not been investigated before is beyond me. But it is clearly a much bigger deal in Australia than the 7% of the economy represented by Mining (OK it's bigger than that in WA).