Australia ranks fourth in the global real estate risk list. Shall we dodge it?

Australia is one of the most likely countries in the world to clock real estate price falls, a new ranking shows, after prices have skyrocketed in the past two years.

Real estate prices are high relative to rents and incomes, the Bloomberg Economics survey found, although local experts warn that prices won’t necessarily fall far enough to get back in line with fundamentals.

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Australian property prices are at risk of a correction. (LOUIDOUVIS)

Australia ranks fourth in the OECD due to the risk of a real estate price correction, behind New Zealand in first place and just ahead of Canada, two other countries where real estate markets have been hot for years.

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Central banks around the world, including Australia, have cut interest rates to support economies during the pandemic, allowing buyers to borrow more and driving property prices higher.

As economies recover, interest rates are rising and real estate markets are beginning to slow.

In Australia, the largest cities are driving the downturn. Sydney home values ​​are down 1.4 percent from three months ago, while Melbourne is down 0.8 percent in the last quarter, based on CoreLogic data.

House prices Australia analysis real estate auction real estate market OECD
Five measures of ownership risk for OECD member and acceding countries. (OECD)

“The pandemic has caused a massive real estate boom, not just in Australia but worldwide,” said chief economist Dr. Shane Oliver of AMP Capital.

“House prices rose relative to rents and incomes… What’s happening now is it’s all reversing – the ultra-low rates we saw, which underpinned much higher real estate prices, are now reversing.”

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But just because house prices are high compared to incomes and rents doesn’t mean they will fall unless there is a trigger such as rising interest rates, banks making it harder to get a home loan or an increase of unemployment, he said.

He thought real estate prices were about 35 percent overvalued when compared to rents and adjusted for inflation, or 25 percent when compared to their long-term trend, but insists he doesn’t predict declines of that magnitude.

His base case is that prices will fall by 10 to 15 percent nationally and slightly more in Sydney and Melbourne, with a risk that national falls could be as high as 15 to 20 percent.

This would be greater than the 2017 to 2019 decline, but less than a simple comparison of property prices to rents would suggest.

“Saying it’s a bubble that’s going to burst has proven to be too negative a way of looking at things over the past 20 years,” he said.

Westpac senior economist Matthew Hassan expects real estate prices to continue to fall, but not to levels where they would align with fundamentals such as rents and incomes.

House prices Australia analysis real estate auction real estate market OECD
Property prices are high relative to incomes, but are unlikely to fall far enough to be in line with fundamentals. (DYLAN COKER)

“That’s why these measures are so fraught, they assume there’s a gravitational pull that captures these measures and we return to, and I don’t think that’s the case,” he said.

“It’s a funny old bubble that lasts ten years.”

When comparing property prices and rents, he said broad measures were not as appropriate when looking at the price of investment properties compared to rents, as these types of homes can differ significantly from the broader housing stock. Unit prices have not risen as fast as detached house prices during the pandemic.

Hassan said rising interest rates would affect most, if not all home buyers, but are not shown in the table. Credit growth is ongoing but not red hot and incumbents have paid off their mortgages ahead of schedule, he added.

House prices Australia analysis real estate auction real estate market OECD
Prices of detached houses have risen faster than units. (LOUISE KENNERLEY)

“International comparisons are always very tricky and the reason they’ve done it this way is that these are the measures for which we have the best internationally comparable data,” he said.

“The conclusions are more or less the same – New Zealand and Australia are both in a correction phase of their markets, and given our views on inflation and interest rates, that needs to work through and form a sizeable correction.”

PRD Real Estate Chief Economist Dr. Diaswati Mardiasmo said that while real estate prices are high compared to incomes, wages are now starting to rise.

And income measures don’t account for rising demand from an uptick in migration as borders reopen, or from aid for first-time homebuyers in recent federal and NSW state budgets, she said.

Prices would also depend on the supply of new housing as a construction boom struggles with shortages of materials and labour.

“The only reason the RBA is raising the spot rate is because they think the economy is strong enough to withstand all this,” she said.

This story first appeared in The Sydney Morning Herald

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