Peter Martin: housing bubble won't burst
Housing prices in Sydney and Melbourne will grow in the next year, then plateau. Peter Martin analyses a Fairfax survey of 25 top economists.
PT1M48S 620 349- Autoplay OnOff
- Video feedback
- Video settings
The roaring east coast property market is not a bubble that will burst any time soon say Australia's leading economists; in fact, they predict Sydney and Melbourne could enjoy strong growth this coming year.
An exclusive Fairfax Media survey of 25 leading economic forecasters reveals most believe house prices have risen for fundamental economic reasons – not over-exuberance from investors.
Steve Keen is one of the few economists warning of a bubble. Photo: Demetrius Freeman
They predict, on average, prices will rise by another 10.4 per cent in Sydney this year, and 6.4 per cent in Melbourne. If correct the continued surge is a headache for the Reserve Bank of Australia and the government as they weigh how to stimulate an otherwise sagging economy.
The forecasters – leaders in market economics, academia, consultancy and industry economics – were asked by BusinessDay if they believed an Australian city was experiencing a housing bubble, and if that bubble would collapse.
The majority of them contradicted the opinion of Treasury Secretary John Fraser, who warned last month that Sydney's property market was showing "unequivocal" signs of a bubble, along with up-market parts of Melbourne.
Positive signs: Real estate is tipped to keep flying. Photo: Rob Homer
But many still said they were concerned about the level of over-valuation, warning the situation could become problematic if the price momentum continues.
Economist Saul Eslake said further inflation of house prices is not doing any economic good and is actually doing social harm "by widening the gap between those who own one or more properties and those who don't", and by "locking out" an "increasing proportion of younger adults from home ownership."
He said he does not use the word "bubble" because there is no widely agreed definition of it, and because it is so emotionally laden, but he "absolutely" agrees with RBA governor Glenn Stevens and Mr Fraser's characterisation of Sydney property values as "stretched".
The survey also found most economists predicted the year that will likely lead into a federal election will be characterised by drift with below trend economic growth punctuated by soft wage and export increases, anaemic investment and little lift in household spending.
The economists argued house prices are being driven higher by exceedingly low mortgage rates, a relatively low unemployment rate, strong population growth, high demand from foreign investors, poor public transportation, and the capital gains tax and negative gearing regime.
Some believed prices will only be driven sharply lower by a much higher unemployment rate (above 8 per cent) and an increase in interest rates.
Only third of economists – 7 out of 25 – believe there is a housing bubble in Sydney or parts of Melbourne.
They blamed historically-low interest rates, poor government policies, and expectations of ongoing real price gains from investors and home owners.
Stephen Anthony from Industry Super Australia; Nicki Hutley from Urbis Consulting; Tom Skladzien from the Australian Manufacturing Workers' Union; and Steve Keen from London's Kingston University were among those who warned of housing bubbles.
HSBC's chief economist Paul Bloxham did not use the word "bubble" but said Sydney's housing market had "an exuberance that is worrisome" and he sees a "high risk that Sydney will see price falls".
Shane Oliver, AMP Capital chief economist, says the term "bubble" is being overused in Australia and is distracting voters from the real issues of overvaluation and expensiveness, but he believes Sydney's property market "does look bubbly" with prices high relative to fundamentals and strong price gains "looking a bit self-perpetuating, where buyers are getting in partly on the assumption that recent strong gains will continue."
Sydney featured in most answers about housing problems, rather than Melbourne.
A number of participants said Sydney's house prices have simply been playing catch-up to other cities and rebounding after a sustained period of very flat prices.
"Relative to the national average, Sydney prices are only now back to their long-rum premium of 30 per cent," BetaShares' David Bassanese said.
"Unusually low interest rates have helped push the house price to income ratio above past peak levels, but mortgage affordability is still close to long-run average levels."
The Housing Industry Association's Shane Garrett said it is "no coincidence" that the strong dwelling price growth in Sydney over recent years followed a decade between 2002 and 2012 during which the city's dwelling price growth was the lowest of any of Australia's eight capital cities.
"Overall, the level of dwelling prices in Australia's cities is well within normal territory with respect to household earnings, rents and mortgage interest rates," he said.
Warren Hogan, ANZ chief economist, said he does not expect sustained strong house price growth in coming years, nor a collapse in prices either.
"There is a severe underlying shortage of housing in NSW, reflecting around 10 years where surging population growth and household formation has outpaced new housing construction to a ratio of 3:2," Mr Hogan said.
"This has created an underlying shortage of around 125,000 dwellings."
56 comments so far
More comments
New user? Sign up
Make a comment
You are logged in as [Logout]
All information entered below may be published.
Thank you
Your comment has been submitted for approval.
Comments are moderated and are generally published if they are on-topic and not abusive.