Australian Real Estate Market Fundamentals do not suggest a likely 50 per cent drop in house prices – REIA

he Real Estate Institute of Australia (REIA) have suggested that Mr Edward Chancellor was being too simplistic in his analysis of the Australian Real Estate Market. REIA do not agree that house prices are more than 50 per cent above their fair value.   Mr Chancellor’s comments compare house prices to income only and does not take into account the Australian Housing shortage.

We need to consider other factors which contribute to the affordability of housing, such as interest rates and expected population growth, said REIA President, Mr David Airey.  From September 1996 to December 2007, house prices in Australai have exhibited four distinct phases.

The table below shows these phases:

Period House
Prices Quarterly Average Growth Rate%
Monthly
Average Mortgage Rates%
Median
Family Income Quarterly Average Growth Rate%
Average
Annual

Stock Returns%


Dec96-Sept00

2.1

7.0
0.9
9.8

Dec96-Sept00

3.9

6.8
1.3
0.1

Dec03-Dec08

0.8

7.8
1.3
11.4

Dec08-Dec09

2.9

6.1
1.5
-13.6

The periods of higher price growth (96’ – 00’ and 08’ – 05’) have been accompanied by lower interest rates and higher income growth rates. Lower house price growth rates have been accompanied by higher interest rates and lower income growth rates.

Over the past 18 months Australia has experienced a period of historically low interest rates in response to the Global Financial Crisis (GFC), as well as above average income growth. This has resulted in a strong price growth recently.  Over time prices will stabilise but there is no indication anywhere in the Australian House Pricing model of an expected 50% drop in prices.

The report also ignores that currently houses prices are experiencing the effects of demand from higher population growth, which is not expected to ease for quite some time.

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