AUSTRALIAN house prices are massively out of whack and will be brought back to earth, an expert says. In an analysis of house price busts in the OECD since the 1970s, International Monetary Fund economist Prakash Loungani told a conference in Washington that house prices would fall much farther and for much longer, Dow Jones Newswires reported.
Likening the current cycle to a roller-coaster which needs to come down from a steep hump, Mr Loungani said Australia was one of the countries suffering the largest distortion between house price values and average incomes, as well as the most significant gap between price-to-rent values. Measuring historical peaks and troughs in OECD countries, Mr Loungani said despite an adjustment having already taken place, “we shouldn’t declare victory too soon”. “We’ve had a fresh shock from what’s happening in Europe,” he said.
Not relevant here, says Australian economist
But yesterday, an Australian property analyst said the price-to-income ratio analysis was “fundamentally flawed” as a measure of housing affordability. “International comparisons of house price to income ratios have been widely used to suggest that Australian house prices are significantly overvalued,” ANZ’s head of property Paul Braddick said in a research note.
“These analyses … explicitly ignore a key component of the housing affordability equation – interest rates,” Mr Braddick said. Housing affordability was underpinned by debt servicing levels, of which interest rates were a key driver.
Mr Braddick said housing affordability and the sustainability of current house price levels were “extremely complex issues”. “Drawing conclusions from simplistic aggregate metrics such as house price to income ratios is very unwise,” he said.