The latest on house prices

    Andrew Pegler – 10 June 2011


    Is that the pitta patter of a big drop I can hear coming down the stairs?

    It’s part of Aussie folklore now, that we dodged a bullet during the GFC. But if you ever get a nagging feeling that we didn’t dodge it permanently, that our desperate cleverness just temporarily propped up our house of cards, it might please you – or not – to know some pretty smart people feel the same way.

    One of those is economist Steve Keen, who has predicted house prices will plunge by 30% to 40% over the next ten to fifteen years. He has even staked his reputation on a high, single-digit drop (close to 10%) over the next twelve months.

    Bunkum or wisdom?

    If you ask me, it comes down to how you measure demand – for housing. Regular readers will be all over this like a rash: all things being equal, if demand rises, so does the price. If demand drops, so does the value of your property.

    So how strong is housing demand right now? Business Spectator recently set Steve Keen onto another economist, Harley Dale, from the Housing Industry Association. It was a duel at ten paces, mano-o-mano (although very civil). The discussion got interesting when they tackled my pet topic: housing demand.

    Harley Dale, who gets paid by the housing industry, argued prices would be flat to moderately lower for the next year. He said rising demand, caused by a strong labour market and income growth, would be neutralised by upward pressure on interest rates and ‘post-GFC nervousness’. (New medical condition, anyone?)

    But Steve Keen wouldn’t have a bar of it. He argues housing demand has got nothing to do with income or population pressures. He says people don’t buy houses. Say what? You heard right. He clarifies: people with mortgages buy houses. Therefore, the key driver of housing demand and prices is not rising income – it’s rising debt.

    Which gets you thinking. The GFC was all about banks taking on too much debt. And right now it’s a fact, ladies and gents, that Australians have higher levels of household debt than Americans. And as we move to reduce that debt, or are forced to by rising interest rates, demand for housing – and therefore house prices – will fall along with the debt levels.

    So are we looking at big price drops or not? Anyone who tells you ‘for sure’ has either invented a working prototype of a crystal ball, or is just making an educated guess. But one thing does seem highly likely: there’ll be no good news for home owners. Housing prices will be flat, slightly weaker or downright terrible. For those with mortgages, let us hope it’s not the latter.