BIS Shrapnel: House prices poised to rise, not burst

AUSTRALIAN house prices will rise for the next three years on the back of the country’s robust economy, according to a BIS Shrapnel report.

BIS Shrapnel: House prices poised to rise, not burstThe report, commissioned by QBE and written by BIS Shrapnel, forecast median house price growth of 20 per cent in Perth, Sydney and Adelaide over the next three years, with prices in every major city in Australia rising by 9 per cent or more.

The survey comes at a crucial time in sentiment surrounding the Australian housing market. Recent data shows pricing in the market is starting to slow, while international investors and even the International Monetary Fund have recently argued the local housing market is overvalued.

As prices have dipped, some economists and investors — most notably GMO chief investment strategist Jeremy Grantham — have even argued a housing bubble was being created in Australia, something both BIS and QBE dismissed at a press conference.

“We aren’t in for a period of phenomenal growth but we’re certainly not in for a 20 per cent drop either,” said BIS managing director Robert Mellor.

Mr Mellor argues a string of six rate hikes in seven months by the Reserve Bank of Australia in late 2009 and early 2010 has more to do with the recent slowdown than anything else. Earlier this month, RP Data-Rismark reported Australian capital city house prices fell 0.2 per cent in August from July.

However, should a correction occur, mortgage insurers such as QBE would be arguably most exposed to the drop.

Ian Graham, chief executive of QBE, said the firm hasn’t made any broad changes as the concern has picked up, though he noted the firm went through some changes to tackle the ongoing credit issues during the global financial crisis.

“Any adjustments we’ve made have been at the margin,” said Mr Graham.

In addressing the slowdown in prices, Mr Mellor said even though a first-time home buyer’s grant pushed some sales up to the early part of this year, he expects first-time home buyers to return to the market with vigour late this year and early next year partly thanks to a recent pause from the RBA.

The RBA has now paused with rates in its last five meetings, including last week when it surprised economists by keeping rates steady at 4.5 per cent.

In dismissing the idea of a bubble, Mr Mellor noted than unlike the bubble in the US, Australian housing prices haven’t moved upward continuously, adding prices were still 12 per cent to 15 per cent below peaks from 2003.

Still, the local housing market doesn’t come without risk, according to BIS. Should the economy heat up even more than BIS forecasts, the impact that move would have on interest rates could damage an already somewhat stretched affordability issue in Australia.

“The big risk is affordability,” said Mr Mellor, who said affordability wasn’t a short-term risk but could turn into one by 2013 should rates reach above 8 per cent.

The report come on the heels of a senior central bank official last week saying the housing market has already cooled off. Luci Ellis, head of financial stability at the RBA, said dwelling prices have tapered in recent months and housing credit has slowed, most notably to first-time home buyers.

“Loans to property investor households have not surged the way they did during the more buoyant, rather speculative period in the early 2000s,” Mr Ellis said.

While a temporary cooling of house prices will be welcomed by those worried the market place is overpriced, it has done little to calm those concerned about a bigger correction.

Set for release tomorrow, Fitch Ratings will conduct stress testing on the housing market after being inundated with inquiries both locally and abroad on the sustainability of prices.

SOURCE: The Australian |

  • Geoffrey Rogow
  • From: Dow Jones Newswires
  • October 12, 2010 1:39PM

Originally posted at the : Nerang First National Blog

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