A built-in bonanza for house prices

The current stock market turmoil gains the headlines but our sleeper is the Australian housing market, which on a global basis has suffered a considerable correction.

As a result, the lower Australian dollar and the record-low interest rates have the potential to boost the house prices markedly.

Australian house prices have been much higher than the US for many years but over the last 12 months we have seen the gap narrow by more than 20 per cent (New home sales hit 18-month high, July 3).

According to the Knight Frank global house price index, Australian house prices over the year to March 31 have risen 2.6 per cent while US house prices have risen by 10.2 per cent. But the Australian dollar has fallen almost 15 per cent – we have taken part of the value correction on the currency’s chin.

Our biggest overseas buyers of housing are the Chinese and as I pointed out last month (Haunted housing, June 26) Beijing, Shanghai and Hong Kong dwelling prices have risen by between 23 and 28 per cent in the year to March – around 10 times the Australian rate. Add to that the Australian currency decline and that means that our dwellings have fallen well over 30 per cent compared to the major Chinese cities. Those Chinese who invested here have been battered in the last year, particularly when compared to the home market. We can therefore expect the Chinese nervousness in the Australian dollar currency market to curb house buying interest in the short-term. In time the better value will re-kindle interest.

And the vast number of unoccupied dwellings in China would make any Chinese property investor want to hedge bets.

Australia is going to see a change in geographic growth emphasis as the mining investment book runs down and some mines are shut. The action returns to the eastern states including Brisbane despite the Queensland coal problems.

If the election results in a clear majority I think we will see a rise in confidence as our low interest rates start to kick in, helped by the lower dollar.

According to BIS Shrapnel it will be the Sydney housing market that will start to rise first. I think they are right because our largest city has the most pent-up demand. But Melbourne and Brisbane will also follow once Sydney begins to move.

When the housing market starts to rise it multiplies confidence in communities. That will, of course, halt interest rate reductions but I believe that the stimulatory boost that comes from lower interest rates has gone. In fact at current levels lower interest rates can have the reverse affect because they make people nervous and become simply a way of transferring wealth from savers to borrowers. And the savers are older people who, unless they have substantial savings, are also spenders – and they are adjusting their housing to suit their different lifestyles.

On a global basis, we have seen a substantial correction in the Australian housing market, which when there is political stability, should stimulate activity.