Jumpy about house prices

House prices and interest rates are obsessions of many for whom the family home remains the asset - apart from some meagre superannuation savings and the age pension - likely to provide them with security in their old age. So when there is a forecast that house prices could fall, people pay attention.

By InvestSMART · 21 Mar 2012

By InvestSMART ·
21 Mar 2012

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That's what happened earlier this month when Standard & Poor's issued a report saying that Australian house prices could fall more than 5 per cent in 2012 if Chinese growth dropped to 8 per cent.

S&P said under the worst-case scenario, where China grows only 5 per cent, Australia would go into recession and house prices would fall 20 per cent.

About the same time as the release of the report, China's Premier Wen Jiabao announced his government would target a GDP growth rate of 7.5 per cent in 2012. Market watchers noted that the Chinese economy always grows faster than the target growth rate and most expect the world's second-biggest economy to expand about 8 per cent this year.

With strong demand for housing and an undersupply in most capital cities, analysts say it would take sharply higher unemployment to move prices significantly lower.

The chief economist at AMP Capital Investors, Shane Oliver, is expecting house prices to fall between 3 per cent and 5 per cent in the first half of this year before starting to recover in the second half of the year.

But China is not a factor in that. The reasons for his view are that housing affordability and interest rates are still high and people are worried about their job security.

In his opinion houses are over-valued about 25 per cent as a result of home buyers borrowing up to the hilt before the GFC.

Oliver cannot see any of the triggers for a collapse in prices occurring, such as sharply higher interest rates or state governments releasing a lot of land.

China's economy will slow, Oliver says. But the 8 per cent is still a strong growth rate and will underpin reasonably strong commodity prices and not be a problem for the economy or for house prices. But the China factor cannot be ignored.

"We are vulnerable in Australia because of the high level of household debt and high house prices-to-income ratios," he says.

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Frequently Asked Questions about this Article…

Could Australian house prices fall in 2012, and how big might any drop be?

The article says some forecasts expect falls. Standard & Poor's warned prices could fall more than 5% in 2012 under one scenario, and up to 20% in a worst‑case scenario if China slowed to 5% growth. AMP Capital’s chief economist Shane Oliver expects a more modest 3–5% fall in the first half of the year, followed by a recovery in the second half.

What did Standard & Poor's (S&P) say about house prices and the China growth outlook?

S&P produced a scenario analysis linking China’s growth to Australian outcomes: if Chinese growth dropped to 8% it saw the possibility of house prices falling more than 5% in 2012, and in a worst‑case scenario where China grew only 5% it said Australia could go into recession and house prices could fall about 20%.

How does China’s economic growth affect Australian house prices and the broader economy?

The article explains China’s growth matters because it underpins commodity prices and Australia’s economic strength. Analysts note slower Chinese growth would weigh on commodity prices, but an 8% growth rate is still strong and would help support commodity prices and reduce the threat to house prices. S&P’s scenarios show sharper slowdowns would have bigger impacts.

What is AMP Capital’s view on short‑term house price movements and the reasons behind them?

AMP Capital chief economist Shane Oliver expects house prices to fall 3–5% in the first half of the year then start to recover in the second half. He attributes the near‑term weakness to high housing affordability issues, high interest rates, and concerns about job security—not to China.

Are Australian houses considered overvalued and why?

According to Shane Oliver quoted in the article, houses are about 25% overvalued. He says that is the result of home buyers borrowing heavily before the global financial crisis (GFC), which pushed prices up relative to fundamentals.

What factors would need to change to cause a sharp collapse in house prices, and are those triggers visible?

The article notes obvious collapse triggers would include sharply higher interest rates or state governments releasing a lot of land. Oliver says he cannot see these triggers occurring, and analysts also say strong demand and undersupply in most capital cities mean it would likely take sharply higher unemployment to move prices significantly lower.

How does household debt and price‑to‑income ratio affect Australia’s vulnerability to a housing downturn?

The article highlights that Australia is vulnerable because of a high level of household debt and high house‑prices‑to‑income ratios. Those conditions make households more exposed if incomes or employment fall or if interest rates rise.

What indicators should everyday investors watch if they’re worried about house prices?

Based on the article’s points, everyday investors should monitor Chinese growth headlines (which affect commodity prices), domestic indicators like unemployment and job security, interest‑rate movements and housing affordability, and developments in housing supply—because these are the main factors analysts cite as influencing house‑price direction.