The world’s peak central banking authority has concluded Australia’s house prices have fallen over the past three years and could fall further, in new analysis that will surprise the stampede of investors piling into Australia’s overheated housing market.
The Bank for International Settlements has pointed out that real house prices in Australia — which strip out inflation — declined by about 0.5 per cent over the past three years, even if they have jumped 7.7 per cent in real terms over the past year.
“For a number of countries, current property prices are much higher than those implied by the historical relationship to rents,” the Basel-based organisation noted in its quarterly financial review released yesterday, singling out prices in Australia, Canada, Sweden and France.
“A priori, this could be a reason to expect a price correction in the future,” it said, lending support to local concerns that Australia’s house price growth could at least slow in coming months.
House and apartment prices in Sydney and Melbourne have surged more than 10 per cent over the past year as low interest rates fuel an investor-driven housing boom. Last week Reserve Bank governor Glenn Stevens ruled out further interest rate cuts for fear of “further inflating an already elevated level of housing prices”.
The Basel-based institution, known as “the central banker to central banks”, compared average dwelling prices to historical rents and household incomes over the most recent 15-year period.
Australia’s price-to-rents ratio was 50 per cent above the long-run average, while its price-to-income ratio was 40 per cent above the average.
“House price developments have displayed greater diversity across countries than they did in the aftermath of the crisis,” said BIS economists, who examined international house price movements up to March this year. In the past year real house prices fell 2.6 per cent in Japan and 5 per cent in Italy, but rose 9.5 per cent in the US and 6 per cent in Britain.
Less excitable local analysts won’t be surprised by the three-year fall in real Australian house prices. Research by Stephen Kirchner at the Centre for Independent Studies found Sydney house prices, which surged by 15.6 per cent over the year to March, had risen only 0.4 per cent over the past decade in real terms. “Much commentary on housing markets focuses on dramatic short-term changes in house prices, failing to put these changes in longer-term context,” he said.
“Because Australia has institutionalised a higher rate of consumer price inflation via a higher central bank inflation target than many comparable economies, Australia’s nominal rate of house price inflation will on average be higher than in other economies.”
This article first appeared in The Australian.