We'll all be rich

Not that I place much reliance on the various market predictions that are constantly being released by all and sundry, but a new report "Housing Outlook for 2010 to 2012" released by QBE Lenders' Mortgage Insurance is predicting a 21% rise in Sydney house prices by 2012. If our two properties saw a price rise of 21% my net worth would get a $170,000 boost over the next couple of years! For many home owners such an increase would not increase their disposable wealth, as they have to live somewhere, so any profit made when selling their current home would be offset by the higher cost of the new house they move to. The exception to this is where people make a "sea change" (or "tree change") and sell their city house to move to a country town on the coast, or inland, where prices tend to not appreciate in real terms.

In any event, many other property 'analysts' have questioned the forecasts. For example, Louis Christopher, the managing director of SQM Research, has said that "Given the level of housing debt we have in this country, and overall private debt to GDP which is at quite a considerable high, it's actually near a record high at this time, it means that... borrowers are very susceptible to interest rate rises, probably more so than at any time in the last 30 years,".

"This time round with the cycle, it probably won't take interest rates to get to 9 per cent to stall the market, or to make the market fall, it'll probably take something less. And that's one thing I question the BIS numbers on is what happens if we see interest rates at that time [in two or three years] at say 8 per cent or 9 per cent, what would that do to their forecasts?".

Mr Christopher believes that over the long-term, house prices can only sustainably rise at a similar pace to incomes, otherwise the economy becomes vulnerable to debt-fuelled asset bubbles. Well, who doesn't? The question is how long do you have to wait for "long term" trends to overcome short-term deviations? Moomin has plotted real house prices vs. income, which shows a sustained trend for house prices in Australia to rise in real terms compared to incomes since the 1960s. But a lot of that real increase is due to houses evolving from a fibro, one level, three bedroom cottage into the current "McMansion" houses with multiple bathrooms, a "home theatre" and much higher floor areas. Also, real incomes have increased over the past decades in Australia, so a larger percentage of disposable income can be devoted to servicing housing costs. So, although there must be a limit to how fast real house prices can grow compared to real incomes, it's not clear that the ratio of real house price (or more accurately real housing cost eg. interest payments) to real income can't change significantly over time.

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