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BOOM OR BUBBLE? BANKSA TRENDS EXAMINES AUSTRALIA'S HOUSING MARKET

Wednesday, 26 November 2014

The latest edition of BankSA’s economic bulletin, Trends, examines Australia’s housing prices and continuing claims of a price ‘bubble’.

Released today and conducted in conjunction with Deloitte Access Economics, the bulletin also examines cost of living pressures in South Australia and prospects for the State’s rural sector.

When it comes to living pressures facing South Australian families, BankSA’s Trends bulletin highlights some important positives, with the overall pace of inflation dropping dramatically in recent times, despite a slowing of growth in both wages and national income.

In the rural sector, the BankSA Rural Price Index shows that trends have been generally favourable for South Australia’s farmers in recent months, particularly for crop farmers.

However, amongst these findings, the Trends bulletin also reports that Australia’s overall global competitiveness ranking has slipped back to 21st in the world, down from 20th last year, and down from a recent high of 15th in 2009-10.

The report’s main article examines Australia’s property market and concludes that while some of the gains in property markets have been outpacing the fundamentals of late, the key measures of housing affordability and housing debt have been relatively stable for some time.

However this important point, the report states, has been lost amid a focus solely on housing prices, rather than a matching focus on falls in mortgage interest rates over time.

BankSA Chief Executive Nick Reade said the report suggests that while Australian house prices may be overvalued relative to those in the past, this is not the case everywhere.

“Simple measures of ‘fair value’ don’t seem to indicate that anything too out of the ordinary has been happening in Adelaide,” he said.

“Our Trends report suggests that as a nation we should want our regulators to be ‘alert but not alarmed’ on house prices, and managing the risks while supporting construction and related sectors to carry more of the load when it comes to national economic growth.”

Overall, BankSA’s Trends findings include:

  • Australian housing prices are not a bubble, but rather they have benefitted from two decades of good economic growth.
  • The latest trends - in which housing price gains remain strong yet national income growth has stalled and wage growth has dropped to record lows – mean that, on simple measures, housing does now appear to be mildly overvalued in Australia.
  • Yet this is less true of Adelaide’s housing prices where, although they have lifted notably in recent years, they do not seem to be out of line with the fundamentals.
  • Key measures of housing affordability and housing debt have been relatively stable for some time now. That stability is important, yet its importance has been lost amid a focus solely on housing prices, rather than a matching focus on falls over time in mortgage interest rates.

Trends shows that house prices are still rising at a rapid rate, despite the Reserve Bank warning about some of the associated risks.

“With around two thirds of all wealth of Australian families held in housing, it’s no wonder this is a topic we spend so much time thinking about,” said Mr Reade.

“With mining investment cooling, the economy is looking for other sectors to step up to fill the gap and drive growth, and housing needs to be a part of that transition.”

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