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Published 08 February 2012 13:57, Updated 09 February 2012 05:03
Earlier this year, self-proclaimed millionaire, “life coach” and US real estate adviser Jordan Wirsz predicted Australia was headed for a “property bloodbath” in which house prices would plummet by as much as 60 per cent over the next five years.
Wirsz, who claims to advise Fortune 500 companies about real estate, was extensively quoted in the Australian media, saying “right now is not a time to be buying real estate in Australia”.
His reported theory was that Australia’s property market will be inundated with sellers next year, causing investors to bail out, and thereby prices to plummet. “I’m bearish about world real estate but I couldn’t be more bearish about the Australian market,” he was quoted as saying. “There have been corrections but they don’t hold up to the scale of what is coming.”
But 60 per cent falls in five years would suggest Australia would have a bigger housing downturn than Japan and the United States (see graph).
It’s not the first time Australian house prices have been called overvalued. The IMF has previously predicted a “mild overvaluation” in house prices. And based on a long-run average price-to-rents ratio of 56.1 per cent, The Economist said Australian house prices were the most overpriced in the world.
But Australian property experts say Wirsz’s predictions have no solid basis and are far-fetched. Even those who have a bullish view of what’s going to happen to the property market don’t see a bloodbath on the horizon.
“It’s sheer nonsense that house prices are going to fall 60 per cent that quickly,” says University of Western Sydney associate professor of economics Steve Keen. “House prices are a slow train wreck, not a fast one. [Wirsz] is up with the fairies.”
Keen last year said house prices had hit their peak in June 2010, when the median house price in Sydney was $627,272. He says prices will fall up to 20 per cent by late 2013 based on slower growth of household mortgage debt.
Keen says historically there’s been a strong correlation between the growth of mortgages and the level of house prices. “A constant rate of growth of mortgages would keep house prices where they are now, while a rising growth rate is needed for rising prices, and a falling growth rate will cause prices to fall,” he says. “That’s what’s been happening ever since March 2010 when the impact of the first home owner’s grant boost finally petered out and now mortgage debt is decelerating.”
But Christopher Joye from property investment and research group Rismark International says house prices fell 3.5 per cent over 2011 “and our view is that the housing market is stabilising and will continue to grind out modest gains”.
The reason for this, he says, is the house price to income ratio. “In the long run, house prices are determined by what people can pay for housing,” he says. “And what people can pay is determined by two things, income and interest rates.
“Over the past nine to 10 years, incomes have grown 10 to 15 per cent more than house prices. The second thing we know is that mortgage interest rates are well below the 15-year average. Since 1995, mortgage rates have averaged 7.3 per cent.”
Joye thinks house prices will “appreciate by roughly 4 to 5 per cent per annum over the medium term, and certainly over the next five years”.