This article is from the Australian Property Journal archive
The Australian housing market is the most over-valued property market in the world and a report by the Organisation for Economic Cooperation and Development warns it is also the most susceptible to a large market crash.
The OECD report of 17 rich nations showed Australian house prices were 51.8% over-valued, 19% higher than the runner up, the United Kingdom whose house prices were 32.8% over-valued.
According to the OECD, between 1970 and 2005, the Australian housing market recorded the highest number of house price hikes with six upturn cycles.
The report also found in each cycle the average price increase was 31.6%.
In addition, the each upturn cycle lasted 14.3 quarters or 43 months.
The report shows between 1970 and 1974, house prices increased by 36.3% for 16 quarters.
More than a decade later, between 1987 and 1989, house prices increased 35.9% for eight quarters.
And finally, the recent housing boom, between 1996 and 2004, house prices spiked 84.7% for 32 quarters.
The report found the Australian house market has only had five downturn cycles and in each cycle the average price fall was 10.1% and last around 10 quarters.
In addition to been tagged the most over-valued housing market, Australia was also named as the second highest mortgage rates with an average of 7.1%.
New Zealand earned the status of the highest mortgage rates with 8%.
The OECD said the current house price boom is strikingly out of step with the business cycle.
“A number of elements in the current situation are unprecedented: the size and duration of the current real house price increases; the degree to which they have tended to move together across countries; and the extent to which they have disconnected from the business cycle.
“The current upswing is also more generalised across OECD countries than in the past. In particular, a historically high number of countries have been experiencing fairly large increases in house prices since the mid-1990s. A combination of generalised low interest rates across OECD economies, coupled with the development of new and innovative financial products, have no doubt played an important role.
"In Australia, increased competition among credit providers has contributed to the doubling of the number of products provided by lenders,” the report said.
In addition, the report found other factors may have raised the price of housing including Buy-to-let markets, which have grown substantially over the past several years in Australia.
Lower interest rates have also increased the return on rental property for investors, enhancing the attractiveness of and demand for, housing as an investment.
The report found Australia along with the United States, were the only markets in the world to have not recorded house price fall of more than 15% for the period between 1970 and 2005.
The report also found in Australia, the proportion of investors have doubled from around 15% of total mortgage lending in 1992 to about 30% at the end of 2003 and is high in some regional markets, including 42% in New South Wales and 35% in Victoria.
The OECD warns such proportions are fuelling concerns about such high levels of property investment and exposure to a significant downturn in the market.
“Based on the historical record, declines in real house prices, when they have followed large run-ups, have taken place more slowly (quickly) if increases in the overall price level are small (large).
“If house prices were to adjust downward, possibly in response to an increase in interest rates or for other reasons, the historical record suggests that the drops (in real terms) might be large and that the process could be protracted, given the observed stickiness of nominal house prices and the current low rate of inflation,” the report concluded.
By Nelson Yap
