By Nick Jacobs 16/12/2010
Based on a recent IMF report which suggest that AUSTRALIAN house prices could be overvalued by as much as 10 per cent in some areas, but strong population growth and rising income will continue to underpin the market, an international report viewing to the International Monetary Fund (IMF) has found a link between episodes when Australia has a strong terms of trade – the relative performance of exports to imports – and rising house prices.
The current historically high terms of trade are expected to be long-lasting,
Strong population growth and high real income growth in the wake of record-high commodity prices this year will continue to support house prices.
In the past 20 years house prices have increased by almost 120 per cent, and have already recovered from the global financial crisis shock in 2008 to pre-crisis levels, although prices have now levelled out yet.Home loans, savings accounts and more
This rebound was supported by the federal government’s more generous first time home buyer subsidy and a fall in mortgage rates in 2008/09 that helped to increase housing affordability.
Aside from the wealth effect from the terms of trade, population growth in Australia has also been higher than other advance economies, mainly because of strong immigration.
An insufficient supply of housing is also placing ongoing pressure on house prices.
The increasing scarcity of land in main urban centres in Australia is an important factor.
The fact that such a high proportion of Australia’s population live in two major cities tends to drive up average house prices.
They say recommended reforms reported in Australia’s Future Tax System – the so-called Henry tax review – to stamp duties and land taxes should reduce the current impediment to housing supply generated by the tax system.
The review says that stamp duties are a highly inefficient tax on land, while land tax could provide an alternative and more stable source of revenue for the states.
Such recommendations have so far not been taken up by the Federal Government.
The IMF staff report also suggests that from a financial stability perspective, any downturn in Australian house prices is likely to be orderly.
Stress tests suggest that a correction in house prices is not expected to take a toll on banks because of the low-level of high-risk mortgages, they say.
Nick Jacobs
Australian Property Investment Cairns
www.australianpropertyinvestment.com
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