US and British house prices are falling. Australian house prices are still rising. Housing here is protected in the short term by strong Australian growth, but that will not last forever.
The US housing market is in turmoil. US sub-prime lending allowed many poor households to purchase a home. Booming demand saw US house prices double in 10 years. In the last year US house prices fell 5 per cent as demand fell and repossessions forced sales. Britain is following. A recent Financial Times poll of British economists showed many expected British house prices to fall 10 per cent to 30 per cent from the peak. British house prices tripled in 10 years and have only fallen recently. The catalyst was the collapse of Northern Rock, a deposit-taking home-loan lender. The global house price boom has ended. The freezing of the interbank money market has hobbled credit markets. The pain is spreading from housing to commercial property and equity prices are now falling.
The IMF has warned that house prices could fall in Europe. The European central bank is resisting rate cuts and the euro locks nations into a monetary straightjacket.
Professor William Buiter of the London School of Economics has welcomed the end of the asset bubble and sees a US recession as desirable given the distortions created by financial excesses.
The US might cut rates aggressively to try to keep the party going, but that might be difficult with credit markets imploding.
Do Australian house prices necessarily follow? Australian house prices rose 160 per cent in 10 years and are still rising at the upper end.
Australian share prices will follow global share prices, but our housing seems unlikely to falter unless the economy slows rapidly.
The US sub-prime market sector is much larger than here and non-recourse borrowing in the US means borrowers often walk out when house prices fall below the value of the loan. This creates more volatile house prices.
Australia has had limited use of low interest rate introductory loans and mortgage insurance protects lenders. While RAMS failed we have not had a run on a deposit-taking institution as in the UK.
Even so, the OECD suggested in 2005 that Australian house prices were the most overvalued of any developed country relative to income or rents. Our household debt and servicing costs relative to income are high. Households are exposed if rates rise sharply.
In the US and Britain financial problems mean housing might cause recessions. Barring tax changes, or a financial collapse, that seems unlikely in Australia.
It needs rising interest rates and a world slowdown with rising unemployment to prick Australia's housing bubble. Some say that's unlikely, but overpriced assets do fall. Do not assume Australian house prices will rise forever.
