The property slow melt is not over

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Business Spectator’s new economics guy, Callam Pickering, is a new bear on the block:

What investors and owner-occupiers need right now is a sense of perspective and a little bit of context. First, dwelling prices are effectively anchored to income and credit growth. Second, the Reserve Bank is likely to increase the cash rate in 2014. Third, foreign investment in Australian property is almost negligible.

…As the graph below shows, dwelling prices have increased by around the same pace as household disposable incomes for the past decade. Unfortunately for buyers, the outlook for income growth over the next couple of years is only moderate, reducing the probability of a sustainable house price boom.

For the index below to get back to 140 (roughly its upper bound) by mid-2014 requires further house price growth of around 7.5 per cent. Effectively, buyers are looking at growth of 7.5 to 10 per cent before prices stabilise and then rise at below income growth. For those looking to get in the market, the easy returns are almost over.

callamhouse1

A very reasonable version of the property slow melt argument. Only one point to add. The RBA is not going to raise rates in 2014 unless property makes them do so. The capex cliff allows no other outcome. Investors know they have the bank trapped between themselves and the dollar and will push property for all its worth.

Not that that debunks the Pickering argument. But it does mean animal spirits are at large with the perceptions of a one way bet. That, in turn, will fuel volatility on the upside and down.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.