Dr Wilson: Houses will forever outpace incomes

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By Leith van Onselen

Fairfax’s resident property spruiker, Australian Property Monitor’s (APM) Dr Andrew Wilson, has swiftly played-down the RBA’s housing valuation report (summarised here), which warned that renting would be a better option than buying if real house prices were to grow below their long-run average of 2.4% per annum:

Domain Group senior economist Andrew Wilson said there was no evidence to suggest that house prices were not going to maintain their long-term average.

”We’re going to have to have some significant long-term deterioration in the value of housing in this country for this to become even a reality,” Dr Wilson said.

”Even if it was, it would probably self-adjust because a shortage of rental supply would put up rents and then encourage people back to buying again.”

The implausibility of Dr Wilson’s suggestion that Australian real house prices would continue to grow on average by 2.4% per annum infinitum is illustrated by the next chart, which shows that house values have doubled against incomes over the past 50 years:

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ScreenHunter_3299 Jul. 15 07.20

If real house prices were to continue growing at the same long-term rate, and the experience of the past 50 years was to repeat, then house values would likely rise to around 12-times incomes – an impossible situation.

Dr Wilson has also conveniently ignored the fact the deregulation of the financial system in the mid-1980s – and the associated surge in mortgage debt (see next chart) – was a one-off positive shock that cannot be repeated.

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ScreenHunter_3326 Jul. 16 10.41

He has also failed to acknowledge that income growth is likely to be lower in the future, due to the falling terms-of-trade and worsening demographics (i.e. falling worker share as the population ages), which will cap real house price growth.

It is foolhardy for Dr Wilson to believe that house values can grow in excess of incomes forever.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.