The Bank for International Settlements (BIS) – the central banks’ central bank – released a new report over the weekend proclaiming that Australian housing is severely over valued:
Graph 2 juxtaposes recent house price growth rates with the deviation of current valuation ratios from their longer-term average values for the countries in the database with sufficiently long series. 13 The horizontal axis in both panels measures the three-year growth rate of residential property prices for each country on the basis of the selected price series. The graph clearly shows the very different recent experience across countries, with declines of more than one quarter in some countries and price hikes in excess of one third in others…
The vertical axis in the top panel shows the most recent value of the ratio of house prices to rents, rebased using its historical average. A value of 110 indicates that the current ratio is 10% higher than the historical average. Countries are quite dispersed with respect to this benchmark. While for most countries the current ratio implies that price movements are not diverging from rental values in ways that imply unsustainability, for a number of other countries current property prices are much higher than those implied by the historical relationship to rents. A priori, this could be a reason to expect a price correction in the future..
The vertical axis in the bottom panel shows the most recent value of the affordability benchmark: the ratio of prices to disposable income per capita, also rebased using its historical average. The graph suggests that for most countries the current ratio is not too far from this benchmark, suggesting that prices have not diverged dramatically from income trends. For a number of countries, however, current property prices are at least one fifth higher than those implied by the historical relationship to incomes, suggesting potential downward pressures on real house prices… This argument would be more compelling for markets where prices have grown rapidly in the recent past, and where income growth is projected to be rather moderate.
So according to the BIS, Australian housing is around 50% above its long-run average when valued against rents, and around 40% above average when valued against incomes. It is also toward the top end of the league tables on both measures.
Australia would also seem to meet the BIS’ definition of a housing market at risk of correction, since “prices have grown rapidly in the recent past” (i.e. the past 18 months) and“income growth is projected to be rather moderate”, owing to ongoing falls in commodity prices and the terms-of-trade.
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.
