Kohler’s “new normal” for house prices

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According to Alan Kohler:

The problem, in short, is that Australian house prices are not in a bubble, and are, instead, in a ‘new normal’ and are not going to come down on their own.

…Most of the focus on last week’s submission by the RBA to the Parliamentary Inquiry into Home Ownership was on its comments about negative gearing — that there is a “case for” reviewing it, “but not in isolation”.

“…there are no examples internationally of large falls in nominal housing prices that have occurred other than through significant reduction in capacity to pay (e.g. recession and high unemployment).”

And: “There is no mechanism to get a large and sustained level shift down in prices while a substantial fraction of the population can — safely and sustainably — service the obligations involved in paying the higher price.”

Finally: “…there is no example in Australia or internationally where supply expansion on its own generated housing price declines of a similar order of magnitude to the increases in prices seen in some Australian cities in recent years.”

…In other words, those who own a house already are winners; those who don’t will have to buy a flat.

It is the complete reverse, I’m afraid. Yes, you need all sorts of demand and supply reforms to create a functioning property market. Some of them should have been deployed by the RBA three years ago when MB was promoting them and had they been right now house prices would be much lower.

But by not doing it you don’t prevent house price falls. On the contrary, you only guarantee them falling from a much higher level when the bust finally comes (and it always does). As the mining crash destroys the system that supports high house prices by depleting income, as well as exhausting monetary and fiscal firepower, recession and high unemployment are in pipeline for Australia:

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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.