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Housing market groundhog day

Christopher Joye
13 April 2011

How incredibly boring. It seems around once a year, every year, we have this silly debate about the cost of Australian housing cleaved by extreme pessimists on the one hand forecasting devastation and precipitous price falls, juxtaposed against, well, a range of more sensible views spanning the spectrum of positive to negative.

For some reason, Australians seem to lap this stuff up even though it is typically the same old tosh recycled every 12 months. And, of course, once in a blue moon the extremists will look like they called it right.

Well, let me help you out: as Rismark has very accurately predicted for a long time now, there is nothing happening in Australia's housing market. We've been projecting weak building approvals for years. Why economists ever anticipated a surge in supply we will never know given the parlous returns on equity currently offered to developers care of local and state government taxes and charges driving up the marginal cost of housing to above its market clearing price.

Since late 2009, we forecast a soft landing in 2010 with little to no capital growth, and the risk of some nominal falls if the RBA hawked up over 2010-11. As incomes continue their inexorable rise, housing valuations will improve until the RBA starts cutting rates again, which will likely trigger a return to above trend capital growth. Until that time, the housing market is not going to be doing a great deal, and should be boring the pants off most of us.

Interestingly, if commodity prices collapse, resources investments get iced, and the China/India story ends, the one Australian sector that will probably fare well is housing. Since it is the most interest rate sensitive area of the economy, it will benefit most if the RBA slashes rates, just as it did during the GFC.

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