Most Australians think they’re amateur experts on property but over the years I’ve learnt there’s a lot to learn about making money on the property ladder. So, when someone as smart as Dr Shane Oliver pens a piece on “seven things you need to know about the Australian property market”, I’m happy to learn and share it with my readers.

This opening piece in his recent newsletter sets the scene about property prices here in Australia. “Some real estate spruikers still wheel out the old ‘property will double every seven years’ line. But property doomsters say it’s hugely overvalued and overindebted and so a crash is inevitable,” he reveals. “The trouble with the former is that it implies the already high ratio of home prices to incomes will double over the next 12 years!

“The trouble with the doomsters is that they’ve been saying that for decades. The reality is that it’s far more complicated than the extremes portray it.”

He believes there are seven facts that property players should have on board before going long real estate. I’ll sum this up below:

1. House price-to-income ratios have doubled since the year 2000 and the house price valuation based on the ratio of home prices to rents (a bit like a price earnings or PE for shares) adjusted for inflation shows house prices around 36% above their long-term average price-to-rent ratio. So, the median multiple of house prices to income is at 8.2 times versus around 5 in the US and UK.

2. There’s no one Australian property market and the table below shows Perth is one market where the overvaluation measure is not over-the-top.

3. While housing affordability is poor and household debt is high, some households are suffering significant mortgage stress with the two- or three-fold increase in mortgage rates. But despite this mortgage arrears, rates remain remarkably low, though he says the savings buffers built up during the pandemic are whitling down and this could contribute to a slowdown of the economy, which won’t be great for future price increases.

4. In case you think interest rates don’t matter to house prices, he tells us to think again. The price surges for property have been driven by low interest rates and recent rate rises will eventually bite, but he isn’t arguing big price falls are likely any time soon.

5. The shortfall in ‘housing supply meeting a boom in immigrations’ explains a lot of recent house price increases and is behind the smaller impact of rising interest rates on house prices. The Albanese government is cutting back on immigration but given the chronic undersupply of homes, house price slumps are less likely.

6. Predicting house price crashes isn’t a smart play. This is what Shane concludes: “Failed property crash calls have been a dime a dozen over the last two decades and forecasting property swings has been hard. For example, last month RBA Governor Michele Bullock noted that “I wouldn’t like to predict housing prices...every time we tried...we seem to get it wrong...” So be humble and sceptical when it comes to house prices forecasts.

7. Property returns are similar to the pay-off from shares! The chart below shows that since 1926, the return from shares and property has been around 11% per annum!

In conclusion, Shane Oliver thinks house prices will grow 5% this year, and I suspect he’s right. I can’t see a big price fall for property until we have a serious recession and unemployment starts heading up towards 5% or 6%. A prelude for that to happen would be home loan interest rates at 7% or higher, but that kind of scenario doesn’t look likely over the next couple of years as central banks are determined to bring down inflation, and so far, they’ve been doing a pretty good job.