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Aussie Property - Safe as Houses, or a House of Cards?

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Will Aussie property continue to hold firm or are we on the brink of a prolonged decline in housing prices? James Dunn gets two sides of the story. If the saying is true, what makes a market is that you have a buyer and a seller, who have a difference of opinion. Well, that’s certainly the case in the residential property market.

Residential real estate is almost the sacred cow of Australian investment. Over the last 80 years the trend rate of growth in real house prices has been about 3 per cent a year – consistent with long-term real GDP growth. Lately, that growth rate has been even higher. According to real estate advisory business Rismark, between December 2004 and December 2009 Australian house prices, Australian house prices grew by 6.2 per cent real a year.

The RP Data-Rismark Hedonic Index for national city dwelling values rose another 1.4 per cent in February, making the annual gain for the 12 months 12.7 per cent.

Melbourne rose 2 per cent on the month, to be up 19 per cent on the year; while Sydney jumped 2.6 per cent to be up 12 per cent for the year.

Steve Keen, associate professor of economics and finance at the University of Western Sydney, says growth rates such as these cannot last. Keen says that Australian house prices are overvalued, and will fall by 40 per cent over the next ten to fifteen years.

Christopher Joye, chief executive of Rismark, scoffs at this view. He says prices will continue to rise – although he does not discount the possibility of volatility – for the simple reason that housing is an under-supplied commodity in Australia.

It’s worth pointing out here that, contrary to a prevailing belief in many Australian investors, there is nothing intrinsically magical about residential real estate that makes it always rise in price. If it is over-supplied, it will fall – as in the USA at present.

But that is not the case in Australia. According to the Housing Industry Association (HIA), Australia presently builds 109,000 fewer dwellings a year than it needs. On present population projections, HIA economist Ben Phillips says that shortfall will reach 466,000 dwellings by 2020.

Joye says the shortfall is being magnified by Australian’s booming population. “Australia has got the strongest population growth in the developed world. It’s currently running at 2.1 per cent a year. We have 22 million people presently, it’s forecast to go to 36 million people by 2050, we think that’s actually more likely to be 40 million people.”

The widening gap between demand and supply “categorically” stands as an underpinning factor for house prices, says Joye. “The fact of the matter is that asset prices are determined by supply and demand. To have a view on asset prices – on house prices – you have to have a view on demand and supply, because that’s the way that prices are formed.

[MOD: paragraphing done by me (only because I like your charts). Penance: More analyis on stock indices Mr Cobran, the non paragrapher] :yes:

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