Another US house price survey, another decline in value. This time it was the National Association of Realters which revealed a 7.7% drop for the year to March — the largest fall the association has recorded since it started taking records in 1982. The average median house price in the US is now $US196,000. Leading the way down were Sacramento (29% fall), Las Vegas (20.2%) and Phoenix (15.4%).

The correction seems to be heading across the Atlantic, with David Blanchflower (who is a member of the Bank of England) suggesting last week that UK house prices could fall by 30%. Blanchflower’s view was based on the fact that “the UK average house price of £178,555, according to Nationwide Building Society, is six times mean earnings. That’s way above the long-term average multiple of 3.7. To get there, UK house prices would have to fall 30 per cent, even counting in three years of 5 per cent growth in average earnings.”

The logical question arises — if the US has fallen by upwards of 30% in some regions, and the UK is priming for a big drop — exactly how overvalued is Australian residential property?

There are two schools of thought. Property bulls will suggest that while prices appear high in historical and relative terms, the number of people moving to Australia exceeds the number of dwellings being constructed — supply and demand suggests that this will continue to put pressure on house prices. This view is supported by increasing rental yields.

The contrary opinion is that Australia is in the midst of a housing bubble in which prices bear absolutely no reflection of underlying economics. Using the metric suggested by Blanchflower — the median price of a house in Sydney is $551,000, while the Melbourne median is above $450,000. According to the RBA, average weekly earnings for all employees are $45,729.

Therefore, the average house price in Sydney is 12 times earnings, and in Melbourne it is 9.8 times earnings. Sydney house prices are therefore almost double those of the allegedly overpriced UK in relative terms.

Another metric which is considered to be more telling is the ratio of monthly mortgage payments versus income. In the UK, the current rate is 50%, which is significantly higher than the long-term average of 37%. In Australia, the ratio is above 57%. It appears that Australian residential property is one giant Ponzi scheme of sorts, with property owners relying on ever-increasing house prices to vindicate their investment.

The US has slumped, the UK is looking extremely wobbly, yet Australia continues to sail through, despite its residential property appearing far more expensive than our Anglo-counterparts.

The key for Australian residential property is employment. Not only is Australia virtually at full employment, but despite consumer confidence being down, few workers expect to lose their jobs. If that changes, our housing market could experience a very substantial correction.

Peter Fray

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