High house prices making households 'vulnerable', says economist

by Julia Corderoy13 Apr 2015
Rising house prices are making Australian households “vulnerable”, according to a leading economist, however the Reserve Bank still needs to cut rates.

Real house prices have been running well above trend since the early 1990s and now sit at 14% above trend, says AMP’s chief economist Shane Oliver. According to the 2015 Demographic Housing Affordability Survey, the median multiple of house prices to household income in Australia is now 6.4 times, versus 3.6 in the US and 4.7 in the UK.

Australia’s high house price to income ratio means Australian households are vulnerable, says Oliver.  

“High house prices compared to rents and incomes combined with relatively high household debt to income ratios suggest Australia is vulnerable on this front should something threaten the ability of households to service their mortgages,” he said.

“While this vulnerability has been around since the house price boom that ran into 2003 – with numerous failed predictions of property crashes – the RBA is right to be concerned not to further inflate the property market.”

However, Oliver says there are some offsetting factors, so the property market should not be a constraint on further RBA interest rate cuts.

“First, home price gains are now narrowly focussed on Sydney. According to CoreLogic RP Data Sydney home prices rose 13.9% over the year to March. But growth across the other capital cities ranged from 5.6% in Melbourne to -0.8% in Darwin with an average of just 1.5%,” he said.

“Second, growth in housing debt is running well below the pace seen last decade, and there are some signs of a loss of momentum in the last few months. Investor debt is up  10.1% year on year but reached around 30% through 2003 and in the last few months has slowed to an annualised pace of 9.3%.”

Oliver expects the cash rate to fall to 2% in May with a strong possibility rates will fall below 2% later this year, as the slump in mining investment intensifies, non-mining investment remains weak and iron ore prices remain deflated.


  • by Phil 13/04/2015 9:47:41 AM

    This observation should be just about Sydney not Australia.

  • by Jason 13/04/2015 10:28:18 AM

    The Sydney market is very concerning indeed, prices are so over inflated. Worrying times indeed.

  • by Tom 13/04/2015 10:51:22 AM

    Why do so many people think Sydney prices are unsound? Is it simply because they can't afford them? If so, that doesn't make them unsound - unaffordable, yes, unsound, no.

    Commonsense dictates that if you have a population of 4.5m people all trying to live within a 10 - 20km range of the CBD, prices are going to be pushed up by those with deep pockets who can afford the prices, at the expense of those who can't.

    Land in inner city locations is a finite resource, once it's gone, it can't be replaced.

    It doesn't sound like speculation gone mad to me, simply a supply and demand equation.

    Oh, and while I'm on the subject, how about we stop referencing the income to price ratio, and start comparing the house buying costs to rental costs. Because looking in from the outside where I'm sitting, it is cheaper to buy than rent.

    I'd much rather pay my "rent" to the bank so I own an asset in 30 years rather than pay off someone else's asset.

    But then again, I choose not to live in Sydney, so I don't face the problem!

    Perhaps it's time for those trying to buy in Sydney to start looking at their lifestyle choices and the potential for living elsewhere.