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The [Melbourne] Age: Economist predicts long house prices fall

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Yes, Australia is not the same as the USA. But the Australian economy has been enjoying a terrific run for a while now, and Australian housing prices between 1996 and 2002 behaved *exactly* like housing prices in (for example) Washington DC are right now. There were articles written about how the rising prices could be sustained for decades because demand was so outpacing supply, and how new industries in the cities were supporting the costs.


Economist predicts long house prices fall

By Tim Colebatch

Economics Editor


July 4, 2005

Australians will see their wealth decline for the first time since the last recession as housing prices fall, investment bank ABN AMRO has warned.

In a new analysis, the Dutch-based bank's chief economist in Australia, Kieran Davies, said house prices had entered a period of decline, which was needed to bring prices back towards their normal relationship to household income.

The housing bubble almost doubled household wealth between 1998 and 2004, creating a "confidence effect" in which consumer spending boomed. As that process goes into reverse, Mr Davies warned, it will damp consumer spending and economic growth.

It could put a significant brake on economic activity, he said. Household spending accounts for 60 per cent of demand in the economy, and in recent years it grew faster than household incomes. Households now spend more than they earn.

"The economy is facing a period where declining household wealth should be a significant and ongoing drag on growth as the massive bubble in house prices slowly deflates," he said.

Economists predict that this week's economic data will show the unemployment rate has risen for the first time in four years.

With surveys reporting fewer job vacancies, a Reuters survey found market economists expect Thursday's figures to show no growth in jobs, with unemployment rising to 5.2 per cent.

Commonwealth Bank chief economist Michael Blythe warned markets not to expect an interest rate cut, as futures markets are suggesting. He said constraints in the economy and the rapid growth in household debt would keep the Reserve Bank inclined to raise rates, most likely in the December quarter.

Some commentators have said house prices are likely to flatten out at their peak rather than fall, but Mr Davies said we were more likely to see "modest outright declines in prices over the next year or so".

"The fundamentals will slowly catch up with prices, and valuations should gradually return to more sustainable levels," he said. "As this happens, declines in real home prices should see declines in real net household wealth."

ABN AMRO's research found that almost two-thirds of Australian household wealth is now in housing, with a market value of $3.2 trillion - almost six times households' annual income. Over the past 45 years, the value of housing has, on average, been just 31/2 times household income, and for much of that period interest rates were as low as now or lower.

While 64 per cent of Australian households' wealth was in real estate, just 6 per cent was in ownership of shares, the bank said. Another 18 per cent was in superannuation, 8 per cent in cash or bank deposits, and 3 per cent in cars and other durables.

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