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Housing Market Set To Crash

Housing Market Set To Crash – Edward Chancellor, of US investment bank GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.

Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value – a once in 40-year event. ”

If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably,” he told The Australian.

He said prices would have to fall by more than a third to reach fair value – although some of this fall would be cushioned by income growth.

He described Australia’s banking system as a “cartel” and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

“It’s the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse,” he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

“We would see the Chinese demand for Australian commodities as being potentially vulnerable,” Mr Chancellor said.

He said he expected the negative news in Australia to come from “the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity” and a “terms of trade shock”.

Everyone referred to Australia as the lucky country, he said. “I think that’s pretty apt.”

 

Tags: Australian Commodities, Australian Economy, Average Income, Banking System, Chinese Demand, Crunch Time, Edward Chancellor, First Home Buyers, Global Financial Crisis, house prices, Housing Market, Investment Bank, Iron Ore, Liquefied Natural Gas, Lucky Country, Mortgage Repayments, Mr Chancellor, Negative News, Rising Interest Rates, Sheer Weight
Posted in Money