> Mike Beggs, as I recall, you were pretty sanguine about the Australian housing market. Now I see that Australian house prices are falling. Pretty gently for now, 3.4% for the first seven months of the year:
>
> http://www.theage.com.au/business/house-prices-extend-falls-in-july-20110831-1jkvh.html
>
> Still, bear markets often begin with gentle declines.
>
> What do you make?
Well I haven't been following it too closely and I hesitate to make predictions. I was sanguine in response to people who thought something like what happened in the US was certainly imminent. These arguments were based on the idea that 'what goes up must come down' in terms of dwelling price to incomes ratios, whereas I think it's quite possible for house prices to become permanently more expensive relative to average incomes, for various reasons. That's not to say that actual house prices are sustainable as they are, only that I really doubt they are destined to suddenly drop back to their long-term average. Even if the average were to be restored, which is by no means a certainty, it's more likely to happen with a small drop and a long stagnation while incomes catch up - which is what's tended to happen historically.
When prices went up again after a short pause from mid-decade to 2008, overvaluation and some kind of correction seemed more likely. It still seems to me that this will probably happen, if it does, through stagnation rather than a sudden collapse. There are big differences with the pre-crisis US situation: (1) the boom did not involve a major expansion of house-building ahead of demand, so there is no general over-supply; (2) housing debt is correlated with the ability to service it; (3) mortgages here are mostly on variable rates so the cost of servicing is responsive to monetary policy (this could work the other way when the RBA gets back to tightening).
But I'm no expert on housing, these are just vague impressions from reading the news and a few reports. I venture to comment only because there are plenty of people without any more idea than me pontificating that the end is nigh. Personally, I would love it if house prices crashed so I could afford a house. Sydney has a higher cost of living than NYC. This is the one thing that gives me pause - how are the prices sustained when it seems that no-one in my generation can afford to get in? But in fact people are still taking on mortgages - moving much further out into the sprawl, getting help from their parents, and/or accepting that housing will take up a bigger proportion of their income. Politically, I think panting after a crash is a mistake - better to assume housing costs are going to stay high and do something about it.
There's an excellent brand new review article on the economics of Australian housing by Judy Yates here:
http://www.rba.gov.au/publications/confs/2011/yates.pdf
Mike