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Home price slump looms

A WARNING from the Economist magazine and the International Monetary Fund about an imminent end to the housing boom in OECD countries is bad news for many low-growth economies.

The US, Britain and the Netherlands are currently experiencing falling house prices. As the economies of these countries have been propped up by housing growth in recent years, there are fears of a major economic impact.

Both the Economist and the IMF have forecast that the housing boom in many OECD countries over the past six to seven years will burn out in the near future.

The Economist said the housing bubble would burst because of the widening gap between rentals achieved and escalating house prices and the house price to income ratio.

Australia, Britain, the US, Netherlands, Spain and Ireland are among the countries forecast to experience falls of around 10 per cent to 30 per cent.  Projected falls of 20 per cent are expected in Australia in the next four years; the UK is tipped to have a fall of 25 per cent; and the US market is expected to drop by 10 per cent.

In affected countries house values have increased on average 11 per cent per year from 1995 to 2002, compared with a global figure of 2.5 per cent during the same period. Accelerated growth has occurred in Dublin, which has had value increases of 28 per cent, London with 19 per cent, Stockholm with 14 per cent and Sydney with 10 per cent.

Economist has estimated that construction and the real estate industry account for around 15 per cent of the OECD countries’ GDP. 

Commercial real estate information organisation Research Worldwide.com has reported that countries with low economic growth rates that have relied on the housing boom to boost the economy could be greatly affected by the downturn.

“Existing low growth economic conditions, coupled with threatening deflation exacerbated by falling house prices, could lead to spreading recessionary conditions,” according to Research Worldwide.com.

But any downturn in the housing market in Australia is not expected to have the same magnitude as downturns in the US and the UK, according to Chamber of Commerce and Industry chief economist Nicky Cusworth.

Ms Cusworth said although the US and UK housing bubble appeared to be bursting, the impact would not be as severe in Australia, particularly WA, as the price inflation has not been as large here.

“It is unlikely that Australia will be tipped into recession regardless of what happens with the housing market,” she said.

“The US and British markets are weaker than ours, they have been cutting interest rates for longer.

“Even though our market is slowing, it’s nothing like the rest of the OECD countries, and our growth is robust by European standards.”

Ms Cusworth said the most pessimistic view was that the US would be tipped into negative growth, which would have spin-off effects on Australia, including weakening the export market and decreasing the competitiveness of the Australian dollar.

Although weak, the US market has been buoyed by the booming housing market and increasing consumer spending. 

Ms Cusworth said any dramatic downturn in house prices could put a damper on domestic product consumption. Combine this with a reduction in housing construction and there was potential for a downturn in the US economy, she said.

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