Article item posted on Sunday, July 5th 2009 at 5:21 pm

I am gravely concerned about the level of Australian house prices.  Real estate prices have tumbled in the US, the UK and New Zealand, but not here.

It may be unpopular and unwelcome to point this out, but our very high property prices are a cost and not a benefit.

According to RP Data-Rismark, the national median house price of $468,819 is just $520 shy of the record set in February last year, before the global economy sank into recession. Melbourne is leading the housing recovery, with a 6.1 per cent growth in prices between January 1 and May 31 and auction clearance rates in excess of 80 per cent for the past seven weeks. Sydney recorded 5.2 per cent growth in prices over the same period.

All sorts of reasons are offered for this – demographics, immigration, rationing by land-banking corporates and government action to contain the spread of our already large cities.  None of this explains why house prices are so high relative to incomes.

That is, Australians spend much larger multiples of their income on housing – they now cost about six times earnings – than anywhere else in the world. How is that affordable? How is that socially or economically useful?

If that is confusing, understand that at six times earnings a mortgagee with a 100% mortgage over 30 years will need to pay 20 per cent of their pre-tax income in principal repayments.  Interest is extra.  Anyone signing up for such a mortgage is committing themselves to a lifetime of poverty, after including those interest payments.

A reversion to the long term average ratio – house prices at about three times earnings – would mean a halving of house prices. That seems impossible and psychologically impermissible to a lot of Aussies. Price falls of that magnitude are already underway elsewhere and probably nearly completed in the USA.

Our government sparked a lending boom to those people in Australia with the most to lose from taking on a huge mortgage at the low end of the interest rate cycle: young Aussies, the most vulnerable workers in the job market who spend the highest percentage of their discretionary income (not much) on an asset they are buying at the top of the boom.

If you wanted to deliberately wipe out the financial prospects of an entire generation by saddling them with crushing debt, increasing the first buyer’s grant and putting on a time limit is exactly what you’d do.Many thanks for background to The Daily Reckoning Australia  www.dailyreckoning.com.au

The pain is yet to begin

Tags: Australian Democrats, australians, business, choices, clearance rates, corporates, democrat, democratic, democrats, demographics, depressions, economic foundations, fiscal conservatism, global economy, government action, house prices, incomes, interest payments, interest rate cycle, international monetary crisis, january 1, john maynard keynes, kevin rudd, labour party, liberal party, magnitude, median house price, millennium money, mortgagee, ordinary man, political thought, politics, principal repayments, recession, reversion, rudd, sectional interests, self interest, senate, senator, seven weeks, six times, sound foundations, spiritual consolation, tax, taxes, three times, victorians, wall street investors

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