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House prices to fall by 20%?

Australian homes are overvalued and are set to fall by 20% by the end of 2014, so says a leading international strategist.

Investec Asset Management’s Michael Power says that Australian property prices have fallen 6% in the last 2 years; he expects them to fall further in the next 18 months to two years, according to report in today’s The Age.

Mr Power said that according to the Economist Property Index, Australian homes were amongst the highest in the world, and have been for an extended period of time, something which he says eventually “catches up with you”.

The Economist, in its August update, said Australian house prices were still 36% above their fair value. “After years of dizzying ascents, a big dose of gravity has hit residential property markets around the world”, the magazine says.

However, unlike other property bubbles in the US, Ireland and Spain, Australia was partly protected by low unemployment, and real interest rates, compared to zero or negative rates in some countries. He warned that if property prices slide, then Australian banks including the big four, Australia and New Zealand Banking Group (ASX: ANZ)Commonwealth Bank of Australia (ASX: CBA)National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), may be affected, because they had to borrow money overseas to finance local mortgages.

Australian household debt is also still very high, which would get worse if housing prices fall. As Treasurer Wayne Swan is fond of saying, we’ve had 21 years of consecutive GDP growth. That may have lulled Australians into a false sense of security – in other words, thinking that what happened overseas couldn’t happen here.

Still, global concerns have shown that Australians have reacted, with retail sales falling dramatically, and credit growth drying up, as consumers stop borrowing and redirect funds into paying off credit cards, personal loans and mortgages.

The Foolish bottom line

Analysts have been long been predicting that Australian housing is overpriced, and likely to fall. This time they may be right.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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