Australian house prices could fall by 25% “OR MORE”

Television news and printed newspapers around the country has today reported on comments from the Economist Magazine warning the Australian residential property market could plunge 25 percent, triggered by the European Debt Crisis.

The European debt crisis reached new highs this week when an auction of $8.26 billion 10 year German bonds failed with only a 60 percent take-up. Commonwealth Bank Chief Executive Ralph Norris said the global credit market “effectively froze” similar to the weeks prior to the collapse of Lehman Brothers and has warned GFC-II is on its way. ”This has potential to be significantly worse than the Lehman Brothers collapse and the subprime crisis because now we are talking about nation states,” Mr Norris said.

In the article titled “House of horrors; The bursting of the global housing bubble is only halfway through”, the economist calculates Australian housing is overvalued by 53 percent on a rent to price basis (sort of like the PE ratio for shares) and 38 percent on a income to price ratio.

The 25 percent figure used by the Australian media is coming from the paragraph “Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden,” suggesting 25% is the minimum over-valuation of these nine countries. The report goes on to say Australia, Belgium, Canada and France are more overvalued today than at the peak of the American housing bubble, providing some guidance as to the relative size of our bubble.

While GFC-II could provide the trigger to finally pop the Australian housing (and debt) bubble, readers should note Australian house prices have been falling this year after the First Home Owners’ Boost stimulus wore off and affordability/debt serviceability hit limits.

» House prices 25% overvalued: The Economist – The Age, 25th November 2011.
» Bond sale struggles as jitters hit Germany – The Australian, 25th November 2011.
» GFC II on its way: Norris – The Sydney Morning Herald, 25th November 2011.
» House of horrors, part 2; The bursting of the global housing bubble is only halfway through – The Economist, 24th November 2011.
» Aussie home prices could suffer – Channel 7 News, 26th November 2011.


  1. It’s still the weather or some other bullcrap…….. it says so….

    “Among those selling yesterday were Mikki Wiebe, 35, and Peter Maher, 37, who sold their renovated two-bedroom house at 16 Argyle St, Footscray West, for $596,000.

    They bought the property 10 years ago for $265,000 and are moving to Sydney to be closer to their family.”

    I suspect the total funds including interest and renovation costs would push over the $400k mark for the last 10 years, in other words it took them 10 years to achieve a 33% return on their money which is not great. Since they are buying again right now they will lose some of that in fees and government taxes as they move to the most expensive state in Oz.

    What a joke, please someone, bring on a dam recession and clear out all this crap.

  2. German bonds were not all sold as the 10 year bond rate is under 2%! Which is similar to the short term rate so investors simply have preferred to buy short term German bonds as the returns are so low for German bonds. The price you pay for security. There is an awful amount of doom and gloom about the Euro financial crisis in the English speaking world that is not entirely based on fact but rather emotion

  3. We could be the first country in the world to see a significant housing colaspse simply because of the weather. But then, Australia was always going to be different.

  4. You guys are going to hate me saying this but we won’t have a crash until changes are made to Negative Gearing and Capital Gains Tax.

    The whole Aussie Property Market hinges on these hair-triggers that’s why no political party will touch NG or CGT because the market would instantly collapse if they did.

  5. @AverageBloke, don’t hate ya’ for saying it, I agree as well as disagree with you. I know one person that can negative gear into orbit but, he’s still going down. Can’t afford to keep his (only) investment property. I know another bloke with 6 investment properties going quite well, all because of negative gearing.

    I think (emphasis think, cause it is my ….. observational opinion), negative gearing is and will be the demise of many people, and it is and will be the making of a few. If you can’t afford the house now, I don’t think you can afford it when it (here is the busted myth) doubles in value after 7 years, negative gearing included. I think Negative Gearing, like many other things in this world, will benefit a few (privileged, smart, lucky,…) investors. For the bulk of others, it will be the thick, heavy anchor chain around their necks.

    I believe (I don’t agree with this, emphasis believe), negative gearing will be here for a while yet. I think now the economy has crashed for tonnes of people, and can’t be better for a few others. As with property, many people are seeing their venture with property crashing, while a few others are doing well out of it.

    I think NG will stay for the benefit of the few that are doing well from it, just like many other things in life and the economy.

    Personally I’d like to see the end of Negative Gearing. It would be a step in the right direction.

  6. Who here thinks that to avoid a massive housing correction, that inflation will be at massive highs in the next few years to offset the potential falls, ie, the printing of extra currency into circulation, increase inflation the cost of everything to cover the housing market, seems to be already happening with water, electricity and now groceries with the murray darling fixes and a carbon tax!!!!! Diversify your savings, gold, silver, savings accounts, bonds, shares. limit exposure to what is happening already.

  7. I highly doubt inflation can even make a dent in this problem.

    Housing prices are set by the extent that buyers will take on debt.

    Higher inflation, lower consumer sentiment, less faith in abilities to pay debts, hence prices will not rise in any meaningful measure.

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