IMF claims housing market overheated but locals predict growth in 2011

The International Monetary Fund has warned that housing prices in Australia are overheated by as much as 10% due to an influx of capital driven by the commodities boom.

But Australian Property Monitors’ economist Andrew Wilson says that figure doesn’t matter as long as homebuyers can pay their mortgages, and the rising number of full-time jobs will keep the market sustained even though price growth could stay flat.

“It’s a good time to be a buyer right now, but this won’t last because capital markets are strong. The momentum in the market always turns at some point,” Wilson says.

The recent report from the IMF states the already-established point that Government incentives including the First Home Owner’s grant have pushed prices upwards, and they are currently overvalued by between 5-10%. The paper also points out that prices have risen due to the growth of capital in the west as a result of the mining boom.

But it also says any correction will be “orderly”, and that any price movement won’t affect the banks due to strong balance sheets and liquidity requirements.

“From a financial stability perspective, stress tests suggest that a correction in house prices is not expected to take a toll on banks because of the low level of high-risk mortgages,” the report said.

“The current historically high terms of trade are expected to be long lasting. Strong population growth and high real income growth in the wake of record-high commodity prices this year will continue to support house prices.”

And while the report does point out that a fall in house prices could impact household spending, “the current historically high terms of trade are expected to be long lasting”

“Strong population growth and high real income growth in the wake of record-high commodity prices this year will continue to support house prices.”

The report comes shortly after Fitch Ratings recently indicated that preliminary stress tests show Australian banks would be able to withstand a massive reduction in house prices. The Commonwealth Bank and Westpac have also made similar statements.

Wilson says these factors mitigate any type of overvaluation, saying that the market will sustain whatever prices buyers are willing to pay.

“It’s always a bit of a stretch to define value. I realise they look at variables that determine the capacity of the community as a whole, such as average weekly earnings, and so on. But a much more detailed and rich picture needs to be examined here.”

“There are different factors here impacting price growth, such as supply constraints, and so on. But I am a great believer that corrections occur in income variables, and we have rising incomes and a strong, secure banking system. When people can buy those mortgages, that is the value of the market.”

But Wilson nevertheless admits that prices are beginning to flatten, as stock floods the market. But he says this period of correction is only temporary and that as more full-time jobs are made available, finance will increase.

“We’re having a shift in property at the moment. There’s been a pause here, a correction, people are taking a wait-and-see approach and we have a lot of stock being offered.”

“There are various reasons for that. The lengthy election campaign, a drawn grand final in Melbourne, and perhaps people were thinking about whether now was the right time to buy or sell. So what we are seeing here is a sentiment driven market, not a market driven by fundamentals.”

Wilson says that next year, incomes will increase, pushing finance upwards and prices will see some movement after this period of correction is over.

“It’s all about momentum. We are going to see more full-time jobs, which means higher income levels, and that will move back into the property market, and that will impact prices as well.”