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US Economist Says Rates May Deflate Australia’s Property Value Bubble

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Renowned American economist Dean Baker, co-director of the Center for Economic and Policy Research, has inferred Australia’s real estate boom could quickly turn to bust if the RBA decides to raise interest rates again.  This might be just another voice in the crowd, but Baker is one of the rare few people who predicted the US housing market collapse, and he did it back in 2002, so his words are being taken to heart.

Australia’s expensive real estate industry may see a ‘sharp drop in house prices’ if interest rates are lifted, Baker said. ‘I have noticed the run-up in Australian house prices and it sure looks like a bubble to me.’

Fortunately for now the recent RBA meeting saw the Reserve Bank leaving the current 4.5% interest rate as is, but some experts anticipate as many as seven 0.25% raises over the coming three years.  However, opinions in the real estate industry have been divided in recent times, with market pundits and economists predicting both raises in house prices and bursting property value bubbles.

Mr. Baker’s perspective falls at opposite ends of the spectrum with RBA members and numerous private sector specialists who say Australia’s relatively high household debt levels and property prices are sustainable. These opinions are backed up by evidence of a mining boom, a shortage of new homes amidst growing immigration numbers, and a tax system beneficial to investment property ownership.

Mr. Baker backed up his claim of an Australian housing price bubble by observing a trend over previous years where housing price increases were much more drastic than their rental fee counterparts. He said this trend says, ‘it is not the fundamentals of supply and demand in the housing market that are driving prices.’  Australian Bureau of Statistics records say if you look at the four-year period of June 2006 to June 2010, capital city house prices have increased by an average of 39.7%, while rents have only increased by 26.6%. This is in a country where 60% of all people live in the state capitals.

On a brighter note it must be mentioned Australia has kept its head well above water when it comes to house price comparisons with other wealthy nations. When the Global Financial Crisis hit we feared the worst, but property values have only dipped a little in the last few months, whereas the US, UK, Spain and Ireland have all seen their house prices fall dramatically.

Recent RP Data figures show the average Australian house price fell to $457,000 in August 2010, a monthly drop of 0.2%, although July saw an increase of 0.4%. These figures could infer raised interest rates are starting to have a follow-on affect.< In September 2010 the RBA said Australia’s business and household sectors remained stable, with strong economic growth increasing both personal incomes and business profits. Many people believe the economy has remained strong amidst Western chaos because of our link to the thriving Asian economies of China and India. Australia has narrowly avoided the recessions having recently plagued many European nations.< Fitch Ratings agency is currently undertaking economic stress tests to help ensure investors Australia’s real estate industry is in a safe position. In recent months overseas investors have wondered about how strong our housing industry is, which has resulted in the Commonwealth Bank heading off on an international tour of reassurance. Investors Goldman Sachs recently said Australia’s house prices could be overvalued by as much as one third. It may just be a good time to sell your property.

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