IMF assures housing prices correction to be orderly

A report made by the International Monetary Fund assures that while housing prices in Australia are rising, a collapse is unlikely.

The IMF said price corrections in the market are likely to be orderly even though prices are now 5 percent to 10 percent overvalued. The IMF report written by Patrizia Tumbarello and Shengzu Wang attributed the higher home prices to population growth, growing exports and disposable incomes, in addition to a limited supply of land for development and the recent first-home buyer grant given by the government.

“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.”

The report went on to say that while house price-to-income and house price-to-rent ratios indicated that prices are overvalued, interest rates have fallen since 2000.Currently, median home rates in the country are about 6.8 times yearly median household income compared to only 2.9 times yearly median household income in the United States.

"Conclusions drawn from their restricted models therefore need to be treated with a degree of caution as they are interpreting unexplained movements in house prices as overvaluation," ANZ head of property research Paul Braddick told the Sydney Morning Herald in reaction to the IMF report. "We believe much of the gap could be explained in a broader analysis that included some of the variables listed above."