House prices to stagnate for 'years'
By Nicki Bourlioufas
HOUSE prices will likely stagmnate for "many years," dragging on consumer spending and economic growth, according to analysts at ABN AMRO.
Rising petrol prices are also causing shock to consumers, which will weigh on the economy, the analysts said in a report on consumer spending.
"House prices are likely to stagnate across the country for many years, most likely drifting lower as wages and rents slowly catch up," said analysts Felicity Emmett and Kieran Davies at ABN AMRO.
"Record high petrol prices and interest-servicing costs have both contributed to the slowdown in household spending, with growth in real household income slowing sharply, but the weakness in house prices also seems to have played an important role."
"House prices remain wildly out of line with wages and incomes, so it seems likely that household wealth will be a noticeable drag on spending for a very long time," the analysts said.
Households finances are in a fragile state, with people spending more than they earn and drawing down on the value of their homes to support spending, the report said.
"The admittedly poorly-measured saving rate is still negative, with income slowing in tandem with spending over the past year or so," the analysts said.
"Similarly, households are still actively drawing down equity in their homes." Households draw down on equity in their properties if rises in debt exceed the increase in the value of housing.
"New South Wales householders have been the most enthusiastic extractors of household equity, consistently withdrawing equity at the highest rate," the analysts said.
"This reached a peak in late 2003 when (NSW) households were withdrawing the equivalent of 12.5 per cent of consumption spending.
"Surprisingly, with Sydney house prices falling for a more than a year, households in New South Wales are still withdrawing equity at a rapid rate, equivalent to around 6 per cent of consumption spending.
"Elsewhere, housing equity withdrawal continues in the smaller states, but at more modest rates than seen in New South Wales," the report said.
Sydney house prices are around one-third more expensive than the next most expensive city, Melbourne, the report said. Sydney prices are around 12 times average earnings, while Melbourne prices are only around 9 times average earnings.
Rising petrol prices are also causing shock to the economy, the analysts said.
"Almost all industrialised countries, with Australia no exception, are net oil importers of oil, so the rise in energy prices is a negative for growth."