Economist stomps on bubble rumours

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A leading economist has severely criticized the notion that Australian housing is in a price bubble.

BT chief economist Chris Caton told a Vow Financial conference in Phuket, Thailand, that simple comparisons with the US housing market may paint Australian housing prices as overpriced, but the argument is harder to sustain when other countries are thrown into the mix. 

“The fact is our housing prices are in broad alignment with many similar economies, so it’s my belief [that] talk of a housing bubble is misplaced,” he said. 

Caton also predicted lower rates and higher housing prices over the next 12 months. “Although I’m not as bullish as some other economists on lower interest rates, I still expect at least one cut in the cash rate and possibly two as the Reserve Bank prepares for a downturn in mining,” he said. 

On housing credit and house prices, Caton expects a pick-up over the next year, with Western Australia to lead the pack. “I suspect we will be back at next year’s conference and housing prices will have risen over the past 12 months.” 

Caton also remained optimistic about the global economy and its impact on Australia, but pointed to lingering problems. 

“The Euro-zone remains an issue, but it’s more about contagion across Europe than a Greece in isolation. Greece per se is not an issue; its economy is small. It’s Italy and Spain we have to worry about. That said, the trend in the long-term bond rate in those two countries in the past three months gives ground for some confidence. 

“The US is facing an inadvertent massive tightening of fiscal policy with tax increases and spending cuts totalling close to 5% of GDP in early 2013 (the so-called fiscal cliff) because of past policy decisions. Were this to happen, the US would be pushed back into recession, but commonsense should prevail. 

“China, too, remains a worry, but only because it’s been such a good news story for Australia. Measured by this yardstick, the commodity boom we have enjoyed because of China’s strong growth is unlikely to continue. But we will still enjoy healthy terms of trade with China,” he said.

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