Property game is over - house price growth trend 'over'

THE rapid upward trend in housing prices is at an end, with the Reserve Bank forecasting that growth will be slower than over the previous 30 years.

The slowdown means today's young homebuyers should not expect to receive the same capital gain on the family house as their parents did and that total returns on rental properties will also fall.

The population demands on the nation's key cities are also likely to see urban dwellings become more compact, exacerbating construction delays.

Head of the Reserve Bank's Financial Stability Department Luci Ellis played down the much-touted shortage in housing supply as a significant factor in pushing up prices.

Dr Ellis has instead put the onus back on to the industry, saying that construction expenses were the largest contributor to the costs of developing a new home.

In a speech to a Citibank Property Conference in Sydney yesterday, Dr Ellis said the housing market had finally adjusted to the onset of the low inflation era that began in the 1990s.

She said household savings ratios had reached a "new normal" level of about 10 per cent of income, recovering from when falling interest rates loosened access to credit and pushed up housing prices.

Dr Ellis said the aggregate debt to income ratio had been "broadly flat" since about 2005 and the ratio of average housing prices to income had levelled off a year or so earlier.

She said the slow adjustment to the low inflation era was due to the time it took for people who borrowed before inflation declined to pay off their loans and drop "out of the calculation" and for people's additional borrowing capacity to bid up prices.

"The transition period following the disinflation is almost certainly over," she said.

"Trend housing price growth will be slower in future than in the previous 30 years."

"We think it is very unlikely to return to its 1970s levels, or to rise rapidly once again."

Dr Ellis suggested there would be more periods when housing prices fell in absolute terms and a slower growth in housing credit with implications for the growth of bank balance sheets and profits. She said the transition to slower trend growth in housing prices meant that total returns on rental properties would fall unless other things adjusted.

She said if land shortages were the key factor pushing up housing prices, then prices should be rising fastest on the greenfield sites on city fringes.

"It turns out that construction costs are the largest contributor to the total costs of production, and they seem quite high compared with the total cost of a newly built home in some other developed countries," she said.

Dr Ellis suggested that land seemed in such short supply because of the Australian tendency to consume so much of it, noting that population density in Sydney was only 40 per cent of Toronto's.

She warned that the "low-density" lifestyle was becoming unaffordable for some and forecast a trend towards more medium-density and high-density dwellings in the nation's cities than in past decades.