House prices are already about 10% above their long-term trend, exactly where they were the last time the housing market peaked in 1987.
Fueling the continuing boom are factors such as immigration, which while declining, should still be positive. "If we get an extra 20,000 people in the next year, that’s still a lot of demand for housing," he says.
Interest rates are still low, the labour market is tight and job security high, making people readier to take on debt than if they were worried about losing their jobs. Added to these factors are the clear investor preference for housing and the current shortage of builders.
But beyond the end of 2004, net migration will be falling at an accelerating rate (it had already fallen to 39,310 in the year ended October). Immigration went from about plus-30,000 in the year ended April 1996 to minus-6,000 in calendar 1998, Alexander says.
There are already signs that rental property is in over-supply and the evidence will be even greater in 12 months time, he says.
Additonally, the Reserve Bank will lift interest rates at least a percentage point before the end of 2004. That will take the major banks’ floating mortgage rates to between 8.05% and 8.25%.
People should also take into account that interest rates may actually rise more than currently expected. By the end of next year, people will be worrying about interest rates rising even further ad they will start looking to offload property investments.
At the peak of the last housing cycle, "everything hit the fan at the same time." There was the Asian Crisis, drought, floating interest rates hit 11.25%, immigration plummeted, we had a recession and house prices fell 5% on average.
While such a plethora of shocks aren’t likely (although they are still possible), the additional house price appreciation this time around means the housing market will be that much more vulnerable than it was at the end of 1997, Alexander says.
He recommends that all but the hardiest risk-taking investors forego further housing investment. Even the risk-takers have only about six months’ left of "buy and flick." And first-home buyers should probably step out of the market. "Affordability can improve greatly over two to three years."
