Latest NewsShortage to Push Prices up 12pc, Says JpmorganTuesday, 07 February 2017

JPMorgan says government policy is distorting measurements of the Australian housing market in a way that is not fully understood.

In a report, the bank tips house prices to rise 12 per cent this calendar year, driven by a shortfall in production of dwellings estimated at 180,000 dwellings that emerged between October 2006 and December 2009. But report author Ben Jarman admits there are inherent difficulties in making these estimations as most analyses, his included, focus on the flow of new housing and not how much stock is on the market.

This is because changing demographic trends make it hard to measure the capacity of existing stock and the demand for new stock.

"It is figuring out how the trends change in terms of desirable household size, that's the toughest thing to get a handle on," Mr Jarman said.

The bank's method is to focus on a short period and assume that demographics have not changed too much. "When the number of people per household goes up, as it has here in the last few years, you can't assume that's not all demographic effect," he said.

There are other distortions. Low rental returns suggest Australian property is "substantially overvalued". However, negative gearing, which lets owners claim a rental loss as a tax offset, makes it worthwhile to buy property at high prices as long as its price tag increases over time.

Foreign investment policy changes last year are another factor. Temporary residents buying property were no longer required to notify the Foreign Investment Review Board, which created a statistical black hole. The changes were reversed in April, and temporary residents now must sell if they leave the country. But lost data means "we have no clue as to the base from which foreign purchases will fall, nor the volume of dwellings that will come onto the market as these temporary residents leave", says the report.

Housing finance approvals are plummeting but this is probably because the first home buyers grant brought forward demand, not because demand is falling. "All these cross-currents are making things difficult to judge," Mr Jarman said.

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