FIRST home buyers are leaping aboard a sinking ship, with house prices set to fall about 20 per cent in the next two years, an Australian National University economist says.
Professor Quentin Grafton said house prices could not continue to grow at a faster rate than that of incomes and consumer prices.
This "property bubble" is about to deflate, he said, and first-timers, encouraged through government grants to buy at the top of the market, could be over-committed when hit by job losses and, later, higher interest rates.
"First home buyers who don't have much of a deposit and can barely afford their mortgage payments on the current interest rates – they'll be in trouble," Professor Grafton said.
"I wouldn't be surprised if overall we get a 20 per cent decline in nominal house prices over about the next two years."
This could lead to borrowers owing more than they own, he said.
"Ultimately, house prices have to be related to the ordinary prices that we pay for other goods and services and our incomes.
"In the past decade, house prices have gone up about 50 per cent in terms of that ratio.
"That is not sustainable, and certainly won't be sustainable as the recession bites."
Professor Grafton's comments coincide with house-price data showing small but steady gains in the first three months of this year.
RP Data-Rismark, which is used by the Australian Stock Exchange, reported that Melbourne values grew 2.4 per cent and national values 1.6 per cent.
Rival group Australian Property Monitors said median prices were up 0.1 per cent nationally.
Christopher Joye, of funds manager Rismark, said despite the "unsubstantiated, hyperbolic claims of some renegades", the figures suggested a "slow house price recovery".
While house prices fell about 3 per cent in capital cities last year, most of the damage was done in August, when interest rates were at their highest, he said.
"With home loan rates now falling, we've seen a massive increase in affordability," Mr Joye said. "That (1.6 per cent) growth is a very encouraging outcome. It shows a natural resilience."
He said an increasing number of buyers were investors "positively gearing" — looking to make money from rent rather than declare tax losses, as in the past.
He cited the Reserve Bank's latest financial stability report, which suggested that the substantial gap between incomes and house prices was permanent.
The RBA said recent policy changes had brought "an environment of lower inflation and thus lower nominal interest rates" compared to those of previous decades; that encourages people to borrow and fuels demand for houses.
Professor Grafton said prices at the lower end of the market were artificially inflated by the Federal Government's first home buyers' boost.
It doubled grants to $14,000 for existing homes and tripled them to $21,000 for new homes.
But Macquarie Bank economist Rory Robertson said this year's price growth was not primarily because of the grants.
"It's because interest rates have fallen into the 5 to 6 per cent range," he said.
"The vast majority of home buyers with variable rate mortgages are suddenly enjoying rates lower than they ever had contemplated."
He said last year's rapid cuts in the RBA cash rate had tilted the buy-rent decision towards buying, as the cost of servicing a mortgage dropped sharply relative to the cost of renting.
With PETER MARTIN
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