House prices overheated and could take 10 years to correct: Expert

House prices are growing too fast, are severely overvalued and the government should remove the first home owner’s grant to avoid a housing bubble, property experts warns.

John Edwards, chief executive of Residex, which published data this week revealing a 1.1% jump in housing prices during July, says the housing industry risks overvaluation that could take a decade to correct itself.

Most house price indices have shown strong growth in the last six months. The RP Data-Rismark National Home Value Indices showed house prices jumped 4.5% in the first half of the year and a 3.7% rise in the June quarter to a median price of $446,344.

“I think prices are moving far too fast,” Edwards says. “It would be good if the Government found a way to solve the housing stock issue, and because of that I think it would be good if the Government removes the first home owner’s grant for existing homes.”

Edwards says the Australian property market will not see a major price correction, and that housing affordability will continue to be a problem for years.

“The only times you will ever see significant price corrections are during depression times. Apart from that you see short mild periods of price reductions. Now, on the issue of affordability, I think it’s unlikely you would have seen a price correction in Australia the likes of which was in the US. But what you see now is because of the lack of stock, the housing affordability issue will grow.”

“This issue could take a decade to recover itself. If you look at housing affordability in historical long term trends, if you don’t get price corrections you get a long-term increase in housing prices.”

Edwards says the solution is to create more “regional hubs” around towns outside the capital cities, and invest in infrastructure that will see land prices stabilise.

“Creating more regional hubs is the only way you can get affordable land. Infrastructure is going to waste out there, so we’ve got to encourage people to go to the regional areas. The goods and services need to be there, and we’ve got to bite the bullet and understand that building infrastructure is not going to immediately pay for itself, but will deliver benefits.”

“We’ve got to provide stock, and also, we have to do things like the Victorian government is doing, putting in regional rail lines and so on to create more regional hubs.”

Tim Lawless, research director at RP Data, agrees with Edwards and says more infrastructure needs to be developed in regional areas that could accommodate large population growth.

“There’s definitely a risk when it comes to housing supply. When we look at the imbalance between population growth and new housing stock there’s a big gap that’s getting wider as time progresses, and that’s a reason why we haven’t seen falls in property values. Because of this supply deficiency, we’re seeing quite strong growth.”

“More houses need to be developed, but we need to think strategically about this. How are we going to encourage developers and how is the government going to strategically release more land? And if they are releasing land, we need make sure that transport infrastructure keeps pace, no one wants to live in regional areas without transport, employment, goods and services and so on.”