Always is the key word here and it is a big one because there will be times when house prices do not rise and even times when it falls with these fluctuations being referred to as volatility. It has been this volatility that has seen substantial changes in prices overseas in America and England.

The important question however for us is how volatile is the Australian housing market and this is the question that was addressed by Christopher Joye – Managing Director of investment, research and advisory business Rismark International – earlier this year. He examined the volatility of a range of asset classes from 1982 through to December 2009 and found that the annual volatility of the Australian housing market was relatively low. In fact, the volatility of the Australian share market has been 5.6 times higher than that of the housing sector.

He also pointed out that most of the economic crises we have seen in recent years (the 1987 crash, the Long Term Capital Management bailout, and the 2001 tech wreck) involved the equities markets. Even the Global Financial Crisis saw the stock markets of Australia, UK and US fall by 40-50%, but the housing market decline by just 4%, 14% and 30% respectively.

There has been a lot of discussion of late that the Australian housing market is expensive but this was based on  using house price data from capital cities and comparing it income data from across the whole country. Since house prices tend to be higher in cities, this overstated the real price to income ratio. If these city house prices were compared to the incomes of people living in the cities, they were much more reasonable.

There has also been considerable debate on the “housing shortage” but interestingly the Federal Government’s National Housing Supply Council second State of Supply report in April 2010 estimated the cumulative undersupply of housing stocks in Australia at 178,400 and predicted that this undersupply would grow to 308,000 by 2014.

Predicting the future is always a hazardous business. The performance of any market can be affected by a range of factors and a strong housing market in one city can be offset by a weaker market in another city. Nevertheless, the demand and supply fundamentals and Australia’s persisting economic strength continue to suggest that the Australian housing market has solid foundations and is likely to continue to at least hold its value for the foreseeable future.

Based on information supplied by La Trobe Financial.

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