Has it started? Or are we witnessing a premature dip?

RP Data reported last week that the national median house price in capital cities slumped from $473,000 to $459,000 — a drop of 3%. This comes amid a backdrop of increasing CPI, so in real terms the fall was higher. Average time taken to sell properties is also increasing, as clearance rates slump across the nation.  Melbourne, Australia’s auction capital, has seen clearance rates dip below 60%, down from more than 80% the previous year. The situation is most concerning in Perth and Brisbane, which have seen price drops of about 5% in the past year.

It seems like the sudden reversal has confounded the property bulls. Instead of predicting the usual “5% annual house price growth”, suddenly, the “experts” are suggested house prices will drop this year. REIV communications manager Robert Larocca told the Financial Review that “the REIV expects a drop of around 3 to 5 percent in the March quarter and then minimal growth over the rest of the year”.

There appears to have been a very quick change of heart for Larocca, who less than a month ago gloated to the Herald Sun that “the history of Melbourne property prices demonstrates solid returns and while we won’t see 20% gains such as we saw last year, solid growth is likely to continue into the future”.

The price falls aren’t happening quite quickly enough for everyone. Last week, activist group Prosper Australia called for a boycott of property purchases the try to combat the affordability crisis. While Prosper’s ultimate aims of removing the appalling negative gearing regimen and reducing stamp duty for lower-priced properties are noble, they need not be too concerned. For the best cure of high prices is high prices. The prices of an asset (be it property or shares or businesses) will not remain above its “intrinsic values” forever, eventually, prices will return to their correct value (which is based on cash returns from the asset, not some mythical future “capital gain”).  This happened for property in the US, in Japan, in continental Europe, and eventually, it will happen in Australia.

In fact, “top-end” property has already been seeing dramatic price reductions for the past year as wealthy buyers shrewdly ignore the housing market for more productive investments. The Age’s Domain section reported this weekend that a St Kilda West mansion was discounted to $4.95 million recently, after failing to sell in June last year for $7 million. The story is the same in Toorak, where a two-storey Lansell Road property has been on the market for $12 million, with interest in the property at less than $10 million.

The middle and lower end has not yet witnessed such steep declines, largely due to extraordinarily lax lending standards from the big four banks, who desperately lend money on loan-to-valuation ratios of more than 95%.

Meanwhile, the future for property bulls is appearing increasingly bleak. The last white hope for Australia’s residential property Ponzi scheme, the alleged “housing shortage” seems to be coming unstuck. Immigration figures released last week indicated that Australia’s population grew buy only 1.6% in the year to September, spurred by a 41% drop in net overseas migration. The housing shortage claims are difficult to justify when the population grew by about 360,000, but according to the Australian Bureau of Statistics, enough dwellings are being constructed each year (about 165,000) to house more than 420,000 people. So instead of a shortage, it appears Australia, like much of the United States, may actually be facing a housing glut. (Interestingly, Bloomberg reported yesterday that Manhattan property, which had withstood the general falls in the US slumped by 9.9% last quarter, while experts predict prices in booming Hong Kong may also fall by 30% as interest rates increase).

Of course, there are plenty of levers the federal government can pull to keep the Australian bubble inflated for a little while yet. A quick reinvigoration of the appalling first-home owner’s grant is one option, while the RBA will quickly reduce interest rates upon the sign of a substantial deflation in property prices. Of course, eventually the prices will return to their intrinsic values, despite the worst intentions of our helpful public officials.