Housing bust warnings grow

UBS Warburg has warned that house prices will have to fall by an average 22 per cent across Australia if they are to return to their long-term average within three years. In Melbourne, where house values have almost doubled in the last five years, prices will have to drop by 36 per cent.

This isn't unusual, says UBS Warburg, and contrary to the myth that prices never fall, one only has to look at Sydney house prices over 1988-1990, when the median price fell by 25 per cent. The bank research house says it expects significant falls in both nominal and real prices over the next three to five years. It points to several signs of weakening demand in the property market, such as record highs in house prices in relation to rents, growing investor unwillingness to put money into property, lower auction clearance rates in Melbourne and Sydney, and the first home owners' grant – which has “pulled forward” demand.