Gerard Minack, a senior economist at Morgan Stanley, predicted two years ago that house prices were set to experience a dramatic 30 per cent fall by this year given rising unemployment.

”Australian houses are much more overvalued than US houses; indeed, on some measures, our houses are arguably the most expensive in the world,” Minack said.

”My very simple take on it – the bigger the bubble, the bigger the pop.”

But with no snap crackle or pop, and debate still raging whether there has been a bubble, Minack last week revised his script to envisaging the bubble deflating, not popping.

”Dodging the worst of the global financial crisis didn’t demonstrate that there’s no bubble. In my view it just showed we dodged the prick,” he said.

”I’m not persuaded by arguments that houses are sustainably priced. Most measures suggest house prices are around 40 per cent above fair value. However, the risk of big price declines in the near term seems low.”

Minack points out that much of the discussion about the residential market future overly concentrates on owner occupiers despite a jump in taxpayers reporting rental income jumping from 608,000 in the late 1980s to about 1,765,000 now.

He notes the percentage of landlords claiming a rental loss (that is, rent not covering interest and other costs) has risen from 50 per cent to 70 per cent over the past decade.

With broad-based job losses appearing unlikely, Minack now sees the more imminent risks to property price growth as the

banks tightening credit and negative-gearing landlords departing the market due to low capital appreciation.

Ignoring the fact that investment property for many is their nest egg in the absence of superannuation, Minack envisages property investors becoming disillusioned with the ensuing widespread disposal of their investments. ”This is an investment that depends on capital gain for its payback. With net income not even covering interest charges, this is a classic Hyman Minsky Ponzi scheme,” he says.

”The real return on residential property over the next decade is likely to be negative.”

Minack also took aim at the Reserve Bank deputy governor, Ric Battellino, who recently said that 75 per cent of household debt was held by the upper 40 per cent of income earners.

”It is simply wrong to assert that rental properties are largely owned by high-income households: losing on residential property investment is largely a middle-class affair,” Minack writes.

”Taxpayers who earn $80,000 or less own 80 per cent of all loss-making properties.”

His 10-year negative return timeline forecast is offered without explanation. But the prospect of a price plateau rather than a pop is a much more plausible position for Minack to now embrace. This is especially so for Sydney which recorded a slump and then negligible price growth for many years after the last investor-inspired boom that peaked in 2004.

Some further excessive froth in Sydney pricing that was evident by late 2007 and early 2008 was removed by the global financial crisis fall-back.

It wasn’t until late 2009 that Sydney’s median house value finally surpassed the $568,000 peak of early 2004, according to Australian Property Monitors. At its worst, during the global financial crisis, the median was 6.5 per cent off its earlier peak. It’s now at $625,000.

But Minack, who lives in Mosman, has only to sound out another economist, Stephen Koukoulas, to know that many neighbourhoods across Sydney are going nowhere fast.

Koukoulas, now based in London as the chief global markets strategist for TD Securities, sold out of Mosman earlier this year for $1,175,000. The Mosman house had traded at $1,285,000 in 2007.

Mosman’s pricing is problematic, but Minack’s abandonment of his bubble pop forecast is especially intriguing as Melbourne’s price juggernaut has put it in a more precarious position than Sydney.

Melbourne’s dwelling price growth over the past decade sits at 174 per cent compared with Sydney’s 83 per cent, according to Australian Property Monitors.

Over the past five years it has been 66 per cent in Melbourne and 17 per cent in Sydney.

The latest Housing Industry Association affordability survey for the June quarter suggested Melbourne could shortly rank alongside Sydney as the least affordable Australian cities.

The HIA chief economist Harley Dale noted affordability dropped year on year by 39.8 per cent in Melbourne and in Sydney by 33.5 per cent.

”If that trend were to persist then you would rapidly be approaching a situation where Melbourne is on a par with Sydney in terms of [least] affordability,” Mr Dale said.

Story by Jonathan Chancellor www.domain.com.au

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