It’s a question lots of people are asking. So what should property investors believe?
BY MICHAEL YARDNEY
The Australian and British housing markets are the last two bubbles left in the wake of the financial crisis and it’s only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.
So who is this guy who grabbed the headlines recently?
The Australian says Mr Grantham famously reported the following a year before the global financial crisis: “In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence to day
will have simply ceased to exist”.
He was also reported in The Australian as saying that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.
Is he right? Are our property markets going to crash?
Well, not according to the Reserve Bank of Australia (RBA).
RBA Deputy Governor Ric Battellino said house prices in Australia, relative to income, were reasonable.
“People feel that house prices in Australia are quite high and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated,” Mr Battellino said. “But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”
This should give comfort to those worried by the many predictions of economic disaster. If you pit the headline-seeking doomsday brigade against the RBA, I’ll believe the Reserve Bank any day.
However Mr Battellino said recent events in Europe were worrying because when governments get into financial trouble there is no one to bail them out.
David Airey, president of the Real Estate Institute of Australia (REIA), also slammed the comments by Grantham, saying:
“What we are experiencing in the housing market is normal growth for house prices. If Australia was in the midst of a so-called housing bubble, then we have been there for some time. REIA’s data highlights that historically, median prices, compared to income, have been relatively stable for the past 10 years, taking into account normal fluctuations,” said Mr Airey.
“It is important to note that the price/income ratio doesn’t entirely explain the state of houses prices. Demand fundamentals, such as interest rates and stock returns also need to be considered. As well as these fundamentals, we need to look at structural factors, such as: population growth and the current undersupply of housing.”
“What is evident from the data recorded by REIA is that we are not seeing a bubble developing which will implode, but rather, the cyclical changes of the Australian housing market,” concluded Mr Airey.
Let us know what you think.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. Subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.