Probably the biggest property myth of 2010 was the claim that Australia was in a ‘property bubble’ that was about to burst.
BY MICHAEL YARDNEY
It all started a few years ago when ‘doomsday economist’ Steve Keen predicted Australian house prices would plummet. Awkwardly for him, average house prices went up rather than down 40 per cent, after Dr Keen made a very public statement selling his Sydney home in late 2008, just before the Sydney market rebounded and values in his suburb skyrocketed. Oops!
The Economist magazine also said Australian property was overvalued. In fact it has come to the same conclusion for years. But this time they suggested our property markets were overvalued by 61 per cent based on the current ratio of house prices to rents, and historic ratios.
Then investment legend Jeremy Grantham, who, based on his calculation on the premise that housing trades near 7.5 times family income today versus about 3.5 times in earlier times, also saw a bubble. And of course the International Monetary Fund (IMF) warned our property values were overpriced. Interestingly both Grantham and the IMF have since downgraded their warnings.
So is our property market really so overpriced and a bubble waiting to burst?
Interestingly, I’ve read similar commentary from The Economist magazine year after year, and heard doomsday economists make similar predictions over the years and in the meantime property values have just kept increasing.
I guess their argument could be: “Yes the bubble is just getting bigger and bigger which means Australia is heading for a bigger property crash just like overseas.”
Why don’t I think houses in Australia will drop in value like they did overseas?
Well in some areas property values have been falling and are likely to fall a little further from their highs, especially as interest rates rise further later next year. This is happening in some of the outer suburbs and lower socio-economic suburbs, as well as in regional Australia and on the Gold Coast. But our overall market is unlikely to collapse because the current property fundamentals, including our strong economy, rising wages, increasing population, rising building costs and the shortage of housing in our inner and middle ring suburbs, will insulate Australia from a property crash. The problem is that these economists keep analysing Australian properties as if they were shares – it’s like comparing apples with oranges.
Remember, in Australia 70 per cent of properties are bought by owner-occupiers. And one of the things that keeps pushing our property prices up is that, by and large, these property owners all want to live in the same areas. If you think about it, 70 per cent of our population lives in one of eight big capital cities and most of these people want to live in the inner and middle ring suburbs, near the city, near amenities and near their jobs.
Secondly, Australia doesn’t have suburbs full of empty houses awaiting mortgagee sales like the United States of America. Instead we’re not building enough houses. And despite our population growth falling lately, it’s still growing at a rate faster than most developed nations.
Sure, some Australians currently have issues with housing affordability and are putting off their home buying decisions. But people still need a roof over their heads. People are still getting married and people are still getting divorced, some are having babies and others have to move house for their jobs.
If they can’t afford to buy a house they rent one, hence vacancy rates are at unprecedented lows and pushing up rentals.
However price growth is levelling off
Our property markets have changed – don’t expect the type of capital growth in 2011 that many of us enjoyed in the past year or two.
The Reserve Bank has deliberately put speed bumps on the road. They have increased interest rates to slow our booming property markets, and to an extent the general economy, on purpose.
What this means is that buying any property and hoping it will make a good investment just won’t work in this new era in property. Now is the time to buy well in areas that will outperform the averages and buy properties to which you can add value.
In fact we have a two-speed property market, with properties rising in some areas and not in others. Values will keep increasing in the inner, more affluent suburbs and not as much in outer, working class areas and in regional Australia.
But our markets aren’t going to crash and hopefully we will hear a lot less about ‘bubbles’ in 2011.