A lot of talk is going around about extraordinarily high Australian property prices. Houses are said to be overpriced by 40 per cent and there are claims there’s an Australian housing bubble that’s about to burst.
BY PETER KOULIZOS
It’s no wonder the average person in the street isn’t sure what’s happening in the housing market, as there are untold numbers of so-called ‘experts’ who have their version of the story.
Let me try and set the story straight for you.
I too listen to experts and try and understand their basis for an argument. However, the expert(s) that I take most notice of are part of the Reserve Bank of Australia (RBA), in particular Reserve Bank governor, Glenn Stevens.
Love them or hate it, the RBA knows what it’s doing. There are a number of reasons I respect their comments:
- They understand the AUSTRALIAN housing market better than any overseas individual/organisation.
- They have no vested interest to tell us the market is great (when it’s not) or the market is about to crash, so as to grab headlines for itself.
- There are numerous governors on the board and I suspect they learnt a lot whilst studying their various PhDs.
The RBA was one of the main reasons we avoided the catastrophes of other countries as a result of the global financial crisis; they know what they’re doing.
At a recent business event in London, Glenn Stevens explained why he’s not too worried about Australian house prices. Below are some of his comments:
“It’s quite often quoted – very high ratios of price to income for Australia,” he said. “But if you get the broadest measures – country-wide price and a country-wide measure of income – the ratio is about 4.5, and it hasn’t moved much either way for 10 years. That’s higher than it used to be, but it’s actually not exceptional by a global standard, as far as I can see.”
The key phrase in his quote is “country-wide price and a country-wide measure of income”. What he’s saying is that if you use the income from the whole country and compare it to house prices around the whole country, not much has changed in the last 10 years. When you use this measure, you’re not just comparing apples with apples but Red Delicious apples with Red Delicious apples. Too many experts are comparing Fuji apples with Granny Smith apples; same fruit but different taste and importantly, a very different price.
?One of the reasons Australian house prices are relatively high (not necessarily overpriced) is that most Australians live in a capital city and all our capital cities (except Canberra) are on the coast. Many Australians don’t live in the middle of the country because it’s a desert! As I often explain in class, proximity to the city and the sea are the greatest drivers of capital growth. With the vast majority of houses in a city and by the sea, you’d expect high property prices in Australia.
??On the other hand, United States property (the most compared to Australian property), is scattered all over the country. The total population in the US is not as ‘urbanised’ as it is in Australia as many Americans live in regional and small country towns. Most cities in the US are not on the coast, unlike Australian cities.
??I have used a global example to illustrate my point but a local one can also be used. It would be like comparing house prices in Sydney with house prices in Broken Hill; same state but very different locations.
??Anyway, I sleep well at night knowing that there is no imminent housing bubble about to burst. I hope you do too!
Peter Koulizos is a property educator at UniSA and TAFE and the author of The Property Professor’s Top Australian Suburbs – a guide to Australia’s top suburbs for property investors and homebuyers, available from www.businessmall.com.au
Well done Peter, it is about time people realize that ” The Reserve Bank and it’s Governor ” are the experts. They are not soothsayers or alarmists, just a body of very competent people with the interest of all Australians at heart.
Comment by Mark Bellingham — March 17, 2011 @ 3:23 pm
House prices are stabilising, with crash and boom off the table for the time being. We’ll experience moderate rises in most cities except Perth where we’ll see slight falls, nothing dramatic. Must say the bears made many bad calls (I include myself) and I only wish I would have predicted the unfair government stimulus to save the housing market. The stimulus was wholly unexpected. Nobody could have predicted it. The discussion has moved on to how long the stagnation will last before prices resume a definite direction (down or up). Something must be done to address the supply issue. There’s no doubt a shortage exists and is worsening. Rents and prices in my town (Perth) continue rising (undersupply). Don’t know what may happen population ramps up once more, a scary thought. Global citizens fleeing their depressed economies may wish to live in Australia. We should do everything possible to welcome migrants, but I worry about the upward pressure this places on house prices and rents.
Max
Comment by Max Carnage — March 22, 2011 @ 12:42 pm
Why trust a reserve bank, they have their own agenda. Reserve banks are run by acedemics with no grasp of the real world, I think the US FED proved that by denying they had a problem.
The people shouting bubble have massive clout internationally and have a solid reputation for making money from picking bubbles, even our own Steve Keen is held in high regard internationally and even won the Revere award for warning about the GFC. So forgive me for listening to people who actually know what they’re talking about rather than a collection of bureaucrats. The biggest reason I don’t trust Stevens is his use of a dodgy statistics to derive his 4.5x house price, he uses average income (higher than median) and median house price, that is deception/fraud in my book.
Comment by Rich — March 24, 2011 @ 6:17 am
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