Australian house prices are overvalued!
This shrill call has become so common I have almost taken to scheduling it in my diary.
BY GREVILLE PABST
Every year in March, one overseas based ‘authority’ or another makes a fearful announcement about Australian property being overpriced – and newspapers respond by splashing gloomy headlines across their front page foretelling doom.
This year, it’s the London based The Economist sounding the same old alarm; that Australian housing is overpriced.
It’s a publication with a reputation for thoughtful analysis but not, I’m afraid, a solid track record forecasting the future of property markets. Back in 2004, it made similar claims about the Australian market and predicted that America’s market would suffer as first homebuyers would soon be priced out of the market. As it turned out, American first homebuyers peaked at 40 per cent of buyers three years later, while the “frothy” Australian market, forecast to fall, just kept on improving.
When we convened our own experts at a recent seminar, we asked the question: ‘What is the future of the Melbourne residential market? Has the continuous rise in Melbourne house prices created a classic investors’ bubble?’
The answer came back and it was definitive.
“No”, said Justin Smirk, Senior Economist at Westpac. “The real measure of a property market’s viability is the amount of income coming into it. While it may have become harder for single households, dual income households are helping to support the market.”
John Symond, Aussie chief executive officer and one of Australia’s most respected business people, concurred, telling the audience, “While I expect the market to be cooler for the next six months, I don’t see any danger of a housing bubble in Australia.”
For my part, I told the audience exactly what I’m writing here today. There’s no question that Melbourne property is less affordable than it was 10 years ago but the market is a long way from facing a bubble. The chance of a severe fall in house prices is miniscule.
How can that be when so many overseas property markets have run into bubble trouble over the last few years? What makes Australia so different?
The first thing to recognise is that the property prices are an outcome of the balance between the supply of properties for sale and market demand. While demand for Australian housing is as strong as ever, the supply of new property has failed to keep up, leaving Australia with an entrenched housing shortage, which the Commonwealth Bank currently estimates at around 190,000 dwellings. In Melbourne, the annual shortfall is estimated by the Property Council of Australia to be rising by 6000 dwellings a year.
Now compare our situation to property markets overseas. Those markets that fell the hardest were also those that built the most. In Ireland, construction rates soared leaving scores of ‘new village estates’ empty with no buyers to be found years after completion. In the United States, the housing market collapse of 2007 to 2009 followed the country’s largest ever construction boom, resulting in 2.5 million unoccupied dwellings. In Spain, a country with roughly twice the population of Australia, more than a million homes stand empty. Meanwhile in Australia, construction of homes is still stuck at the rate it was in the 1970s – when we had around half of our current population!
Australia’s housing shortage has produced pronounced unaffordability for first homebuyers, but ironically these same conditions are helping to underpin prices. The flipside of an undersupplied market is that the market price of an asset in short supply rarely falls, and a pool of latent demand for housing grows and grows.
We see the outcome of this from time to time; as soon as prices or conditions for first homebuyers improve, they come out in force and quickly drive the market back up. So rather than breaking the market, affordability is instead acting to shape demand.
The result for those interested in property investment is that gains over the next two to three years are likely to be increasingly focused on relatively affordable properties in locations with good access to transport systems.
We’ve already seen this pattern emerge. In the second half of 2010, the prices of more affordable family homes in certain middle ring suburbs with good transport access kept rising while the prices of large family homes in high-priced inner suburbs came to a halt.
This new trend is also benefiting properties with price tags under $1 million in the right inner precincts. The bidding competition for apartments remains strong and there has been a discernible uptick in buyer demand for inner suburban townhouses.
So far in 2011, the Melbourne market is holding up better than many expected. Quality properties in the right price range are selling under the hammer, but at prices much closer to their reserve. Auctions in high demand, family-friendly areas have seen good attendances and some strong results. On the other hand, ‘trophy houses’ at the very top of the market are struggling and their auction results are patchy.
For investors, this new mix of market conditions represents both a challenge and an insight into a new era. The days of selecting any old property and expecting double-digit capital growth year after year have probably ended. Yet for those investors well advised or shrewd enough to read the undercurrents, the market is ushering in some interesting and profitable new strategies.
Fortune may once have favoured the brave, but in this new era, it’s more likely to reward the well-prepared investor.
Greville Pabst is Chief Executive Officer of WBP Property Group, a national valuation and property services company based in Melbourne. Greville is a Certified Practicing Valuer with many years’ professional experience valuing and buying residential and commercial property.
For more information about Greville visit www.wbpproperty.com