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
Prices are falling here on the Gold Coast at an alarming rate. 10% down since last August at this rate 20% by the end of the year. Thats a crash by anyones standards. Land hangs around literally for years so much for there being a shortage!
Why perpetuate the myth it only prolongs the incoming recession, which will come as sure as night follows day! As they have for centuries.
I notice you do not mention the undersupply of new housing in the UK prior to that market crashing!! I note also you don’t mention net immigration levels, a major excuse you property spruikers use. Did you know the net immigration into the UK prior to the property crash was higher than that of Australia! Yet the market tumbled regardless.
Give up this self serving conspiracy theory and let the bubble deflate as this is the surest way the bring back the housing boom you so want. After the pain comes the gain!
Comment by Andrew — March 21, 2011 @ 7:49 pm
The Gold Coast is quite a peculiar property market – different from other Australian cities for a number of reasons. Firstly, the Gold Coast economy is highly dependent on tourism, a sector which has taken a battering as the high Australian dollar keeps foreign tourists away and sends many Australian holiday makers overseas. A struggling economy always impacts on a property market eventually. Secondly, the Gold Coast has the highest proportion of high rise unit development of any market in Australia – and this results in a very lump supply pattern of new properties coming on to the market. Often, after a concerted building surge, unsold properties sit unsold on the market for some period of time, deflating prices.
Yes, you’re right I didn’t mention the UK “undersupply” which makes an interesting point in itself. In 2003, the Bank of England used a complex monetarist approach which essentially said there must be a housing undersupply as property prices were rising at twice the rate of inflation. I think you will find that even at the time, many industry experts thought this methodology was a perhaps little too reliant on economic purity rather than commonsense.
In Australia, the most common approach to estimate whether we have a housing shortfall or oversupply is to compare the number of new households reported by ABS with the number of new housing units completed. The National Housing Supply Council and all the major banks use this methodology and they all put the accumulated housing shortage in Australia at between 180,000 and 225,000 dwellings.
It’s that housing shortage, along with a relatively strong national economy which is underpinning the fundamentals of the property market. To be clear, I don’t, see a major boom around the corner, but nor do I see any of the conditions for aserious property price deflation present in any of our major capital cities. The Gold Coast, unfortunately, is likely to have an underperforming property market for another 12-18 months because it is the only major city with an oversupply problem.
Comment by Greville Pabst — March 23, 2011 @ 11:14 am
I know how these bubbles start to burst, with people like me. I’m a potential first time buyer, I’ve got the deposit and a stable well paying job and I’m just saying no to this game of pass the parcel.
I’m currently living in a house “valued” at $1.2 million but only paying $490pw in rent, I make good money but if I wanted to buy my own place I’d be living in a cardboard box, paying much more than that and expecting to see it rise in value by up to 20% each year? If this is a ladder then the bottom of it is greased, made of cardboard and on fire.
The only way buying a house makes sense to me is if I truly believe there’s going to be someone guilable enough to buy it off me, I just can’t believe that will happen. I’ll keep my deposit and wait till the bottom falls out of what’s essentially the old folks market.
Comment by Steve — March 30, 2011 @ 10:55 am
Gotta agree with Steve on this one – the sentiment has changed and this sort of article starts to look a bit desperate to be perfectly honest. I and my family live in a great inner west terrace (600pw) money in the bank since selling my home early last year and there is no way i am getting back in until the rest of the tide is out.
Cheers and good on you Steve for being up front!
Daniel
Comment by Daniel — April 4, 2011 @ 5:34 pm
Comments like Steve’s (comment #3) and Daniel’s (#4) remind me of a cartoon I’ve seen, which shows a dusty skeleton sitting in a rental property. The caption goes something like “He’s STILL waiting for house prices to fall.”
Other people that have confidently bet that Australia’s house prices would crash have ended up having to hike up Mt Kosciuszko wearing a T-shirt that says “I was hopelessly wrong on house prices.” Oh well – if you can’t be right, you can at least improve your cardio fitness in the process of being wrong. (Right, Mr. Keen?)
Almost since records began, Australia’s house prices have followed a similar pattern – long periods of price growth interrupted by periods of flat prices, or even modest falls. Then the growth resumes again.
We’re in a flat phase at the moment, while affordability catches up a bit. Average wages are rising, interest rates are stable, the economy is doing well and house prices are flat (or recording modest falls in some areas, and modest growth in others).
Therefore, housing affordability is improving… which is a good thing. It needed to.
Once housing affordability catches up a bit, house price growth will resume – like it always has, and always will.
I think all the silly “house price crash” nonsense is creating a large class of very unfortunate, sadly misled Australians who think they’re being clever by vowing to keep renting until some imaginary, huge “house price crash” occurs in Australia. Some even call this “strategy” a “buyer’s strike.” These people may become the pool of long-term renters that will make the next generation of property investors wealthy by paying their mortgages off for them, while the landlords enjoy the capital gains.
If you’re waiting for the Great House Price Crash to occur in Australia, you might as well be waiting for the Easter Bunny.
Comment by Nick B — April 7, 2011 @ 2:22 pm
I agree with Daniel. You can pretty much ignore the no-bubble talk coming from the real estate industry, banks (especially Commonwealth Bank and Westpac who are up to their eyeballs in mortgage lending), property investment gurus, and publishers such as Fairfax who are making huge revenue from property listings in Melbourne Weekly and the like. The independent economists are generally in agreement that Australia is experiencing a massive housing bubble and that there is no housing shortage. The general feeling is that the bubble has already popped and prices are falling and will fall significantly over the next few years. To Nick who seems to think that house prices never fall. They said that in the US, Ireland and Spain and their property markets have collapsed. Property prices in Australia have fallen significantly on multiple occasions in the past and they are currently falling. Our house prices are absurdly high but that is all about to change.
Comment by Mikey — April 14, 2011 @ 12:05 am
This article is hilarious. I love this part at the start ….
“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.”
And what happened next in the American market three years later after 2004? Hmmmm…
If The Economist points out a bubble, (an irrational over valuation of an asset class), and if that bubble doesn’t pop immediately, this does not make The Economist wrong in it’s assessment. The Economist and other forecasters are pointing out that the asset class is seriously overpriced. Real estate yields of 3% or less do not make sense, and supposed real estate investors who buy into a market like this simply buy into the greater fool methodology of investment and are nothing but real estate speculators.
All assets need to be assessed based on their income potential not their anticipated future capital growth. When real estate yields 8% and borrowing costs are 7% it makes sense, but when yields are 3% and borrowing costs are 7% it’s a no brainer, it’s a dead duck, the investment philosophy relies on nothing but teh hope of prices rising. Guess what, prices can and do retreat over significant time periods.
Comment by Michael — August 6, 2011 @ 12:34 pm