Probably the biggest property myth of 2011 was the claim that Australia was in a ‘property bubble’ that was about to burst.
BY MICHAEL YARDNEY
It was only a few years ago when doomsday economist Steve Keen predicted Australian house prices would plummet. Awkwardly for him, average house prices went up 40 per cent, rather than down.
Interestingly he now predicts house prices will fall around 10 per cent this year.
Let’s not forget Harry Dent, another purveyor of doom, who came to our shores last year warning an economic tsunami was about to hit. Starting in Europe, Dent predicted the downturn would spread to the US, China and eventually Australia, causing property values to drop to levels not seen since the late 1990s.
He was right about the economic troubles much of the world faces, but I don’t think he understands the fundamentals of the Australian property markets.
I’m not suggesting we’re immune to the overseas problems, clearly we’re not. And I must admit I can see property values falling furth
er in some areas, but I don’t see a property crash happening here.
What about affordability?
Throughout the year there were cries that housing is unaffordable and ‘something’ had to be done.
The year finished off with The Economist magazine warning Australian house prices could plunge by as much as 25 per cent on the back of a global credit crunch caused by the European meltdown. This is not as bad as last year when it suggested our property markets were overvalued by 61 per cent based on the ratio of house prices-to-rents.
Then this year started with the Demographia International Housing Affordability Survey reporting that “Australia exhibited the worst housing affordability of any national market outside Hong Kong”.
So is our property market really so overpriced and is there a bubble waiting to burst?
The latest figures from RP Data suggest Australian property values fell by 3.6 per cent nationally for 2011 and the most recent Australian Bureau of Statistics figures suggest capital city house prices fell 4.8 per cent over the past year.
The predictions of a property market crash just did not eventuate in our main capital cities.
Of course it did in some of our holiday locations like the Gold Coast and the Sunshine Coast, but these were never really areas to invest in.
I know some property pessimists would argue that the bubble is just getting bigger and bigger which means Australia is heading for a bigger property crash just like overseas.
Is housing really unaffordable?
I agree that a lot of housing in Australia is expensive. But that’s what comes from having large dwellings in some of the best spots in the world to live.
Let’s face it… house prices got ahead of themselves in some parts of Australia and have since corrected, especially in the more affluent areas and holiday locations.
But that does not necessarily mean property is unaffordable or that it’s going to crash.
The most commonly used benchmark to determine whether housing is affordable is if it costs less than 30 per cent of a household’s income. However some households can afford to spend more than half of their income on mortgages or rents, while others struggle when housing eats up 30 per cent or less of their gross earnings.
Another way of measuring affordability
A new study by the Australian Housing and Urban Research Institute strongly suggests that the traditional method of calculating housing affordability is outdated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.
According to a paper from the US Census Bureau, the rule that households can devote 30 per cent of their income to accommodation costs before the household is said to be ‘burdened’ evolved from the US National Housing Act of 1937.
Times have changed a lot since then.
There are a lot more DINKS (double-income no kids), SINKS (single-income no kids) MINGLES (middle aged singles) and one-person households.
Yet another way of looking at affordability
Property commentator Michael Matusik suggests that instead one looks at income left over after debt servicing because this approach paints a different picture to that obtained simply by calculating the proportion of income devoted to repayments.
Rising incomes have allowed households to meet rising loan repayments whilst maintaining, and often increasing, living standards.
Matusik believes rising household incomes mean that the 30 per cent traditional affordability benchmark is now outdated.
In fact, given higher income levels now, households can devote as much as half of their income to debt servicing, whilst maintaining the same standard of living.
Now don’t get me wrong… I’m not saying some people aren’t suffering from mortgage stress. What I’m saying is that some households can easily afford 50 to 60 per cent of their income going on rents or mortgages and still have plenty enough left over.
What it boils down to is that potential first homebuyers need to understand that buying your first property is not easy. It never was. It involves saving discipline, sacrifice and compromise and maybe moving into something not as attractive as your ideal home first up.
Why I don’t think the Australian property market will crash
Currently a tug of war is affecting our property markets, with low interest rates pulling hard on one end of the rope and economic uncertainty joining forces with subdued prospects for economic, income and employment growth at the other.
I expect the economic side of the equation to win out in the near-term, influenced in the first half of 2012 at least by continuing global financial turbulence.
This will mean property values are likely to remain flat in most parts of Australia for the first half of the year.
But our overall market is unlikely to collapse. For that to occur we would need to have high interest rates, massive unemployment, a recession or a failure of our banking system.
I can’t see any of these happening in the foreseeable future.
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 US. 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.
Michael Yardney is the director of Metropole Property Investment Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Investment Update blog