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
Michael, you said in your opening paragraph, “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”
Can you tell us all what index you might be referencing from when you say average house prices in Australia went up 40% only a few years ago?
Your credibility for this article depends on your ability to substantiate your sweeping remarks – otherwise it simply appears to all us readers that you are merely exaggerating facts in a futile attempt to construct an argument.
Comment by Mark — February 13, 2012 @ 2:06 pm
Mark
Thanks – you’ve picked a good point.
I meant to say houses in the inner Sydney suburb where where Steven keen sold have gone up considerably. Unfortunately he sold at a cyclical low point.
You will find more reference to this in this post on economist Chris Joye’s blog:
http://christopherjoye.blogspot.com.au/2011/12/debunking-steve-keens-predictions.html
And it is also referenced in Jhn McGrath’s blog here:
http://www.johnmcgrathblog.com.au/blog/2/68/
Comment by Michael Yardney — February 13, 2012 @ 2:37 pm
Interestingly any yahoo can come out and say the sky is falling and its gets front page press in the media. I find this frustrating as I know real estate is a great at producing income. Hey if banks lend me 110% on a rental property they must consider the risk to be almost negliable. Another point others have not realised is that the real estate has been flat for over 4 years. Does that mean values will “double” in 3 years to keep to the 7 year rule? Lets wait and see. I think they will.
Comment by John — February 16, 2012 @ 12:17 pm
Michael,
Awkwardly for you, you had to admit in your response to Mark’s valid comments that average Australian house prices did NOT in fact go up 40 per cent in the last few years. Equally as awkward is the fact that your article names and criticises those with opposite views, claiming that their predictions only came true (so far) in select areas (like the Gold & Sunshine coasts you specify as examples). Yet your own opening bold “40% increase” statistic only applied to the much more select “Inner city Sydney” market, and was obviously written carefully to to be assumed by the average reader as Australia wide (based on your previous opening sentence). Do you really think the average reader really cares how Steve Keen’s house has performed since he sold it? I think not. We would however like you to tell us specifically what prediction Steve Keen made and when, and how the average AUSTRALIAN house price has performed each year since Steve Keen made that prediction. Perhaps you could also do the same (specifically) for your own predictions that were made around the same time. Surely that would be more honest (albeit less spectacular) journalism, which I think we should be able to expect from someone who claims to be in the business of giving “independent, unbiased property advice”.
One thing that does interest me about the sale of Steve Keen’s property is if YOU would be prepared to buy it now for 40% more than what he sold it for. Given your optimistic remarks in the article about both Australia’s property market and investing in inner capital cities, I imagine you’d be Keen (pardon to pun) to leap at such an opportunity. Perhaps you should offer such a price to the current owner now and see if it attracts any interest. If not you, would you give independent, unbiased property advice to your clients to make such an offer (assuming their personal and financial situation generally suited a purchase in that area and price range)?
I would like to suggest that the biggest property myth for 2012 by far is that average house prices have gone up 40 per cent in only the last few years.
Comment by Adam — February 16, 2012 @ 4:38 pm
Michael,
Further to my previous comment, I would like to commend you for at least citing valid references for two of your less creative claims. You said:
“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.”
As your article implies that capital cities are a sensible investment and elsewhere general is not, can you please explain why “Australian property values fell by 3.6 per cent nationally, and … capital city house prices fell 4.8 per cent”? Shouldn’t it be the other way around according to your investment advice? Especially if we consider the Gold & Sunshine coasts would have dragged down the national figures, but not the capital city figures.
Add to this the fact that the capital city houses tend to generally be more expensive to buy and with lower yields. Just look at the figures in the API magazine you write for. Most such properties purchased in the last few years would be heavily negatively geared. Further, last week I renewed my insurance for 3 capital city properties I own. Two policies had doubled in price in the last year, and the third tripled. All policies remain unchanged with the same insurer with no claims in the past few years and only a very few minor claims over the last 10 years. None were affected by natural disasters. My point is that the overall return for most people who bought in the last few years would be very poor indeed – especially for those who bought in capital cities. Perhaps you could tell us how some of your clients who bought such properties in the last two years are faring? Please be specific with any figures you quote, and include their sources.
Can you please also provide the same figures as above for both houses and units for the last five years (nationally and for capital cities) so us readers can all make our own conclusions about how close we’ve come as a nation to the 40% boom your opening paragraph boldly speaks of. I noticed this article is the number 2 feature article in the latest API email newsletter. Perhaps you should correct your opening paragraph with what you “meant to say” (according to your response to Mark above), and do so quickly before your faithful API readers make important and potentially dangerous buying decisions based on this creative fiction which you youself now claim as being false.
Since posting my previous comment I’ve also noticed that your narrow “Australian” Market is even narrower than “Inner city Sydney”. In fact, it’s only a single suburb! Far more narrow than “the Gold and Sunshine coasts” you highlighted, which each stretch for hundreds of kilometres and are made up of dozens of suburbs. Perhaps you could name that Sydney suburb and provide it’s median house price for the last 10 years?
Finally, since posting your article we’ve had all four big banks (and some smaller ones) raise their interest rates in recent days, despite the RBA holding theirs steady. At least one of these big banks has also announced major slashing of jobs, as has Qantas. As far as I can tell, most of the job losses will be in capital cities. Given your article commenting on these factors being drivers for a decline in housing prices that are unlikely to occur, can you please also comment on these latest happenings, and your view of the likely effect on property prices. Australian prices as a whole that is, not just one specific yet anonymous suburb.
For the record, I currently own several properties in capital cities, I have never owned property on the Gold or Sunshine coasts, and I have owned property over many years in both capital cities and non-capital cities. I’ve done a mixture of buying and holding, renovating, small time development, and reselling for profit. Not a big scale property guru by any means, but I’m not complety inexperienced either, and I’ve been careful and fortunate enough to have made money out of every property I’ve bought so far. I’m willing to listen to anyone’s view of the current and future property market, as long as it IS unbiased and is supported with creditable, referenced statistics, and more interested in the truth than spectacular headlines.
Comment by Adam — February 17, 2012 @ 5:55 am
Well Adam, I can’t propose to know what’s in the mind of Mr Yardney so I’ll have to leave him to answer your other questions regarding his literary work, however according to http://www.rubyreports.com.au/blog/2011/12/21/2012-sydney-real-estate-predictions.html the suburb in question is Surry Hills.
Comment by ChrisP — February 17, 2012 @ 9:58 am
Adam: “At least one of these big banks has also announced major slashing of jobs, as has Qantas. As far as I can tell, most of the job losses will be in capital cities. Given your article commenting on these factors being drivers for a decline in housing prices…”
Employment in Australia is *improving*, not getting worse. While the media loves to print loud screaming headlines every time a bank or airline announces plans to cut jobs, the fact is that unemployment in Australia is decreasing.
According to yesterday’s Herald Sun – http://www.heraldsun.com.au/business/australias-unemployment-rate-at-lowest-level-in-six-months/story-fn7j19iv-1226272649689
“TREASURER Wayne Swan says the latest employment figures represent a great start to the year for the Australian economy. The jobless rate fell to 5.1 per cent in January as 46,300 people joined the workforce in the month… City Index market analyst Peter Esho said the unemployment rate could to dip below 5 per cent towards the end of the year… Recent job losses, while painful for the individual, are at least coming at a time of low unemployment, a Treasury official says.”
While it’s sad to see any company announce that a large block of jobs are being cut, it’s important to remember that (although it doesn’t make the huge negative news headlines that editors love) for every one of these job losses, many, many more jobs are being created. Unemployment is decreasing, not increasing.
If rising unemployment (which is not happening) would be a driver for declining house prices, then presumably falling unemployment (which IS happening) will be a driver for rising house prices.
Comment by Nick B — February 17, 2012 @ 11:30 am
Adam – don’t get too wound up – the writer of this article (Michael Yarndey) has already embarrased himself enough and I think he knows it! I’d say Michael has learnt a very important lesson in his writing career in this article alone – and that lesson is don’t treat your readers like fools. This article was an insult to any of us who have half a brain and it simply makes your look uninformed and desperate, if not manipulative. I’m not trying to make this a personal attack, but what a way to turn your loyal readers off!
Comment by Wayne Cowan — February 22, 2012 @ 2:45 pm
Lol – don’t worry Wayne – I’ve exhausted all my verbal diatribe on the topic. Consider me all wound down
Comment by Adam — February 22, 2012 @ 3:23 pm