The chorus of concern about ‘inflated’ Australian housing values has increased with the anonymous analysts of The Economist branding Australia ‘the most overvalued housing market in the world’. This accords with statements by the IMF and OECD as well as other foreign entities.
Undoubtedly, investors poised to enter the 2011 property market are worried; in fact, just about all of us in a country where the vast majority of wealth resides in the family home could justify our concern.
Should we believe such hallowed international institutions?
The Economist says our homes are 56.4 per cent overvalued, comfortably above Hong Kong’s 53.7 per cent and the property values of Shanghai, Sweden or Switzerland. Consequently, much of Australia’s media has adopted the view that if Sydney and Melbourne homes cost more than those in Hong Kong, we must be in a bubble.
Forgetting of course that the Reserve Bank of Australia and several major banks unequivocally stated last year that there was no bubble in Australian property, what exactly did the Economist measure? Fortunately, James Kirby of The Sunday Age recently asked that question. The answer is the ratio of home prices to rents in 20 economies.
What about earnings? What about supply? What about unemployment? What about immigration? What about the health of individual economies?
Kirby points out how ‘leaky’ The Economist’s single measure truly is, observing that it could equally be said that ‘Australia tops The Economist list because our average rents are too low’. In fact, although yields have remained unchanged at four per cent for many years, they are beginning to rise, as predicted in First National’s 2011 Property Market Outlook.
Australia’s default perception concerning our own economic success and house price stability appears strongly tied to our historic national obsession with cutting tall poppies. Surely if house prices in the UK, USA and parts of Continental Europe have suffered falls of 40 per cent or more; what makes us so special? Why couldn’t it happen here? Surely we must be in a bubble!
This economy is rated as one of the strongest in the world.
It’s no fiscal anomaly that our banks and other financial institutions didn’t collapse like those in so many other countries. The housing market is almost unique and that’s also no coincidence. Nominate, for instance, any single country with such vast areas of land but a population concentrated in just four cities.
Perhaps our values are entirely justified.
The family home is a tax shelter. Unemployment is low by international standards. Immigration remains at record levels post World War Two. Undersupply characterises most major property markets. What’s more, the factors that could start to move prices higher or lower are dormant. Levels of investor activity in the marketplace have scarcely changed since the GFC and there is no prospect of housing oversupply depressing values at any stage in the future.
Although housing loan approvals have fallen recently, this is largely associated with the summer floods of Queensland, New South Wales and Victoria. The ANZ bank says solid underlying fundamentals should support stable growth in housing finance from the second quarter.
While the destruction of property and damage to businesses throughout these regions will affect economic outcomes for the next few months, reconstruction and replacement of household goods is expected to boost the economy.
The potential for Australia’s economy to be affected by the impact of the earthquake, tsunami and nuclear crisis on Japan, our second biggest trading partner, may now generate new concerns for investors and property owners.
Australian uranium miners and exploration companies may be affected, longer-term, if public support for nuclear power generation wanes as a result of Fukushima. However, coal markets and Liquid Natural Gas (LNG) exporters stand to gain from any move away from nuclear energy. While iron ore spot prices will come under pressure as Japanese steel manufacturers suffer production anomalies associated with electricity shortages, the demand for energy and raw materials in Japan can only increase.
Coming back to international observations of the Australian property market, as The Sunday Age’s Paul Kirby observed, statistics are always riddled with localised exceptions. For example, Australia’s median house price is $412,000 but try finding a house in many of Sydney’s suburbs with that budget! So, when you start comparing house prices internationally, the problems are enormous.
It’s clear that the factors driving the property market have been stalled by successive interest rate rises. However, there are few signs that prices are going to plunge. What’s more plausible is the moderation of a marketplace that has performed exceptionally well in recent years, and a return to gentle, albeit slower growth throughout the latter half of 2011 and beyond.
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