Bringing some sanity to the housing bubble fears – Michael Matusik

Housing bubble?  Give me a break.

I forewarned a few weeks back, that we might see an increasing detachment from reality as this residential market recovery takes hold.

I was thinking it would start in earnest sometime next year.  But it looks like I was wrong.  The loopers are already at it & in force.  Lord help us when we actually see some real heat in the overall housing market.

 Just the normal noises

For the record, Sydney house prices are up 8.3 per cent over the past 12 months according to RPData, but were up only 1.2 per cent last year & were down 2.4 per cent in 2011.

As for the rest of the country, Perth is up 7.9 per cent for the year but down 0.5 per cent last month while Melbourne is up 5.4 per cent for the year & the Brisbane-Gold Coast region is up a measly 1.8 per cent.

Hmmm, a housing bubble indeed.

Yet we now have the IMF – yes those clowns – planning to visit Australia (to help get a suntan, I suggest, rather than anything else) to determine if Australia is in deep throes of a housing bubble.

It was just two months ago, when we were still waiting for Australia’s housing market to bust.

For mine, what we are experiencing is the normal machinations of the property cycle – nothing more, nothing less.

Valuations are often short at the recovery stage of the cycle.  They sometimes overshoot near the peak.

There are many issues regarding valuations in Australia.  We have written about them several times.  Go here, here, here & here if you have nothing much better to do.

But given this is a Saturday post, maybe reading the weekend funnies would be more enlightening.

Development, redevelopment & renovations 

One of the problems with house price reporting is the way prices are measured & more importantly what influences the rise (or fall) of both median & mean house price figures.

New development or redevelopment often causes the middle & average price to rise, without seeing resale values increasing much at all.

This is what often happens around key infrastructure, such as railway stations.

New projects lift the median/mean values, whilst resale prices remain flat at the time of new development/redevelopment.

The same can be said about weekly rents.  Base property values/rents often rise faster closer to core infrastructure, but the overall residential cycle must be on the improve.

A similar trend can be found in many areas affected by flooding across Australia in recent years. 

Many of these areas, especially in Queensland, have now been redeveloped.  This has seen new properties replace older stock.  Median/mean values have often risen as a result.  But many owners in these areas, who are trying to resell flood-affected but unimproved homes, cannot get much more for their property than they originally paid for it.  They are often getting less than they most likely would have if they sold just prior to flooding.

Median & mean housing prices are also affected in the same way when it comes to individual house renovations.

Many areas across Australia are experiencing a renovation surge.

Areas which are going through his swell of reno activity are seeing a strong lift in suburban median & mean prices.  But when you factor in the cost of the renovation itself (and especially if you include your time at a commercial rate), then the true uplift in financial gain is far less than the headline suburban price growth being touted.

It is true that a high & consistent proportion of renovation work across many homes in an area, is a good thing in terms of improving the underlying investment potential of a location.

It is another of our key ten measures which helps us determine the strength of a place’s underlying investment clout.

Such activity suggests that owners are ‘placing money where their mouth is’, so to speak; which in turn often leads to more owner-resident resale interest; which increases the actual size of the resale market & in due course, can help get a much better price on resale.  But it takes time for the base value of property in such an area to increase.

New development; large scale redevelopments & major renovation activity cause median & mean values to rise.

But this isn’t the same as seeing the base value of the existing, unimproved housing stock increase in a certain location.

When we see rapid increases in the base value of residential property, and across widespread areas, then we are experiencing boom-like conditions.

I suspect that – outside of a certain areas in Sydney & Perth, maybe parts of Melbourne now – the base value of Australian housing isn’t increasing much at all.

But the IMF & I suggest this weekend’s papers will be telling you otherwise.

Enough, 825 words from me is too much, especially on a weekend.  Enjoy the rest of your day.

I am going to continue what I started last night – listening to LRB – Carry me gently ‘cross the water – Find me a place where I can hide – Blow me breezes never falter – Lead me back to sanity’s sid



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Michael Matusik

About

Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive


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