I would not try to argue that Australia’s property markets are cheap. They’re not.
But the arguments in favour of their being an enormous and unsustainable property bubble are also wrong and often reflect the preconceptions or hopes of those making the arguments.
A “bubble” is defined as a speculative mania or an unsustainable investment scheme, and tends to be characterised by a chart of prices or valuations roaring upwards before crashing very sharply.
Instead in Australian property, what appears to have happened is a moderate correction of prices of between 5-15% in most areas before prices stabilised.
That’s not to say that prices can’t fall some way further yet. Of course, the short-term outlook in any market is uncertain.
However, here are 8 reasons why over the long-term, property prices in Australia are likely to actually increase rather than crash:
1 – Population growth
To drive property prices up over time a country needs two things: a growing population and growing wealth per capita. Australia has both in spades.
Some countries have had a falling population and as demand falls, either gradually or quickly so do dwelling prices. Perhaps one of the best modern examples was in Japan where population growth stalled and then after the turn of the century the population began to fall which naturally resulted in easing property prices.
The contrast with Australia couldn’t be more marked, with the population increasing by millions of people with each passing decade. Over the next few decades the population is likely to boom to somewhere between 30 and 35 million.
2 – Demographic shifts
Even where the population of a country is increasing, prices can still fall if the population shifts from one style or location of living to another.
A good example was seen in certain states in the US, such as in the Midwest farm crisis of the 1980s. As commercial farm profits plummeted, numerous small farms were forced into receivership and as tenants moved away, demand for property collapsed.
In Australia, we have a strongly urbanised way of life, with most of us living in the major cities, and as new migrants flood to the capital cities, demand only continues to increase.
In fact, the falling average household size in Australia causes further headaches for city planners – we need thousands more properties to house the same number of people, as apartment and townhouse dwelling becomes ever more popular.
Meanwhile, the idea of a quarter acre plot in the outer suburb seems like a dated concept to many young Australians.
3 – The lack of over-supply
Some countries have had major property corrections over the past few years. Spain is a great case in point. Ireland too. The US has been another. What do these countries have in common? Too many properties: supply outweighing demand.
Does Australia have an over-supply of under-supply of properties? There are two schools of thought on that, but the reality is that where most of us want to live (close to capitals) there is an under-supply in a number of the major conurbations.
Granted, in certain locations, such as in the CBD of Melbourne, there are too many apartments and prices are easing in these areas.
In cities such as Perth, Darwin, parts of Sydney, and indeed in many of the supply-contrained inner- and middle-ring suburbs of the capital cities, vacancy rates are very tight indeed and this forces prices up.
4 – Constrained demand
There is a scarcity of land available for release in the main capital cities. Combined with very slow and ineffective systems of public transport and problematic zoning and approval restrictions, the supply of prime-location property fails to keep pace.
The dwelling approvals and construction data reveal a worrying rate of home building for Australia.
5 – Debt allocation
While some mortgage holders got in over their heads, on a national basis HSBC’s most recent housing report noted that:
“…housing debt in Australia is well allocated. The bulk of the debt is held by wealthy households. There are very few highly indebted and financially vulnerable households. On average, mortgage holders are well ahead of schedule on their loan repayments.”
6 – Housing Price to Income ratios
It’s easy to see how people come up with massive price to income ratios. They take the average gross salary of an individual in Australia and compare this to the price of a house in Sydney’s eastern suburbs – and come up with a number in the stratosphere.In reality, large houses in the prestige suburbs are rarely bought by salaried employees with little equity and nor are they likely to be in the future. It’s an interesting fact that around half of the all homes in Australia have no mortgage debt at all against them.
A more realistic measurement today is to compare the average income of a household with the cost of an average dwelling (which includes the one third of properties located in the regions and not only those in the capital cities). Note I say “dwelling” here not “house”. HSBC estimates that 24% of Australian properties are of the medium-density type rather than standalone dwellings.
HSBC thereby calculates the housing price to income ratio to be 3.7 times. The RBA comes up with a similar figure (the graph below only runs to the middle of 2012, before interest rates were dropped significantly further).
While these figures do show that prices are not cheap, nor do they indicate a speculative mania.
7 – The arguments of first homebuyers
There is a lot of talk of property in the suburbs close to the centres of major capital cities being unaffordable to first homebuyers. I do sympathise with this view, but it is hardly a phenomenon that is unique to Australian cities.
Talk to first homebuyers in Washington, London, New York, Hong Kong, Miami, Tokyo, Moscow, Vienna, Paris, Frankfurt, Geneva, Osaka or Singapore and ask them if they consider their lifestyle to be affordable (if you can find any first homebuyers, that is).
8 – The rise in household debt
Charts such as these are often produced as irrefutable proof of a bubble. I’d question this, for although the use of household debt did increase in the 1990s, this was a natural and perhaps inevitable response to a structural change in the economic environment, being low interest rates and low inflation.Obviously when interest rates were at the 17% nosebleed level, households were strongly disinclined to leverage up heavily.
Will interest rates return to those levels? Well, nothing is certain, but with interest rates now at just 3.00% and deemed by futures markets as more likely than not to fall yet further, we won’t be seeing high interest rates again any time in the near future.
And, as HSBC notes below, it is hard to argue that debt levels are unsustainable (particularly in light of falling house prices through 2011 and 2012) for they have remained at similar levels for over a decade.
A bubble is a speculative mania. Housing price to income ratios remaining at a constant level for a decade may therefore indicate high prices, but not a speculative bubble.
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