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The biggest property myth of 2011

Probably the biggest property myth of 2011 was the claim that Australia was in a “property bubble” that was about to burst.

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% rather than down.

Interestingly he now predicts that house prices will fall around 5% this year, and I must admit that this is likely to be the case in some areas.

Watch out for the economic tsunami

Let’s not forget Harry Dent another purveyor of doom who came to our shores last year warning that 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 1990’s.

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 are immune to the overseas problems, clearly we are not, but I can’t see a property crash 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 that 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 they suggested our property markets were overvalued by 61 per cent based on the ratio of house prices-to-rents.

Then only last week the latest Demographia International Housing Affordability Survey reported 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?

Let’s start by looking at the latest figures from RPData.

 

As you can see Australian property values fell by 3.6 per cent nationally for 2011 and Brisbane and Melbourne experiencing a 6.8 per cent and 6.1 per cent market value decline respectively.

Australian Property Monitors also reported that median house prices rose slightly around the country in the December quarterThis is the first such rise for their index since late 2010, and was dragged up by a stronger than expected result in the Melbourne market.

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 to many 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 is going to crash.

Economist Christopher Joye gives the final word on house price affordability in this excellent article here.

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 out-dated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.

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 struggled when housing ate up 30 per cent or less of their gross earnings.

According to a paper from the United States 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 United States National Housing Act of 1937.

Times have changed a lot since then – we now live differently.

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 should look 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 that rising household incomes mean that the 30 per cent traditional affordability benchmark is now out-dated.

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.

The AHURI study I mentioned above found similar results.

Now don’t get me wrong…I’m not saying some people are not suffering from mortgage stress. What I am 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 left over.

What it boils down to is that potential first-home buyers 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.

And 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.

In the meantime we’ll see more US analysts surprised that Australian real estate hasn’t collapsed as their market has. The problem is that these economists keep analysing Australian properties as if they were shares – it’s like comparing apples with oranges.

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 is 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.

We are moving into the next stage of the property cycle

And the next stage is the stabilization phase of the cycle.

You see, the markets don’t move directly from the downturn phase to a property upturn. There is a period of time where buyers return and take up the slack before prices start rising.

And I expect more buyers to return to the market this year when they realize prices won’t fall any further.

By the way…the stabilization phase is a great time for savvy investors to get set for the upturn stage of the cycle.

This year may be a good time to buy property – I have always found it a good time to buy when everybody tells you that property is a bad investment. Now is the time to get set for the future.

And over this year I’ll be giving you my thoughts on how to firstly protect your assets and then how to grow your wealth through:

  1. My daily blog – this is a different subscription to my fortnightly newsletter. If you don’t already subscribe I suggest you do so by clicking here.
  2. My fortnightly newsletter – If you are not subscribed for this please do so at the top of this page.
  3. A series of National Property Update seminars I will be conducting in 5 states in March and April. I’ll send you details of these soon.
  4. My Mentorship program where I work closely with a small group of investors to help learn the science of becoming wealthy. The next intake opens soon. Find out all about this program that has helped hundreds of investors move up to the next level by clicking here.  The next intake is open now, so please join me and work with me this year.
  5. Wealth Retreat 2012. This is Australia’s ultimate educational and networking event for property investors, entrepreneurs and business people. If you’re a serious level 3 or Level 4 investor, or you want to become one, put aside the last weekend of May in your diary and join a small group of investors who have already escaped the rat race by building their property investment business. Check out more by clicking here.

Of course I’ll keep you up to date with how to take advantage of the changes happening in our property markets in future updates, but it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team at Metropole have no properties to sell, so their advice is independent and unbiased.

If you want to find out a bit more about what is happening in your local market and what our research suggests is in store for us, join us at a free property briefing in Melbourne, Sydney and Brisbane or with our associates in Perth. Just click on this link to find out more and reserve your place.

I’m looking forward to 2012. Are you?

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'The biggest property myth of 2011' have 13 comments

  1. Avatar for Property Update

    February 3, 2012 @ 2:05 pm Tristan

    Love your new site!

    Reply

  2. Avatar for Property Update

    February 3, 2012 @ 2:08 pm Tristan

    You are right, the sharemarket drops more in a typical day than a property market for entire last year.

    Reply

  3. Avatar for Property Update

    February 3, 2012 @ 5:28 pm Archie

    Steve Keen might have got it wrong, however, I still don’t think the housing indices should be dismissed altogether.

    Reply

  4. Avatar for Property Update

    February 5, 2012 @ 12:55 pm Dave

    Welcome back Michael, I’ve missed your regular newsletters. We’re looking forward to availing ourselves of Metropole’s unquestionable expertise this year and getting off the 9 to 5 Carousel.

    Reply

    • Avatar for Property Update

      February 5, 2012 @ 3:15 pm Michael Yardney

      Thanks David
      We had a 4 week break, but it;s good to be back. It will be another interesting year

      Reply

  5. Avatar for Property Update

    February 7, 2012 @ 11:05 am Get Real

    hmmm….no conflict of interest here?
    I think I might go and ask my real estate agent on whether I should buy a property from him, I’m sure he’ll have my best interest in mind.

    Reply

    • Avatar for Property Update

      February 9, 2012 @ 10:42 am Jen

      Yep what “property investment” spruiker in their right mind would say its going to fall. Sorry but all credibility fails when you get to the bottom with all the property investing ads and links.

      Its like you deliberately want to hurt people!

      Reply

  6. Avatar for Property Update

    February 9, 2012 @ 12:01 am chris

    Why would you compare the sunshine coast with the gold coast. I am sure you have done your research on the sunshine coast and noted the $2.5B being spent on the largest public/private teaching hospital in the country, not to mention the accompanying infrastructure and the employment this will bring. What about the fly in fly out jobs Clive Palmer is negotiating and the airport upgrade plans. Regional areas are outperforming the capital cities in both yield and growth, why not look outside your box and consider other areas? Demand drives yield and growth do you not see the pent up demand on the coast?

    Reply

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      February 9, 2012 @ 9:00 am Michael Yardney

      Chris
      Thanks for the comment, you are right. The big capital cities are not the only place where there is growth.
      However I also like stability and the larger population and economic base our capital cities have means less volatility in property values. It’s the method that has worked for me, yet I accept others have different investment philosophies.
      I also agree the property market in the Sunshine Coast is very different to the Gold Coast (which is in a much worse position) but why should a new hospital boost the general property market?

      Reply

  7. Avatar for Property Update

    February 15, 2012 @ 10:22 pm Lara

    Thank you Michael. I always read your newsletters and gain a lot from them. In regards to the negative comments above, I find that you give advice without forcing your ideas on anyone. And this advice you give is free. I appreciate it, and to anyone who doesn’t, don’t read it!

    Reply

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      February 16, 2012 @ 4:32 am Michael Yardney

      Lara
      Thanks for the kind words.
      I have allowed the negative comments to be posted, because I’m trying to be fair. Clearly I don’t agree with them, but I’m happy I’ve made the readers think.
      I’ve based my comments on my view of the world, which has served me well and as you say this information is free. The ads help pay for it, like on TV.
      Once again I appreciate your kind sentiments. It makes it all worthwhile

      Reply

  8. Avatar for Property Update

    February 19, 2012 @ 8:30 pm George

    I am your loyal reader, Michael. You are a big advocate of buying in good capital gain areas and using the equity to buy the next and the next properties. How can this be achievable when I have 3 negative cash flow deals and wanting to be buying the 4th and the 5th one? Servicibility is the issue here. Does that make sense to buy in a remote area to have positive cash flow to increase the servicibility here to keep on investing?

    Your reply will be greatly appreciated.
    George

    Reply

    • Avatar for Property Update

      February 19, 2012 @ 9:26 pm Michael Yardney

      George
      It was Warren Buffet who said “wealth is the transfer of money from the impatient to the patient.”
      Congratulations on accumulating 3 properties in your portfolio.
      Now it’s probably time to stop and let your portfolio do it’s job. slowly growing in value and rents increasing.
      Most people I see want to by 1 property each year, it just doesn’t work that way. You’ll probably have to wait a few years now.That’s what everyone lese does.
      BY the way…you can speed things up by “manufacturing” capital growth & rentals through renovations

      Reply


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