The question of whether Australian house prices are overvalued has been an extremely polarising issue for some time. Many observers believe property values in Australia are severely overpriced relative to other countries, relative to historic trends, relative to incomes, and relative to rental yields. Such observations have led some people to believe that a speculative housing bubble may be growing in Australia.
Normally in an unregulated economy, housing values should meet an equilibrium based on availability versus demand. When values increase, this suggests that availability has reduced or demand has increased (or both). In fact in Australia, both events have occurred. First, very low age interest rates and easy credit conditions led to increased borrowing capacity, thereby boosting demand for property. Second, strong population growth (including immigration and natural growth) further lifted demand. Third, the Australian government choked the supply of new dwelling stock, through high taxes and roadblocks on residential development. Finally, government incentives, such as taxes and grants are directed at the property market, also increasing demand. As a result, Australian median house prices have been on a rising trend in real terms (after inflation) for around sixty years, have increased particularly sharply from late 90s to early 2000s, and have remained at those elevated levels to the present day.
Recent analysis by The Economist identified the magnitude to which Australian house prices have diverged from historic trends. The Economist calculated that Australian house prices are more than 60% overvalued, making Australia the most overvalued housing market of all the countries analysed by The Economist.
Additional analysis conducted by Demographia as part of its International Housing Affordability Survey found that Australian house prices were the least affordable of the six countries examined (those countries being Australia, Canada, Ireland, New Zealand, UK and USA). Based on a ratio of median house price to gross annual household income, Australia was considered to have the most severely unaffordable housing market.
Also, in August 2010, Goldman Sachs declared that Australian house prices are "25 to 35 per cent overvalued, based on a measure of affordability that takes house prices, income, lending criteria and mortgage rates into account".
Furthermore, legendary American investor and bubble expert Jeremy Grantham, Chairman of GMO, has stated that he believes "the two (bubbles) that are (currently) outstanding are the UK and Australian housing bubbles" and that if those bubbles do not collapse, "it will be the first time in history that such a bubble has not broken". Grantham goes on to say, "The U.K. and Australian housing bubbles may be unimportant to U.S. investors, but to bubble historians they look extraordinary. The U.K. event in particular has broken out of any previous mold. Despite the usual cry of "special case", they will decline around 40%, back to trend, as was the case for the previous 32 bubbles."
Australian first home buyers today face an environment where houses prices, relative to incomes, are twice as expensive as those of their parents. The average house price in most capital cities is equivalent to more than seven years of average income (up from roughly three times income for the previous generation).
Several important factors (in addition to lack of land supply) are generally considered responsible for housing affordability issues in Australia. These include rapid population growth, irresponsible lending practices, and government tax policies. In particular, high immigration recently resulted in an Australian population growth rate of around 2% (roughly twice the global average).
Australian first home buyers today face an environment where houses prices, relative to incomes, are twice as expensive as those of their parents. The average house price in most capital cities is equivalent to more than seven years of average income (up from roughly three times income for the previous generation).
Several important factors (in addition to lack of land supply) are generally considered responsible for housing affordability issues in Australia. These include rapid population growth, irresponsible lending practices, and government tax policies. In particular, high immigration recently resulted in an Australian population growth rate of around 2% (roughly twice the global average).
Sadly, the exponential growth of property related debt in Australia has created nothing positive for most Australians. While the explosion in property credit may have boosted GDP figures, it has not manifested in any real production or productivity gains. Instead, it indicates wasteful consumption, as the vast majority of property related debt is funneled into the trading of existing dwellings, rather than the development of new housing stock.
Apart from providing basic shelter, housing offers little of benefit to an economy (beyond the initial construction boost). On the other hand, business investment, which furthers technological advancement and creates employment, does provide long lasting economic benefits. The vast capital flows that are currently directed towards the trading of existing dwellings in Australia could be allocated much more productively to other sectors of the economy.
Furthermore, some observers have suggested that speculative hoarding of property is rife, with many property investors holding empty dwellings in the hope of future capital gains. Many parts of the country are experiencing a rental crisis, and this may be due to large number of multiple property owners being unwilling to lease their excess properties. According to recent Senate Estimates Transcripts regarding data provided by the Housing Supply Council "at any one time in Australia, there are roughly 800,000 vacant dwellings". When such investment properties are left vacant with the primary aim of accumulating capital gain, this contributes nothing to the provision of shelter in Australia.
Apart from providing basic shelter, housing offers little of benefit to an economy (beyond the initial construction boost). On the other hand, business investment, which furthers technological advancement and creates employment, does provide long lasting economic benefits. The vast capital flows that are currently directed towards the trading of existing dwellings in Australia could be allocated much more productively to other sectors of the economy.
Furthermore, some observers have suggested that speculative hoarding of property is rife, with many property investors holding empty dwellings in the hope of future capital gains. Many parts of the country are experiencing a rental crisis, and this may be due to large number of multiple property owners being unwilling to lease their excess properties. According to recent Senate Estimates Transcripts regarding data provided by the Housing Supply Council "at any one time in Australia, there are roughly 800,000 vacant dwellings". When such investment properties are left vacant with the primary aim of accumulating capital gain, this contributes nothing to the provision of shelter in Australia.
Recent house price data from the Australian Bureau of Statistics, for the September quarter 2010, indicated that house prices were finally heading down in five cities, yet up in three cities, and with a slight positive national result (due mainly to a particularly strong Melbourne result). The question remains - what happens next? Will the Q4 ABS data be the first quarter to show a national fall? If so, that just might spook the public, and the falls could accelerate. However, if house prices rise again in Q4 then the public may once again believe that the worst is past, and that Australian house prices are back on an upward trend. Public sentiment is the key.
