Australia has been one of the best performing property markets in the world in recent years, but is it now over-priced?
If you listen to the media, they will tell you that it is. Eight out of ten economists will tell you that it is. The man in the street who has never bought an investment property will tell you that it is.
They all know shit about real estate investing. So what I’m going to do now is go really heavy-duty on you. It took me 4 hours of research and 2 hours to write this bloody article. I didn’t go to bed until 3am in the morning.
No, I’m not a slow researcher or writer. I just had to think this through.
This article will take you 7 minutes to read. But you might need to read it a couple of times to actually get it… After all, it took me 7 HOURS and a lifetime of investment experience to piece together.
Let’s get cracking… Here’s how all of this happened.
Someone sent me a link to the Economist Magazine the other day. They have an interactive tool up on the website that pulls together a bunch of housing data from a bunch of different countries and lays it out in these nifty graphs.
Aint technology something.
Anyway, I thought it’d be interesting to take a look, and recap how the Australian property market is doing on an international scale. Particularly now that we hear all this talk of a ‘bubble’ brewing and unaffordable housing. Is that really what’s going down?
So first up, this chart here compares house prices for a bunch of countries, setting 2000 as a common base. It’s a mess of spaghetti noodles so let me break it down for you.
First up, let’s look at the underperforming countries – strip out the ones that haven’t boomed in recent years.
What you’re left with then is the US, Ireland and Japan.
Japanese house prices peaked sometime back around 1991, and have been on a downward run since. They’ve pretty much halved in value since the peak… I don’t pretend to understand the Japanese economy, or why it can’t get going again. I don’t think anyone really does. Let’s just lob that one into the too hard basket.
Singapore is the flat purple line. It’s had some wild rides, with a boom and bust in the 90s, and again around the GFC. These days its tracking slow and steady.
The other two countries are our classic ‘bust’ markets. The US and Ireland. Both markets are still in the process of picking themselves up off the floor.
The important thing to note here is that US house prices peaked in the middle of 2006 – a full year before the GFC. You hear a lot of people say that it was the GFC that caused the bust in US property, but the causality runs the other way. It was falling house prices, which exposed a whole bunch of dodgy lending practices, that put the financial system under such pressure.
And what caused the falling prices? Simple supply and demand. The US had gone on a building binge and had simply built too many homes. That glut in the market eventually put downward pressure on prices.
It’s kind of a similar story in Ireland. They’d also gone a bit crazy with the bricks and mortar. That was fine until the GFC put a freeze on credit, and a lot of people were caught with their pants down. Without credit fuelling growth, it came back to simple supply and demand, and when it did, it saw that there was a massive glut in Ireland too. Prices started falling (and again, thanks to some dodgy bank lending practices) got a bit of a run on.
Anyway, the take-home message for me is that a glut of housing is the most common trigger of a housing bust. I take comfort in that thought because I know there’s no glut here. In fact, I know we have a major shortage, so I’m not worried about a price collapse.
Anyway, if we strip out the under-performing countries instead, we’re left with a peloton made up of Australia, NZ, Canada, the UK and Hong Kong (and if we want to be picky and focus on this kind of arbitrary indexing point, Australia is winning. Yay.).
We can see that there’s not all that much separating the pack here, though Hong Kong has seen particularly rapid growth in recent years. Why?
China. Chinese hunger for foreign property hit Hong Kong first, before it started flowing out to the rest of the developed world, including Australia.
So if we’re winning here, does that mean Australia is expensive?
Not exactly. The Economist also provides ‘real’ house prices – house prices adjusted for inflation. This gives you a sense of the true value of property.
If we look at this group through the real prices lens, we can see that three countries – Australia, Britain and New Zealand, are still below their most recent peaks.
Three countries are still heading north – Hong Kong and Canada in particular, and to a lesser extent China.
So it seems to me that if you were worried about bubbles, China and Hong Kong would be your first port of call. But what do we know about these markets? Well, we know they suffer from under-supply (I’ve written about Canada, and Hong Kong is an island…), and they’re getting a big kick from China.
Just like we are.
Seems to me like there’s good reason for the recent price increases.
The Economist also tries to get a feel for affordability, by comparing prices against incomes and against rents.
On the incomes measure, we’re about bottom of the leader group, but there’s not a whole lot in it.
But on the rents measure, we’re quite a way off the pace. We’ve seen much starker divergences from rent in Hong Kong, Canada and New Zealand.
So is the Australian market expensive? Well, these measures aren’t perfect, and have no way of accounting for what’s happening with interest rates and mortgage serviceability. Never-the-less, it seems that we’re in good company, and actually doing better than a lot of places.
At the end of the day, it’s worth remember that the stellar markets of recent years, including Australia, have all been driven by fundamental dynamics. Supply is constrained, and demand (thanks to low interest rates and China) is spiking.
In that scenario, rising prices are exactly what you’d expect to see.