Now that I’ve got your attention, let me tell you how crazy my subject line is and why all of the doom-sayers have yet again got it wrong! Let’s begin…
Joe Hockey has called out “lazy” international analysts who are trashing Australia’s property market. He’s right. The recommendations of their “models” are actually laughable.
Basically, he told them to pull their finger out, or mind their own business.
While this is the same message he has for the long-term unemployed, I think he’s right on the money with this one.
More and more we hear the call from overseas that Australian property has caught a dreaded case of the bubbles.
But these calls are coming from institutions that don’t fully understand the reality of Australian property, and they’re based on simplistic rules of thumbs – what Hokey-Pokey rightly called “lazy analysis”.
Basically, these rules of thumb compare Australian house prices against incomes and rents. They do this simple calculation and then compare the results to other countries around the world. If Australia ranks highly, then there’s a bubble.
For example, at the end of last month, The Economist magazine reported that Australia had become “one of the most over priced housing markets in the world.”
How’d they figure that one out? Simple. They measured prices against rents, and concluded that Australia was a mind-blowing 55% over-valued. The only markets more expensive than ours were New Zealand, Canada, Belgium and Hong Kong.
They also compared prices against income. On that simple measure, they concluded that Australia is 33% overvalued – THE MOST OVER-VALUED COUNTRY IN THE WORLD!
Sell! Sell! Sell! Sell property, buy tinned food and shotguns.
Madness.
Never mind that there are huge structural differences between Australia and the rest of the world. We have been able to spend big on property because the economy and a (relatively) honest and well-functioning banking system supports it.
We’re not Spain with massive unemployment, a demographic crisis and a financial system only one bad cheque away from a full-blown crisis.
And never mind that there are unique factors driving the Aussie market. As Hokey-Pokey points out, the main story in Australian property is the chronic shortage of housing.
“Australia fundamentally doesn’t produce enough houses to meet demand.”
Exactly Joe. I’m glad one of you mob gets it.
House prices might be high, but that doesn’t mean that the market is broken. It doesn’t mean that prices are “over-valued”, and it definitely doesn’t mean that there’s a ‘bubble’.
High prices are exactly what you get when we “fundamentally don’t have enough supply to meet demand.” That’s what a well-functioning market should deliver.
It’s a classic case of mis-diagnosis. The Economist looks at the symptom (high prices) and then deduces that these high prices must have come about through some sort of bubbly madness.
But I could look at the exact same data – the exact same symptoms – and build a “Land Release Efficiency Index” and conclude that Australia has one of the least efficient land release systems in the world.
The logic is just as faulty, but we’d end up a lot closer to the truth in Australia’s case.
But if you bought what The Economist was saying, what would you do? Well Australia is over-valued, so that’s a screaming sell. But where would you buy?
China.
If Australia is 33% overvalued, on the same measure China is 38% undervalued.
Bargain right?
No of course not. Buying into Chinese property is probably the worst thing you could do right now.
The Chinese have leveraged into property in a massive way in recent years, and there’s a staggering oversupply of housing in some markets. Everyone expects Chinese prices to fall over the next few years.
Some say that the market could collapse altogether.
Why? Because China does have the two key ingredients of a bubble – a massive and uncontrolled explosion in credit, and a massive over-supply of housing.
These two suspects were also at the crime scene around the collapse in US prices around the time of the GFC.
It’s also these two factors that make me confident about the Australian market. As I said, there’s a huge undersupply, and credit growth has been slowing, and is well down on pre-GFC levels.
I’ve never heard of a nation deleveraging into a bubble.
But with all that going on in China, in a massive and unpredictable way, you’d have to think that international agencies would be out there warning about the bubble in Chinese property. Nope. They’re telling everyone its massively ‘undervalued’.
Buy! Buy! Buy! What could go wrong?
Fair play to The Economist’s marketing team, though. One set of data punched out by the work-experience kid over the weekend, and you’ve got a front-page headline in every country in the world. It’s been getting huge mileage in Australia.
You just can’t buy that kind of publicity.
But it’s as reckless as it is lazy. If investors actually followed their “models”, they’d be selling out of the Australian market – a mature and proven market with excellent prospects, and buying China – a developing and unpredictable market with atrocious prospects.
I actually can’t think of worse advice.
(Maybe sell Aussie property, buy Nigerian inheritance options.)
So good on you Joe for calling them on it.
But now you’ve seen that we’re not building enough, what are you going to do about it? Who’s going to whip the states and the councils into line?
Are you going to be the first pollie to get serious about it?
I’m hopeful, but not holding my breath.
Does Aussie property seem over-valued to you? What measure should we be basing that on?
Is it a bubble?
Graeme says
Good article as usual Jon… but the only thing wrong is that you suggested that they are lazy and don’t understand the Aussie property market well enough. They do but the big concern of the Managed Fund industry particularly the Industry Funds is that more money is flowing out of their funds and into property and once there it will never come back. First the Govt. attack their inflow of funds with the slowing of the increase in Compulsory Super now this. It is all about money and they are not worried about yours because they view yours as theirs. Good article and good on you Joe Hockey!
Nicola says
Hi Jon
After reading an article this morning about the property market collapse in Handan City, China with developers fleeing the country, tens of billions of money from shadow banking systems being ‘misplaced’, credit union officials being arrested and crowds of victims protesting outside government offices I thought you might have gone completely bonkers. Great headline grabber! Having seen all the empty high rise apartment blocks first hand one cant help but think that its going to get very ugly over in China.
SK says
About the ‘value’ of the Australian property, I get the property under supply, the overseas demand, the SMSF demand, stable government, legal system, etc etc. But at the end of the day, the real incomes for significant majority of the masses are not going anywhere… but there has to be some correlation
where this increasing gap between real aussie incomes and increasing property values are considered.
With regards to the possible China property collapse and its similarity with the US, I would like to call out one massive difference. The US Govt was as broke at the GFC and took Mugabe’s lead and started to print money on all the paper they could find. China has massive reserves with a government that can do whatever it wants. This free will, on the governments part, will drastically reduce the impact.
Jon Giaan says
Exactly. and when you remember that most wealthy Chinese are trying to do the opposite – get out of Chinese property and into Aussie, it shows you just crazy it is…
I reckon your right SK about china being in a very different position to the US. The Chinese government has a lot more ‘liberties’ than the American one. That might help avoid total collapse, but if was an individual in China, I’d be very nervous…
Martin says
The
Australian market is overpriced and the release of land is controlled so as to
keep prices high That’s the only reason there is a shortage of dwellings .There is a property code amongst the home builders and developers to keep it this way ! There no room is this industry for competitiveness’.
Salaries have not gone up 10 fold since 1985 I bought my1st home 29 years ago At 25
years I paid $31,000 for a 3×2 @ 29 years ago it is now valued at $350,000
How does
my 25 year old son at the same age I was, now borrow $350,000 to purchase the same home with
his salary?its double mine was back then but only equivalent to the same worth 25 years back.
You Idiots
of course Australia is over priced
Natasha says
I disagree, if your son works 2 jobs and save every dollar he can manage to save he will get a house or 5….it’s not rocket science it’s smart thinking and hard work that will take you places.
Michelle says
I have to disagree Martin. My parents purchased land and built on what was considered the outskirts of Brisbane at the time (1980) with a lot of rural land because they could not afford inner city suburbs. This town they bought in is now its own metropolis hence why its gone from $25,000 up to around $400,000 median today. There is still property available that people can afford, just not as close to the city. With jobs being readily available in many of the skirting suburbs, your son will be able to afford a house and work close by.
If the property market was so overpriced, then why is it I can still purchase investment properties within 25min of the Brisbane CBD that are either cashflow neutral or positive? Purchased one in November last year and just missed out on another this month.
I’m not rich in any sense but I am smart and savvy. As Natasha says, to get places in life, it is about taking control of your life and working hard to achieve what you want. It requires sacrifice. My family goes without now on a lot of things so that we can afford to acquire properties to fund our retirement and pass down to our children.
Mark says
Aussie property is absurdly overvalued.
Ignore the Economist at your peril…
The old “its different here” arguement…. Classic trap.
We do not have a fundamental shortage of houses. This has been empirically proven.
http://www.macrobusiness.com.au/2014/09/the-great-shortage-housing-myth/
If by shortage of houses you mean, that we don’t have enough houses for every taxpayer in Australian earning over say 70K a year to be able to have 3-4 NG IP’s, and for every wealthy Chinese investor to own several as well, then yes, we do have a shortage…..
Question. If you were 22 today, just graduated from Sydney Uni, just got a good job, much better than most 22 year old’s with a big company as a graduate, earning say 60K could you buy a house?
Well, you can’t, and that’s absurd, and to me screams bubble. (My calculator says you could get a 300K loan….. and u can’t buy S**t in Sydney for that…..)
When the average Sydney house (now over 800k) is going to consume almost a lifetime of the average persons output to buy (800K, plus interest, plus maintenance, equals pretty much the average wage earners LIFETIME after tax earnings), well to me that is absurd, and screams bubble.
I think that you fortunate ones, who by virtue of simply when you were born, and were hence able to buy a house at 3-4 times your wage, as opposed to 10plus times, and have been magically bestowed all of this unearned equity in your houses, have lost sight of simple maths.
dmacpusser says
Mark, i think you mis understand the difference between overvalued and highly priced. Property is highly priced, absolutely agree, but it is not overvalued in a bubble. Simple economics tells you if there is a decrease in supply, then price goes up. If there was an over supply of housing, rents would fall, building approvals would be up and houses would be vacant. We dont have that. We have the opposite. Rents continue to go up because landlords know that someone will rent the property because there is not enough to go around.
I can afford to live in Sydney, nor would I, but as long as there is high demand to move to a city location and a shortage of houses to buy, prices will go up, but that is fair market value – not a bubble!
Charles says
Absolutely no supply shortage. An investor can buy 3,5, 10 properties, how can you say there is a shortage? The real problem in Australia is the non investors pay so much tax to subside investors in the form of negative gearing – $6 billions a year. Thus average people can’t afford. Negative gearing must go.
Tom says
Part of the problem in all of this discussion is the definition of “Under-supply”!!! Most Aussies still have a roof over their head; so in that sense, there is no under-supply. However, community expectations are having a heart attack.
Australia is going through a fundamental social transformation. In the Lucky Country, it has traditionally been assumed that with a bit of diligence, anybody can own their own home. However, we are rapidly becoming a nation of renters. Instead of investing in unreliable shares, savvy people are looking more and more to bricks & mortar. The ‘Rip-Off’ superannuation funds run by the finance industry are being superseded by “Industry Funds” (supposedly run for the benefit of the members), while the really smart money is being put into SMSFs. These generally have a ‘diversified’ spread of investments, usually heavily weighted towards ‘Blue Chips’ & property. Their general expectation is that the cyclical hiccups experienced in trading the securities markets can be avoided with long-term rental property.
These permanent investments are no longer based on trading – ‘buy & sell’. This is a major change, with profound repercussions for those with less investment capital.
The “Great Aussie Dream” is doing a dodo!!!
Tom says
Sorry! A couple of points were omitted!
What is in “under-supply”? Is it ‘housing’ per se or ‘investment opportunity’? I suspect it is the latter.
What are people’s expectations. The “Oh so successful” Baby Boomer Generation frequently started out with a two-bedroom fibro – with banana boxes for furniture and a Vegemite sandwich or spaghetti & sauce on the table (a packing case).
Next came the ‘Triple-fronted Brick Veneer’.
Only after retirement are they fulfilling their childhood dreams of traveling the Wide Brown Land on a Beamer or as a Grey Nomad.
It seems that today, despite similar opportunities, few young folk are prepared to be so logical & frugal.
For the ‘NOW Generation’, expectations are unrealistic.
Peter T says
The only bubble I see is the one of negativity and fear in people due to lack of understanding simple economics and correct knowledge for successful property investment.
Saddens me so much as this country is full of gold and people can’t see it.
Call me crazy but I think their is something larger brewing that the general public isn’t aware of yet, concerning population growth.
Mark says
So Peter, what amazing “correct knowledge for successful property investing” would you come up with/deploy if you were a 22 year old graduate in Sydney??
U would like pull an 80K cash deposit out of your a*** right?
Oh, i know, you would do a parent equity loan with your well off parents right?? Too bad if you come from one of the almost 40% of Australian families that rent hey…. or if your parents do own a home but its already mortgaged to the hilt etc etc..
Oh, i know, you would buy an absolute crappy unit, 3 hours drive away, or some house in a small dying town, for 300K (the ABSOLUTE most you could afford, as an average, unassisted, 22 year old graduate), and hope that the magical invisible hand propels that unit up 100k over the next few years, to give u a tiny bit of equity (implying that some bunny is going to be willing to pay even more, and take on even more risk in a few years time?
Peter, let me guess…. u already have a house that you bought on a multiple of a mere few times your wage, at some point before say 2000???
Great……
To bad if you are a youngster now hey…..
And how does ever spiralling house prices, in real terms, somehow translate into a country “full of gold”
Its not real, its just paper values, and any intelligent person can see that our exorbitant house prices are now a net drag on the economy, are crowding out more productive uses of capital, have created enormous systemic risk for us a nation, and are reprehensible….
And PS, i earn circa 500k a year in my own business, so don’t make any assumptions along the lines of “broke whinging loser, or gen y just want everything handed to them” blah blah blah……
I grew up in a poor family, and have worked like a manic for the last 10 years to become the multi- millionaire that i am today, so i understand wealth and investing….I have very much outperformed my peers… I’m only mid 30’s…But this is not about me!!! I can buy any house i want, but what of the rest of the country? What about the kids of today?? Are happy to stand by and watch the country go down the toilet, as we
1. Become ever more uncompetitive, as we for example pay 40% of a business’s revenue in rent, compared to our competitors everywhere else in the world who only pay 20% of their revenues ceteris paribus (i wonder how many people on this forum might know what that means?)
2. Funnel 95% of all new credit in 2014 into resi and commercial RE lending, and just a few % into business lending… Our banks obsession with resi lending is absoluelty crowding out actually productive lending for our SME’s..
Why do so few people seem to see the problems we are sowing with our outrageous house prices???
Peter T says
My friend it seems your stuck on how a 22 year old afford buying a $800,000 house in Sydney.
I wanted a ferrari when I was 22 but started with a HJ kingswood, today I can afford that ferrari (cash) but chose a BA falcon and poor my funds into investment properties that make money for me while I sleep (gold).
Your comment “Oh, i know, you would buy an absolute crappy unit, 3 hours drive away, or some house in a small dying town, for 300K” I have heard before a hundred times and all from people who know nothing about successful property investment.
SUCCESSFUL PROPERTY INVESTMENT COMES FROM:
**Correct Knowledge Applied**
Give that 22 year old the correct knowledge and he can chose to retire in 10 years.
Many years ago my parents built a brand new home in Melbourne for some ridiculous cheap figure under $50,000 but there were paddocks next door and the city wasn’t what it is today, and your using Sydney today as an example.
My prediction: Australia hasn’t yet seen the population growth/immigration that’s planned and coming. You think today’s prices are bad, you ain’t seen nothing yet.
Educate yourself, become the landlord not the tenant and you will see the gold.
Last tip, keep that 22 year old out of Sydney.
Brenden says
I 100% agree with you Peter, a 22 year old graduate should not be buying a property in the Sydney CBD to begin with. They either have to make a commute to work or buy an investment property outside of the CBD and rent where they live.
I purchased a property when I was around that age and admittedly the FH grant did help me back then, but it was a $230,000 property that needed a lot of work. I also rented all of the other available rooms to people to help with cashflow.
Instead of complaining about ‘why’, people need to think about ‘how’ and take action. A 22 year old in most cases hasn’t earned the right to live in a Sydney CBD 800k property… But you can always start somewhere.
Education and determination is the key!