More and more reports are hyping the ‘Australian Property Boom’. But talk of a ‘national’ market is always a short-hand, short-cut way of talking about a whole range of distinct local markets, and many of these markets would laugh at you if you told them they were booming. The buying season isn’t over yet…
This property boom isn’t all it’s cracked up to be.
Sure the market overall has swung into an up-swing phase, but this boom talk is getting out of hand. If you believed everything you read, you’d think every quarter acre block in the country was a gold mine, prices were surging, and the children! Won’t somebody think of the children, forever suffering at the hands of unaffordable housing.
If you believed this talk then you’d also be crazy to buy. No-one wants to buy at the top of the market (which is where booms tend to be found).
But if you ask me, this boom talk is totally over-blown.
(hey? See what I did there. This tafe course in creative writing is really paying off.)
First up, when we’re talking about the national market, things do look pretty good. According to RP Data, Australian prices are growing at 10% a year. That’s definitely pretty good. Maybe not a booming, but definitely on the way there.
But what does this ‘national’ figure mean. If you’re RP Data, where most the data comes from, then it’s a “combined capital cities” measure. That is, it lumps all the state capitals together and takes an average.
So while it gives you a feel for the bigger picture, it tells you nothing about what’s happening on the ground. And it gives you no sense for what factors are driving the market, because these are all playing out at the local level.
It’s like going into a fruit shop, surveying all the fruit, and saying that the average ‘price of fruit’ is x. Then you come back six months later and do the same thing and say that the price of fruit is y, and the price of fruit has gone up 10%.
But how meaningful is that? Maybe apples are cheaper but oranges are more expensive. The big picture figure doesn’t tell you what’s actually happened. And we all know that we can’t be running around comparing apples and oranges.
And so if we break this national figure down, we can see that that impressive 10% figure is really being driven by Sydney, with Melbourne playing a trusty-sidekick kind of role. Sydney is growing 15% a year, while Melbourne is growing around 9% a year. (The black bars in this chart.)
I think it’s probably fair to say that Sydney is well and truly into boom-territory. Melbourne’s a bit more of a line ball. But out around the other capitals, things are a long way from booming.
Brisbane’s growing a decent 7%, and Darwin a fair 6%. But Perth’s only growing at 5%, and Adelaide 3% and Hobart 2%.
Try telling Tasmanians that the Australian property market is booming.
The other interesting thing RP Data have done with this chart is adjust house prices for inflation. This is particularly useful to us as investors, because it gives us a sense of the value of our money.
Property is only earning us a ‘real’ profit if prices are growing faster than inflation.
On this measure, Sydney still looks impressive, growing at a real 12% a year. But Melbourne is down to 6% and everywhere else below 4%. Prices are actually falling in real terms in Adelaide, Hobart and Canberra.
Again, it’s hard to say exactly what a ‘boom’ is, but I’m pretty sure this isn’t it.
The other interesting thing RP Data have done is compare current prices (both nominal and real) to the most recent peaks in each city. Voila:
Cutting it up this way, we can see that 4 of the 8 capitals are still below their most recent peaks – in nominal terms.
Once we take account of inflation though, we can see that all the capitals except Sydney, and the national average, are still lower than their most recent peaks.
And Sydney’s peak is so long ago that the nominal gains of 17% actually fall to just over 4% in real terms.
Not really that impressive.
So real house prices across the country have actually fallen 2.5%, and only one city has posted real price gains.
If that’s a boom, then I’m a monkey’s uncle.
So don’t tell me that Australian property is booming. Some segments are. Like Sydney, but then you’ve got to remember that Sydney itself is made up of hundreds of distinct property markets, all doing their own thing.
So maybe the Sydney market is booming, but many, many others are not. Or aren’t yet. Some probably won’t kick in this cycle at all.
The national property market is always cycles within cycles within cycles. A wheel within a spinning wheel.
And as an investor, it’s hard to make money off the national cycle. You need to buy cycles in individual markets. If you wanted to buy Sydney, you’ve probably missed your chance to get in on the ground floor. If you want to buy Brisbane, I reckon you’re opportunity’s here, or is coming up soon.
There are factors that will affect a large number of markets. Chinese buying for example. That’s going to have an impact on most capital city markets. But not all, and some rural areas will never see a drop of the flood of Chinese money heading our way.
It would be nice if there was one number that could describe the entire Australian property market. It would make research and due diligence a whole lot easier. But there isn’t, and we’ve got to not get carried away with the media’s focus on a single number.
It requires a bit of extra work, but I never said property investing was easy.