I’ve had enough!
In fact, many subscribers have sent me emails challenging me on my thoughts and ideas and investment philosophy.
The biggest bubble in real estate is not the prices, it’s the B.S. of journalistic opinion about “the imminent real estate crash.”
It’s getting to the stage where we might even see a headline that reads, “Expert Says Sell Your Real Estate Now Before You Lose Millions!”
That expert of course is probably someone who doesn’t own any real estate, never has and never will.
The contrarians, who have been saying for a long time the Australian market will crash are at it again. Now the predictions are anything from 40% to 62%.
Crazy, crazy stuff I think…
You are probably wondering who has been pedalling this dooms day scenario… Well apart from the usual suspects in the press, the guy who seems to have the biggest voice here is US investment legend, Jeremy Grantham.
His views are that the Australian housing market is a time-bomb, seriously over-priced and on the verge of collapse.
His research to formulate his view seems to based on one idea – and that is that Australian house prices are 7.5 times the family income. Supposedly twice what they should be.
Now, it’s an important point that I’ve just mentioned.
“Twice what they should be.”
Stick with me here, I will explain…
The other group of doom-sayers are surprise, surprise… All involved in some form of stock market promotion. Whether it’s newsletters or transactional, it doesn’t matter. They’ve all jumped on to this, not because they’re concerned about the real estate market – but because it’s a great story to get clients out of real estate and into stocks.
So I thought I’d drill a little bit deeper and get some facts.
You don’t have to be Einstein to figure out that the real estate market has slowed and with clearance rates averages at 60%, the tide has turned from a sellers market to a buyers market.
But should you be buying?
Based on the media’s view – absolutely not!
Professionals don’t use the media as their motivation for investment, in fact I learnt a long time ago to do the exact opposite direction of media consensus.
But I digress.
Now back to the facts…
I searched around to find information on exactly what is the Australian home-price to disposable income ratio. A useful fact, but in isolation not much good to you. However, seeing that Jeremy’s premise is based on that fact, let’s see if I can come up with a factual, logical counter-view.
Here’s what I found…
Utilising the latest ABS national account data, combined with Australia’s most comprehensive residential sales database, RP Data (which captured 100% of all home sales), the home-price to disposable income ratio is now…
Only 4.6 times as at June 2010.
That’s 40% less that Grantham’s claim and only marginally above what it should be based on his view as to what is normal.
But could we in fact have a normal real estate market or are we about to see an all mighty crash?
Now to see a crash in the real estate market, a lot of factors have to come into play. I can’t deal with all of them right now, but one of the main things that needs to happen is for people to stop buying (unlikely) or banks to stop lending. This is what happened in the States.
The fear of most commentators is that the Australian banks are top-heavy to the mortgage industry and are simply lending on high loan to deposit ratios.
Three years ago this may have been the case, when they were lending at 95%. Today, they’ve gone conservative and are back at 85%.
However most commentators fail to recognise that in the eye of the storm of the recent GFC, the government came in swiftly and by and large, guaranteed our major banks funds in the unlikely event of a rush for liquidity.
Considering that most people who own their own home are not investors, and therefor have no need to panic and sell, it’s unlikely that our market will see a free-fall of prices that some US experts predict.
I’d love to show you a chart here, but unfortunately I cant, which tracks that relationship between national median dwelling prices and national disposable household incomes from March 1993 – 2010.
…But maybe I can paint a picture for you.
There has only ever been a brief period where Australian house prices have out-paced disposable incomes and that was between 2000 and 2003. …and we saw a cycle-peak in 2000 as well as another cycle-peak around 2004.
After that, a lull and a sideways period and then prices continued to increase again.
The bottom line is, our incomes are growing in par with our real estate prices and there is no major blowout in that department.
Now it’s important to note and illustrate where some of the data has come together to base my opinion.
Now remember, we based out information on all sales, houses, terraces, units, etc, etc, etc.
The average price Australia-wide was $413,000.
The median on the same data was slightly higher at $441,848.
It’s important to note that we went across all transactions in Australia, not just the major metro.
Ok, that deals with price. Now income.
I’m drawing from HIA data. There are 8.57 million households in Australia and pulling the rate of ABS national account figures, the average disposable income is $95,089 per household.
Maybe, just maybe Jeremy (our US legendary investor) should have a look at these numbers again and get a bit more of an accurate picture into exactly what is happening in a foreign country with a foreign concept to him of strong household income, a strong banking system and strong residential market.
…Like I said, a foreign concept to most US experts considering the last 3 years of shenanigans in their country.
If you wanted to drill down even further, what you would need to do is get the data on the average or median price for metro areas and the average disposable income for those areas.
…and what you’d find is that a high average price and a higher average of household incomes.
I bet you that whichever way you look at the data, it wont come to a 7.5 times ratio.
Now what I’m saying is, do your own homework, don’t believe the headlines that appear in newspapers and statistics are not always valid.
Ok, it begs the question – is it a good time to buy?
Well, I did say earlier that it’s a buyers market, and the bottom line is if you are well-researched, understand the segment you’re in and you can find value, YES, absolutely. Buy it! i have no problems with that.
There are always bargains in the real estate market – regardless of where prices are. It just happens that some times are better than others.
You make up your own mind… I’ve made up mine.
They’re my thoughts.
What are yours? Post your comments below.
Signed with Success,
P.S. Have to let you in on a secret… A lot of the research here I compiled with the help of keeping up to date with many publications. In particular, Rismark and Chris Joye.
P.P.S. Now, I’m not saying that real estate prices will again accelerate. Good Lord, we’ve had an incredible run in the last 3 years, But if it comes back 10% and you had gains of up to 30 and 40% – it’s still good isn’t it?