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.
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?
If Australia is 33% overvalued, on the same measure China is 38% undervalued.
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?