“House price build-up but no bubble” screamed the Financial Review yesterday. According to the latest RP Data figures, residential property prices rose by 14.9% in Melbourne, 9.9% in Sydney and even 6.1% in Perth. On an annualised basis, Melbourne’s prices rose by about 18%. Given that economic growth is currently sitting on a somewhat less rampant 0.3%, it would be fair to suggest that housing prices have long departed from any rational basis.
While leading financial rags and real estate agents vehemently dismiss the notion of a residential property bubble, evidence points to the contrary.
On a relative income basis, Australian residential property is about double the price of the United States. It is also more expensive than the UK, and pretty much every other country. Although not everyone agrees — Business Spectator columnist Rismark boss and Crikey sparring partner Chris Joye yesterday claimed that “the median Australian home value is only four times average disposable household incomes. This is inconsistent with claims that Australian dwelling prices are six to eight times household income.”
Joye’s analysis appears somewhat optimistic, given the median house price in Australia is about $480,000 and according to the ABS data, average household disposable income is $55,432 annually — which means dwelling prices are almost nine times disposable income. This is extremely high by international and historical standards.
The most popular rationale for Australia’s booming property market is that Australia is in the midst of a dire housing shortage, caused by organic population growth and massive immigration. However, statistics tell a different story.
According to the ABS, 12,814 residential dwellings were approved in October — that equates to about 150,000 constructed annually. Given that the average Australian household has 2.6 people, dwellings for about 400,000 Australian are being built each year. Last year, net migration to Australia was 213,461 (of which skilled migrants made up just over half). In short, there is substantially more housing than there are migrants. It appears that the housing shortage is two parts myth, zero parts reality.
Further, it is highly doubtful that migrants are even in a position to “bid up” the price of properties. Most migrants would not be in a position to pay $500,000 to purchase a property, nor would they have the ability to obtain a mortgage. Migrants, in the short-term at least, generally rent property (non-skilled migrants would be in an even worse position to purchase a property). This means that the recent house price appreciation would have appear have very little to do with net migration levels, despite what property bulls claim.
Further, given the alleged migration probably wouldn’t have an immediate effect on property prices, can property advocates could rely on migration to lead to higher rentals (and indirectly, higher property prices as yields improve)? Well, no. According to the (usually bullish) BIS Shrapnel, rents increased last year by only 3.5%, barely more than inflation. Not only are immigrants unlikely to cause property to rise in price directly, they are not even having a particularly telling effect on rental yields.
Migration isn’t the only cause of population growth. Population increases also occur organically, especially given Australia is in the midst of a baby boom. In 2008, 296,600 babies were born, the highest figure ever. However, last year 143,900 people died, meaning that actual population growth was only 152,700. So, even adding the net births to the net immigration levels, it still appears that surplus housing is being built. (There is also the small issue of time lag — most babies aren’t in a position to enter the housing market for about 25 years so the recent baby boom is unlikely to be a cause of the recent price rises).
Another factor of bubbles is that those perpetuating the myth will turn any news into “good” news for asset prices. For example, billionaire property developer and one of Australia’s richest men, Harry Triguboff, recently claimed that house prices would increase as a result of the RBA’s hawkish monetary stance. According to Triguboff (who has somewhat of a vested interest in the matter given he is one of Australia’s largest home builders), higher interest rates act to reduce supply of dwellings, and when combined with a rising population, that allegedly leads to higher prices.
The contrary and somewhat more logical argument is that higher rates will cause a substantial dampening in demand as most property purchases are funded largely through debt. The higher the interest rate, the less buyers are able to borrow, thereby reducing the demand curve.
The fact remains, residential property has been largely funded by debt and aided by government policies such as the first home-owner’s grant, negative gearing and concessional capital gains tax. Like in the United States, Ireland and Spain, property is being bought by people who are expecting capital gains — in most cases, net rental yields are below 3%. Even assuming inflation of 3%, that still puts property on a price/earnings multiple of about 25. Coupled with annualised capital growth of almost 20% this year in some parts of Australia and contrary to what property “experts” might suggest, we have an almighty bubble.
Adam, you really have no clue when it comes to housing.
First, did you bother to check the RBA’s latest estimate of Australia’s dwelling price to income ratio? No! You can view their chart here:
http://www.rba.gov.au/Speeches/2009/_Images/190509_gov_graph6.gif
Their estimate of the capital city dwelling price to income ratio is just under 4.5x. Now how on earth does that reconcile with Adam Schwab’s estimate of 9x? Of course, it does not. Because you are once again wrong. You should publish a correction.
You’ve made two key mistakes. First the national median dwelling price is not the $480k you claim. If we take EVERY SINGLE home sale in Australia since March 2008, which RP Data collects directly from the Valuer Generals’ offices, the national median over this period is about $360k. As at June 2009 it was around $370k.
So this is more than $100k less than the number you quote.
Why are you wrong? Because the data you quote only relates to capital cities and 40% of ALL homes in Australia are NOT in the capital cities.
Okay, so that’s the first mistake.
The second mistake is that you are using the wrong disposable income definition. We use the definition employed by the RBA to estimate the dwelling price to income ratios linked above.
To quote the RBA: “For income, our conventional measure is household disposable income before interest payments and excluding unincorporated enterprises obtained from the national accounts…To make it per household, we use the number of households which is reported by the ABS in their Australian Demographic Statistics release…This provides a yearly time-series of the number of households.”
Using the national median ALL REGIONS, and ALL PROPETY TYPES dwelling price of $370k, and the RBA’s standard household income definition, Australia’s house price to income ratio is 4.1X, less than HALF the 9x you nominate.
Accordingly, Australia’s housing is not expensive by international standards given a national median price of $370k, nor relative to national incomes.
This perfectly correlates with (a) Australia’s internationally high home ownership rate, (b) Australia’s incredibly low mortgage default rates, which have been low by international standards for a long time, and (c) the fact that the value of Australian housing has been rising, not falling, indicating that households are having little trouble affording to purchase properties.
As a layperson, I’ve done similar back-of-the-envelope calculations – housing price growth vs. population growth – and come to the same conclusion. But no matter how I convince myself Australians are all trading tulip bulb futures and patting themselves on the back, there’s something in the paper almost every day warning of even higher hikes in housing prices. It’s hard to know, but I have to believe the numbers. Personally, I put my money where my mouth is (and invested in my business instead of a house) but some days it’s hard to maintain the faith.
Into which category do overseas students fall? They are not (yet) migrants, but they do require accommodation. Some of that accommodation will be rental, but some of it is also purchased by their parents who reside overseas, and visit from time to time.
I understand that there are fairly clear segments – secondary students, students at universities, those undertaking vocational courses – and that they come from different geographical regions. I suspect, although I have not done the research to validate this – that the effect of these students is having an impact on both the rental market and on the housing market. As well as the public transport usage, at least in Melbourne.
Such effects should be taken into account as externalities when various governments trumpet the $ benefits of the overseas education market.
Yeah, there is a touch of the “Clive Hamiltons” to this article (and indeed to all Adam’s posts on residential property).
Until I see the mortgage nonperforming loans climbing from 0.6% or the proportion of households owning their home without a mortgage decreasing rapidly (according to the abs, almost 33% of households as at 2007 ), I’ll agree with the RBA (and Chris) and say there is not much to worry about.
“(There is also the small issue of time lag — most babies aren’t in a position to enter the housing market for about 25 years so the recent baby boom is unlikely to be a cause of the recent price rises).”
Adam clearly in unacquainted with babies. They are *very* effective at insisting on having appropriate housing. They don’t care who pays or who signs the papers.