Australia’s So-Called ‘House Price Bubble’

by John Edwards

Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

The media is rife with talk of a housing price bubble – particularly in Sydney. Are these reports correct? In short, probably not.

Are we going to see media stories about people getting into trouble with home buying? Probably, yes.

Before I explain, let’s look at the August statistics, which reveal interesting information about Sydney and Melbourne.

In Table 1 – August Statistics we provide the various growth numbers for each capital city and state.

Table 1: August Statistics


Interesting facts emerge from Table 1:

  • Melbourne has unexpectedly increased in monthly growth for August;
  • Sydney is now more unaffordable than ever in recorded history; despite this, it is still showing strong growth, albeit at a lower rate;
  • Brisbane showed the largest reduction in growth of the major east coast capital city housing markets in the last month.

The Melbourne market often seems more volatile than other markets. We suspect this is a function of the selling process, which is predominately auction driven. Its growth in August of 2.31 per cent is the highest since March 2013. The quarterly trend (See Graph 1 – Growth Trends) suggests this growth is probably a one off, and more moderate growth will occur in September.

Fortunately, growth in Sydney is slowing – but not as quickly as expected. Based on median household income, the affordability measure is now at historic highs. It takes about 54 per cent of after tax income to make loan repayments on the median value home of $852,500; it takes close to 8 times the annual median income to buy the median Sydney home. These ratios are extraordinarily high based on historical data.

Historically, at these levels our markets would fall in value. It is this high level of un-affordability that probably leads many to suggest that we are in a “housing bubble”. However, something has changed: The buyers in our markets. Our measure is likely no longer as valid as it once was, because the current buyers are no longer median income families. Median income families living in the median value areas of Sydney are largely renting.

Buyers of house and land are now second and third time housing buyers, with income levels which are much higher than the median income wage. Median income families who are buying are now buying on the city fringes where housing prices are slightly more affordable.

At some point our population, particularly in Sydney and Melbourne, are going to recognise that Brisbane offers better opportunity and lifestyle for less. As the Queensland government repairs its balance sheet, job opportunities will increase, followed by housing values.

Graph 1 shows the trends for the three areas. In each state the data indicates that we have passed the peak of growth in this cycle. As we enter spring, the number of listings will increase and as a consequence, there should be lower levels of competition for available properties, which will lower growth rates.

Graph 1: Growth Trends


In Table 2 – Predictions, we provided our anticipated growth rates for the cities over the next five and eight years.

Table 2: Predictions


The median value of properties in both Sydney and Melbourne are very high. In particular, Sydney is only $147,500 from breaching a median value of $1 million. The data indicates when each of the cities will pass the $1 million median property value, and the number of suburbs that will have a median value over $2 million.

If we assume the predicted growth rate in Table 2 is right, then Sydney will breach the million dollar median value in three years. However, the predictions are also indicating that growth rates are going to slow in the short term and then increase toward the end of the five year period. Hence it is probably more correct to assume that by the first half of 2019 Sydney will have a median property value of $1 million.

Melbourne is going to take much longer. Based on the predictions it is likely that Melbourne will have to wait until 2024 before reaching the million dollar median value.

It is equally clear that there are going to be large numbers of suburbs with a median above $2 million.

There are currently 277 suburbs with a median house value over $1 million, and 41 suburbs over $2 million. Of this group, Point Piper has the highest median value of $8.099 million.

By the end of 2019 it is estimated that there will be 91 suburbs with a median value in excess of $2 million. This represents about 9.5 percent of the city. The percentage of the city with median suburb value over $1 million will be approximately 43.25 per cent.

Now back to the “bubble”. In many respects, this question is one of definition; what characterises a “bubble”? When do they occur?

In my view, a market bubble exists when there is very significant growth in asset values and that growth in asset values is driven by borrowings. In more general terms it is driven by greed and lack of careful thought by both lenders and borrowers. It is excessive bank lending which allows leverage and preparedness by borrowers to pay unreasonable prices for property.

Are we in this situation currently? Nothing suggests we are. Banks and financial intermediaries are becoming a little more aggressive in working to maintain market share, however their risk management policies are acceptable. The driving force behind the growth in values seems to be existing home owners who have reasonable levels of income and assets to support their property purchases which are likely investments. In this situation the lenders can be more aggressive due to the capacity of borrowers to meet their obligations. Will interest rate increases cause these people problems? Probably only to a limited extent, due to the tax deductibility of interest; An interest rate increase of say 1 per cent for the average investor will impact on their cash flow much less than a home buyer as a 1 per cent increase for those on the marginal tax rate is around 0.5 per cent.

Will there be people who are going to get into trouble as a consequence of the current high house price growth cycle and the low interest rates? Yes, there are always people who over leverage and have changes in personal circumstance which cause issues.

Currently it is important to recognise that house price growth is slowing. It is easy to overpay for a property at this point in time, and over payment will not be covered by increasing property values over the balance of this growth cycle. My word of warning, to those who are tempted to stretch themselves by borrowing more than they can afford is: don’t. This is not the time to do that. Buy a lower cost investment property and avoid the stress.

Looking forward, we need to expect rates of growth to slow and by the end of the year to see little growth. In 2015 we should expect the market to be stable but again exhibiting little growth and basically consolidating. For those who are yet to get established or buy their first, or another investment property, there is no rush as there will be good opportunity in 2015 once the market moves into a consolidation phase.

Until next month, why not see if you are any good at working out property sales prices? You could win a cash prize that is on offer in the Fantasy Real Estate game.

Happy investing,

John Edwards.
Founder of Residex and Consultant to Onthehouse.com.au.

 

Growth lower than expected in May

by John Edwards

Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

Table 1 presents the Australian-wide outcome for May 2014.

Table 1

Capital City Property Market Update May 2014
Continue reading »

 

Sydney property approaching boom mentality

by John Edwards

Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

The much dreaded Federal Budget has been presented and from a housing market perspective it is of little consequence. There was nothing that directly, or for that matter indirectly, impacted on property prices. However, the reduction in the corporate tax rate to 28.5 per cent from July 2015 adds a pressure to consider investing under a corporate structure where an investment property is not negatively geared. This is particularly so where the investment is going to be held for a considerable period. The difference between the discounted (50 per cent) capital gains tax (CGT) personal marginal rate and the corporate tax rate is now minimal and over time the benefit of the lower corporate tax rate on income could relatively quickly absorb the positive CGT discount benefit.

Continue reading »

 

Two ‘brave’ Budget decisions that would benefit tomorrow’s generation

by John Edwards

Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

Our markets are behaving as one would expect in a situation where:

  • The cost of a home has risen to a level where the number of first home buyers capable of being part of the current growth cycle is limited.
  • The RBA is letting all who want to listen know that there will probably be no further interest rate cuts and that all should expect rates to rise in the next 12 months.
  • Consumer sentiment is not unexpectedly strong given the various warnings about a rising unemployment level.
  • Very significant “jawboning” by our Treasurer that we all have to take pain to allow our Federal Budget to return to surplus and government debt levels to be returned to more acceptable levels.

Continue reading »

 

Sydney Market Reaches its Peak

by John Edwards
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

We waited with anxious anticipation for consumer sentiment to improve last year as housing markets should have been performing well in early 2013, but this was not the case. Interest rates were low, which has historically caused property growth spurts. Gradually, sentiment improved and property markets started to show strong growth moving into the last quarter of 2013.

However, recent data indicates that Sydney, the lead indicator market, is starting to look soft and as though it has peaked (see Graph 1).

Continue reading »

 

Sydney and Melbourne moving to a renter’s market

by John Edwards
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

Australian dwellings produced a satisfactory result for the year ending December 2013, indicating that the correction phase in the market has come to an end and growth is again presenting.

Continue reading »

 

Positive news for Australian property

by John Edwards
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

Tis the season to be jolly’ with this year’s Christmas bringing good news to our property market!

Continue reading »

 

Residex founder, John Edwards appeared on Switzer TV and said we’re not in a housing bubble and that we shouldn’t expect one either. For his views on this and more, see the interview here… Continue reading »

 

Test your property valuation skills with Fantasy Real Estate

Introducing Fantasy Real Estate (FRE), where you can test your skills at valuing a home and make some money along the way.

Continue reading »

 

Further rate reductions on the horizon

by John Edwards
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.

It was only about 18 months ago that the housing market was full of gloomy news. Many of the worst performing areas in Australia were on the Gold Coast where there was a significant oversupply of stock and values had fallen by amounts not seen since the Great Depression.

Continue reading »

© 2012 Residex Blog Suffusion theme by Sayontan Sinha