Why the economists keep misreading the real estate market: Terry Ryder

AMP’s chief economist Shane Oliver says “Australian property prices are over-valued” and that “rising house prices” are making Australian households vulnerable. Should we be concerned? Should we be listening at all?

I’d suggest a resounding 'No' is an appropriate response.

Oliver’s analysis is so shallow it borders on embarrassing. It relies in part on a discredited report that no one in real estate takes seriously. But above all else, the man’s track record in reading real estate issues is among the worst in the nation.

In his position with AMP, Oliver has been getting it wrong consistently for the past dozen years.

How about this offering: Australian real estate has a “classic real estate bubble” and first-home buyers are being priced out of the market, notably in Sydney.

When did Oliver say this, predicting a bursting bubble and the disappearance of first-home buyers? It was way back in 2003. Since then, over half a million first home buyers have bought homes in New South Wales, most of them in Sydney. And despite three years of extraordinary growth from 2001 through 2003, there was no collapse in prices when the boom ran out of puff.

How about this one: House prices are at least 25% over-valued and may not start to rise again for another decade. It will take 10 years for rents and wages to catch up with house prices and there will be no rise in the housing market until they do so.

This pronouncement was made in 2005. A decade has passed and in that time capital city house prices have risen in eight out of those 10 years (based on the ABS House Price Indexes).

In fact, in 2006, the year after Oliver predicted prices would not rise for another decade, they rose 8.3% - and then 12.3% the following year. How could someone in such a senior position misunderstand the situation to such a degree?

Then in June 2012 he wrote about Australia’s “chronically weak house prices” and suggested we were facing either a crash or a long-term flat trend, caused by “excessive house prices and the excessive level of household debt”.  He said: “The bad news is Australian housing is still way over-valued”.

So what happened?  The following year, in 2013, capital city house prices rose 9.3% on average and then another 6.8% in 2014 (although most of that growth was generated by Sydney’s solo boom).

How does he keep misreading the real estate market so drastically? And why does media keep publishing his views?

The problem Oliver has, and he shares this problem with most of Australia’s underclass of chattering economists, is that he tries to squeeze real estate into his economic models. It’s an interesting study of someone trying to jam a square peg into a round hole, and if the hole doesn’t fit, there’s something seriously wrong with the peg.

Oliver latest pontification on real estate prices – comparing where they are with where he thinks they should be - is based in part on an alleged median multiple. Median multiples are the kindergarten of property price models.

I say “alleged” median multiple because Oliver has based his assessment on the Demographia report – which is a propaganda piece from a developer lobby group, designed to find that all of Australia is unaffordable because we over-regulate property developers.

His argument is based on the notion that Australia has a problem with rising house prices, when the latest figures depict six of the eight capital cities with prices stagnating or going backwards.

There’s also the contention that we’re all vulnerable because house prices are rising “well above trend”. But take Sydney out of the equation and the scenario looks very different.

We’re entitled to expect better from a national figure who lectures on real estate issues.

TERRY RYDER is the founder of hotspotting.com.au. You can email him or follow him on Twitter.