Housing bubble? Give me a break: Michael Matusik

Housing bubble?  Give me a break.

I forewarned a few weeks back, that we might see an increasing detachment from reality as this residential market recovery takes hold.

I was thinking it would start in earnest sometime next year.  But it looks like I was wrong.  The loopers are already at it and in force.  Lord help us when we actually see some real heat in the overall housing market.

Just the normal noises

For the record, Sydney house prices are up 8.3% over the past 12 months according to RP Data, but were up only 1.2% last year and were down 2.4% in 2011.

As for the rest of the country, Perth is up 7.9% for the year but down 0.5% last month while Melbourne is up 5.4% for the year and the Brisbane-Gold Coast region is up a measly 1.8%.

Hmmm, a housing bubble indeed.

Yet we now have the IMF – yes those clowns – planning to visit Australia (to help get a suntan, I suggest, rather than anything else) to determine if Australia is in deep throes of a housing bubble.

It was just two months ago, when we were still waiting for Australia’s housing market to bust.

For mine, what we are experiencing is the normal machinations of the property cycle - nothing more, nothing less.

Valuations are often short at the recovery stage of the cycle.  They sometimes overshoot near the peak.  There are many issues regarding valuations in Australia.  We have written about them several times.  Go here, here, here and here if you have nothing much better to do.  

Development, redevelopment and renovations

One of the problems with house price reporting is the way prices are measured and more importantly what influences the rise (or fall) of both median and mean house price figures.

New development or redevelopment often causes the middle and average price to rise, without seeing resale values increasing much at all.

This is what often happens around key infrastructure, such as railway stations.  New projects lift the median/mean values, whilst resale prices remain flat at the time of new development/redevelopment.  The same can be said about weekly rents.  Base property values/rents often rise faster closer to core infrastructure, but the overall residential cycle must be on the improve.

A similar trend can be found in many areas affected by flooding across Australia in recent years.  Many of these areas, especially in Queensland, have now been redeveloped.  This has seen new properties replace older stock.  Median/mean values have often risen as a result.  But many owners in these areas, who are trying to resell flood-affected but unimproved homes, cannot get much more for their property than they originally paid for it.  They are often getting less than they most likely would have if they sold just prior to flooding.

Median and mean housing prices are also affected in the same way when it comes to individual house renovations.

Many areas across Australia are experiencing a renovation surge.  Areas which are going through his swell of reno activity are seeing a strong lift in suburban median and mean prices.  But when you factor in the cost of the renovation itself (and especially if you include your time at a commercial rate), then the true uplift in financial gain is far less than the headline suburban price growth being touted.

It is true that a high and consistent proportion of renovation work across many homes in an area, is a good thing in terms of improving the underlying investment potential of a location.  It is another of our key 10 measures which helps us determine the strength of a place’s underlying investment clout.

Such activity suggests that owners are ‘placing money where their mouth is’, so to speak; which in turn often leads to more owner-resident resale interest; which increases the actual size of the resale market and in due course, can help get a much better price on resale.  But it takes time for the base value of property in such an area to increase.

New development, large scale redevelopments and major renovation activity cause median and mean values to rise.  But this isn’t the same as seeing the base value of the existing, unimproved housing stock increase in a certain location.

When we see rapid increases in the base value of residential property, and across widespread areas, then we are experiencing boom-like conditions.

I suspect that - outside of a certain areas in Sydney and Perth, maybe parts of Melbourne now – the base value of Australian housing isn’t increasing much at all.

But the IMF and the  newspapers will be telling you otherwise.

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