The cold hard facts about Australia's red hot property market

For some very strange reason property commentators are struggling to differentiate between the investor property market and the household property market.

Treasurer Joe Hockey was right when he commented this week: “It is just an easy mantra for international commentators and for analysts based overseas to say ‘well there’s a housing bubble emerging in Australia’; it is a rather lazy analysis because fundamentally we don’t have enough supply to meet demand.”

I have been saying this for the best part of 12 months now, given the figures provided are a bundle of property sales where the demographic markets are not broken down – simply because they are lazy and you get a meatier headline by using the bundle method.

During the global financial crisis (GFC) we kept hearing the ongoing reference to “green shoots” emerging where today some are attempting to decimate the Australian real estate industry. Many forget that the Australian real estate industry is directly one of the largest employers in Australia and there is a very strong argument that it is playing a major role in keeping our economy buoyant.

I don’t really buy the argument about the low interest rates although in five years’ time we in all probability will see distress sales as the cash rate moves up and home buyers come out of their fixed periods – that is inevitable and should not be used as some sort of shock therapy. Many are forgetting that the Australian banks borrow a substantial amount from overseas so when the cost of lending increases it won’t be the Reserve Bank of Australia (RBA) dictating the rates rather the banks will be increasing regardless of the cash rate setting.

With the ‘Big Four’ banks holding 80% of Australia’s mortgage book they won’t be waiting for guidance from the RBA – they’ve done it before and they will do it again. Although mysteriously the commentators have the RBA front and centre whilst constantly missing the big picture. The cash rate might well remain at 2.50%, but we miss the point that the lenders are hedged to their funding costs which are not determined by the RBA.

To put Joe Hockey’s ‘lazy analysis’ theory to the test this week I went back through Mosman House sales from 2000 to 2014 which shows a very interesting story given Mosman has approximately 4,800 houses and semis.

*Denotes we are two thirds of the way through the selling year and stock levels are well down on previous years – so try explaining that “bubble”?

Sources:Australian Property Monitors and RWM Research

Another reason as to why we have a strong property market is that rental vacancy rates in the Sydney 0 to 10 kilometre range can’t get above 2% yet we forget that twenty years ago they sat between 3.50% and 4.00%. Back in those days landlords were offering one month’s free rent to entice tenants. It needs to be pointed out that the problem we have is on the supply side, which is why I don’t see the slightest problem with this niche market.

The problem is misinformation and yes some markets have reached unprecedented record prices, which in time as interest rates correct property values adjust accordingly based wholly on demand. The interesting part in this is when the property markets are in decline the purchasers decline too, despite the fact that the markets are what we call a buyers’ market. We are currently in a vendors’ market where the buyers are happy to pay over and above the market value.

Real estate has always been a long-term hold, so for the vast majority what prices do is not really a major concern. There are clear patterns evolving where the majority now are not trading up given from a cost basis analysis it makes more sense to renovate – which is exactly what we are seeing today. In the case of Mosman if you take the present 14 year average of yearly house sales in Mosman, we get 321, so the average number of owners selling each year equates to 6.7%. Based on that data an enormous number of house owners would have to find themselves in very serious financial trouble to see the “Mosman Bubble” burst.

Those are the cold facts.