Australian housing market too complex to make sweeping bubble statements: Margaret Lomas

I love it when debates around whether there is a property bubble begin, and so I particularly enjoyed reading about the latest debate, right here on Property Observer. 

This one pitted Terry Ryder, whose job is to examine property markets and their movements at their most fundamental, determining the potential impact of future, planned activity on micro property markets, against Phillip Soos, a master’s research student and employed researcher at Deakin University.

People always take sides, and it comes down to which side of the fence you sit on.  In this particular debate, the two sides have completely different backgrounds, experience and perspectives and use entirely different methods to assess and forecast the property market.

Terry uses factual data to establish whether or not there is likely to be property price growth in the future, along with issues of housing affordability, supply and demand and general price movements.  From what I can see he looks at areas in their individuality, considers the micro-economic situation in its present form and then overlays the information he has about what’s happening next in that area.  When this is all measured against the supply factor, I think he is saying that strong, local area economic growth, where there is an undersupply of property, has to mean that property in that area will go up.

Phillip uses some pretty impressive data, some great-looking graphs and some economic theory to predict a bubble.  From what I can see, he overlays this theory and graph drawing upon the Australian property landscape and from that he draws the conclusion we are in a bubble.  In addition, he quotes Minsky’s financial instability hypothesis, one that says that where income flows cover neither principal nor interest repayments the result is an asset bubble, to assert that there is, in fact, a bubble.

I like economic theory as much as the next guy, and I definitely use economic factors on which to base my own prognosis of where I think a property market is headed.  It’s not an exact science, but there is a good degree of empirical evidence to show that strong underlying economic factors, such as decreasing unemployment, increasing median household income and an improvement in gross regional product can often lead to property price growth.

However, I can’t help but get an uncomfortable squirming feeling when I see someone who devotes their life’s work to studying property markets at the most micro of level debating against someone who uses economic theory to pronounce to the property investing world that there is a bubble.

If my two cents worth means anything, here it is:  If we live in a country where there is such a vast difference in property prices, where we have areas that are ramping up and those that are plateauing or falling in value, where we have two-speed economies (Queensland) and varying degrees of local government activity, infrastructure development and employment opportunities, how can we possibly rely on a single, economic projection of a single property market to establish if there is a bubble or not?

The other factor that has me twitching at my desk, wanting to shake someone, is that those basing forecasts on economic theory like to ignore the bottom line impact of taxation.  Yes, I get it that at any time the government can take away tax benefits. 

I also know that investing for a tax benefit is no way to approach your retirement  income needs.  However, we do live in a country where the tax treatment of investors is quite unique and decidedly different than most others in the developed world, and from what I can see it makes it difficult to rationalise the theory that ‘where income flows cover neither principal nor interest repayments the result is an asset bubble’. 

To the average punter, what matters most is cashflow, and since investing in property in this country is tax advantaged, (and includes on-paper deductions for depreciation in many cases), the cashflow for many properties purchased today in economically strong areas with great yields and potential for further values growth is positive, or at least even.  Whether gross rent covers principal and interest repayments is a moot point when you consider that you can get a tax break equal to, or greater than, the difference.   And while ever that possibility exists, investors will continue to support those markets, creating further, albeit moderate, values growth and continuing strong yields.

I’ll never understand why economists cannot see the forest for the trees and why they insist on having a single-minded, broad view of the Australian property market. I am not suggesting that the market in Australia is fantastic or risk- free, and I don’t think Terry Ryder is, either.  But I do believe that talk of a unilateral property bubble decidedly ignores the true underlying situation – that opportunities for great property investing do exist, and that now is as good a time as ever to find them.

Margaret Lomas is a best-selling author and writes and hosts the popular Property Success With Margaret Lomas and heads up the panel on Your Money, Your Call, both on Sky News.