Is Australian property overvalued? The experts have their say
Sydney prices skyrocketed last year, Harry Dent is diagnosing bubbles all over the country and housing affordability is on everyone's mind. So Property Observer has turned to a range of industry experts for their thoughts on whether Australian property is overvalued.
Cameron Kusher – Senior research analyst, RPData
IF YOU'RE COMING TO AUSTRALIA FROM OVERSEAS, YOU MIGHT THINK OUR PROPERTY IS OVERVALUED – BUT THERE ARE GOOD REASONS FOR IT.
I don’t think you can say that the market is overvalued here in Australia. When you’re looking at examples of other countries, property here does look expensive. But there are good reasons why property prices are high in certain capital cities. Our population is so centralised, and job opportunities are centralised to a few capital city marketplaces – so there’s lots of competition for available stock. Plus there’s the fact that the supply of new housing and land for new housing is very restricted by our government, through their land releases.
So if you’re coming to Australia from overseas, you might think our property is overvalued – but there are good reasons for it.
Whether or not the price of Australian property is beneficial, and to whom, is another question for another day.
Catherine Cashmore – Market analyst
YOU'D BE HARD PUSHED TO FIND ACCOMMODATION ON THE FRINGES OF OUR CAPITAL CITIES FOR LESS THAN SIX TIMES MEDIAN INCOME
It's important to draw a distinction between property and land.
The raw cost of 'building' a home has seen very little increase over the past decade or so - and therefore is not overvalued. However - due to housing policy that encourages speculation into the established sector, and fails to ensure fringe land identified for residential development, is sold close to its agricultural value - the cost of an average subdivided plot has increased more than tenfold.
Meanwhile, in the late 1990s a typical first homebuyer’s budget would have secured a modest family home, in a reasonably facilitated suburb, for three times median income. Today you’d be hard pushed to find accommodation on the fringes of our capital cities for less than six times median income, and in Sydney, it's closer to 10 times.
To some extent, lower mortgage serviceability rates buffer the effects for initial owners who generally work out how much they can borrow month to month, rather than concentrating on the total outstanding amount.
However, for prices to continue to increase, thereby inflating the 'entry cost' further, the system relies on debt being 'ever more affordable' to keep afloat, and the risk of still having outstanding mortgage debt to service upon retirement is significantly higher.
Today - due to the costs of an initial purchase, buyers enter the market later, have less time to pay off their mortgage, and often will end up reaching into their ‘super’ account upon retirement to clear the debt - after which, they obviously don't want to see the price of their biggest asset - which has been a chain around their neck in terms of monthly mortgage repayments - drop.
To some extent, it's a self perpetuating circle - voting for a politician who recognises an economy that relies on 'ever rising' house prices, is one that is ultimately set to fail, by way of an eventual sharp correction, is therefore not desirable for many owners.
But are prices overvalued?
- Land prices are inflated to multiples what they would be if used for other purposes - with sites often 'land banked' in lieu of any development
- Yields are generally low - averaging around 4% for a unit and 3.5% for a house.
- First homebuyers are having to find inventive ways to 'enter' the market if they want to gain a foothold onto the onerous housing ladder - borrowing a deposit, or being 'first time investors' and capitalising on family assistance to do so.
- Mortgage/household debt has gone from 30% - or one third - of disposable income in the 70s, to almost one-and-a-half years disposable income today.
Therefore, ‘Yes!’ land is overvalued. But will people keep buying it?
Of course - land is a necessity to all business and commerce, as well as our personal needs - and whilst buyers are able to service the debt, there will always a market for it.
However, take careful note - as time progresses, and values increase, this significantly valuable resource will increasingly fall into the hands of 'those who can' and not necessarily 'those who need' – and the consequence of such, does not take much intelligence to guess.
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Terry Ryder – hotspotting.com.au
THE ONLY CLAIMS THAT AUSTRALIAN HOMES ARE "OVER-VALUED" COMES FROM INDIVIDUALS OR ORGANISATIONS WITH ULTERIOR MOTIVES
Australian property values are pretty much where they should be, relative to the strength of the economy, the wealth levels of the nation, the low rate of unemployment, the absence of over-supply (except in specific sub-markets) and the low level of interest rates.
Both regular affordability indexes (HIA-CommBank and REIA-AdelBank) says that affordability levels are the best they have been in 10 years. An ABS report found that, relative to incomes, our house prices are at the same levels as in 1995 and the Reserve Bank has stated on a number of occasions that Australian house prices are unremarkable by world standards.
The only claims that Australian homes are "over-valued" come from individuals or organisations with ulterior motives, mostly from the US, including the Demographia report which is published by a developer lobby group campaigning for a major relaxation of regulations "retracting" developer activity and the very strange Harry Dent who makes his living by making doomsday predictions, not one of which have ever come to pass.
Louis Christopher – Managing director, SQM Research
THERE HAVE BEEN TIMES WHERE THE MARKET HAS BEEN MUCH MORE OVERVALUED THAN IT IS NOW
The overall market is, in our opinion, only modestly overvalued. But it’s a difficult question to answer, for many reasons.
For example, if credit is turned off tomorrow, we’d have a crash in this country. And on that basis, you could say “the market is overvalued.” But assuming we continue to have low interest rates, the data suggests to me that we’re only modestly overvalued.
Looking at house price changes in comparison to total income changes – that metric suggests that property is slightly overvalued – and that’s one of the reasons that we’ve been relatively bullish on the market.
Of course if we had a cash rate at 6%, I’d say the market is overvalued, and we’d be due for a correction. One of my concerns is that the market is sensitive to interest rate changes, particularly with the number of investors in the market at the moment. When we get an interest rate rise, I believe it will negatively influence the market in a fairly significant way. Markets would be fairly susceptible to a 50 basis point increase.
But if interest rates stay the same, we only have a little bit of overvaluing. Sydney’s starting to look that way, but in the scheme of things I’ve seen worse, particularly back in 2003. I’d say it’s only moderately to modestly overvalued.
Hobart’s looking undervalued at this point in time, and Brisbane’s looking neutral – neither undervalued nor overvalued. The Gold Coast is starting to look quite undervalued now, and we’re expecting a pickup in their market.
In Adelaide, we don’t think the market’s going to do much. It’s at fair value, considering issues to do with the economy. Perth is looking a little overvalued, given that we know what’s happening with the downturn. Darwin is also looking overvalued, to an extent. And Melbourne’s only modestly overvalued.
But we don’t believe that the market in general is excessively overvalued, assuming the global economy remains in the current status quo.
You could argue that property expensive, but if I looked at the data from the last 20 years, there have been times where it’s been much more overvalued than it is now – particularly in 2003.
jrichardson@propertyobserver.com.au