Australian newspapers appear to be engaged in a bidding war as they frighten consumers with increasingly absurd claims of asset bubbles, overvalued homes and potential impending doom. There’s always someone who can’t believe the strength of the Australian property market, concluding therefore that it shouldn’t be.
The random passing parade of foreign economic ‘experts’ claiming Australian housing is overvalued reached absurd proportions last week when News Limited reported that London based The Economist Magazine had declared Australian homes overvalued by 61 per cent.
Fortunately, in a first with this current trend of doom saying, News Limited sought alternative opinion from Glenn Otto, Associate Professor from the School of Economics at the Australian Business School.
Otto pointed out that The Economist’s reasoning was founded on what it called the ‘fair value’ of housing, based on the current ratio of house prices-to rents historic ratios. There are two problems with that analysis. Firstly, rent levels are not a good indication of the subjective value homeowners put on their houses. Secondly, real interest rates have fallen relative to their historic levels and this skews rent-to-price ratios. Otto concluded ‘it’s not a valid comparison to compare current prices to historic prices because real interest rates have fallen by about half’.
Currency rates and local economic conditions make global comparisons problematic and, despite the fact that the Australian economy outperformed almost all other economies during the Global Financial Crisis (GFC), it seems we cannot accept that our own property market operates with a different set of dynamics and is extremely unlikely to follow the performance of UK and USA markets where falls of 40 per cent in house prices occurred. Otherwise, why would Australian journalists continue to seek negative foreign commentary?
House prices have certainly slowed in growth, or even slipped backwards marginally here and there, which is hardly any surprise following the incredible rates of growth witnessed in some parts of the country last year. There’s also that small fact that the housing market is adjusting to the winding back of post-GFC fiscal stimulus this year.
Two weeks ago, US fund manager GMO’s Jeremy Grantham claimed our houses were overvalued by 40 per cent because they were almost 7.5 times family income – twice the supposed norm. Professor Steven Keen was the last person to make that claim and he climbed Mount Kosciusko as a result.
The respected RP Data-Rismark measure says houses are currently valued at 4.3 times income.
Sydney Morning Herald journalist David Potts highlighted that to reach a figure of 7.5, ‘house prices would have to soar, when all the signs are that they have slowed right down, or household incomes would have to nose-dive, which could only happen with massive unemployment’.
‘Didn’t anybody tell him we’re fast-forwarding new jobs?’ Potts asked of Grantham’s analysis.
This is the problem of course. Headline grabbing claims are rarely properly analysed and they wreak havoc with general consumer confidence, thereby impacting on an agent’s ability to get buyers to sign the dotted line.
Something never observed by foreign commentators and ‘experts’ is that average Australian land sizes are larger than their overseas counterparts. Australians also live in just a few big cities on the coastline – not in the vast, almost empty interior. In fact, 60 per cent of our property sales happen in just half a per cent of our landmass. We have massive immigration (currently the highest levels since WWII) as well as growing incomes, an economy that relies more upon China and Asia than Europe or America, and a perennial shortage of housing.
Talk of a ‘double dip recession’ is largely a symptom of the west’s fundamental misunderstanding of the new global economic landscape. The US is no longer the world’s economic giant – global growth is now driven by Asia and South America. However, because the world’s leading financial market economists are located in the mature economies they still haven’t grasped the notion that the world no longer depends so largely on the United States doing well.
At a recent business lunch in Sydney, the OECD deputy director suggested a double dip was still possible but was later forced to admit this was his personal opinion, not the OECD’s. According to Herston Economics and ICAP market forecasters, the risk of a double dip is just not reflected in global economic data. There is a strong global recovery occurring.
Some media pundits have referred to our current penchant for double dip recession stories as ‘armageddon hypochondria’. What’s clear is that it is a belief founded in old world market psychology, not one that faces up to the new world.
The big stories ahead that could affect the market are the European banks’ stress tests and the US corporate reporting season, which starts mid July. In the meantime, in the absence of excessively negative media, the Australian property market is anticipated to continue its cycle of growth, albeit at significantly slower rates, and offer excellent investment opportunities in the medium term.
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