“House price build-up but no bubble” screamed the Financial Review yesterday. According to the latest RP Data figures, residential property prices rose by 14.9% in Melbourne, 9.9% in Sydney and even 6.1% in Perth. On an annualised basis, Melbourne’s prices rose by about 18%. Given that economic growth is currently sitting on a somewhat less rampant 0.3%, it would be fair to suggest that housing prices have long departed from any rational basis.
While leading financial rags and real estate agents vehemently dismiss the notion of a residential property bubble, evidence points to the contrary.
On a relative income basis, Australian residential property is about double the price of the United States. It is also more expensive than the UK, and pretty much every other country. Although not everyone agrees — Business Spectator columnist Rismark boss and Crikey sparring partner Chris Joye yesterday claimed that “the median Australian home value is only four times average disposable household incomes. This is inconsistent with claims that Australian dwelling prices are six to eight times household income.”
Joye’s analysis appears somewhat optimistic, given the median house price in Australia is about $480,000 and according to the ABS data, average household disposable income is $55,432 annually — which means dwelling prices are almost nine times disposable income. This is extremely high by international and historical standards.
The most popular rationale for Australia’s booming property market is that Australia is in the midst of a dire housing shortage, caused by organic population growth and massive immigration. However, statistics tell a different story.
According to the ABS, 12,814 residential dwellings were approved in October — that equates to about 150,000 constructed annually. Given that the average Australian household has 2.6 people, dwellings for about 400,000 Australian are being built each year. Last year, net migration to Australia was 213,461 (of which skilled migrants made up just over half). In short, there is substantially more housing than there are migrants. It appears that the housing shortage is two parts myth, zero parts reality.
Further, it is highly doubtful that migrants are even in a position to “bid up” the price of properties. Most migrants would not be in a position to pay $500,000 to purchase a property, nor would they have the ability to obtain a mortgage. Migrants, in the short-term at least, generally rent property (non-skilled migrants would be in an even worse position to purchase a property). This means that the recent house price appreciation would have appear have very little to do with net migration levels, despite what property bulls claim.
Further, given the alleged migration probably wouldn’t have an immediate effect on property prices, can property advocates could rely on migration to lead to higher rentals (and indirectly, higher property prices as yields improve)? Well, no. According to the (usually bullish) BIS Shrapnel, rents increased last year by only 3.5%, barely more than inflation. Not only are immigrants unlikely to cause property to rise in price directly, they are not even having a particularly telling effect on rental yields.
Migration isn’t the only cause of population growth. Population increases also occur organically, especially given Australia is in the midst of a baby boom. In 2008, 296,600 babies were born, the highest figure ever. However, last year 143,900 people died, meaning that actual population growth was only 152,700. So, even adding the net births to the net immigration levels, it still appears that surplus housing is being built. (There is also the small issue of time lag — most babies aren’t in a position to enter the housing market for about 25 years so the recent baby boom is unlikely to be a cause of the recent price rises).
Another factor of bubbles is that those perpetuating the myth will turn any news into “good” news for asset prices. For example, billionaire property developer and one of Australia’s richest men, Harry Triguboff, recently claimed that house prices would increase as a result of the RBA’s hawkish monetary stance. According to Triguboff (who has somewhat of a vested interest in the matter given he is one of Australia’s largest home builders), higher interest rates act to reduce supply of dwellings, and when combined with a rising population, that allegedly leads to higher prices.
The contrary and somewhat more logical argument is that higher rates will cause a substantial dampening in demand as most property purchases are funded largely through debt. The higher the interest rate, the less buyers are able to borrow, thereby reducing the demand curve.
The fact remains, residential property has been largely funded by debt and aided by government policies such as the first home-owner’s grant, negative gearing and concessional capital gains tax. Like in the United States, Ireland and Spain, property is being bought by people who are expecting capital gains — in most cases, net rental yields are below 3%. Even assuming inflation of 3%, that still puts property on a price/earnings multiple of about 25. Coupled with annualised capital growth of almost 20% this year in some parts of Australia and contrary to what property “experts” might suggest, we have an almighty bubble.