Thursday, March 10, 2011
Australian House Values...What is the Real Story?
by James Kirby (Article Dated 6/3/11 Source: http://www.theage.com.au/ http://ow.ly/4bp6d)
Are they all wrong? The IMF, the OECD and now, ladies and gentlemen, those anonymous analysts at The Economist who have branded Australia 'the most overvalued housing market in the world'?
It's quite a call - our house prices are more overvalued than anywhere you'd like to name - Shanghai, Sweden or Switzerland. According to The Economist Australia's home prices are 56.4 per cent overvalued. And that's comfortably above the second-highest figure of 53.7 per cent in Hong Kong.
We stand in contrast to the US where the top 10 cities are approaching fair value at 3.7 per cent overvalued, and in wild contrast to Japan, which has been going nowhere since the early 1990s and is now estimated at 35 per cent undervalued.
These reports - and they are now as regular as Charlie Sheen meltdowns - understandably spook us in a land where the bulk of family wealth is in the home. And if it is beyond dispute that Melbourne and Sydney homes cost more than Hong Kong homes, then we are in a bubble.
But hold it one second … what exactly did The Economist measure? The ratio of home prices to rents in 20 economies.
It's a single measure - and a leaky one at that.
You could simply say Australia tops The Economist list because our average rents are too low - rental yields have remained unchanged at about 4 per cent for many years, though they are beginning to rise.
More likely our home values are justified by one of the best economies in the developed world - even if it is a two-speed model in which mining industries thrive and other sectors struggle. And that's before you factor in the exceptional tax shelter encased in the family home along with the concentration of our populations in four cities.
What's more, the factors that could start to immediately move prices - higher or lower - are dormant. Investors as a proportion of the market have remained unchanged since the GFC while the housing shortage remains virtually static.
Paul Braddick, head of property research at ANZ, points to lower home approvals. In trend terms, home building approvals have been falling for nearly a year, although it has to be said the most recent statistics on home building approvals have been skewered by the Queensland floods crisis. Indeed, the floods highlight the problem with housing statistics. The statistics are riddled with localised exceptions.
When you start comparing international house prices, the problems are enormous.
It is much more probable that they will drift for at least a year after slipping by an estimated 1 per cent in the 12 months to January. And this is not a bad outcome for most homeowners whatever this report or the next report might care to say.