Housing Prices In Australia

Housing Prices In Australia

7 October 2010

Dear Investor,

Housing prices in Australia
It is often said that the Australian media operates according to a series of secret, but immutable laws. One of these laws seems to be that you can never publish too many stories on the housing market. In a sense, this is not surprising. Housing and the broader property sector is an important part of the investment portfolios of nearly all investors.However, a regrettable consequence of this law is that sensationalist comments on the housing market are rewarded. The more dramatic and simplistic a statement, the easier it is to write a catchy headline and attention grabbing story. The truth, of course, is usually a little bit more complex and requires a bit more work to capture. In this edition of Investment News, we discuss some of the topical issues surrounding the housing market in Australia.

Will prices in the housing market always rise?
This question need only be posed for the answer to be obvious. Of course there will be times when housing market does not rise. There could even be times when it falls, as the recent experience in the US has shown. The fluctuations in value of any asset class, including the housing market, are a phenomenon known as 'volatility'.

So how volatile is the Australian housing market?
The well known economics, finance and real estate commentator, Christopher Joye, considered this issue earlier this year. He examined the volatility of a range of asset classes from 1982 through to December 2009 and found that the annual volatility of the Australian housing market was relatively low. In fact, the volatility of the Australian share market has been 5.6 times higher than that of the housing sector. He also pointed out that most of the economic crises we have seen in recent years (the 1987 crash, the Long Term Capital Management bailout, and the 2001 tech wreck) involved the equities markets. Even the Global Financial Crisis saw the stock markets of Australia, UK and US fall by 40-50%, but the housing market decline by just 4%, 14% and 30% respectively.So when people are talking about 'bubbles' in domestic or international property markets, it would be nice to hear them queried about the much more common and severe bubbles of the share market.

Are Australian housing prices high relative to household incomes?
In recent times, some commentators have suggested that the Australian housing market is expensive, relative to household incomes. This has led the 'price to income ratio hawks' to suggest that a pricing correction is imminent. However, as the deputy governor of the Reserve Bank of Australia, Ric Battellino, pointed out, this analysis was based on flawed data. What the hawks did not realise was they were using house price data from capital cities and comparing it income data from across the whole country. Since house prices tend to be higher in cities, this overstated the real price to income ratio. If these city house prices were compared to the incomes of people living in the cities, they were much more reasonable.Christopher Joye delved even deeper into the issue. The basis of his analysis was the Rismark national home price-to-disposable income ratio, which includes all types of dwellings in all regions and compares it to the Australian Bureau of Statistics' quarterly measure of average disposable household incomes (not just average weekly earnings). Using this measure, Australia's housing prices are 4.6 times disposable income. Furthermore, this is virtually exactly the same as Australia's seven year average since the end of the last housing cycle in December 2003.

Is there an undersupply of housing in Australia?
Although there was some debate about this issue in years gone by, it seems now to have been conclusively settled. The Federal Government's National Housing Supply Council released their second State of Supply report in April 2010. They estimated the cumulative undersupply of housing stocks in Australia at 178,400 and predicted that this undersupply would grow to 308,000 by 2014. Essentially, there are not enough new dwellings being constructed and high development costs (including government fees and charges) are restricting new projects. Finance for construction projects is also hard to source. On the other hand, population continues to grow and unemployment remains low.

What does all this mean for the housing market?
Predicting the future is always a hazardous business. The performance of any market can be affected by a range of factors and a strong housing market in one city can be offset by a weaker market in another city. Nevertheless, the demand and supply fundamentals and Australia's persisting economic strength continue to suggest that the Australian housing market has solid foundations and is likely to continue to at least hold its value for the foreseeable future.

For more information visit Home Finances Centres of Australia Hobart website.