Is the Australian Property Market in a Bubble?

Is Australia’s property market about to crash?

If we gauge by the common standard, house-price inflation in the short term variedly moves based on a few demand factors, such as disposable income, number of households, interest rates, the yield on other asset classes, and less on the inelastic yardsticks such as of supply of housing.

Those factors, and the influx of overseas property investment in the big cities of Sydney and Melbourne have seen housing prices hit stratospheric levels.

Sydney’s median house price fell below the $1 million mark only recently—in April, for the first time in over five years, and despite a slowing economy and moderating national income, Melbourne’s median house price took a long stride in the trimester leading up to July 30.

As you can imagine, this has attracted a lot of negative attention to the Australian housing market.

A host of bears, both local and international, have taken to our shores with predictions of a calamitous drop in Aussie residential property prices.

The latest being US researcher Jonathan Tepper and his partner hedge fund manager John Hempton. Back in February, Tepper and Hempton fashioned themselves as a gay couple and wandered through Sydney’s western suburbs to determine the extent of what they believe is a housing bubble in Australia.

Their conclusion “it’s worse than we thought.”

“The further west I went, the more irrational it felt. Lots and lots of supply and prices that bore no resemblance to construction cost and income of people around there,” remarked Hempton, Chief Investment Officer at Bronte Capital Management Pty Limited.

Tepper reckoned property prices to plummet by 50 % like they did in Ireland and Spain due to the high household debt to GDP ratios and overvalued property prices.

To him: Australia now has one of the biggest housing bubbles in history.

He is not the only one with this bearish attitude.

Jeremy Grantham, the founder of the $100 billion fund manager, GMO, called it in 2010, that Aussie housing is a “time bomb” with an overvaluation of 42 per cent.

Well, it is 2016. The market has not exploded and neither has it stopped climbing.

The fact that none of that has occurred has only given ammunition to those who perceive it never will.

Christopher Joye at the Australian Financial Review, probably the biggest detractor of Temper’s research, says “most of the concerns highlighted by Tepper”—the ones that drove his conclusions, such as record household debt-to-income and price-to-income ratios, influx of foreign buyers, record interest-only loan shares, and other bubble-like features— “have been addressed by Australia’s regulators.”

He has a point.

The Australian Prudential Regulation Authority took a rather aggressive stand in its crack down on Aussie banks’ lending policies.

He further cites Bank of America Merrill Lynch’s Dr. Alex Joiner, who demonstrated that when you take the median house price in 1985 in Australia and adjust it only by disposable household income growth between 1985 and 2015 and the change in borrowing capacity over this period using declining mortgage rates, the 1985-adjusted value is 1 per cent above current median prices.

This implies that Aussie housing is fairly valued. In fact, slightly undervalued as long as interest rates remain below current marks.

It’s all up there, but while we are at it, what constitutes a housing bubble?

Demand and speculation usually lead to the up shoot in housing prices, normally. With increased demand, supply decreases and takes a relatively longer time to replenish and increase.

This attracts the speculators who enter the market, believing that profits can be made by flipping— that is buying and selling in the shortest possible term.  They increase demand, which cannot be satiated at this point and so it drops. At the same time supply increases, resulting in a sharp turn in prices – and poof! The bubble bursts.

For a property market to crash you need last ditch sellers willing to give away their properties at fire-sale prices and no buyers, supplemented by anything from a major depression, massive unemployment, and high interest rates.

Property investing means much more than this. It is less about trying to pick the bottom of the market or forecast its peak, anticipating that you’ll catch it at the “right time.”

People who have made their money in property all focus on having the right strategy; finding the right property guided by that strategy; and being able to ride the waves of the market for the right price.

In the long term, the benefits of this strategy are boundless.

The Australian property market has consistently supported this and will continue to do so. As long as there’s value in a property, these naysayers can’t shake it. It will show eventually.

Short-termism is a fool’s play riddled with bumps, such as market corrections, transaction costs, and tax implications.

Adopt the right strategy and you can make money in any market.

Source: Invest in Properties

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