Property high priests square off over housing bubble
As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.
Going to a debate about property bubbles is a bit like going to a debate about the existence of God. You know broadly what the arguments will be, but you want to know who is speaking and whether they have any new observations.
And so it was that the Money Institute in Sydney hosted “The Property Bubble Debate: is it doom and gloom or safe as houses?”
In the Christopher Hitchens role (there is no God) we had, inevitably, Professor Steven Keen, this country’s most high-profile property market iconoclast.
As the joke goes, the good professor has managed to pick six of the last three downturns.
Opposing him, in the Archbishop of Canterbury corner, there was a property developer called Dr Tony Hayek from Blue Wealth Property.
In between, there were a handful of participants, the most informative of whom was Dr Shane Oliver, AMP’s chief economist.
One problem with debating the merits of property is that it is such an emotive topic for Australians.
With one of the highest rates of home ownership in the world, having your own home – at almost any price – is a cultural imperative against which it is almost impossible to rationally argue. It is also proof that economics is not always a rational science.
Hayek, the first speaker, said he wasn’t going to show any graphs or statistics, because that was the job of the other panellists.
However, he did show us photos of houses in Concord and Harris Park, NSW, that he said had gone up in value in the past few years.
Fortunately, Keen had a slightly broader view. The University of Western Sydney academic said that conventional wisdom had it that “population pressures drive house prices, but that’s wrong. It is money pressure which drives house prices.”
Australian banks have financed a bigger bubble here than in the US, he said.
“It’s the biggest debt-financed asset bubble in human history, and I’m afraid you ignore it to your peril.”
Oliver began his talk by saying that any negative remarks about the property markets didn’t apply to the northern beaches suburb of Avalon, NSW, because that was where he owned a house. In general, house prices were this country’s “Achilles Heel,” he observed.
In 1987 the housing market soared following the sharemarket crash, and the Australian market recorded much bigger gains than the UK and the US. Although the Australian market is overvalued, the indications of a bubble were missing, he said.
Interestingly, buyer sentiment about property as an asset class has changed. In the mid-1990s approximately 50% of Australians surveyed on this topic thought that real estate was a better place for their savings than other asset classes, Oliver said. Now, only 15% are property true believers, and the rest think they would be better off putting money into bank deposits and paying off debts.
Housing affordability is a huge issue in this country, the economist said. To buy an average-priced house in Australia takes six times the annual disposable income, whereas in the US is just three times that figure.
For instance, the average house price is Sydney is $634,000 while in Los Anegles, which has similar household incomes, it is $346,000. The Perth average house costs $480,000 and Austin Texas, $189,000. Housing rental yields here were about 3% and commercial property about 8%, the economist said.
Oliver then analysed the issue of why Australian property was so much more expensive than its equivalent in the US.
The first reason was that Australians spend less on healthcare than Americans, which means that they have more money in their pockets to spend on housing. The other factors are a greater supply of credit here and an under-supply of housing.
Currently, there is a shortfall of 200,000 to 230,000 dwellings; we should be building 180,000 to 200,000 dwellings every year and we are building less than that, he said.
In conclusion, the economist said that the main risks for the property market were a large number of land releases by government, the collapse of the Chinese economy and a rise in interest rates. Housing affordability was “terrible” and auction clearance rates were trending low, he said.
“My summary would be that prices are overvalued. It’s not a bubble, but we are very vulnerable if anything goes wrong.”
After the presentation, on the way back to the office, I went into a shop to look at a $330 pair of shoes I had just purchased over the internet for $70, plus postage. As I can now buy everything I want with an iMac and a credit card, I wondered: what is the future of retailing property? Buy FedEx.
