The Absurdity of Australian Property

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Today’s absurdity involves Australian property prices. Weekend auction activity in the main cities of Sydney and Melbourne give the impression that the market is once again red hot. The prospect of lower interest rates, it seems, trumps concerns about a slowing China, a sharp drop off in mining investment and rising unemployment.

So is the move driven by fundamentals?

SQM Property Research publishes a weekly rental index. Over the past 12 months its index reading for Sydney and Melbourne (houses) is up 0.2% and 2.1% respectively. On the other hand, SQM’s weekly ‘asking prices index’ for the two cities over the same time frame is up 7.2% for Sydney and just 0.4% for Melbourne.

What does this tell us? Well, first of all understand that this is just one of many measures of house price data. SQM will have different results to RP Data or the Australian Bureau of Statistics. But it does give us the ability to compare prices with earnings, which for houses is rent.

So on this basis, you would argue that Sydney has moved ahead of its fundamentals over the past 12 months while Melbourne has actually underperformed. But with lower interest rates, and the prospect of more cuts to come, you could also argue that Sydney’s strong house prices reflect the discounting of a lower interest rate environment.

On the other hand, you have to ask yourself why interest rates are expected to fall. It’s because of a slowing economy. It’s because of fears over the growth prospects of our largest trading partner, China, which hasn’t even began to reform its hopelessly imbalanced economy yet.

With this in mind, it’s difficult to see how we’re going to get enough growth in national income and wages to maintain ‘earnings growth’ (rental growth) for residential property. If that is the case, and we think it will be, the recent spurt in the property market will be short-lived.

Looking at it from a psychological perspective, you could argue that buoyant activity in the market is a result of a ‘throwing in the towel’ mentality of previously reluctant buyers, as well as continued involvement from the legion of property players in Australia who have never experienced a downturn, and who believe we will never see one again.

We have no idea where property prices will go in the years ahead. But we do know that we have rarely seen a market where the prevailing wisdom thinks you just can never lose by buying now. That is a dangerous sign.

Property is a polarising topic. Satyajit Das, speaking at our ‘After America’ conference last year, says it’s up there with religion in Australia so he avoids talking about it. But we think polarising topics are good fun. They make you think and introduce you to new viewpoints.

So if you want to tell us what you think about the state of the property market today, say based on a recent experience, let us know at letters@dailyreckoning.com.au.

Regards,

Greg Canavan+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Visit the Remembering The Future Facebook Page for more on Australian Property.

From the Archives…

Has the Chinese Economy Hit the Great Wall?
26-07-13 – Bill Bonner

Crisis, Capital Controls, and Accidents of Birth
25-07-13 – Doug Casey

Australia’s Mysterious Natural Gas Shortage
24-07-13 ­– Nick Hubble

Bernanke’s QE Train Wreck That’s Heading Our Way
23-07-13 – Vern Gowdie

The Misallocated Savings of the Chinese Banking System
22-07-13 – Dan Denning
 

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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5 Comments on "The Absurdity of Australian Property"

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small cap
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In Brisbane prices have fallen year on year for the last three or four years. Add to that say 3%/pa inflation then prices have fallen probably 20%+ or so In real terms (I don’t have the actual figures) so I don’t think we are too far away from Steve Keens predictions. Our population is growing also.

Prices wont sit at zero growth for ever due if nothing else to the aforementioned inflation.

Got to move on with your ideas TDR, your property, gold and equity theories are sounding a bit ‘flat earth.’

Peter
Guest

What I want to see are house price rises stratified across the various price groupings, along with volume of sales in each. Easy for outliers, particuarly if volumes are down, to swing the overall figures.

Precipice
Guest
As a small time property investor you are freaking me out but I think low interest rates will allow me to hold on. As a buy and hold investor I have a small office, now owned outright and well rented, a rented villa worth twice what’s owed and the last of 4 townhouses built (3 sold)rented which is probably worth slightly less than what it owes me not counting the time invested to create ‘the opportunity!’. I made enough in the subdivision to cope with the downturn in my terrible timing. I think I have enough equity and as long… Read more »
peter p
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Prices rise because of the way statistics have been put together. When an old 60’s property is bulldozed and a new residence is build on the resulting property values automatically push the property statistics up. That is not a growth in house prices. In other parts of the market when a 60’s house is torn down and 4 town houses appear, it does not make sense to buy a 540k townhouse,rent it out for 450$ per week and hope for capital growth. These new townhouses are build out of cement board and cement wash and fall apart after 4 –… Read more »
john
Guest
Property prices will always go up.. of course there will be growth cycles but the general trend is upwards just like petrol prices. You guys can sit behind your computer screens and speculate all day but the people who are making real money out there are the ones who get off their chairs and take action. I remember 10 years ago people telling me not to buy property those same people are now regretting and what I have learnt over the years is that there will always be doubters who make the same repetitive mistake. I suggest buying property now… Read more »
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