Unreasonable Fears for an Australian Housing Bubble

Concerns surrounding Australian property have escalated recently. With slowing growth in our housing market, and a slowing Chinese economy, commentators are already forecasting the bubble to pop.

Even our own Australian banks are holding high levels of capital as buffers. And some, like ANZ Banking Group [ASX:ANZ], are imposing capital restrictions for foreign investors. While it’s great to be protective of your own nation, it might be a stretch to think we’re in a housing bubble just waiting for the crash.

But how likely is it that Australia’s property market will crash?

The graph below shows the growth of property prices across various nations. Someone looking at the graph might already have jumped to the conclusion that Australian property is overvalued. Just look at how we’ve grown compared to other countries like the US or the UK.

property prices 04Apr16

Source: Fitch

But this is just making an opinions based on what we see in a chart. Wouldn’t it be better to ask: why have Australian house prices grown so rapidly?

And the answer to this question is actually quite simple. Market commentators brush it off regularly. But Australian house prices are in high demand. Much higher than we have houses in supply.

Now, of course I’m talking at a general level. There are places even within Sydney and Melbourne that you or I would rather not live in. It is in these undesirable parts that property prices are stagnating.

The general adage is that people want homes. It’s the great dream, and we are subliminally told that we need to own property to be successful.

There are, of course, many reasons behind the aggressive demand to live close to, or in, the CBD of any city. For example, the Reserve Bank of Australia published a 10-page article about this particular topic.

In the article, written by Marion Kohler and Michelle can der Merwe, population growth was a major driving force. The price of property was largely linked to expanding population growth since the mid-2000s.

But there are still those who believe Australian housing prices are simply unaffordable. And they believe that housing prices will plummet because of lacking demand.

But to say house prices are unaffordable is not entirely true. It’s almost as if I said I wanted to be able to afford a house wherever I liked. This, of course, is unrealistic. How could I, and many other first home buyers, afford to live in the best suburbs of Melbourne or Sydney?

Many people who don’t think Australian house prices are unaffordable just need to widen their scope. Places 30 minutes to an hour out of a city are affordable. Why? Because not many people want to live there. They all want to have a great big house close to the city.

Instead of constantly complaining, people would be better off educating themselves. They should ask the question ‘why?’… Instead of jumping on bandwagon opinions.

China’s slowdown and the Aussie house prices

I mentioned China’s slowdown before for a reason. There are many people who believe it is Chinese investors that are behind the rise in Aussie house prices. And while this might be partly true in some specific areas of Australia, it is marginal.

But, with the Chinese economy slowing down, people are forecasting that Chinese property investment in Australia will slow down too. Is this true?

In the short run this could have some effect. Like I mentioned before, ANZ has made it harder for overseas buyers to get loans. This again will affect the market in the short term. However, in the long term I think these factors will be mere speed bumps.

Chinese property marketer Juwai.com expects Chinese investment into Aussie property to ‘set new records between now and 2020’.

It’s foolhardy right now to make a firm short-term prediction, because too much is happening and any single event internationally could create a boom or reversal in any given quarter,’ Juwai.com co-founder Simon Henry said.

But we are very optimistic for 2016 and even more so for the remaining portion of this decade,’ he said.

Our 2020 forecast for all Chinese international real estate investment, not just residential, is for $220 billion, which would be up more than fourfold from $52 billion in 2014.

And while capital controls might slow short term investment, it might only be a speed bump in the long term.

Härje Ronngard,
Junior Analyst, Money Morning


PS: Real estate is, for many Aussies, a worthwhile investment. However, sometimes putting up the money for a deposit can be daunting for first time investors.

There are usually two routes one can take when investing in real estate. The first is the capital gains approach, where you buy and wait for property prices to go up, before selling. And the second in the cash flow method, where you buy and hold to gain regular cash payments through dividends.

Both strategies work for different kinds of investors.

Money Morning’s income specialist Matt Hibbard will show you how to earn a passive income off dividend paying stocks. In his report, ‘The Top 5 Dividend Stocks in Australia for 2016’, Matt shows you where you could start looking to earn steady new streams of income.

And the best part is you don’t have to put up enormous amounts of capital like you would for property. To get your free copy of Matt’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia