Houses

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There is a raging debate flowing through academic, economic and financial markets at the moment concerning the future direction of house prices in Australia. It seems everyone has an opinion, and the stronger that opinion the less likely that any facts are going to get in the way of the argument.

On one side we have those who look at a very strong track record of price increases over decades, who have absolute faith that (for example) Perth average house prices will be over a million dollars by March 2020. Given current average prices are around the half million dollar mark, this would require a return of close to 7% a year. If we assume that rentals are something like 4% gross then that amounts to a total return of 11% per annum over that period. This is possible but we should ask ourselves whether it is likely.

There are a list of issues in favour of that outcome:

  • Continued high employment in Western Australia, and Perth more specifically
  • High levels of business investment, which should translate to more jobs
  • Likely continued high migration into WA from other states and overseas.
  • Continued restrictions and delays in the release of land for redevelopment.
  • Potential restrictions on funding for development in a capital constrained world.
  • Housing having a ‘special’ place in the mindset of Australians.

Comparisons are made to the situation in most other developed nations, which are suffering from blanket falls in prices for residential housing. It is no secret that the United States’ financial woes are being made worse by continued high unemployment and a housing market that, it would appear, has yet to find a floor price level.

It is interesting to read some of the commentary in other countries, where traditional “truths” held by Australians to be absolute, are currently being called into question. Here is the New York Times suggesting that housing is no longer a lazy pathway to easy wealth. Here is another discussing people walking away from their home loan debts. Here is an interesting series of comments on the same issue.

Just because a position exists in the United States, it does not naturally have to follow that the same position will eventually be reflected in Australia. It is true that global finances are strongly interconnected but local differences can often bring about starkly different outcomes.

This post does not aim to put forward a direction for the prices of houses in Perth or anywhere else in Australia. Rather, it is looking at the various types of commentary and trying to bring some sort of global perspective to the position in Australia. Regular readers will be familiar with a chart that we have published some time ago, which looked at the Australian sharemarket and the residential property market from the point of view of their long term returns (for price only – we discounted dividends and rent). The idea of the chart is to say that the allocation of capital to either market must continue to earn a return that rewards that allocation, and that the rewards in term sof price appreciation seem to come together every few years. However, since around 2006 there has been a disconnect, with house prices rising substantially and staying there, while the Australian sharemarket has fallen substantially. There are many reasons why this may be so. Again, we are not trying to say why things are a particular way, we are simply looking at the correlation between two markets.

Here is an update of that chart.

Please keep in mind that this chart has been put together from a number of sources, and has not been independently audited. Feel free to run the numbers yourself should you have any doubt about our methodology or outcomes.

You may have a better idea than anyone else of where prices are headed. If the proposition that both markets will show similar returns over an extended period holds then we are likely to see another movement towards a common level at some stage in the future. Whether it be with housing continuing to rise and the sharemarket rising to meet it or the property market holding flat or showing only low growth for a period until the sharemarket catches it again or property prices fall to meet the equivalent market level quicker, is something that is subject to far too many variables for any valid certainty to be obtained. What the levels do suggest is that the relative values have diverged considerably, and it is a time to think carefully before committing too heavily into markets.

Interesting times indeed.

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  1 comment for “Houses

  1. Neville Ward
    September 1, 2010 at 1:09 pm

    Thanks, Michael
    Again, it all comes back to timing ( and diversification) in the market – if only we could predict accurately and with certainty.
    Still, that would take the fun aspect away!!

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