Real Estate Review

Mr David Airey, REIA’s President has criticized comments by GMO’s chief strategist Jeremy Grantham – that Australia is in the midst of an unmistakable housing bubble. According to David Airey Australia experiencing normal property growth for house prices.

“If Australia was in the midst of a so-called housing bubble, then we have been there for some time. REIA’s data highlights that historically, median prices, compared to income, have been relatively stable for the past ten years, taking into account normal fluctuations,” said Mr Airey.

Over the period Dec 1996 – Dec 2009, median house prices increased from around $160k to around $500k; a trebling in thirteen years steadily.

Within this period there were four phases:

1. Dec 1996 – Sep 2000, median house prices in Australia showed a moderate average growth of 2.1% per quarter.
2. Dec 2000 – Dec 2003, house prices appreciated at a greater rate of 3.9% per quarter on average.
3. March 2004 – Dec 2008, house price growth moderated to an average growth of 0.8% per quarter.
4. During 2009, growth of median house prices again accelerated to 2.9 % per quarter.

Mr Ric Battellino, Deputy Governor of the RBA, addressed this very issue in a paper he presented couple a days ago, saying, “People feel that house prices in Australia are quite high, and that’s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated.

But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”

It is important to note that the price/income ratio doesn’t entirely explain the state of houses prices.  Demand fundamentals, such as interest rates and stock returns also need to be considered.  As well as these fundamentals, we need to look at structural factors, such as: population growth and the current undersupply of housing – please see the table below:

It is evident from the table, that the rate of growth of house prices is related to the level of mortgage rates, changes in family income and relative returns from the stock market.
When mortgage costs are relatively low, income growth is high and returns from shares are low – we have higher house price growth (Sept 2000 to Dec 2003 and Dec 2008 to Dec 2009) and vice versa.

“What is evident from the data recorded by REIA is that we are not seeing a bubble developing which will implode, but rather, the cyclical changes of the Australian housing market,” concluded Mr Airey.