Focus on the big property picture

The alarmists are out in droves at the moment, sounding warnings that Australia is apparently on the brink of a property crash. Some commentators are even claiming that a move by the Reserve Bank to jack up interest rates either at its meeting next week or in the coming months will be the pinprick that deflates the “housing bubble” they believe we are experiencing.

House prices have undeniably come off the boil over the past few months, with estimates from industry analysts suggesting that Melbourne and Sydney’s median prices fell by 2% and 0.5% respectively over the last quarter.

But does this minor correction mean that prices are about to plummet? Should we be panicking about the future of Australian property?

I don’t think so.

A recent report in the Sydney Morning Herald revealed that while our housing market is experiencing a slight price adjustment, home values in the US, Britain and Ireland have plunged by a massive 40% and continue to fall. This makes our recent market slowdown seem unremarkable in comparison.

But it also fans the alarmists’ fire and makes them cry property crash every time the Reserve Bank threatens to lift interest rates or some other potentially negative economic event is on the cards.

They argue that affordability is an increasing problem with Australian housing and use the average price of real estate in relation to the average income, as well as reports of growing household debt, to prove their point. While these figures might paint a damning picture in passing, the doomsayers – predominantly overseas economists and academic boffins – are not really taking the big picture into account.

Associate Professor with the University of Western Sydney Steve Keen is one such naysayer when it comes to the outlook for Australian property. In a recent radio interview on the ABC, Professor Keen said that property investors earning less than $80,000 per annum make up 20% of the market in his estimate and that the smallest shift would force this sector to sell up, causing “the bubble to burst.”

At the other end of the spectrum there’s the “glass half full” optimists who are tipping that we are on the brink of “the mother of all housing booms”. ANZ economist Paul Braddick, says that while the immediate outlook for house price growth is soft, market momentum will swing upwards strongly over the long-term.

So who’s right? Is there some type of happy medium between these two extreme views?

Enter a new voice in the debate; Australian chief executive with the world’s biggest bond fund Pimco, John Wilson. He emphatically denies that our housing market is experiencing a price bubble and uses some compelling arguments to substantiate his opinion.

For one, says Wilson, Australia’s real estate market cannot in any way be compared to the US or Britain as our economic make-up is poles apart; we still boast strengthening growth and high levels of employment and are in the midst of a housing shortage, not an oversupply as occurred in these nations.

He also observes that although our mortgage repayments are relatively high, the ratio of housing costs to household disposable income has remained the same for more than a decade at 30%. And while household debt is admittedly rising, it is actually good debt – spent on housing – not more on credit cards and personal loans, with the average equity in our homes sitting at a healthy 60%.

Additionally, Wilson believes the RBA have already done their worst when it comes to raising interest rates and others are starting to subscribe to this theory.

Taking all of the underlying fundamentals into account, one can confidently conclude that we are not all about to see the value of our homes and investment properties subside into a property abyss. Yes things have slowed, but this is a normal part of the ups and downs of property cycles. As always, well-located real estate will prevail over the long-term and investors will emerge smiling.

The take home message is – focus on the big property picture, not noise from the naysayers.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.