Found the above chart at The Big Picture .
Unfortunately Australian Real House Prices are missing but I did a quick calculation using ABS data. From the start of 1997 to the start of 2008, inflation adjusted house prices in Australia increased from a base score of 100 to 212 which places Australia somewhere between Spain and the UK in the above chart. Since 2008 Ireland and Spain’s property prices have fallen significantly whilst, off the top of my head, UK hasn’t fallen so much. However Australian house prices, using my calculations, have increased such that our index score sits around 230.
As a result I’m pretty confident that since 1997 our housing market has experienced the highest real return of the above nations. Jeremy Grantham, of GMO, believes UK and Australian residential property markets are both in bubble territory (or at least very very expensive). Whether you believe that or not, the Australian housing market is certainly one of the key risks to our ongoing economic strength as a nation. Whilst there are numerous reasons provided for why Australia didn’t suffer during the GFC to the same extent as others (regulation, banking strength, etc), I’m sure the strength in our housing market was an essential factor.
As mentioned around a month ago after the month of August a rate rise from the Reserve Bank appeared a long way away but September has certainly been a month for the risk takers. Aussie Dollar near record highs and the sharemarkets are up so of course that means government bonds are down. The above chart shows that 1 month and 3 month Australian Government Treasury Notes are trading around 4.85% and with cash rates at 4.5% that can only suggest the market believes a rate increase to 4.75% is odds on.
This will obviously have consequences that will hit home loans the most. Personally I cannot remember a time when there has been so much talk about how expensive house prices are in Australia. We’ve had Jeremy Grantham (the G in GMO) saying if our housing bubble doesn’t burst it would be the only asset bubble in history not to do so; Steve Kean walk to Mt Kosciusko because he expected property prices to decline massively by now; the Commonwealth Bank is spruiking around the world with dodgy figures suggesting our house prices are ok; and Goldman Sachs economist, Tim Toohey, has said our prices are overvalued by something like up to 35%.
I don’t believe this rate rise will send our home prices off the cliff, but there is no doubt to me they are likely to be going nowhere over the next few years. There does appear to be an Australian psychology that we are different and our house prices won’t fall but the warning in that is that is always the psychology before a massive fall…we obviously have many very recent examples to call upon to support that statement.
The RP Data/Rismark house price index has shown the first monthly decline in house prices in 17 months and largest since April 2008!!! …well…its down seasonally adjusted…house prices actually still went up. With global asset allocation gurus like Jeremy Grantham (one of the fundies I do listen to) and vocal locals like Steve Kean suggesting the Australian residential housing market is in a bubble, I guess it was just a matter of time.
Jeremy Grantham, of GMO, believes both Australian and UK house prices are completely out of kilter with household income, and as a recently divorced current renter who is looking at houses with the view of ideally owning a (small) mortgage, I have to agree that the prospect of buying a house in Australia (ok, in Brisbane…well…say…not too far out of Brisbane CBD) is downright scary. Now I get the undersupply issue in Australia, but with households stretched so much to buy, with credit being tougher to get, and with rents so low (I pay a rental yield of around 2% to 2.5%) that investors must be edgy, at some stage growth must slow or go backwards…lets face it, everything is cyclical. Grantham says that if the Austrailan and UK house bubbles don’t correct it would be the first time in history that a bubble has not burst…so….is the latest monthly downturn the beginning of the end? Maybe if there’s an external shock to the local (or maybe global) economy.
