Take Shelter, The Housing Apocalypse Is Nigh…

Posted by Daniel Joseph

I’ve observed during my time assessing the Australian property market that sensationalism sells. That was never truer than when I wasted 15 minutes of my life watching 60 Minutes on Sunday. I’m sure that the gentleman being interviewed (Jonathan Tepper) must’ve recently seen ‘The Big Short’ (four out of five stars, if you haven’t seen it, you should) and envisaged himself being played by Clooney, Pitt, Bale or DiCaprio in an Australian version of the film.

If you didn’t get the chance to see the program, I’ll save you the trouble and provide you with the Cliffs Notes:

Jonathan Tepper: ‘Hi I’m an economist, I’m going to spray out a whole bunch of predictions in the hope that one is remotely accurate. At that point, I’ll proclaim myself a modern day Nostradamus.’

Now, I’m under no illusion that property in some locations, a high concentration of which is in Sydney, is overvalued. I don’t need to look far from home, I live in Sydney’s north-west, to see overvalue in action. Land prices have doubled in the last three years; house prices increased by 65 per cent over the same time frame. As much as I’d love to crack the champagne bottles, I’m not deluded enough to believe that the ‘good times’ will last (I use inverted commas because I don’t happen to think that a rise above fundamental values is a good thing).

Where I disagree with Mr Tepper is the likely result of the concentrated property ‘boom’ reported of late. It is insanely irresponsible to assert that a plummet of ’30 to 50 per cent’ is likely and in the same breath imply it will be a nationwide phenomenon. The report extrapolated isolated instances in economically volatile towns to suburbs in our capital cities. The difference? Decreased demand for resources created a chain reaction that culminated in a near extinction of demand for property. For a result like that to occur Australia wide, we’d need an economic meltdown, drastically higher interest rates, loss of jobs and an unprecedented evaporation of demand. The probability of one or these is unlikely, let alone all in unison.

This doesn’t mean that we shouldn’t be responsible in our borrowing and investing. Our loyal readership will recall our positive coverage of APRA’s regulatory changes in August last year. Our view, and that supported by research, is that property markets move in cycles; Growth phases are inevitably followed by market corrections where we tend to see a period of lateral price movement as opposed to a ’30 to 50 per cent’ decline. I agree with Mr Tepper that the price to income ratio in Sydney is absolutely unsustainable. I’ll avoid pointing out that a more accurate measure of affordability is income to mortgage payments. Regardless, current inflated price to income or mortgage payments to income ratios in Sydney are the primary reason the harbour city has evaded Blue Wealth’s recommendation for the past 24 months.

I’m sure you’re as sick of hearing about Australia’s property bubble as I’m sick of writing about it. How about we think rationally, invest responsibly and be guided by research.

Posted by Daniel Joseph, on 23rd Feb 2016