4th February 2010
The future of Australian property
As you may recall, in previous editions of Investment News we have discussed the strong performance of property through 2009. Since all investments at La Trobe are secured by mortgages over property, this is great news for investors. However, our investors are also interested in whether this performance is sustainable into the future. Key to this issue is the question as to whether the Australian housing market is overvalued.
In this edition of Investment News, we consider what the experts are saying about the Australian housing market.
Is Australian housing properly valued?
Both the International Monetary Fund (IMF) and the Reserve Bank of Australia (RBA) are consistently assessing the Australian property market. A summary of their recent findings follows.
International Monetary Fund Analysis
At the end of October 2009, the IMF released its "World Economic Outlook" in which it noted that:
"... in the case of Australia, if the impact of long-term migration on housing demand is taken into account, the results do not produce evidence of a significant overvaluation of house prices." (page 22)
Christopher Joye summarised the detail of IMF analysis in a presentation to the Melbourne Institute as follows:
Whether assessed since 1980, 1990 or 1997, Australia's house prices have risen in line with its peer group (broadly Western Europe, the UK, US and NZ). Specifically:
- When considered since 1997, the rate of house price increases in Australia is ranked sixth (6th) of eleven (11);
- When considered since 1990, the rate of house price increases in Australia is ranked sixth (6th) of eleven (11); and
- When considered since 1980, the rate of house price increases in Australia is ranked fifth (5th) of eleven (11).
Further, Australia's house price-to-income ratio growth between 1997 and 2008 would rank it seventh (7th) of twelve (12).
Interestingly, the IMF also considered whether there was a global 'correction' occurring in the housing market, but concluded that:
"... the corrections in Australia and the United States are close to complete." (page 21)
Reserve Bank of Australia Analysis
The IMF report followed a presentation by Tony Richards, Head of the Economic Analysis Department of the RBA, on 29 September 2009. Richards commenced by noting that, since the Australian property market hit its peak in 2003, housing prices have risen less rapidly than incomes.
However, Richards then pointed to a number of factors that increase the prospect of housing price rises in the future, including:
- strong population growth (both natural and immigration-led);
- a long-term trend towards decreasing average household sizes (although there is some evidence that this trend might have paused in recent years. The pause itself might only reflect pent-up demand for housing that has temporarily been delayed);
- a long-term increase in average hours worked per week, per household;
- the high price of vacant land on city fringes; and
- zoning and development approval issues constricting new development.
Further, on 25 November 2009, the Deputy Governor of the RBA, Ric Battellino gave an assessment of the Australian economy's future prospects. In doing so, he reviewed the much-discussed ratio of house prices to household income.
Battellino noted that the ratio was higher than 20 years ago, but that the increase was largely explained by the fall in inflation over the period, which had kept interest rates cycling at a lower average level than had previously been the case.
Further, although the Australian home price relative to incomes was higher than that in the United States, this reflected the differences between the two countries, including:
- the higher population concentration and urbanisation in Australia;
- the lower level of income (including medical expenses) spent on non-housing consumption in Australia; and
- the tendency of Australians to pay off their debt more quickly.
For these reasons, Battellino stated that:
"... the Australian household sector as a whole appears to have the financial capacity to sustain a relatively high ratio of housing prices to income."
More recently the Commonwealth Bank Economics Research team released its analysis of housing and housing costs. Reassuringly, the report concluded that 85% of households spend less than 30% of their gross weekly incomes on housing.
Despite the often-overheated commentaries in tabloid papers, the evidence does not seem to suggest that prices in the Australian housing market have been increasing at an unsustainable rate in recent years. Indeed, it seems that the correction that has been occurring dramatically in the US and the UK over the last couple of years has, in fact, been occurring at a more measured pace in Australia since the market peak in 2003.
Although predicting the future is always a risky venture, the experts suggest that the fundamental demand and supply position means that the Australian housing market is likely to remain strong and attractive to investors for the foreseeable future.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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