It seems the whole of the country is asking the question: will the Australian housing bubble burst? And it’s a fair question. Unfortunately, it seems that everyone has an answer, so who should we listen to?
When it comes to gaining quality insights into the Australian property market, I am a particular fan of The Property Couch. I listened with interest to Bryce & Ben’s latest podcast which is all about the prospect of a major downturn in the Australian property market. The catalyst for this episode was one of their listeners who asked for an opinion on a particularly gloomy article on the Australian economy written by Matt Barrie, CEO of Freelancer.com.
When I read this article, which is long and extensively researched, my initial reaction was to curl up in a ball and cry. But then I thought, hang on, while I am no expert on equities, currency, China, etc, I do know a lot about Sydney residential property. I’m not certain that Mr Barrie has enough of an understanding of our market to be able to say that we are in the middle of a massive bubble that’s about to burst and cause property prices to fall like a house of cards (sorry about the mixed metaphors).
“As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”
He could be right, but it seems to me that Mr Barrie is not talking about a property bubble, per se, but a development bubble. But more about that later. Let’s first consider the idea of an Australian property bubble.
Let me be clear – I’m not singling out Mr Barrie because I think he’s the only person saying this sort of thing. I actually agree with some of the points he makes. However when property owners across the land are asking, “will the Australian housing bubble burst?”, anything suggesting it will makes a great headline. This article is typical of what we’ve all been reading of late and I’d like to see more informed commentary. Instead, one international bank puts out a press release and suddenly we have a 55 year Australian property boom: “A bubble that has lasted for 55 years and seen prices increase 6556% since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).” These sweeping statements irritate me just a little and it’s not the first time I have written about this sort of thing.
The first time I read a reference to this 55 year boom (back in the SMH in November), I thought it was a typo since I know that we’ve experienced a 5 year boom in Sydney and Melbourne. However, over those same 5 years, some other parts of the country have actually been experiencing negative growth. So, why do some “experts” insist on making reference to the “Australian Property Market”?
If we just go back to 2009 we can see that the whole country has not been experiencing a boom even in the last eight years, let alone 55 years… According to this graph from Dr Tim Lawless at Corelogic, while Sydney & Melbourne have had a continued growth trajectory since 2013, they both saw values fall in 2011 & 2012. This also shows that the other capital cities have certainly not experienced anything near a boom.
Here’s another graph from Corelogic which shows that even Australia’s strongest property market, Sydney, has experienced negative price growth at various times between the end of 2003 and the beginning of 2013.
Still convinced Australia has been experiencing a 55 year property boom? When we look further back, as with this graph from Dr Andrew Wilson from domain.com.au, while the overall trend is up, some cities have endured years of stagnant growth and other periods where prices have fallen.
Of course, if you combine all the figures, you’ll see prices trend upwards, but Australia is made up of hundreds (maybe even thousands) of micro markets and their charts don’t all look the same. It’s simply ridiculous to make sweeping statements about the “Australian Property Market”. Will the Australian housing bubble burst? Well, the answer to that would be another sweeping statement.
Now, let’s look further into what Mr Barrie is talking about when he refers to a property bubble in Australia. He talks about an “apartment building frenzy” in Sydney and I share a lot of his concerns. But to suggest that the proliferation of new apartments has the potential to unravel the entire property market… well, I think that’s a long bow.
You see, these new apartments only appeal to a segment of the total market and I’d even go so far to suggest that the new apartment market operates completely independently of the established property market. I would argue that this market could in fact crash without really impacting on the prices of existing homes in nearby suburbs. There is a precedent for this in both Sydney and Melbourne, where there have been pockets of oversupply that somehow have remained sluggish over the past 5 years, even while the rest of the market was experiencing record growth.
It’s important not to mix these markets up. The article moves straight from talking about new apartments to middle-class houses (which I have referred to as the established property market) without making any distinction between the two.
“That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe “one of the biggest housing bubbles in history”. “Australia”, he added, “is the only country we know of where middle-class houses are auctioned like paintings”.”
The reason that “middle-class houses are auctioned like paintings” is because there is an element of scarcity around these properties. Families buy for the long term and don’t move regularly, so there is often a supply issue. Auction oriented areas do not dominate the “Australian Property Market”. Typically, auction is the preferred method of sale in inner Sydney and Melbourne, whereas the majority of property elsewhere is sold by private treaty. You don’t routinely find middle-class houses in the outer suburbs going to auction, nor do you find that apartments in large, new complexes are offered for sale by auction. This is yet another example of an overseas expert in property bubbles making comment about a market they simply don’t understand on a deeper level. Interestingly, Tepper himself says: “It is very difficult for a foreigner to understand just how crazy the Australian housing bubble is.” And this is my point. One needs to understand the complexity of the market in order to make meaningful comment. From an outsider’s view, it is insane, I agree. In much the same way that I think the UK’s ”chain” system is insane.
Back to the apartment bubble… Who is really buying these newly constructed properties? According to this article, pretty much only the Chinese.
“The government decided to further fuel the fire [via their post GFC stimulus] by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval.
“It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”
As much as I love a good conspiracy theory, I just can’t buy this (pardon the pun). Anecdotally we know that the Chinese have been buying a lot of brand new apartments as well as existing houses in certain suburbs, usually within the catchment area of well-known selective high schools and close to prestigious private schools. With new apartments they have largely been buying product that has been designed specifically for their market, hardly stealing the homes out from under hard working Australians. I do, however, believe that local house buyers have been priced out of some suburbs because of this Chinese spending spree. Their perception of value may stem from comparing a family home on a quarter acre block to an apartment in Shanghai. That said, the impact these buyers have had is long way off inflating prices across the whole of Sydney or Melbourne, let alone the whole of Australia.
When I last researched this topic, in early 2015, I found that the numbers simply didn’t support the hysteria (the Chinese were being blamed for the affordability crisis at that time). One article in The Australian in October 2014 stated that not quite 10% of foreign buyers were in fact Chinese.
“According to FIRB, over the period 2009-10 to 2012-13, approvals for Chinese investment in Australian real estate totalled $16.6 billion.
“At first blush this seems an impressively large figure. But it is actually less than 10 percent of the total value of foreign investment approvals in the sector.”
A Credit Suisse report released in early 2014 and quoted in this ABC article, estimated that Chinese buyers are snapping up, at most, 18% of the new stock.
“Given the restriction on non-permanent residents forcing them to buy newly built properties, Credit Suisse estimates that Chinese buyers are currently purchasing around 12 percent of new homes in Australia.
“However, the report’s authors say that buying is concentrated in Australia’s two largest cities, meaning that an estimated 18 percent of new dwellings in Sydney and 14 percent in Melbourne are being purchased by Chinese nationals.”
Let’s look at some more numbers. This graph from the NAB Residential Property Survey (Quarter 2 2017) shows that foreign purchases of new stock peaked in 2015. You can also see the impact of APRA restrictions on Australian investor borrowing coinciding with an increase in first home buyer demand (investor and owner occupier), an example of what happens when our government pulls some strings.
Back to Mr Barrie’s article. I don’t believe that an “Australian Property Market” exists, but even if it did, best estimates are that Chinese are buying around 1.4% of new property. Will the Australian housing bubble burst as a result of a change in such a small segment of the market?
Now, don’t get me wrong. My philosophy when it comes to property investment is to focus on capital growth, low risk and the long term. And it is for all three of these reasons that I shy away from buying brand new apartments or houses. I also cringe when I hear of property “investors” on a mad “get rich quick” quest of accumulation. Consequently, there are points Mr Barrie has made on which I completely agree, and this is one:
“Take, for example, this recent headline from the Fairfax owned Sydney Morning Herald on March 1st 2017, “Meet Daniel Walsh, the 26-year-old train driver with $3 million worth of property”…
“This is what the Australian press more commonly holds up as a role model to young people. Not a young engineer who has developed a revolutionary new product or breakthrough, but an over-leveraged train driver with a property portfolio on mostly borrowed money where a 1% move in interest rates will wipe out the entirety of this cash flow.”
But really, this is a topic for a whole new blog. Suffice to say, the article makes reference to a lot of macro-economic activity that I am not qualified to comment on. I wrote this blog to address the fear I felt (and I am sure others felt it too) about the property market when I first read it. Will the Australian housing bubble burst? I do agree that some areas and property types will experience price falls (it’s inevitable at the end of a boom) but I am saying that I don’t believe there is one big bubble. There are probably a few small ones out there, and buyers do need to be careful to get good advice before they buy.
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Published: 11th January 2018
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