Interesting view from Leith van Onselen:
Business Spectator’s Callam Pickering has produced an interesting assessment of the RBA’s new research paper, which attempts to determine whether Australian homes are overvalued versus renting.
Like my analysis posted earlier, Pickering also concludes that Australian housing is significantly overvalued given the likely prospects for incomes and capital growth; although how he arrives at his conclusion is a little different:
My general view is that Australians are frequently ripped off when purchasing a home. A combination of poor housing policy… combined with housing supply restrictions… have resulted in arguably the most expensive housing stock in the world…
[The RBA] find that the decision to buy or rent is highly sensitive to one’s expectations regarding capital appreciation. Their base scenario assumes that house prices will continue to grow at their post-1955 average, during which time real house prices rose by 2.4 per cent annually. Under this scenario, housing is perfectly priced compared with rents.
But as I’ve argued frequently it is unreasonable to assume that future house price growth will match past gains…
The sensitivity of their analysis to various price growth assumptions is contained in the graph below.
Structural shifts in the Australian economy resulting from an ageing population and a declining terms of trade, combined with the Chinese economy slowing, will weigh on income and price growth, while high levels of indebtedness should place a speed limit on potential growth.
The most interesting scenario considered by Fox and Tulip is the scenario where real house prices grow at the rate of household income growth (denoted in the graph by “HHDY”). This scenario is perhaps a little optimistic (the risks to income growth are on the downside) but it approximates our current reality… Under this scenario, housing is overvalued by around 20 per cent…
[The RBA research] using plausible assumptions for price growth, suggests that housing is severely overvalued in Australia and many Australians are getting ripped off.
Spot on and well argued.
Reproduced with kind permission from Macrobusiness
I certainly agree that Australian housing costs are outrageously high, and highlight the [bordering on criminal] negligence of governments of all persuasions for creating such conditions. But I also cringed when I read this:
“[The RBA] find that the decision to buy or rent is highly sensitive to one’s expectations regarding capital appreciation.”
Does the RBA really believe a single mum cleaning houses to pay the rent has “expectations regarding capital appreciation” first and foremost in her mind? She’s renting because she can’t possibly create a surplus for a deposit. It’s this sort of RBA ivory tower elitism that keeps them wholly and intellectually occupied from month to month while accomplishing precisely nothing.
“My general view is that Australians are frequently ripped off when purchasing a home. A combination of poor housing policy… combined with housing supply restrictions… have resulted in arguably the most expensive housing stock in the world…” So true!! It really is “[bordering on criminal] negligence of governments of all persuasions”.
But our PM says “if housing prices go up, sure that makes it harder to get into the market, but it also means that everyone who is in the market has a more valuable asset”. And our treasurer says “Rising house prices actually help to make marginal property development viable. And there is a shortage of supply out there and what this will do is make supply more readily available.” As Macrobusiness comments “What Hockey has effectively said is that the Government will continue to run a high immigration policy and let state governments continue to strangle supply in order to support house prices; or using Hockey’s own words:“to manage the market”.” Incredible. Our government actually believes that ever increasing property prices is a good thing. Clearly they just don’t get it.
Rising prices should never be used as the catalyst for increasing supply. What’s needed to increase supply is for both State and local governments to adjust the zoning regulations and remove the onerous taxes and red tape that drive prices up in the first place.
On another note, I hope Mr Gottliebsen is right when he suggests that the current level of foreign investment in Sydney and Melbourne could start to ease. The market is long overdue for a reality check.
http://www.macrobusiness.com.au/2013/09/coalition-backs-rising-house-prices-ducks-reform/
http://www.macrobusiness.com.au/2013/10/joe-hockey-ponzi-lord/
http://www.businessspectator.com.au/article/2014/7/14/property/chinas-corruption-crackdown-could-deliver-blow-australias-property-market