Are we in a housing bubble?

Be cautious of the fear mongers

Some economists have recently expressed views that Australian house prices are overvalued when compared to historical trends and prices in other developed countries. 

Economists often compare housing markets by comparing house price to income ratios.  In Sydney UBS has reported this ratio to be over six – meaning that the average house price is six times the average household annual income. When compared to a global averageratio of around three and a half, this appears high.

“But such comparisons should be treated very cautiously,” says Tony Carn, Homeloans’ general manager of third party distribution.

Carn explains that over 80% of Australians live within 50km of the coast and this concentration of population distorts comparisons to other countries where populations are more evenly and more densely spread.

“Australia’s house to income ratio in our capital cities is comparable with other coastal cities around the world, such as San Francisco, New York, Vancouver and Auckland,” he says.

There are other factors supporting the view that Australian properties are not overvalued.  In June 2010, Ric Battellino, deputy Governor of the Reserve Bank of Australia stated that if you look at the whole of Australia, the ratio of house prices to income is not that different from most other countries*.

The Australian economy continues to be very strong by international standards, and property values are underpinned by steady population growth.

“There is an old warning about the reliability of averages, pointing out that if your head was in an oven and your feet were in an ice-bucket, your body temperature would be around average,” says Carn.

He points out that a lot of data focuses on averages, such as average home prices or average incomes.
“It is interesting that almost 75% of household debt in Australia is held by the top 40% of income earners, which tends to skew any reliance on data averages,” he says.

There are many other factors which underpin the strength of the Australian property market, ranging from regulatory factors to our well-known love affair with home ownership.  But one important thing to remember is the Australian population is expected to continue growing strongly over the next 40 years.  And at a time where new housing starts, many regions cannot keep up with population growth, it appears reasonable to assume that our real estate market remains strong. 

“At Homeloans, we were recently proud to release access to loans up to 95% of the valuation, and we believe this clearly reflects the strong state of the housing market,” says Carn.

Some economists will continue to seek the limelight with dire observations and predictions about the future of the Australian housing market, and they will often come from overseas.  Perhaps they should put their money where their mouths are, like the famous Australian economist Steve Keen.  In the middle of the global financial crisis Steve bet that house prices would tumble by 40%.  He clearly lost the bet with prices actually showing significant growth, and as a condition of his bet he had to walk from Canberra to Mount Kosciuszko wearing a T-shirt that says, "I was hopelessly wrong on house prices! Ask me how."