The Absurdity of Australian Property

Today’s absurdity involves Australian property prices. Weekend auction activity in the main cities of Sydney and Melbourne give the impression that the market is once again red hot. The prospect of lower interest rates, it seems, trumps concerns about a slowing China, a sharp drop off in mining investment and rising unemployment.

So is the move driven by fundamentals?

SQM Property Research publishes a weekly rental index. Over the past 12 months its index reading for Sydney and Melbourne (houses) is up 0.2% and 2.1% respectively. On the other hand, SQM’s weekly ‘asking prices index’ for the two cities over the same time frame is up 7.2% for Sydney and just 0.4% for Melbourne.

What does this tell us? Well, first of all understand that this is just one of many measures of house price data. SQM will have different results to RP Data or the Australian Bureau of Statistics. But it does give us the ability to compare prices with earnings, which for houses is rent.

So on this basis, you would argue that Sydney has moved ahead of its fundamentals over the past 12 months while Melbourne has actually underperformed. But with lower interest rates, and the prospect of more cuts to come, you could also argue that Sydney’s strong house prices reflect the discounting of a lower interest rate environment.

On the other hand, you have to ask yourself why interest rates are expected to fall. It’s because of a slowing economy. It’s because of fears over the growth prospects of our largest trading partner, China, which hasn’t even began to reform its hopelessly imbalanced economy yet.

With this in mind, it’s difficult to see how we’re going to get enough growth in national income and wages to maintain ‘earnings growth’ (rental growth) for residential property. If that is the case, and we think it will be, the recent spurt in the property market will be short-lived.

Looking at it from a psychological perspective, you could argue that buoyant activity in the market is a result of a ‘throwing in the towel’ mentality of previously reluctant buyers, as well as continued involvement from the legion of property players in Australia who have never experienced a downturn, and who believe we will never see one again.

We have no idea where property prices will go in the years ahead. But we do know that we have rarely seen a market where the prevailing wisdom thinks you just can never lose by buying now. That is a dangerous sign.

Property is a polarising topic. Satyajit Das, speaking at our ‘After America’ conference last year, says it’s up there with religion in Australia so he avoids talking about it. But we think polarising topics are good fun. They make you think and introduce you to new viewpoints.

So if you want to tell us what you think about the state of the property market today, say based on a recent experience, let us know at


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From the Archives…

Has the Chinese Economy Hit the Great Wall?
26-07-13 – Bill Bonner

Crisis, Capital Controls, and Accidents of Birth
25-07-13 – Doug Casey

Australia’s Mysterious Natural Gas Shortage
24-07-13 ­– Nick Hubble

Bernanke’s QE Train Wreck That’s Heading Our Way
23-07-13 – Vern Gowdie

The Misallocated Savings of the Chinese Banking System
22-07-13 – Dan Denning

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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