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 firstname.lastname@example.org.
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The Misallocated Savings of the Chinese Banking System
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