Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

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Catherine Cashmore

19 November 2012

The centuries-old crystal ball that proves Australia's housing price growth cannot outpace inflation forever

The centuries-old crystal ball that proves Australia's housing price growth cannot outpace inflation forever

In Australia, thus far, we have avoided the sharp downward cycle experienced in the USA and areas of Europe during which the “pre-crash” environment was stimulated by low interest rates, unregulated credit booms, and to put no lighter word on it – greed.

Inevitably the market has reverted to what could be termed a more balanced atmosphere. Even with the best efforts from our state and federal governments, which are set on promoting growth in the housing sector to make up for a drop in projected mining and yearly profits, our current low interest rate environment and new rounds of swiftly introduced first-home buyer incentives are failing to produce the same level of enthusiasm witnessed during the 2009 buying spree – thus far, at least.

However, we’re reaching that time of year where real estate pundits will dust off the crystal ball and make some future predictions into 2013 – not that we haven’t had a fair few already.  Out will come the property clocks, and we’ll get a lesson in how to tell the house market time in order to assess exactly when “the right time to buy or sell” is.

To do so, most will take a look at lessons from history and evaluate market cycles – and to be fair, it would be foolhardy to ignore previous trends that form repeated patterns over time.

But it’s worth remembering the words of John Toland – a great American author and historian who used a single statement to neatly sum up “historical cycles” in his Pulitzer prize-winning book, The Rising Sun”:

“There are no simple lessons in history,” he commented.” It is human nature that repeats itself, not history.”

Human behaviour dictates historical cycles, not the other way round – hence why the consumer sentiment index is so important when assessing market cycles and can often act contrary to “on-paper” economic forecasts.

The trouble with the housing market is that we have had a decade-long boom in growth, during which median prices in many areas of Australia have more than doubled in nominal terms, and tools such as negative gearing and SMSF investment have been broadly adopted by many mum and dad investors. Reliance on the capital growth of the asset above and beyond inflation to fund retirement has further fuelled the established playing field and resulted in real estate becoming a speculators’ paradise. 

The market is spruiked, tweaked, evaluated, and analysed, and splits groups down the middle as if it were a game of politics.

We have monthly and now “daily” indexes to fixate and argue over – and with $12.6 billion in revenue set to be raised by state governments through stamp duty alone this financial year, real estate investors and property speculators are not the only ones hoping for “broad-based” market recovery in 2013 – proving once again values are on the up and punters are flocking to the market in an emotional driven foray.

The wealth of our real estate market has the ability to make or break Australia’s bank account, with some estimating its overall value around $4 trillion. It is especially significant as foreign and local real estate investment funds perceive the Australian housing market a relatively “safe” terrain counting on future prospective population growth to underpin prices for many years to come.

However, despite the growing populous, the RBA recently pointed out in its November speech that “the outlook for dwelling investment” is being negatively impacted by a number of factors, principally “the sharp increase in house prices from 1999 – 2003” along with broad-based development costs, “red tape”, and lack of infrastructure in outer-suburban areas, the cost of which – no longer funded by governments – is now passed onto the developer and consequently home buyer.

As such, new housing demand has fallen short of underlying demand, leaving many scratching their heads wondering why the much-spruiked “housing shortage” and strong population growth has not translated into sales.

It could be argued that even with a slight uplift in the number of seasonal transactions as we approach the end of 2012, a larger population of buyers have determined that the cost of housing is still too high and further corrections to market prices need to be in evidence before they read the property clock as a call to dust off the cheque book and head back out into the housing market terrain.

As if to underline how unaffordable housing is deemed to be on a historical time scale, households are no longer decreasing in size, children are leaving it later to leave the nest and the increase in the number of people sharing accommodation has accelerated.

Lifestyle factors aside, few would argue that affordability and the reluctance to take on debt is not a significant contributor to slowing of growth in local dwelling investment – and this is mirrored in the UK and US, where shared buying schemes are growing in popularity, and the rental market is once again feeling the strain, with groups such as Shelter UK calling for government action to reduce the cost of accommodation for struggling individuals and families.

For investors, housing has long been viewed as a hedge against inflation.  Since the mid-1990s to the peak in 2010 Australia’s housing market has enjoyed long periods during which prices have far exceeded the rate of inflation. However, as shown by some of the oldest housing indexes in the world, house prices that consistently exceed the rate of inflation typically undergo a period of “correction” and remain the same in real terms when viewed over the longer trajectory.


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