Noise sells newspapers, but don’t mistake media fodder for investment advice
The digital time and space we live in is interesting, particularly when it comes to how the media reports the health and fortunes of Australia’s residential housing sector.
Lately, there has been a lot of talk about a “property bubble” and while I have read a couple of interesting articles on this topic, most of what is currently being broadcast by mainstream media as alarming truths about sudden value spikes and an over-heated market, loses validity in light of the actual facts and figures.
Trawling for the truth
A recent blog and accompanying table from RP Data really puts recent property price movements in perspective. According to the June quarter RP Data-Rismark Home Value Index, rather than experiencing extreme price inclines, combined capital city home values actually fell by -0.2% over the second quarter to June 30.
Interestingly, the RP Data report considers home values in ‘real’ terms based on the Australian Bureau of Statistics’ Consumer Price Index (CPI) data, which shows a decline of -0.7% over that second quarter period.
The industry analysis heavyweight says CPI “is important to consider because raw or nominal figures don’t adjust for the impact of inflation.”
So while at a headline level, a rise of 10.1% was recorded for combined capital city home values across the 2013/14 financial year, when this figure is adjusted to account for inflation during that period (recorded at 3.0%) the ‘real’ value growth is actually more like 7%.
In other words, the growth we are currently experiencing, when you take inflationary figures and other economic factors into consideration, is not necessarily as ‘off the charts’ as some media commentators would have us believe. In fact according to RP Data, growth has been fairly moderate across most major capital cities, with slight falls in some areas.
It could actually be argued that what we are seeing at present is a period of price catch up, after the residential real estate sector went relatively cold and values dipped between 2010 and 2012, before slowly starting to pick up the pace once again in mid-2012.
Although at first glance home values appear to have risen beyond their previous peaks across most major city markets, RP Data argues that when you account for inflation, Sydney is the only city where values were higher in June this year than for their previous documented peak in March 2004.
As illustrated in the following table, this is not at all surprising, given Sydney had a lot more room for growth after a greater prolonged period of negligible to negative (inflation adjusted) price movement,s compared to the likes of Melbourne, Canberra, Darwin and Adelaide, whose markets last peaked in 2010.
In ‘real’ terms, home values still appear to have some way to go across most markets before they manage to catch up and regain some of the ground that’s been lost over the past four to seven years, since the last price peaks that occurred post-GFC.
Why inflationary data counts
RP Data says the impact of inflation needs to be accounted for when discussing property values in earnest, because it reflects on the purchasing capacity of Australian households, including the real value growth and capital gains that homeowners have experienced.
Additionally, it places a massive question mark over the ongoing affordability debate; with many commentators suggesting the current buzz of investor activity is pricing first time buyers out of contention. In reality, says RP Data, people who don’t yet own a home should be in a better buying position now than they were at these previously recorded market peaks.
Then of course there’s the argument that some are using, to suggest the Reserve Bank is being too lax when it comes to controlling housing market activity with ongoing monetary policy around interest rates. Much has been made of the current low rate climate by the media, and its alleged influence on the so-called ‘property bubble’ phenomenon. However, this argument falls short when you consider value movements in Brisbane, Perth and Hobart where growth has still been relatively subdued.
RP Data says, “Mortgage rates are but one consideration for the home buyer and obviously considerations such as employment, cost of living and housing demand driven through population growth are equal as important of a consideration as mortgage rates when considering whether to purchase or not.”
Comparing apples and oranges
Keep in mind that talking about “property” as though there is one all-encompassing market experiencing the same fortunes at any given time is like generalising about the health of all 50-year-old males in Australia. There are some super-healthy 50 year olds and some in very poor health.
Generalising requires you to talk about the “averages”, but information about “averages” is of no use if you are in the upper or lower quartiles (i.e. super-healthy or unhealthy).
The bottom line is that property investors need to focus on commentary that ONLY applies to investment-grade property, which may only account for 3-5% of properties in Australia. That’s why most talk in the media about property is not at all meaningful to investors; because it doesn’t apply exclusively to investment-grade property. At the end of the day, all the hype is just noise that sells newspapers.
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Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: email@example.com
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