Australian property: forever blowing bubbles?
Despite the warning signs, property prices continue to rise. Is Australia really an exception to the boom-and-bust rule?
Tangible bricks and mortar may seem like a safe investment but historic falls of over 50% (sometimes significantly more than 50%) have tended to happen once every generation. Therefore buying or investing at the wrong time can be an extremely expensive investment mistake. On several occasions, it has taken a lifetime for the property market to recover to previous highs. In the most extreme case, inflation-adjusted Amsterdam property prices in the 1950s were still less than a third of values in the 1730s.[1]
For the last decade, the price of Australian residential property has been going through the roof. Whilst the Australian consumer price index rose by around 27% between Q1 2007 and Q1 2017, the 8-capital-city house price index shot up by 79% over the same period. If we take those figures back to Q3 2003, we see that CPI inflation had increased by less than 40% in ten years but the house price index more than doubled. This has been fuelled by a more-than-tenfold increase in household debt since 1993.[2]
Some don’t see a problem with this. For example, the Turnbull government[3] and HSBC’s chief economist for Australia and New Zealand[4] have both gone on record stating the huge rise is a natural progression.
Professor Steve Keen, my colleague at economics think tank, IDEA Economics, doesn’t agree. In fact, he found himself at the centre of a controversy when he undertook a study that indicated back in 2009 that Australian property was extremely expensive relative to long-term trends. He indicated that “a pricing adjustment” was due at some stage. In his research at the time,[5] Steve highlighted that Australian property prices were in real terms, generally at least, some 40% above trend – he explained that this could be resolved by an immediate fall of 40%; a price stagnation for so many years that the trend eventually caught up with the gap; or, most likely, a combination – a fall over a protracted period.
So, if Prof. Keen was right, how is it that the burst hasn’t happened yet? One of the reasons is the artificial support the Australian government and the RBA have been giving to borrowers. For example, from 2000 onwards, state governments have encouraged purchases by offering grants to first home owners.[6] Since 2011, the central bank has consistently lowered its short-term interest rates to commercial banks in a move designed to encourage the latter to pass its reduced costs onto lending rates to individuals and businesses.[7] Making the market accessible today thus boosts prices tomorrow because of supply-demand issues and/or speculation.[8]
This can’t go on forever though. Eventually enough people will refuse, or will be refused access to, the high prices. That is precisely what has happened time and time again over history. The clearest recent example is that of Spain. The chart below shows how the last decade in Australia compares with Spain’s 1997-2007 charge.
Of course, the timelines don’t necessarily follow. A ten-year pattern in Spain could take twenty years to pan out in Australia. Nevertheless, forewarned is forearmed – here’s what happened in Spain after 2006:
There is also a clear sign that, despite its support until now for house-buyers, the Australian government itself could bring about a crash by belatedly trying to stop the runaway housing train. One instance of this is a proposed change in tax policy affecting non-residents who own property in Australia.
Currently, those, whatever their nationality, who live in an Australian property as their principal place of residence (PPR) can sell it without paying capital gains tax – what’s called a Main Residence Exemption (MRE). A property qualifies for this if either
- it has never been rented (the absence rule, no time limit); or
- if it had been rented out, but was then sold within six years of when the owner ceased to live there (whether or not they became non-resident at that time).
New draft rules, which would be backdated to May 2017, intend to abolish the MRE, without any time apportionment, for property owners who are non-resident at the time of signing the sales contract.
Existing properties as of 9th May 2017 will be granted an exemption until 30th June 2019. But this won’t extend any 6-year provisions for rented properties once that period has expired.
For expats owning Australian properties this means there’d be a pretty limited window of opportunity in which to act to avoid getting caught in this new tax web.
This is potentially bad news on two fronts for people intending to sell their property. Firstly, they are likely to be hit by capital gains tax, from which they were previously exempt. Additionally, the changes could well trigger a mass exodus of foreign investors and discourage new investment.
It could be argued that this move could make property more affordable for Australians wishing to get onto the property ladder. It’s also a reasonable position to say that a correction is completely necessary to put the brakes on the decades-long private-debt madness. But try telling that to someone who’s bought in at the peak of the market.
MBMG Investment Advisory has recently issued a detailed analysis of the Australian property market in the form of a Research Note. If you would like a synopsis or even a full copy, please email us at [email protected].
This article was originally published at https://www2.mbmg-investment.com/in-the-media/inthemedia/152
[1] Eicholtz, Piet M.A. , A Long Run House Price Index: The Herengracht Index, 1628-1973, University of Maastricht - Limburg Institute of Financial Economics (LIFE) https://papers.ssrn.com/sol3/papers.cfm?_id=598
[2] Bank of International Settlements
[3] https://www.huffingtonpost.com.au/2016/12/27/the-government-thinks-australias-crazy-house-prices-are-fine_a_21632908/
[4] https://www.theaustralian.com.au/business/property/housing-market-not-in-a-bubble-says-hsbc/news-story/7b0736fe38a95db107880e6a1935aeba
[5] The Hand of Gov – Professor Steve Keen
[6] https://www.firsthome.gov.au/
[7] https://www.rba.gov.au/monetary-policy/about.html
[8] https://www.abc.net.au/news/2017-04-25/is-supply-the-answer-to-housing-affordability/8470552