The price of Australian real estate is all over the news.
Some areas have had very strong rises over the last three years (Sydney and Melbourne for example), while others have struggled (such as Townsville and many remote towns near mines).
This variation in prices makes me think talking about Australian real estate price rises and falls as a single item is dangerous and often misleading.
Former speaker of the US House of Representatives Tipp O’Neill once said all politics is local. In a similar vein, we all know that all Australian real estate is local.
That said, Shane Oliver from AMP Capital says that the value of Australian residential housing has, on average, been above its long-term trend for more than 10 years.
Just another asset class
On the whole there’s no doubt Aussies love real estate and our admiration for it sometimes blinds us to the fact that it’s just another asset class like stocks or government or corporate bonds. Its price will be determined by the market. I know this is obvious but it amazes me how some people don’t seem to recognise this basic fact.
There are many influences on the market price of property, particularly government policy.
For example:
- State and Territory transaction tax (called stamp duty) when a property changes hands;
- Federal government incentives such as depreciation, borrowing cost deductions and building allowances;
- State planning laws which see high charges for the provision of essential infrastructure; and
- State and local restrictions on new developments.
- We also have to add in the emotional aspect of owning our home.
I’m sure you don’t need to be reminded of the significant property price corrections that took place in the US and parts of Europe during the GFC.
It’s often thought that Australia has never suffered a similar correction. But this is not true. Melbourne, in the 1830s and 1880/90s, had two enormous falls in property prices. Both were caused by nothing more than asset price bubbles bursting.
The land rush
In the 1960s, Michael Cannon published a book called “The Land Boomers” about the second boom/bust. His book is still in print and I recommend it.
The gold rush had made Victoria rich and it also had a growing population. Because of rapid development, its capital city became known as ‘Marvellous Melbourne’. Business and banking boomed and money poured in from overseas, especially money from British banks.
Cannon relates a story of large parcels of land being subdivided and then sold and resold on multiple occasions each time for a higher price. During the rapid increase in profits, Cannon says it was easy to believe that any mug could make his or her fortune.
And that is what happened. Almost all of Melbourne became active speculators and sought quick gains via the investment of their savings and, in many cases, borrowing to invest the equivalent today of vast sums.
The whole city mistakenly thought it had found the secret to eternal prosperity. The first phase of the bubble was caused by some property developers, who were less than scrupulous, and the banks, which applied lax lending standards.
By the mid-1880s some of the banks became concerned and raised their interest rates on loans. To get around the hassle of higher rates, “land banks” began to appear and the bubble was able to continue.
At the same time some could see the disaster that would probably unfold and predicted a terrible outcome. By 1888, one newspaper said the boom was over but it argued the awful foretold outcomes wouldn’t happen.
By the early 1890s every land development company was in liquidation. Many important members of the business community took their own lives because they couldn’t face the shame of financial ruin.
Others attempted to manipulate, in some cases with success, the sharemarket by publishing incorrect financial statements, paid dividends when no profit had been earned and gave false forecasts of future good business performance. One purpose of this charade was to ensure the share price remained higher than it should have been so they could sell their personal holdings before the truth came out.
In early 1893, the Victorian Government had to force the temporary closure of the banks for a week to prevent some of them from becoming insolvent. Two banks ignored this order and remained open.
Lessons to be learned?
Is our current residential property market grossly over-valued? Wiser and more knowledgeable heads will have a better opinion about that than I.
What I do know is that property values fluctuate in unpredictable ways. One could argue that five issues that might see property maintain its value are:
- Insufficient housing developments to soak up demand;
- An increasing population via natural increase and elevated immigration numbers;
- Some interest from overseas buyers;
- Record low interest rates; and
- Federal government tax incentives.
Recently some property gurus have been saying that they don’t see any correction in the real estate market in the near future.
I have to confess I get very nervous as soon as someone says “this time it’s different” or “don’t stress, prices aren’t going to collapse anytime soon, if ever”.
These ‘experts’ didn’t predict the collapse of “Marvellous Melbourne” or the GFC either.
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