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I've been told that the Australian property market is more than 45% over valued, I've also heard arguments that there are justifications for this such as:

  1. increased rate of immigration,
  2. shortage of land,
  3. shortage of labour to build new property.

So what is it? Is it a big bubble or are these factors permanently increasing the real estate prices?

  • Besides opinions, I don't think you are going to find answers to a question like this until we can all look back in hindsight. – Michael Pryor Dec 3 '10 at 22:29
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    The same excuses were used during the Japanese asset bubble. Shortage of land, really? – James Roth Dec 3 '10 at 23:05
  • yes shortage of land. The government is very slow to release new residential zoned areas. Australia may look big on a map, but most of it is uninhabited. – Anonymous Type Dec 6 '10 at 22:19
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Note that the two issues most cited:

  1. increased rate of immigration,
  2. shortage of land,

are a major part of what was said about the US's boom. In fact, the Time magazine article about the US boom reads like a blow-for-blow of what is happening in Oz. Not good reading.

http://www.time.com/time/magazine/article/0,9171,1069097,00.html

  • thats pretty spooky when you think it was written in 2005. – Joe.E Dec 4 '10 at 2:24
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    Compelling, isn't it? Unfortunately, we seem intent on not learning from the past, or at least on not reflecting on it. Professor Steve Keen is doing his best to bring some reality to the situation, as is Michael Pascoe of The Age. From various threads I watch most folks think they are getting rich with the price boom - and they don't like being told that's not true. (I used the phrase "keeping up with the Jone'ses" and was vilified on one board!) – gef05 Dec 4 '10 at 12:45
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I think the main metric that people are looking at is the income-to-price ratio; specifically the median income to median house price. That ratio is ridiculously high in Australia.

The commonly-quoted figure for affordable housing is an average sale price of 3 times median income. That is, if the median income is $50k (which is about what Australia's is) then the median house price should be $150k. Australia's ratio is more like 6-8 times median income. Using the above median income expect houses to cost $300k to $400k. As far as I know the US's income-to-price ratio was this high right before the bubble burst.

There are many theories as to why the income-to-price ratio is so high for Australia, some of which you've already outlined in your question. Another reason that's often quoted is the tax policy called "negative gearing", where you can deduct losses from investment properties from your taxable income. This means people put up with their investment properties returning a loss with the expectation that the property price will increase more over time to cover it.

For more reading check out http://bubblepedia.net.au/

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    Also, be very careful about reading reports in the media about how housing prices are set to rise. The Australian media has a nasty habit of reporting on press releases from property investment groups like BIS Shrapnel. – craigforster Sep 14 '10 at 21:24
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    Could it also be that most households are dual income? Which mean that most households would be about 100k+ income per year, and given average house prices are about 400k, isn't that about the same ratio then? – Joe.E Sep 14 '10 at 23:08
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    But how is this different to the US? I'd argue that the same percentage of households are dual income in both countries, yet housing prices crashed from the 6-8x ratio back to near the 3x ratio (I think, I don't have any sources for exact numbers). – craigforster Sep 15 '10 at 16:20
  • When you mention this income to price ratio? Are we talking before tax or after tax income here? – Joe.E Sep 20 '10 at 22:11
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    @poolie - I may have mischaracterized BIS Shrapnel; I agree that from their website they're more of an analyst group. – craigforster Dec 2 '10 at 1:48
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This prompts the question - who said this and what was their reasoning? There are times that property can rise with good cause, but it's usually local, not so widespread as to affect the whole country. In the US, for example, the bubble was more localized to certain areas.

If there's that great an overvaluation, builders will rush in and start to build, in great numbers. That's often what will send prices back to reality.

  • Yes but builders are trying to build wherever they can already, however land release from government has been slow, and this is compounded by the fact that there are limited medium-high income jobs in regional areas. – Anonymous Type Nov 16 '10 at 3:15
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The three factors you mention -- "increased immigration", "shortage of land", and "shortage of construction labor" -- to the extent they exist, mean that there will be increased demand and reduced supply of housing. All else being equal, you'd therefore expect that the market-clearing price will rise. For instance, it might rise so much that emigrating to Australia becomes less attractive, or so that wages in construction rise and more people are drawn into working in construction.

(I'll note in passing that the third point seems to somewhat contradict the first: in many countries construction jobs are exactly the sort of job that new immigrants can do well, but it's possible Australia gets the wrong kind of immigrants, or unions restrict access to these jobs, etc...)

However to the extent these factors are true, you would expect them to drive up both rents and sale prices. But it seems that sale prices are rising considerably faster than rents.

  • This is true to a point, rents are now starting to rise across the board as interest rates go up. – Anonymous Type Dec 6 '10 at 22:22

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