Rainbow Beach Property Price Predictions

“Statistics: The only science that enables different experts using the same figures to draw different conclusions.”
Evan Esar

Believe it or not, but the average Australian’s annual income is $67,000 (Source: Australian Bureau of Statistics, Household Income and Income Distribution, Australia 2007-08). This figure may appear relatively high however it should be taken into account that there are extremes at either end of the scale. Ie. Personal incomes in excess of $1 million blow the average out and tend to ‘mask’ the lower income earners (less than $30,000 per annum).

There are some financial commentators believe that if house prices are in excess of 4 x the average annual family income, they are considered “unaffordable”. At present, Australian’s median house price is close to 7.5 times the average family income. This is almost twice the sustainable rate and some property data professionals believe it could point to problems over the long term.

In line with these statistics, recent media reports predicting the future of the Australian property market have featured the opinion of Jeremy Grantham. Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo (GMO), a Boston based asset management firm well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets.

Grantham has built much of his investing reputation over his long career by correctly identifying speculative market "bubbles" as they were happening and steering clients' assets clear of impending crashes. Grantham avoided investing in Japanese equities and real estate in the late eighties, as well as technology stocks during the internet bubble in the late nineties. (Source: Wikipedia)

Interestingly, in GMO's April 2010 Quarterly newsletter Grantham wrote about the tendency for all “bubbles” to revert to the mean saying “that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend…..You cannot possibly miss it."

As an example, he cited the British housing market bubble of 1989. At the time, he said people dismissed the bubble because there was no more rezoning, creating a land shortage and as such, they believed prices would rise forever. "Seven years later, in 1997, they hit the lowest multiple of family income since the record books started in 1945. It's always the same old argument; they are not making any more land". In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support. Since last October, the Reserve Bank has raised the official cash rate six times. If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history…. sooner or later, the rates will go up and the game is over." Grantham’s opinion reflects that of our own Professor Steven Keen who boldly predicted back in 2007 that Australian property values would decrease in the order of 40%.

The Reserve Bank of Australia (RBA) has downplayed concerns over a house price “bubble” in Australia, but painted a bleak picture for heavily indebted governments (ie. Europe and the USA). RBA deputy governor, Ric Battellino, said at a business function in mid June: “house prices in Australia, relative to income, were reasonable …. people feel that house prices in Australia are quite high and that's quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated." Mr Battellino went on to say: "But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries."
The argument against Grantham and Keen’s logic centres on the fact that there is simply too much demand for housing in Australia for prices to dramatically decrease. Natural population growth and immigration have led to a shortage of housing in many areas and this in turn leads to higher prices. Where there is an inherent oversupply of properties, there have been casualties of the GFC and this has led to situations of too much stock on the market and a lack of demand = lower prices.

Overall, the fundamentals of property values rest on the location and surrounding amenities of the investment itself. Access to public transport, main roads, schooling, shops, sporting/recreational and health facilities will always be important to investors and owner occupiers however the natural surroundings of a property also have an influence on buyers. Whilst the cost of building/construction along with developing land and supplying infrastructure such as power, water and sewage remains relatively high – prices should remain stable despite the dire predictions of some.