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.

Housing undersupply and it's impact on the local property market

“A budget tells us what we can't afford, but it doesn't keep us from buying it.”
William Feather

For those of you who really like figures and statistics – you will get a kick out of this month’s article. The property market across the board could best be described as a ‘mixed bag’ with Western Australia and Melbourne going gangbusters whilst much of the remainder of the nation is still experiencing a general lack of demand and urgency from buyers. The Rainbow Beach market remains sluggish and although properties are still selling, we are still well below average sales volumes. As stated in our May article, we believe we have hit the bottom of this market cycle – the only question is – how long will the ‘bottom’ last?

National housing finance data recently released showed a further slowdown across the property market. On a seasonally adjusted basis, owner occupier finance commitments for: construction of new dwellings (-7.3%), purchase of new dwellings (-3.2%), purchase of established dwellings (-2.9%) and total owner occupier loans (-3.4%) all recorded falls during March 2010. Over the year to March 2010 only commitments for construction of new dwellings has increased, albeit by only a small percentage, 1.6%. Meanwhile, on an annual basis, finance for the purchase of new dwellings is down -21.7%, finance for established dwellings is down -26.0% and total owner occupier loans are down -23.3%. (Source: RP Data April 2010)

These figures represent the continued effects of the Global Financial Crisis despite an apparent recovery in the resource sector which seems to be taking its’ time in cheering up pessimistic and almost paranoid investors.

Again at the national level, the Federal Government’s National Housing Supply Council recently released their second State of Supply Report. Probably the most important finding of the 228 page document was the estimate that nationally there is a cumulative undersupply of 178,400 dwellings. The greatest undersupply in dwellings was found to be within New South Wales (57,600) and Queensland (56,100). The states with the smallest estimated shortfall in housing were found to be: South Australia (100) and Tasmania (1,000). See the graph below:

Source: RP Data April 2010

This data supports the view that Australia will face a major housing crisis in the very near future and raises the issue of further development as it is needed to meet the demand. Although environmental, community and social needs are important and should always be taken into consideration – it is evident that at some point – a compromise will need to be made.

South-east Queensland’s population is predicted to increase dramatically over the next 5-10 years and beyond through immigration, births and the aging population (ie. People are living longer and the number of births per year is greater than the number of deaths). This will place a huge amount of pressure on both the State Government and Local Councils to provide housing solutions for tens of thousands of Queenslanders. Infrastructure is vital to support this population growth and hand-in-hand with this is providing affordable, residential options for individuals and families are paramount.

What affect these housing undersupply issues will have on our local property market remains to be seen however it is certain that it will have an impact in the medium to long term. The pressure for further development in and around our region will also increase as a result of the resources boom as workers look for housing within a radius of centres such as Gladstone, Rockhampton, Bundaberg and Maryborough.