I can understand that the author would get so caught up in his academic theory that he would lose sight of reality, but to suggest that the Australian housing market is in bubble conditions is absurd.

At least the author is right to suggest that you know a bubble when you see it, and one of those is a lot of buying and selling activity and rapid increases in prices in the short term, and by that I mean a lot shorter term than on the graphs the author presents.

Those graphs point to a long term trend which I won't explore here but the grim reality is that house prices have been static for years, except in WA and Brisbane where they have climbed significantly for solid economic reasons. The author should dump the theory and, for greater insight, do a state by state breakdown of house prices.

He should also take another look at his negative returns graphic, taking into account the tax break from negative gearing, and that his own graphic seems to suggest that the market is correcting.

All that said, house prices in all states probably won't do much this year, but a catastrophic decline is highly unlikely.

Australian house prices, as measured by the IMF, World Bank and various other leading economic organisations are already over-valued by about around 50%.

Credit availability globally is still drying up and risk aversion from investors continues to rise.

Additionally, Australian’s have one of the highest ratios of private debt in the world, now exceeding this countries GDP. Consumers in general are pretty much tapped out.

Some commodity prices, particularly iron-ore, will stagnate or again fall and stabilise at a much lower levels, this will have a major impact on the Australian economy in 2013.

House prices may rise over the very short-term, but by mid 2013 will begin a long-term contraction. I would estimate by about 20% over the next couple of years, ever heard of negative equity?

The housing industry is busy telling consumers, particularly first home buyers, that now is a great time to buy into the market, particularly noting the low interest rates. What they fail to mention is the high possibility these consumers will not have an ability to repay their debts if they economy continues to tank as it continues to do so globally.

Global per capita wealth is rapidly disappearing and we are headed into a debt deflationary spiral, Australian consumers are effectively running one of the world's largest housing Ponzi schemes.

It's a shame that more people can't seem to grasp these very simple truths. Of course Curmudgeon won't admit this, his on-going employment relies on growing more consumers and 'positive' financial news for the minion's who read his employers newspaper.

Interesting informative article.
One only has to compare us with the rest of the English speaking world to know there is a bubble!
We have the highest median house prices in the English speaking world. The only thing I take issue with, is the suggested over-valuation of just 44%?
I think the average, could be closer to 60%?
One of the things that have contributed to this factor, is negative gearing, and or, the 1.7 million residential property investors who use it and residential property as a tax minimisation strategy!
Credible reports has this costing the Australian taxpayer in excess of 5 billion PA.
Welfare for the rich, writ large!
Making millions from housing should rely exclusively on new build volume, not over leveraging; and or, massive margins!
Repealing negative gearing, would restore the basically abandoned budget surplus.
And make property investment/hoarding, a great deal less appealing, but particularly if a possibly punitive capital gains tax was to replace the current tax breaks, for basically, land banking!
This money could actually fund the very decentralisation, we need to depopulate our gridlocked and overpopulated cities, where the carbon footprint on average, is 2.5 times that of country town residents!
Our cities have grown like topsy, with no thought of putting hundreds of thousands of people, in harms way, on flood plains!
Arguably, our most arable land.
The median house price used to require 2.5 times the average income to fully pay off, now its somewhere between 7-10 times!
Don't tell me there's not a bubble!
The sooner it blows up in the faces of the greedy the better! Maybe then our kids will be able to once again afford a house?
Rhrosty.

My figure is 40% overvaluation, The difference between house and land + improvements is exorbitant. For some reason as soon as a house is put together the price triples, for what. The sooner these prices come off the better for all.
House prices are a two bob million airs dream, anyone that buy's into flood prone land, remember it is your decision.

Geoff of Perth, Rhrosty and 579

Look Fellas, pound this hard into your heads.. high prices by themselves have nothing to do with price bubbles, you are confusing the two concepts. Our house prices are higher than elsewhere for various reasons, mainly geographical as I understand it.. urban concentration, among other factors .. As houses are not internationally traded, there are bound to be big regional variations in prices, just as there between the different states in Aus.

There is no indication of any kind in the actual market (as opposed to the graphs the author relies on) that we are in some sort of over-heated bubble that will burst. House prices had a big run up in the eastern states a few years back and have nothing since .. in fact, since well before the GFC.. Qland and WA are a different story as I indicated. But mostly the property markets have been in the stagnant - gently declining state for years, and everyone seems to know this but you guys.

Geoff of Perth's efforts to throw a little muck were wildly off target.. a housing bubble would be good for newspaper ad revenue.. Otherwise I would not dignify that piece of sillyness with a response.

Government taxes account for 44% of the cost of a median priced home.

http://hia.com.au/media/Industry-policy/~/media/Files/documents/CIE%20Tax%20Report.ashx

It is only to be expected that government and the apologists for it are not going to mention an inconvenient fact like that.

As well, there is no comparison with the increase in pays, ie., average weekly earnings.

If you take the remuneration of those who advise and determine government policy, the bureaucrats and politicians, the pay, benefits and golden handshakes they receive far outpace inflation and the very humble 2% gross made out of rental houses by the small aspirational mums and dads investors.

Most Gen X and Y would spend more on their lifestyle and electronics than on rent. Few even blink paying $500 for a mobile phone to bolster their ego and $200 on a night out is chicken feed. Expensive electronics are churned on a whim. You can always tell the rentals in the street by the discarded cartons of the most recent fad in TVs and other electronics dumped on the nature strip.

It is not so long ago that such discretionary expenditure would have been regarded as a complete waste, an obscenity.

Eschew the self-indulgent lifestyle and save. Learn that government has no money and all of those demands have to be paid for out of taxes, and yes, all levels of government regard home owners as milch cows for ramped up taxes.

Some scary numbers here, for sure.

The concept of "overvaluation" needs to be examined a little more closely, I feel.

My suggestion to those who believe the market is overvalued - including the Economist magazine - is to analyze more rigorously the impact of factors other than those they presently use. The Economist, for example, posits undervaluation of 45% against rental values, and 23% when measured against "disposable income per person".

http://www.economist.com/news/finance-and-economics/21569396-our-latest-round-up-shows-many-housing-markets-are-still-dumps-home

Only when you dig deeper do you find the vestiges of other possible measures:

"Spain’s bust reflects a massive oversupply of housing built in the construction boom..."

As, indeed, does the Irish market, where according to their population forecasts, there will be no need to build a single new dwelling for an entire generation.

So where, I wonder quietly, does supply and demand fit into this equation? We all know that as well as Ireland and Spain, the US also built thousands of new houses to cater for the demand created by the profligate mortgage industry and its predatory sales folk. We also know what happened to them.

As far as I am aware - and I am always open to correction on these matters - we do not currently have an oversupply of housing. We also have a growing population, as Ludwig keeps telling us. So exactly when, I wonder, will the equation that says that the combination of increasing demand and restricted supply cause higher prices, be repealed?

An answer, of course, will be "when the GFC bites us in the backside, unemployment goes through the roof, and the streets are filled with homeless people unable to afford a roof". I'd humbly suggest that this will not occur any time soon, thanks to our robust economic situation.

My own view, for what it is worth, is that we do not have a bubble. But on the other hand it is likely that the market will become far more sober and predictable for the next five-to-ten or so years, until the world emerges from its recession.

After that, all bets are once again off.

Talking of scary numbers...

>>Government taxes account for 44% of the cost of a median priced home.<<

Thanks you onthebeach for providing the link, which is itself a fascinating insight into the way statistics in a report are massaged in line with the author's desired conclusion.

The obvious direct taxes, GST, Stamp Duty, Land Tax and Council rates ($75,422) make up only 12% of the "Total Dwelling Cost", ($639,533), so where does the remaining 32% come from?

Well, there's 13.5% more ($86,180) in taxation on "indirect inputs", that is to say, capital, labour etc. While there is a kinda-sorta argument to be made that these costs are captured in the price, it is not at all unique to housing. It is an inevitable cost of doing business.

On this basis, I would suggest that a screaming headline that "Government Taxes account for 70% of the cost of your restaurant meal" would not be out of order. Dumb, of course, and entirely meaningless. But entirely valid.

So, I hear you ask, how is the remaining 16.5% ($106,276) calculated?

(You're gonna love this)

Under the heading "Hidden and Ambiguous" (I kid you not) there are two entries, "Excessive Infrastructure Charge", and ... wait for it... "Zoning Restrictions". These items are, it would appear, "Government taxes". Who'd 'a thunk it?

It comes as no surprise to anyone, therefore that the report was prepared for the Housing Industry Association.

p.s. I know that these numbers only add up to 42%. But that is the example they used for illustration purposes.

Pericles
"Government taxes account for 44% of the cost of a median priced home."

Thank you for highlighting that piece of nonsense.. I also looked at the report. To get to the conclusion they did, the authors had to add in all taxes at every point in the house production process they could think of, and then added in another $100,000 or so in "hidden" taxes.. And its wild-eyed nonsense.. the bulk of housing price in Australia is due to the land, not the building ..

Rhrosty, if you would return to Soos' previous article on negative gearing and the forum comments I go to some effort to explain that removing negative gearing does nothing for gov't coffers because if interest can't be written off against income then it is written off against the capital gain when the house is sold, which is entirely fair and reasonable.

Soos doesn't seem to want to get this either, starting from the view that NG is simply a perk connived by the rich to rob the poor. His whole argument is built on the straw men and falsities well described by Pericles.

I can understand that the author would get so caught up in his academic theory that he would lose sight of reality, but to suggest that the Australian housing market is in bubble conditions is absurd.
Curmadgeon,
This is one of those rare situations where an academic actually makes sense and, yes he is right about the bubble.

Housing can not go up much further because it is governed by affordability. For affordability to continue wages must continue to keep pace & if wage rises keep going up so will the un-affordability of employers to employ people. That's when the bubble will burst. It has already gone beyond working pressure & is nearing maximum testing pressure.
Investors need to came back to earth & Government needs to have the nonsense shaken out of it. The problem is how to shake them when an equal force is holding them down to prevent shaking. There are obviously people out there to whom common sense is utterly abhorrent why else would they keep voting in such incompetent politicians ?
Going back to housing, another problem is that "owning" a home has become utopian. Between mortgages & rates home ownership is for banks, councils & power companies only now.

individual
You make an excellent point about affordability but that is why house prices have been stagnant for years .. the market is correcting but its obviously not in a bubble.. the article is absurd..

I linked to a report by the International Centre for Economics earlier. The report concluded that Government taxes account for 44% of the cost of a median priced home.

While it is always worth examining the methodology and calculations, this organisation is a contractor to government and there should be no quibbling about the expertise of its principals and staff. Here is another report it has done,

http://www.metroplansydney.nsw.gov.au/Portals/0/pdf/AlternativeGrowthPaths.pdf

There is no implication of fudging where the methodology and limitations are stated which indeed they are.

Where government itself claims rising cost of items to the budget and plans pruning, say the 'rising' cost of analgesics, it ensures that all direct, indirect contributors as well as associated impacts are factored in.

Pot meet kettle.

Curmudgeon, "the bulk of housing price in Australia is due to the land, not the building"

We bought a house recently for $660,000. The independent valuation of the house is $450,000, excluding fittings such as blinds and so on and landscaping. That was confirmed by the lender's valuer as well. It was not unreasonable, an average sized home of 250 sq metres with a medium finish costs $538,750 to build in the area (Washington Brown price calculator).

But even if land represents the highest cost, you then need to identify the government taxes and not exclude the costs of holding land for development including such costs as land taxes.

Maybe people should be reading the report by the Centre for International Economics for themselves rather than dismissing it simply because a non-government body commissioned it. The numbers are there and someone has to pay. Half of the monthly mortgage payments lost to taxes is not a good look.

"Fudging", onthebeach? Perish the thought.

>>There is no implication of fudging where the methodology and limitations are stated which indeed they are.<<

Stating the methodology does not, however, guarantee that it is sound.

From the report:

"Ambiguous taxes are charges that are related to specific activities but may be levied above the cost of the services provided or above the costs less the share that should be borne by government. In this sense it is often ambiguous as to whether they are a usage charge or a tax."

The main culprit here is the Infrastructure charge. This is a) taken by the government and b) used to provide (surprise!) required infrastructure. This is not a tax in the sense that stamp duty is a tax. In business terms, it is a cost-of-sale - a necessary, direct cost of doing business. Without the infrastructure charge, no infrastructure. No infrastructure, no house.

"Evaluating hidden taxes is more complicated than other forms of taxes as hidden taxes are in place in order to achieve other community objectives"

Nevertheless, having stated the clearest of caveats, the report proceeds to add together every single "hidden tax" that it can find.

Sorry, onthebeach, the report is totally without credibility. I doubt the research company in question queried the categories of cost that they were asked to calculate, they just went ahead and did the sums they were asked to perform.

>>We bought a house recently for $660,000. The independent valuation of the house is $450,000<<

Ummm, why?

Because, I would suggest, you determined that the house was good value in meeting your requirements, and that if you hadn't bought it, someone else would have.

That's supply and demand for you, right there.

That's supply and demand for you, right there.
Pericles,
If only this philosophy was applied to the public services as well.
Unfortunately though it's greed & no need.

"There are more than 1.7 million investors with an interest in one or more properties, owning close to two million rental properties."

Facts, figures, and lying statistics ?

Is 1,700,000 of 22,896,242 or 7.42% really so large ?

22,896,242 from http://www.abs.gov.au/AUSSTATS/abs@.nsf/Web+Pages/Population+Clock

The statement and stats are designed to confuse thus promote "buy now" arguments.

Display numbers for "investors" who's only investment is their own home.

Display as "serious investors" those owning more than one home.

Are numbers for "investors" buying another home to move into and selling their first home to pay for this change significant % ?

How many "investors" own more than one block of land, particularly two adjoining blocks of land with one hous

Pericles,

When I related that we "bought a house recently for $660,000. The independent valuation of the house is $450,000" I was demonstrating that the land value was well below the house replacement cost(construction not including demolition). My wording was clumsy. I should have said land and house for $660.000. Sorry for that. Another poster had commented that land was the highest cost component, which it often isn't.

Regarding your comments on the figuring by the Centre for International Economics, government itself includes all conceivable inputs when criticising policies, but government rarely if ever provides any specifics of its calculation. So what the Centre did was fair enough, and at the end of the day someone has to pay regardless of how an economist might treat the tax on the books.

As for infrastructure, we pay taxes for improving the Wivenhoe Dam -the original Stage 2 has never been constructed- and for other dams that took years (and $millions) in the planning but never eventuated (eg Traverston). Those taxes increased the cost of land development and land-house packages. The 'once off', 'special purposes' taxes remain forever. Just another way of increasing taxes.

It is demand that drives house prices, with serious peaks and troughs being linked to (ham-fisted) changes in government policy. Home prices in SE Queensland for example have been driven for many years by over-enthusiastic federal immigration policies and poor government planning (State and federal). Although there is not a great deal that State Premiers could do where the federal government was continually setting new records in migrant numbers and the new arrivals ended up in the major cities.

Investment is really a double-edged sword. On one side it drives up the profits & on the other side it drives up unaffordability. This is failing the community dismally. People always whinge & bitch about the poor & the rich but they're just watching as the poorer are exploited to last degree because the poor themselves are constantly on the lookout to emulate the rich.
Until some sort of investment regulation is put in place nothing will change. To become rich should involve expertise, knowledge & above all fairness. The notion of "writing it off" is in my opinion a stupid & corrupt one. Let wage earners write off their spending mistakes or dud purchases & they too will be better off.
In my opinion no-one needs more than one home & should not deny others the opportunity to buy one by driving up the prices of several properties without adding any value to them.
How many times has a council made several blocks available & one developer bought the lot. That might be a good technical move for the developer but so far as a community is concerned it is immoral.

" The notion of "writing it off" is in my opinion a stupid & corrupt one." Huh? So interest paid to hold an asset should not be deducted from income gained from the asset or the capital gain it accrues before determing income or capital gains tax?

Who would invest on that basis? Ah yes, the state would (have to) invest. Perhaps a stint in a failed socialist state (all socialist states are failed) would help you see the light, Indy.

Who would invest on that basis?
Luciferase,
Well, definitely not those who are wrecking everything now ! To care about others means to not deny them reward for their effort & vice versa. We should not but do, handsomely reward little effort. The whole system is ar$e about in favour of those who aren't capable of doing things themselves. The businesses use others' money i.e. write-offs & the senior public servants pay themselves with our money for absolutely nothing in return.
Look at housing for example. A house gets bought for 400 Grand, it is lived in for a few years & then sold again for 600 Grand. What has been done to that house that is worth 200 grand apart from new curtain rails ?
People are so engrossed in trying to make a profit that they can't see they're wrecking everything for everyone. Ever heard of change ? As in looking at something that doesn't work & changing it such as our Tax system & business practices ? Highly naive I know because it requires integrity.

"A house gets bought for 400 Grand, it is lived in for a few years & then sold again for 600 Grand. What has been done to that house that is worth 200 grand apart from new curtain rails ?"

You'll have to ask the person who buys it for 600K, Indy. What do you think might possess him/her to pay that? Inflation? Supply and demand? Improved amenity?

In a competitive capitalist economy, if you now want the same nice house for 400K you may have to buy it in a less desirable location, Indy.

Luciferase,
If our inflation rate is indeed that high then surely it can't get any clear that the system is broken. But it isn't that high is. It's the greed rate that's going through the roof & it is sanctioned by incompetent authority. I look at bank interest rates for example where interest is more than the loan. I suppose you could argue our inflation rate based on that but shouldn't we then take the banks to task ? That Bangladeshi Gentleman, yes gentleman, who even received a Nobel Prize for his noble service of providing bank loans to the poorer to enable them to make a start in small business. This man offered low interest rates instead of "writing off" at the taxpayers' expense. Not only is our system unfair it is outright corrupt. Hundreds of millions of taxpayers money is spent on advertising the corrupt system but id an individual owes the ATO ten bucks they'll haunt them at great expense to no end. What a lovely system ! Super fund Managers are going to wall by design evm after having "written off" millions in so-called expenses & the investors lose all. Great system yeah !
Star looking at it yourself, the list of loopholes is nothing short of endless. Start managing or get out if you can't make it without maggotting off everyone else. You hear Government & business !