Predicting a property crash in Australia seems to have become a type of sport amongst economists worldwide. It’s almost as if members of this profession are wishing a property crash on us. But how accurate are their predictions and should property investors in Australia be worried by this up-surge in gloomy analyses for our property market?
In looking at how much credence can be taken from these forecasts it is interesting to have a look at who the doom merchants are and what their record is like in predicting major financial market events. The latest to jump on the bandwagon is The Economist, who have branded Australia ”the most overvalued housing market in the world”, they join other respected organizations with questionable records in economic prediction, such as the IMF, OECD and various ratings agencies. Lets have a look at the events that none of these organizations predicted:
- The recent Global Financial Crisis in 2008
- Tech Wreck in 2000. During the late 1990’s many economists talk excitedly about the “end of the business cycle” When a small minority of economists, and many non-economists, started fretting about the boom in ‘dot.com’ stocks, of companies which have never made a profit, the majority of the profession could not see a problem. Profitability no longer mattered, just market share.
- The Asian Financial Crisis in 1997. The currencies of South Korea, Thailand and several other East Asian and Southeast Asian countries lost up to half their value, while economies in the region were sent into a tailspin. No widely respected economist expected or forewarned of this. The very same year “The Economist” magazine published an article predicting that oil prices would decline to record low prices within 6 months. 6 months later, the cost of oil per barrel had doubled.
- Most economists failed to predict the bursting of the Japanese real estate bubble in 1991, or the recession that followed and from which Japan has still not fully recovered
- In 1987 the biggest stock market crash since 1929 also caught most economists by surprise.
We have previously discussed a study by Demographia and outlined the folly in analysing a national property market based on one set of variables only, in that case median price to median income. The predictions of The Economist in the March 1st edition, in which they surmised that Australia’s home prices are 56.4% overvalued, have been similarly based on an over-simplistic set of variables. This study analysed housing market data on the basis of prices compared to rents in 20 economies. To illustrate how misleading this study is, let’s look at the housing market in Karratha, WA as an example. Average rental yields in Australia are currently at around 4%, so on the basis of The Economist’s study, this must mean that the average 4 bedroom house in Karratha, WA, which sells for around $950K and rents for $1,800 per week, is relatively underpriced, as its rental yield is more than double the average. Clearly this is not the case, as there are other factors that result in the high rental yields (mining town, commodity boom, lack of housing, native title issues etc). All of these factors would need to be taken into consideration if the market was to be properly analysed. Unfortunately, serious economic analyses of housing prices that take into account the unique set of variables defining each market seem few and far between. What will happen to house prices in the short term? The truth is nobody knows. It is possible to argue for hours about the positives and negatives of the Australian economy and property markets, and what is most likely to happen. What is not possible, is obtaining a definitive answer. The direction of the property market is a risk which each individual must take when choosing whether or not to participate in it. History would suggest that participation is a better choice than non-participation. The doomsayers may yet end up being correct, but if they are it will probably be through blind luck and most likely the result of an event that nobody has yet forseen.