And is it about to pop?

My partner is keen as mustard to invest in residential property.  Being an outstandingly nice guy, I too wish to benevolently allow someone to pay off a mortgage for me. I want to own an investment property, but should I buy now? Professionals and amateurs both have strong opinions on where housing prices are headed. Most prognosticators or at least the loudest, are predicting  higher prices. Cough, cough. Are they fricking insane. 

I am not an expert in residential property, but I am a pretty darn good investor. For most long term investors there is only one time when you should buy any asset.
You should only buy long term assets when they are cheap. 

With that in mind there is only one question that we need to answer. Is residential property in Australia cheap? The experts will try and fool you with scores of statistics and bury you with a mountain of data, but it is all worthless. Housing shortages, migration, affordability and the rest are don’t answer the one key question. They are noise designed to distract you. Designed to keep the gravy train flowing for all the vested parties with incentives to prop up property prices.

The title of this article probably showed my hand a tad early. Jeremy Grantham in his recent outstanding quarterly letter, The Last Hurrah and Seven Lean Years, lamented that all the asset bubbles had popped. My gut tells me he has not cast his eye over the Australian property market.   

Are Australian Property Prices Cheap or In a Bubble?

To answer that we should look at some history. Australian house price indices show significant housing booms from 1971 to 1974, 1979 to 1981, 1987 to 1989, and from 1996 through to 2008. The following chart by Peter Abelson, Roselyne Joyeux, George Milunovich and Demi Chung graphically shows the step like nature of Australian property prices.

With that chart in mind what do you think prices are likely to do? This is not complicated stuff, most investing isn’t. You must buy low. Are prices low? No. So don’t buy property as an investment. Wait with patience and prices will come to you. There are lots of other good reasons to buy a property now. From first home buyers taking advantage of the generous government grants to people looking for a home to enjoy. However, this is an investment site and as far as investments go, property does not look to be a good investment right now.

I don’t usually turn to economists to back up my thinking, but if you do then you must read this speech by Anthony Richards, Head of Economic Analysis Department at the RBA, Some Observations on the Cost of Housing in Australia. Here are a few graphs form Richards 2008 speech.

What conclusion do you draw from all those charts? Bubble or cheap? While bubble may be debatable, cheap certainly isn’t. Residential property in Australia is clearly not cheap and will be cheaper on real terms at some point in the future.

Affordability has increased over the last year, but affordability is a total red herring and something for governments and social service to worry about. Affordability has very little to do with investment merit. Affordability looks at, not surprisingly, how affordable houses are for people and not at whether residential housing would make a good investment.  Affordability looks at mortgage rates, government grants and the like. They look at the noise while as investors we want to focus on the real action, probable future price direction, distance and momentum.

More data than you can poke a stick at

The Australian Bureau of Statistics published their House Price Indices for the March quarter a couple weeks back. Here are the key points:

• Preliminary estimates show the price index for established houses for the weighted average of the eight capital cities decreased 2.2% in the March quarter 2009. 
• The main contributors to the decrease were Sydney (–2.9%), Melbourne (–2.3%), Perth (–3.6%), Brisbane (–1.1%) and Adelaide (–0.8%).  These decreases were partially offset by increases in Darwin (+2.2%), Canberra (+0.5%) and Hobart (+0.1%).
• The movement in the preliminary established house price index between September and December quarters 2008 has been revised from an estimated decrease of 0.8% to an estimated decrease of 1.2%.

Here are a couple graphs from the ABS publication.

The graphs show a market topping out. It is no wonder the realestate spruikers are out in force trying to get the suckers to hold the bag. An investment in Australian realestate now is likely to be a very poor investment. To be fair the two other major housing data purveyors reported housing prices were up slightly. To me that simply indicates the normal volatility associated with long term price changes, i.e. the market is topping out. Keep in mind by bias is to buy things cheap, so I want to see the data indicating prices are starting to flat-line.

As stock markets are currently on sale that is where I’m investing my money. When housing goes on sale I will invest in property. No doubt that will be when interest rates are high and everyone will be predicting worse to come. 

Finally have  a look at this property clock. Then leave a comment with what time you think the clock is at now. Ignore the hands on the clock, this is an old photograph of mine, apologies to the author whose name I can’t recall.

Related posts:

1. Bubbles Always Pop
2. Housing tipped for price implosion
3. Cycles and Waves
4. Top 10 Australian Business, Finance and Investing Sites
5. Case-Shiller Housing Update: Home builders Revisited
6. I AUD it on the Grape Vine