“Hysteria” about Australian housing being overvalued is spooking institutional investors from investing in much needed new housing, says Rismark economist Christopher Joye.

Joye says contrary to what’s being said by some in the media, housing in Australia is not overvalued.

Delivering a presentation titled “Australia’s Broken Housing Model” at the recent HIA Housing Summit which highlighted a serious undersupply of new homes to meet population growth, he said current housing valuations could be explained by market fundamentals with “dire predictions never remotely coming to pass”.

Joye pointed out that  peak-to-trough fall in housing values during the GFC were less than 5% and provided the following graph to show historical valuations of property.

“Since 2003 house prices have tracked disposable incomes…as an asset-class, housing has been a very safe store of wealth,” said Joye.

He said the housing market had significantly outperformed equities and bonds and the current market cycle should be investment-friendly.

“We should be seeing a surge in new supply,” said Joye, but instead “institutional capital has certainly been ‘spooked’ by housing hysteria”.

Joye highlighted that Australia has a population planning crisis and equally a serious housing/infrastructure crisis.

“Australia needs to build seven million new homes in next 37 years to accommodate 13.7 million extra people by 2050.

“This equates to around 200,000 new homes per year, but since 2000 only 156,000 new dwellings have been approved on average per annum.”

To address this chronic undersupply of new homes, Joye focused on property taxes.

“Housing is one of the most heavily taxed sectors of the Australian economy, both in absolute and relative terms,” he said, contributing 12% of total govt tax revenue and 45% of total state/local govt revenue.

New housing, he said adds 1.2% of value to the economy; but accounts for 2.8% of total government tax revenues.

According to Joye, tax reform could drive a 30% to 40% affordability gain.

“We need to work out how to more equitably redistribute the national tax/infrastructure burden,” he says, pointing to guidance in the Henry Review including:

  • Reform (land) taxes that discourage institutional capital
  • Replace inefficient transaction taxes with immobile taxes
  • Relax zoning restrictions/allow higher densities
  • Speed up approval decisions through State govt direction
  • Overcomes NIMBY (not in my bank yard) conflicts that plague councils

Furthermore, he said an obvious savings would be to convert first-home owner grant into an interest-free loan due on sale, which would save  around $1 billion per annum.


Funding options for building societies have broadened with superannuation fund AustralianSuper’s entry into commercial property lending, according to The Australian Financial Review.

AustralianSuper – the country’s largest superannuation fund, with $32 billion under management – has agreed to lend $200 million to a property debt portfolio controlled by Challenger Financial Services Group, and is seeking to increase its property lending portfolio, the paper reports.

“This is the first step we’ve taken to what we think could be a new asset class for superannuation investors,” AustralianSuper chief investment officer Mark Delaney told the AFR.

Mr Delaney said the fund is optimistic on the outlook for the country’s property sector.

“We quite like property because in the current environment because property prices have come down,” he told the paper.

“Cap rates are up substantially. The Australian market is recovering slowly.”

“It’s a good time to invest in property so we’re not worried about property values.”

With property prices in many capital cities hitting new highs, people are once again asking: “Can property values keep rising?”

We’re told that we have record population growth and we’re not building enough houses, and this is pushing up property prices.

So do we really have a shortage of dwellings? And can property prices keep rising?

Well…yes and no. Like most things –it depends.

You see, there’s not one housing market so it’s impossible to make a blanket statement about whether we have a housing shortage or not and whether property values can keep increasing.

Like most things in property it’s all about supply and demand.

While many first home buyers are looking to set up family in the new outer suburbs, a good proportion of them want to buy apartments in the “aspirational” inner suburbs of our capital cities close to their work and entertainment. This also happens to be the same market where many investors are looking.

At the same time, established homeowners are looking to upgrade their homes in these inner and middle ring suburbs.

With more buyers wanting the same type of properties in the same suburbs, yet fewer properties on the market than a year ago, we have a shortage of supply in locations where people most want to live…and this means property prices will keep increasing.

With very little construction of medium and high density dwellings (apartments and townhouses), this shortage of properties to buy or rent is unlikely to change for some time. Currently banks are reluctant to lend to developers, and when they eventually do turn on the taps there will be a lag of a number of years before new developments are completed. And these new developments will have come on stream at considerably higher prices than currently achieved to allow the developers to make the kind of margins that banks will want to see.

While there may be a surplus of CBD apartments in those new high rise towers, in general these cater for investors and over 80% are inhabited by tenants. Few homebuyers are keen on living in the centre of the city, so the many high-rise towers developers have on the drawing boards are unlikely to change the groundswell of unmet demand from homebuyers, who will head for the suburbs.

Yes property values will keep increasing in these inner and middle ring suburbs.

However there’s no shortage of housing in the outer suburbs of our major capital cities where builders are busy building new stock. There is also lots of land, resulting in subdued price growth.

Similarly in many regional and rural areas, demand is low and housing is plentiful, meaning there will be only modest price growth.

So is there a housing shortage? Yes in some areas and no in others.

Will property values keep increasing? Yes, but significantly more in some suburbs than others.

As home owners and investors (and tenants for that matter) head for the inner and middle suburbs, areas where the land is already built out, yet which offer proximity to workplaces, schools, public transport, shopping and entertainment facilities, rents and property values will keep increasing.

What about affordability? There will always be cheap properties around – just look in the outer suburbs or regional or rural Australia. The problem is most people just don’t want to live there.

Posted by Michael Yardney on 24/11/09