Australian Housing Valuation Report

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Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. Hi UE,
    Great report. Thanks. Could you rework the last couple of graphs including the tax, negative gearing, all costs, etc assuming some average figures

  2. Hi UE,

    “Australian housing is overvalued. Nobody denies it…”

    Nobody denies it? Sorry, but plenty of people deny it, including myself!

    Why Australian property is NOT overvalued or unaffordable!

    You also say…

    “growth of Australian house prices has far exceeded the growth of rents, suggesting that the housing market is significantly overvalued”

    Why does that mean prices are overvalued. Perhaps rents are undervalued? Since renters are subsidised by the government (negative gearing), I would say rents are definitely undervalued.



    • so if negative gearing is a subsidy to renters what do you think would happen if it was lifted, who would hurt more the renters or the investors?

      like a lot of the points in your article you seem to have things back to front

      • If NG was removed, it would place downward pressure on house prices and upward pressure on rents, as investors would be less inclined to buy or build new property to let. It would take a while for the impact to be felt, at least a year, but as the population continues to grow, and people start to come off their leases into an environment where there are less rental properties available, we would start to see more upward pressure on rents. The government would eventually then be required to step in and provide much higher levels of public housing, as is the case in the UK and other countries without negative gearing.

        • Not really a downward pressure on prices will increase the profit margins of developers and they will be more development (if land was not severely regulated ) , there will be a shift of lots of renters to house owners.

          Also there will a class of investors who will chase down dwellings for positive cash flow and thus support the rental market for renters.

          • Sorry, how a downward pressure increase profit margin? Is that not counter-intuitive (Please ask property developers in US)? Also, if I am not mistaken, dwelling vacancy is at historically low. In this scenario, a removal of negative gearing would probably have a larger impact on rent increment than the drop of housing price, in term of investment risk/reward adjustment.
            Tax policy is only one part of the equation. May be all the multiple/multiply/divisor should start consider the cost of replacement too? As a simile, you might build a whole railway system in the early 20 century at the same cost you need to pay for a segment of it today. As a reminder, carbon tax is coming, I won’t predict its effect on housing but I think the cost of steel production might incease, just ask the CEO of Bluescope. Truly economist.

        • I also welcome the idea that goverments subsidies if at all required going directly to government owned assests like public housing instead of speculators.

          • if you look at public housing/rent control empirically it has had a negative impact on the community at large.

          • the lesson here is observe govt action on its results not on its objectives despite how well meaning they seem.

        • so large amounts of bureaucracy and public housing is linked to negative gearing?

          nothing to do with the leftist flavour that many European nations have endorsed since ww2?

          Also your scenario is on a basis of static housing composition ie. supply remains the same and people per household does not rise to combat growing costs. And there is only a certain level that rents can get to before renters are deemed crazy as it is much cheaper to buy. However I do admit this scenario could hold true if credit availability was restricted (as could logically be expected), similar to the situation we have in the USA.

          However ultimately the effect of removing NG would be turning property into a real investment class where it is evaluated on yields not tax savings(NG) and potential CG’s. And if yields were to come more into line it would be the deterioration of housing values not the large increases in rents that would cause this to happen..

          Now if policymakers were to scrap NG, the fallout from investors going belly-up would be too severe, they would have to stage it over a 5 -10 year timeline where the tax savings are reduced gradually.

          • “Now if policymakers were to scrap NG, the fallout from investors going belly-up would be too severe,”

            Possibly… however don’t forget the many wannabe home owners constantly being outpriced by NG speculators (aka “investors”). The fallout may be a politcal bonanza instead.

        • The government would eventually then be required to step in and provide much higher levels of public housing, as is the case in the UK and other countries without negative gearing.
          That should not be a problem, given that the government would collect $6-8 billion per year in additional taxes.
          The government can build a lot of public infrastructure (including housing, if necessary;although I “predict” they won’t have to) with the $8 billion in extra funding every year!!
          Negative gearing is an inefficient use of taxpayers money to subsidise rent for the needy.

        • This reads like a bad 1st year economics essay. Residential real estate “investors” (if you can call middle class welfare investing) have been fed a diet of increasing capital gains for years, it’s almost like you just have to buy a place and whoosh your an investment genuis. Under that scenario, they are willing to trade yield for capital growth. To assume that rents will rise because negative gearing is removed is akin to assuming dividends will rise if imputation was removed.

        • Which has more influence, negative gearing (undervalued rents) or speculative borrowing (overvalued housing? Do landlords really put off rent rises because they don’t need the extra cash thanks to negative gearing. Or do investors borrow more than they can really afford on the hope of capital gains? I know which I would choose as the most likely.

        • The old tired hat argument that NG makes investors build houses. Only 1 in 16 landlords are investors as that is the proportion who build a new building. The other 15 out of 16 landlords are speculators (pretending to be investors). Speculators on 2nd hand houses use NG and other tax deductions to outbid genuine home buyers. Either NG is limited to new construction only or I want my taxes back!

        • Rents would be unaffected because every time an investor sells a rental property an owner occupier takes over. Supply and demand remain completely unchanged.

          The fallacy of ‘negative gearing means lower rents’ has been done to death on MB it’s surprising that people are still falling for it.

          Public housing is only required when people have no reasonable way of paying for a place to live. Governments are the ones who make it widespread not rents.

        • If NG was removed, it would place downward pressure on house prices, and TEMPORY upward pressure on rents, until house prices retracted enough to become affordable to the masses once more, including low income earners, who would releave any upward pressure on rents by buying a home of their own and leaving the rental market.
          Look at the new car market: What happened when cars got cheaper? They sold a lot more, and used cars got cheaper.
          NG exists for the purpose of satisfying GREED, and has greatly contributed to high prices. It was started by big business [Financial] for the express purpose of wealth creation.
          Governments are guided [controlled] by big business.

      • Negative Gearing rewards poor investment decisions using tax payers money to the tune of $6.8 Billion per annum. This tax break for failing investors is utter stupidity at the extreme. No where else in the world are people paid to lose money on investments. And because of this convoluted tax break, it has distorted our housing market. It needs to be removed and the savings can be funnelled into true housing affordability. Imagine how many public houses can be purchased each year for $6.8 BILLION!

    • So what’s the problem with the floundering housing market then? Something must be causing the ongoing malaise. Is buying in the doldrums because rents are too low?

    • I would say rents are definitely undervalued
      What is the true market value of rent then?
      If negative gearing is removed, do you rents to rise to a level where the renter’s monthly income has to go directly to the landlord’s bank account? In addition, do you expect the renter to take out a personal loan and pay the rent?
      Show us some hard data/statistics to back up your assertions and we may yet believe you.

    • “growth of Australian house prices has far exceeded the growth of rents, suggesting that the housing market is significantly overvalued”
      Why does that mean prices are overvalued?

      Because rents are set by what people can afford to pay while property prices are set by how much banks will lend.

    • In 1988 my average wages even with an interest rate of 18% I could afford a small 3 bedroom house, in the same area today my average wages is no way to covering the cost of a mortgage on a small 3 bedroom house with rates of only around 6%. This to me screams that housing prices are way to high. Yes the NG have had a nice run, but the chickens are now coming home to roost and itsa now a race to the bottom, after all baby boomers are retiring and they need to offload their investments, but do they do it now, or in 5 years time when prices are a lot lower. I am happy to sit on the side lines renting until the price is back down to around 3 times wages, I will save the difference between the rent and the mortgage.

  3. Would it also be suggested that ‘investors’ are not only relying on cap gains but inflation to be relatively high, ie an 80’s scenario where the bank ‘paid’ you to take out a mortgage?

  4. Great work UE.
    Sorry for going off topic here, but I’ve gotta say, it was harder on my eyes to read this report than I would like, as the “story space” on the website has shrunk overnight.
    I like the move toward premium content, but if it comes at the expense of story readability, it might backfire. So maybe a website re-design is needed?

  5. darklydrawlMEMBER

    Hi Guys,

    Yeah, I have the same issue the others had above. Logged in but cannot view the content. Maybe it is because the server needs to update my details? dunno. Will try again later. I am posting this comment for
    1: to let you know there maybe an issue
    2: others said after they posted a comment all worked well.

    Here’s hoping.

    • darklydrawlMEMBER

      Ok… Leith, you might want to look into that. After a comment was posted I could view the article, but before that, nada.

      Anyway, good work guys.

    • Same issue. This is at top of page even though logged in.
      You must be an active subscriber to view this premium content. Subscribe or Login.

  6. It’s interesting the graph that shows Canadian housing assets to GDP ratio at 1.8 times, while Australia is at 3 times.

    I read Garth Turner’s blog occasionally on the Canadian housing bubble for a comparison on how things are going for another country which is a heavy commodity producer.

    It seems their bubble is bigger than ours in terms of price levels and still going strong.

    It will be interesting to follow what happens to both Canada & Australia once the infrastructure boom in China slows.

    • Unfortunately for Garth , its going to be a long wait. Vancouver is definitely in a bubble but there are so many more affordable markets out there.

  7. That can go along side his Business Spectator drivel about how housing is set for a rocket while the share market flounders. I’ve noticed that for some time now, when he is challenged he reverts to the personal attack. I’d just ignore him. He will be remembered in a few years times as a deluded spruiker and his demise won’t be lamented by many.

    As for APF……………pass the tinfoil hat please!!

  8. The hypocrisy is strong with CJ. His post today on BS is basically the mirror image of what he accuses MB of – an attack on equities while spruiking housing.. He really has no shame

    • Couldn’t agree more. Joye is a sneaky one. A wolf inside a sheep inside a trolls clothing. And Stringburger is an infamous bull troll. But still, you can’t really let that article by Joye stand, it puts the integrity of this site at risk (perceptively) if people start to believe him. I’d put out a strong rebuttal before this thing escalates!

      • Jack,

        I wouldn’t worry about it too much, mate.

        That’s what the internet is all about.

        Having read the APF threads, I’d say that the originator of the threads came out a little the worse for wear – didn’t seem to get a lot of support from what I could see.

        As for it being an attack by APF – I wouldn’t accept that either. I don’t frequent the site, but it seems to be just another blog where presumably people have the right to post comments within bounds. The fact that some less than complimentary comments appear there – I don’t see that as a slight on the blog – it simply shows that the blog is performing its intended function – to allow people to express their opinions. Unless, of course, it became a campaign or vendetta, then the situation moves into another gear.

        The real villian in this piece is the snotty little sneak who, having seen two boys wrestling in the playground, couldn’t wait to run up and tell the teacher whilst, at the same time, breathlessly enjoying the spectacle and hoping it would never end.

        His blog has just been deleted from my daily visit list – it was getting pretty bloody boring anyhow.

        The attack on David (and you couldn’t call it anything but an attack of the worst looking-down-your-nose type) says heaps more about the little snot, than it does about David.

        I have crossed swords with HnH on a couple of occasions, but have always enjoyed his contributions, and gauge the man on what he has to say, not on what he may or may not have done in the past.

        Fact is, now that I know that he spent time as a ski instructor in Canada, I’m probably going to come down harder on him, out of sheer bloody-minded jealousy.

        Of course, he could soothe my flaring nostrils with a post about apres-ski life on the Canadian slopes 🙂

      • It doesn’t put this site at anything. There are plenty of share bears as bloggers (eg The Prince is looking at AORD 3100 as a target).

        And, plenty of degrees in Mathematics, Commerce and Economics floating around here. 😉

        Its just trolling to invoke a response.

        As credibility tends to zero the voices get shriller.

      • of course you let it stand. have seen this all before and is highly amusing to see a “forcaster” degenerate into a mudslinger as he lets his inner petulant child be seen by everyone. a pathetic excuse for a forcaster like CJ who is consistently wrong on everything starts to get frustrated by markets because he doesnt “get it” then goes on personal attacks against those who are right and make him look like the fool he always was.

  9. Why bother responding to that? Ignoring it sounds like the best idea. I imagine the MB crew are far more concerned about what their readers think than what Joye/other forums or blogs think.

    MB readers were not forced or tricked into coming here, MB is not trying to convince anyone of anything, they provide information, analysis and opinions and we the readers are free to draw our own conclusions. We even have the option of posting questions or alternative views that more often than not get responded to – where else do you get that?

    If the MB content was not of quality then we probably would not be reading it!

    I have been reading this blog since around the time it started and I am far far more educated thanks to MB. The quality from most other sources is so extremely poor and I am very tired of the MSM, I am grateful MB exists and for the effort that goes into this blog. My biggest concern is that it is too good to last!

    • +1 ignore it

      APF is not about attacking MB anyhow – it’s just an isolated forum article, not representative of APF…

      CJ is just trying to stir.

      And as for the ‘shares spruik’ angle at MB? Crikeys, shares get analysis, some shares get said to be “good value”, jsut as there is probably some “good investment value” left in property.

      But, really, if I udnerstand MB’s general tone at the moment, one needs to be a discerbing “investor” now, as there is no longer the “just buy something, hold and win!” aspect of investment these days – shares or property….that’s at least how I understand MB’s general attitude to investment in the current hearish climate both domestically and globally.

      Knickers in knot.


    There’s never been a market that, by any definition, stayed overvalued for too long. I guarantee the thinning sections of Aussie housing market that are still “overvalued” will not eventually defy the law of gravity.

  11. What happens to house prices in the next 2 years will speak louder than words

    (just don’t delete the evidence)

  12. Looks like MB is getting under the skin of one Pungently Accurate Svengali – the Iconoclast is pssd off methinks.

    MB ruffling feathers and disturbing comfortable nests…

  13. Apart from the excellent contents of MB a major point i like is that we have knowledgable people making comments and mostly they are very mature and dignified in their replies. (altho there have been a few irate/rude comments particularly from the anti mining lobby…pity).

    The critique of MB’s founder is very personal and for any mature person it reflects badly on the blog making these comments.

    I would not stoop to reply to to these comments, if anything it gives more publicity to MB and could draw more readers to it.

  14. Saw Wayne Swann on TV yesterday and he reckons the Australian economy is worth about $8 Trillion. I take that to mean total assets. (Considering the annual GDP is around $1T that sounds about right)

    So with housing valued at around $4T that would be half of the country’s assets.

    Anyone else manage to see that comment? And have a different take on what that goon meant?

    • I saw an article, it might of been from Mish Shedlock about how the Yank banks had 23 trillion of mortgages secured agaisnt about 15 trillion of property.
      May T could give us the figures re the Big’s 4 loan exposure agaisnt the 4T, I think it is about 700 billion.

      • Its about $1Tn. But that does not tell the story. The risk is only in about 20% of the book but that’s more than enough

        • Doesn’t 4T housing assets out of 8T total economy seem like a distortion of capital allocation? Provided the 8T is correct of course.

    • +1

      The inverse relationship bewteen Stocks and Property is utter bollocks PARTICULARLY during major recessions and depressions as unemployment climbs and credit dries – up check the 1890s and 1930s.

      The only saviour in 2008 to RE was Pink Batts; $900 bribes, Overpriced School Canteens and The RuddPrime FHOG boost.

      On the other hand Fixed Interest has history as a safe haven.

      Also, from Oct 2007 to to Mar 09, SP500 lost 50%

      In that period Gold rallied 40%.

      • Property boomed then crashed in 1925,
        Money shifted to share market before crash in 1927,
        Money shifted to commodities which boomed before crash in 1930,
        Money moved under beds…

        Property boom to 2003,
        Share market upshift in 2004 before crash in 2008,
        Money shifted to commodities before crashing,
        Money moved back under beds…

        There is only so much money floating around… its not an inverse relationship between shares and property just lots of sheep charging from one asset class to another.

  15. I told him last week that he should get some more diversified content if he wants to lift its credibility.
    See!! I told you so # 3 (unfortunately, my predictive powers aren’t as good as CJ’s).
    The bullhawks secretly want to get on the MB superblog.
    H&H, please offer Mr Joye the honour of blogging on MB – it will increase his web hits from a measely 100+ per day and also let readers comment on his blog – Win win!!
    And unlike other bullhawks, International man of mystery, Chris Joye’s posts usually has some entertainment value.

    • A blog from CJ on MB (even just a guest article) would be a great way for MB writers and readers to rebutt some of his thoughts on where our property market is heading.

  16. If the page still doesn’t load after registering, try holding down the Ctrl key while clicking on the refresh/reload button of your browser.

    This will force your browser to retrieve a new copy of the web page rather than using an out of date cached copy of the page.

  17. i see that The Age is also running with this article. Not sure that the real estate advertisers over there would be too pleased. Or, I suppose they’ve given up now and are just relying on volume to drive commissions, even as prices fall.

  18. Rents are anchored in reality – in effect, they are limited by median incomes. E.g. What renters can afford to pay out of their weekly pay check.

    House values don’t have the same restrictions. Expectation of future capital gain & access to finance, is what has driven up the median house price.

    Therefore it’s a lot like margin lending to buy more stocks. And we saw what happened there.

  19. Leaving aside the negative gearing debate for a moment….. Does anyone else question the rental yields data (from APM)?

    Rental yields showing at around 4 -4.5% ? Anecdotally, that seems extremely high.

    I rent a small house, (that would sell for approx $1m) for $800 a week. Admittedly, this is in a smart suburb of Sydney, but even assuming a 80% lvr, a competitie mortgage rate – with all the land tax, strata fees – I cant imagine my landlord is making any return at all -let alone 4%.

    Is my suburb the exception, or is this rental yield figure looking questionable?



    For a house purchased from one’s own savings and in which one is living in, it maybe wrong to compare the rental yield (or saving rental expenses) with the term deposit rates. One would have to factor in the tax effect.

    The rental expense is after tax dollars and the term deposit rates (income) is before tax dollars. For e.g if one were to rent a property worth a million dollars. The rental expense of this property would be say 4.4% as of June 2011. This equates to 44000 after tax dollars per annum. Assuming a tax rate of 31.5% this equates to 64,233 before tax to be earned. This compares favourably with what one could earn on a term deposit 6 % as of June 2011. Since it would be a primary residence, land tax would not be a factor. Council rates would probably bring it very close to the rental saved.

    Anecdotal evidence observed among my peers suggests that while one may stay/buy a million dollar house, it is much harder to rent a house above $ 600 dollars per week. I guess what I’m trying to suggest here is that it maybe easier for people to buy a million dollar house but not so easy to pay rent above $ 600 per week.


    Most of my peers have gone down this route. It was not easy for me to accept that they would knowingly be giving the bank, money to own a house (the difference between interest charged by the bank and the rental saved). In this case both are after tax dollars so it is a huge outflow. While hoping for capital gain is one part of the equation the other is to protect against rental increases. Most don’t seriously analyze the opportunity costs but they thoroughly analyze whether they can afford it. As long as they can afford it they will take the plunge and buy a house. Of course all their friends are buying their own houses and this creates social pressure for them to buy thier own house as well.

    Once they have bought the house, they will scrimp and save to pay it off as fast as they possibly can. It enforces a discipline which is only possible by having this huge loan and monthly repayment. In fact once they pay off this loan, they don’t really know what to do with the extra money they suddenly find they have. Some of them then go and buy another house or they upgrade their current house.

    Would appreciate if others can comment specifically on my observations with their own.

    • I see your point. I suggest that of the people who can afford $800 pw for housing, many would choose to spend that on buying a not-so-nice dwelling for some of the reasons you give, rather than renting the nicer place.

  21. Thanks for the analysis. I would have liked to see the rental yield vs term deposit and mortgage rate chart go back to 1989 like the earlier charts. What happened back then?

  22. I just want to know…

    If house prices are so overvalued (and have been since 2003), how come we haven’t seen a massive increase in the supply of housing?

    Could it be that the price of houses is being predominantly set by supply and demand factors? And not by speculation that prices will ever rise higher?

  23. “Given Australian housing’s higher risk profile, this result suggests that residential property investors have been banking on making solid capital returns in order to compensate for the poor rental returns on offer.”

    And how is this different to people who buy shares with a poor yield? The underlying philosophy is exactly the same! High PE = high growth expectations.

    • Richard, people invest in high PE stocks because they expect the company earnings to grow at a high rate whereas for residential property, they know rents are only likely to grow at CPI or wages growth rate but they invest for price doubling every 7 to 10 years. Two quite different philosophies.

  24. “Of course, the above comparisons of rental returns relative to mortgage and term deposit rates do not take into consideration the tax preferred nature of Australian housing – in particular the ability to write-off income losses against other forms of income (negative gearing).”

    How is this tax-preferred? I can do the same with my geared share portfolio.

  25. An historic view of the Median Multiple would be interesting. Has Australia always been expensive using this metric? When (if ever) was Australia at a “3”?

    Parking the paper value of the house for a moment, perhaps also it is worth understanding the debt obligations? How much debt is owed on these houses? What is the avg mortgage debt/income ratio, now and historically? Essentially asking the question of whether or not people can afford to pay existing mortgages? This is the main cause of what popped the US RE bubble. People could not pay their mortgage.