Oliver's Insights - Australian housing. Is it a bubble? What's the risk?
29 Nov 2010 - This note looks at the vexed issue of Australian house prices, with much debate in recent times as to whether the Australian housing market is in a price bubble or not.
The key points are as follows:
- Australian housing is not in a bubble but it is very overvalued, and combined with high household debt levels leaves Australian households vulnerable should anything significantly threaten house prices. It is a reason for the Reserve Bank of Australia (RBA) to tread carefully in raising interest rates.
- Poor and worsening affordability will likely lead to soft house prices over the next year or so. Key factors to watch for in terms of the risk of a substantial housing slump are a collapse in China leading to much higher unemployment, excessive tightening by the RBA and a big increase in the supply of housing. None seem likely in the short term, but they are worth keeping an eye on.
- Australian housing and shares have provided very similar returns for investors over the long term, with both returning 11.5% pa since 1926. Right now though, with housing looking expensive and offering a net rental yield of around 1.5%, shares are probably a better bet as they are cheap on most valuation measures and offer a more attractive dividend yield of around 5 to 5.5% once allowance is made for franking credits.
