A subscriber alerted me to an interesting bit of research that hit the SMH (Sydney Morning Herald) headlines a few days ago.
It cites analysis undertaken by AMP chief economist Shane Oliver.
Oliver has used rents as metric for valuation - essentially the earnings of the property - and in doing so, assessed that housing in Australia is “massively” overvalued.
Source: Sydney Morning Herald
In Sydney, houses were overvalued by almost 33 per cent, meaning the median house price would need to fall by about $458,000 based on CoreLogic figures to be considered “fair value”.
In Brisbane and Canberra they were overvalued by 33.5 per cent and 31.1 per cent respectively.
Houses in Adelaide (26.9 per cent), Melbourne (25.9 per cent) and Perth (8.8 per cent) were also above fair value.
Oliver started comparing median house prices with the average rents in each capital city, excluding Darwin and Hobart due to lack of data, in December 1983.
At that time, the national median house price was $69,569 and the average rent was about $110 per week, meaning about 8 per cent of a house’s value could be earned in rent each year.
Today’s median house price is $1,091,938 while the average weekly rent is $574, which equates to annual rents of just 2.7 per cent of the home’s value.
Oliver said the measure worked in a similar way to the price-earnings ratio for shares.
“It’s only one guide, there’s no perfect measure to valuing any asset class, but a key approach in equity markets is to compare share prices to their underlying earnings,” Oliver said.
“For property markets we don’t have earnings, but we do have rents, and you can make an argument that whether it’s a rental property or an owner-occupied property, there’s still rental value coming from that building.
“With valuations being more stretched, it provides a warning that if something does go wrong, like a severe recession or a huge cut-back in immigration levels, then you could end up with a period where property prices come down sharply.”
However, he stressed that was unlikely to happen, especially with interest rates tipped to ease at the end of this year. Lower rates typically meant higher house prices, he said.
“There’s not a lot of room for things to go wrong in the property market,” he said.
House prices could come back to a fair value if there were more interest rate rises, slower rate cuts or a sharp rise in unemployment, none of which were on the cards in the near future, Oliver said.
They’re interesting comments from the perspective of the Land Cycle.
We in fact have the timing for that downturn. It will likely be triggered in 2026 – maybe 2027 - pushing us into recession into 2028.
And although there’s far more that goes into valuing property, than just its rental value – such as the earnings of land from a development perspective, for example. The metric has some value to us in identifying when the peak may come.
It’s similar to another metric I’ve utilised previously. One that not only tracks the land cycle closely, but also gives good indication as to when it’s a good time to buy, and when it’s a good time to sell.
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