LVRG CONFIRMS “THE GREAT AUSTRALIAN REAL ESTATE BUBBLE”
By a number of objective measures Australian property is in a bubble, exposing landowners to the imminent prospect of a once-in-a-century price collapse, the Land Values Research Group confirmed today.
“Sober cautionary voices from within Australia and overseas have been ignored in a frenzied headlong rush to profit from the surge in prices,” LVRG Research Associate Bryan Kavanagh said.
“It is now too late. The profits have been made. Canny investors have already sold up and left the market.
The LVRG today released its annual assessment of real estate sales for the financial year ended 30 June 2010. It includes the aggregated residential, commercial, industrial and rural real estate sales from all Australian states and territories.
“The 2010 property turnover figure is 3.74 times that at the peak of the 1989 real estate bubble.
The 2010 figure of $327.447 billion (for 664,816 sales) is a new record. It compares with 2009 financial year sales of $272.997 billion (612,975) and the 2008 figure of $309.604 billion (665,982). Only the real estate sales for Queensland were less in 2010 than those in the previous year, $50.5 billion in 2010 compared to $53.3 billion in 2009.
“The growing build-up of inventory with agents, particularly in residential real estate, will almost certainly ensure a drop in turnover during the current financial year – setting the conditions for the first Australian recession in twenty years.
The LVRG has tracked real estate sales data since 1972. It defines a real estate bubble as anytime total sales exceed 18 per cent against seasonally adjusted gross domestic product.
During the period of the current bubble (1999 to 2010) Australians spent $2.767 trillion on real estate of which 29.1% ($805 billion) is in the bubble and will need to be ‘deleveraged’.
“Measuring the current level of real estate prices against GDP takes into account both the growth in population and in the economy. Despite difficulties in getting the data together, the picture they paint is clearly one of a bubble which must correct,” Mr Kavanagh said.
The argument that population increases and the shortage of supply explains away the current exceptionally high real estate prices does not stand up to scrutiny, Mr Kavanagh said. He noted property agents in the USA tried to justify high prices in just these terms before the bursting of its residential bubble.
“I cannot give a date for the Australian bubble burst – this depends on spontaneous motivation, “animal spirits” – but it is clearly looking us in the face.
Although turnover represents a record, Australian Bureau of Statistics figures show total land prices had already turned down in 2009 when the federal government primed them with the First Home Buyers Boost. (See first graph below.)
“The GFC has reset expectations around the world. Australians are now focused on reducing their record high household debt to a more manageable level, making it unlikely any similar government intervention will induce another buying surge in the residential market, Mr Kavanagh concluded.