Reserve Bank warns about investment in Australian real estate
Glenn Stevens, one of the governors of the Reserve Bank of Australia, has issued a veiled warning to those looking to make a quick buck in the Australian real estate market. While some have accused the governor for being overly pessimistic about the short to medium-term outlook, he did make a number of very salient observations about the Australian real estate market in general. If you’re looking towards the Australian market there is every chance to make some decent money in the longer term but you need to be aware of the current environment.
So, what did Governor Stevens suggest to those looking towards the Australian real estate market? Why did he issue a warning about the future and why is he apparently looking to take the froth off the market?
Real estate cycles
Sometimes it is easy to forget that real estate markets around the world move in cycles and the boom times will never last forever. Human nature often ensures that the boom times are overextended on the upside and the bust times are overextended on the downside. Real estate markets, and other investment markets, perfectly reflect the extremes of human nature.
Quote from PropertyForum.com : “On the surface, the International Monetary Fund’s (IMF) warning about a potential “overshoot” in Australian property prices and a suggestion that regulators need to scrutinise property investment finances, is starting to sound like the US mortgage crisis situation of 2008.”
The statement which seems to have attracted most attention, and has been seen by many as a veiled warning, is that boom times in Australian real estate are usually followed by a fall. This makes perfect sense, seems to be something of a no-brainer but sometimes those looking for a speculative investment need a reality check. He looked towards the south east Queensland market over the last few years as a reflection of issues after the boom times.
Cheap finance
Looking back it is now clear that property prices in south-east Queensland benefited enormously from relatively cheap credit prior to the worldwide economic downturn. Indeed this ongoing demand for real estate led to some developers constructing “the wrong type of dwelling” which would inevitably lead to problems for some real estate developers.
Perhaps the perfect reflection of the price paid after a period of relative strength in any real estate market can be seen in the Brisbane property sector. Historically this particular market has been priced at around 60% to 65% of property prices in Sydney. However, this relatively steady link between the two real estate markets was disconnected in the boom times of just a few years ago with property prices in Brisbane reaching 85% of those in Sydney at the peak.
Coping with downward pressure
Once the Brisbane real estate market began to wobble, readily available finance became scarce and demand began to fall, this led to a downward spiral which has taken nearly a decade to work through. Property prices in Brisbane have now fallen back to around 60% to 65% of those in Sydney and while not necessarily a “collapse” in Brisbane real estate prices it has certainly been a difficult decade for investors and developers.
It is the short, sharp, shock of boom and bust times which tend to grab the attention of the worldwide media but relatively long-term corrections, such as that seen in Brisbane, can often go unnoticed but cause significant issues for those in the marketplace. The Reserve Bank of Australia is not necessarily talking down the Australian real estate market but it is giving a warning to those looking for a quick buck.
There is also the issue of cheap credit, as a consequence of the worldwide economic downturn, and the fact that interest rates will increase over the next few years. Only then will we really appreciate the growing difference in household incomes as a multiple of average real estate prices and the fact that even the merest increase in interest rates could decimate some household finances.