Housing Bubble?  Not here.

It's nice to see that Jeremy Grantham has rolled into town this week and stirred up the property bubble argument once more. Mister Grantham, the co founder and chief investment strategist of US based investment management firm Grantham, Mayo, Van Otterloo & Co (or GMO), has been widely quoted during his tour across Australia saying that Australian property prices are in a bubble and need to fall 42 per cent to revert to trend (42 per cent, he's even more bearish than one noted local bear who bet on 40 per cent falls). Whilst in Australia Mister Grantham has also commented on Australia's proposed Resources Super Profits Tax, the UK and Chinese Property markets.

Whilst one can't argue that capital city prices are expensive and unaffordable for many, capital cities do not make up the entire Australian property market. There is such a focus on the capital city property markets due to the fact that this is where the majority of Australian's live. Over the three months to April 2010 the median house price in Australian capital cities was $492,000 and the median unit price was $410,000. When you combine all areas of the country including those outside of capital cities the median price falls to $425,000 for houses and $382,500 for units. The median price for all dwellings (houses and units combined) is $414,000. Clearly national median prices are heavily influenced by the capital city markets however prices are generally much more affordable once you move out of the capital cities.

The big difference between Australia and most other parts of the world is that we are a highly centralised society with only six states and two territories. 60 per cent of all home sales take place across 0.5 per cent of the land mass. Based on ABS figures to June 2009, the capital cities account for an estimated 14,039,373 persons of a total of 21,955,256 persons nationally. This means that about 64 per cent of the Australian population lives within the capital cities with an estimated 55 per cent of the population living within the four largest cities (Sydney, Melbourne, Brisbane and Perth).

When you compare this to other countries you can see there are fundamental differences not just in the size of Australia's population but the fact that it is so heavily centralised. As some examples:

In 2007 the USA had an estimated population of 302.2 million persons, the 20 largest cities in the country, in terms of population, accounted for just 10.7 per cent of the population. The 50 largest US cities account for only 15.5 per cent of the population. Sydney makes up an estimated 20.5 per cent of Australia's population.

There are similar results in some European nations. Although the data is a little older, 2001 Census data shows the United Kingdom had a total population just over 49 million persons. Whilst London accounted for 14.6 per cent of the total population, the 20 largest cities accounted for 27.7 per cent of the population. Sydney and Melbourne combined account for an estimated 38.7 per cent of Australia's population.

In Germany, 2002 statistics show the estimated population was 82.4 million persons. The capital Berlin accounted for 4.0 per cent of the country's total population whilst the 20 largest cities accounted for 17.8 per cent of the population.

Finally, 2002 statistics for France show that the 20 largest cities in the country account for 11.7 per cent of the total population.

Getting the idea? As a population we spread ourselves very thinly across the country. Obviously we can't all move to the desert in the middle of Australia but there are plenty of habitable regions of the country which are under populated. 64 per cent of the country's population on 0.5 per cent of the land mass is completely nonsensical. The capitals are also experiencing the highest increases in population, which creates a major strain on infrastructure in these regions and leads to higher property prices (particularly when new housing construction is in such short supply). As an outsider looking in you can understand why international experts believe we are in a housing bubble but when you look beneath the surface the fundamentals of the Australian property market are very different here.

We are also yet to mention the fact that Australia's population grew at a rate of 2.1 per cent during the year to September 2009. With an addition of almost 452,000 residents to the population during the last year where do you think they are going? They go where the jobs are... and where are the jobs? The jobs are where 64 per cent of the population is, in the capital cities. More accurately, most jobs are in Sydney and Melbourne and to a lesser extent Brisbane and Perth.

Add to the mix the fact that unemployment has peaked much lower than forecast and continues to improve, the Australian resources sector is once again warming up, mortgage arrears remain well under 1 per cent and, as a nation, we remain undersupplied in housing by more than 178,000 dwellings. With all this in mind, the outlook for Australian home values doesn't appear to be anything like a 42 per cent correction. Our view is that home value growth is likely to moderate, tracking household income growth which is likely to be circa 5 per cent over the coming year.

Source: http://blog.rpdata.com/

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