Is our Property Market Over-Valued?
Steve Keen was criticised at the start of the Global Financial Crisis for suggesting property prices would drop by up to 40 per cent.It was indeed a big call from the Associate Professor of Economics and Finance at the University of Western Sydney, but his doomsday predictions have fortunately only rung true in one market – the Gold Coast prestige market.The case in point is Hedges Avenue and luxury beachfront apartments. The exception is Sanctuary Cove which recently achieved a record price for a luxury home for $7.2 million.Here’s a snapshot which gives an accurate reflection of the challenges being experienced in the prestige Gold Coast apartment sector. One luxury absolute beachfront apartment sold on the Gold Coast recently for just over $5 million, representing a square metre price of $6800 per square metre. This ultra-luxury apartment, like many others that sprung up in the halcyon days between 2002 and 2007, were originally commanding up to $15,000 per square metre.There’s no doubt the drop in values in this sector on the Gold Coast has been spectacular. But there is a silver lining. Any apartment sale for in excess of $5m is a positive sign that those in the know, those who have done their homework (not to mention those who just can), are returning to the marketplace and are willing to part with a lot of money.Either that or they are just plain naive, like the investor who parted with $4.5 million to purchase in the Hilton at Surfers Paradise (see today’s Gold Coast Bulletin), representing a square metre rate of some $19,000.What the sale of the $5m apartment is telling us is that is that buyers with the money now see unbelievable value. They believe the free-falling market has hit the floor and this is a welcome sign. I’m not suggesting we are going to return to boom times any time soon. I’m just saying we have probably reached the floor.So, one sector of the Australian property market has tanked and Keen can have the bragging rights that his crystal balling was at least partly reliable – but the unbelievable reality is that the general housing market nationally remains robust. Sydney and Melbourne have experienced price growth in post-GFC haze even if Queensland’s has been more subdued.Here’s why property prices won’t drop to any dramatic degree. We have a housing shortage in Australia, we don’t have enough houses to rent and there are less landlords able to purchase homes (because of affordability) to put renters in.But most of all, we have a very low unemployment rate of 5 per cent. People might be struggling in the midst of this two speed economy, but at least they are working and the majority of them can sustain their mortgage payments. If unemployment was at 10 per cent it would be an entirely different story.The only factor that can change the status quo is the uncertain global economic environment. We will watch with interest the geo-political uncertainty in the Middle East (The United Nations Security Council today voted unanimously in favour of the establishment of a no-fly zone over Libya); the decimation in Japan, the world’s third largest economy; and talk of a fall in commodity prices in China.Cast your mind back to 1991, the recession we had to have. After the initial property market carnage, the foreclosures caused by interest rates of 17 per cent, and the mortgagee sales, prices stabilised. And we then saw a slow, almost flat line in prices for almost 10 years until the market started heating up across the country at the end of 2001.I think we are in the 21st century equivalent of about 1993, although the global geo-political and economic climate is potentially a lot more volatile than it was back then.