Bursting a millionaire's housing bubble

The top end of the housing market is barely representative of the rest, despite what some commentators suggest. And the recent GFC has seen the most expensive homes suffer the biggest losses.

Property Observer

For years I’ve encouraged analysts and commentators to avoid using the performance of property in the unique areas in which they live – e.g. Mosman, Toorak, Whale Beach, or the Mornington Peninsula – as a proxy for Australia's diverse, $4 trillion housing asset-class.

The behavioural tendency to extrapolate out from our immediate environs to the 8.5 million homes not located in our street leads to what psychologists might call an ‘anchoring bias’. It is no different to taking a micro-cap listed on the ASX, and assuming that its returns are a good guide for the ASX All Ordinaries Index. If anything, individual homes, and specific suburbs, are even more heterogeneous.

This anchoring bias is arguably exacerbated by the fact that media organisations tend to focus the bulk of their efforts on covering $1 million plus properties. But as my first chart below shows, these homes are irrelevant to 95 per cent of all Australian property buyers. In particular, this diagram depicts the distribution of all sales over the last 12 months sorted by price. You can see that homes worth more than $1 million accounted for just 5.7 per cent of total sales. For what it is worth, 90 per cent of all Australian homes sales were for dwellings worth less than $800,000.


Anyone familiar with Australia’s housing market will intuit that this makes sense. The median dwelling price across all regions and property types was only $400,000 in December 2011. As I reported earlier in the week, Australia’s dwelling price-to-disposable household income ratio has now fallen 12 per cent from a peak of 5.2 times to its current level of around 4.5 times.

Notwithstanding these facts, the property liftouts in most newspapers and magazines dedicate an inordinate amount of space to the tiny minority of homes that trade for more than the magical million-dollar mark.
We also know that by dint of their incomes, many of the analysts, economists, retail bankers, fund managers, investment bankers, accountants and financial planners who are called on to proffer comment on Australian house prices live in its more salubrious suburbs. In this respect, they are especially ill-placed to make inferences about the broader market.

This is likely why during downturns, such as in 2008 or 2011, one frequently finds investment bankers amongst the most ‘bearish’ on conditions, with shrill claims they are down 10 to 30 per cent. Ironically, the bankers are probably right if they are talking about Bellevue Hill, Bondi, or Point Piper. But these statements are meaningless when it comes to the 450,000 homes that sell each year that are not located in these areas.

Of course, if the bankers’ communities were representative of the national market there would be no bias. But they are not. In fact, they have systematically underperformed during these corrections. My next chart shows the change in the value of homes situated in Australia’s ‘cheap’, ‘expensive’, and ‘mid-priced’ suburbs since the housing market started flat-lining in April 2010. The chart beneath it presents the same data in a slightly different way by comparing Australia’s most expensive suburbs with all others.



If you happen to live in the most affordable 20 per cent of suburbs, the value of your dwelling drifted by only a trivial 1.5 per cent over the last 1.5 years. If you inhabited the price cohort above, which we classify as the ‘middle 60 per cent’ of suburbs ranked by price, your home’s value declined, on average, by a still fairly modest 3.7 per cent.

It is, by way of contrast, the affluent who have suffered the worst. The most expensive 20 per cent of suburbs across Australia have registered much more substantial price falls of about 6.5 per cent over this period. And you can bet that if you broke this group down further, into, say, the dearest 10 per cent of suburbs, you would find steeper losses again.

So what explains the inferior performance of Australia’s most expensive localities over the last year or two? I would argue one candidate is post-GFC structural adjustment.

The financial services industry, which was one of the principal drivers of demand in the dearest suburbs in Australia’s non-resources states, has now quite radically altered its future growth expectations.

The retail banks, investment banks, and stockbroking firms are not shelling out anything like the pay-packets that were prevalent in the period preceding 2007. The abysmal performance of the sharemarket more generally has weighed heavily on the portfolios of wealthier individuals, who were often loaded up with equities by their advisors. If only they had more cash and fixed-income.

I would venture that this new ‘air-pocket’ in housing demand is most relevant to non-resources states, and to homes valued at between, say, $3 million and $10 million. Australia is still creating extraordinary wealth with the list of billionaires now numbering in excess of 20. And private sector wages growth, and total disposable household income growth, have been expanding at normal rates.

In the last one to two years, home buyers have received a tremendous affordability dividend, with the circa 4 per cent decline in house prices accompanied by healthy disposable income growth of around 5 per cent per annum. And now due to the RBA’s benevolence, mortgage rates are 0.40 percentage points lower than they were in October 2011.

So I suspect the housing market will remain healthy for most Australians. RP Data-Rismark’s new ‘daily’ house price index, which is quoted by the ASX, has reported small capital gains over February and March. There is nevertheless likely to be a fundamental downward adjustment in that specialised $3 million to $10 million segment that was once dominated by financial services professionals.

On the other hand, it is questionable whether demand at the extreme heights of the market, where estates trade for more than $20 million, and buyers typically have little debt, will be much affected.
Australia will keep on producing individuals worth hundreds of millions, if not billions, of dollars. For the time being, however, fewer will do so in financial services.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark International. The above article is not investment advice.

This article first appeared Property Observer on March 15. Republished with permission.

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