Where is the housing market heading?

OVERHEATED or undervalued? A powerful part of the Australian economy or a bubble that could burst and damage Australia's miracle economy?

Australia's housing market has always been one of the most talked-about sectors of the economy, but the recent surge in property prices – against the backdrop of the subprime crisis and the implosion of housing markets overseas – has further emphasised the divisions between the property bears and the property bulls.

The bears argue Australia's house prices are far too high when incomes and debt levels are taken into account and believe the bubble must burst – and spectacularly.

The bulls argue a shortage of housing and Australia's growing population means property prices will continue to rise, albeit at a lower rate.

It's a complex and sometimes controversial area, so let's explore the issues with a feature-length SmartCompany Q&A.

I'm feeling pretty darn good about house prices right now. We've just come out of a great 2009, haven't we?

Unquestionably. After a year in which it looked like the entire financial system was teetering on the brink, Australian house prices surged, helped in no small part by the fact interest rates remained at historical lows for a big chunk of the year and the Government's decision to boost the first home owners grant to $14,000 for established homes and $21,000 for new homes in late 2008 (this was extended in the May Federal Budget).

There are three main measures that we follow for the latest on house prices: the official Australian Bureau of Statistics figures, data from Australian Property Monitors and the RP Data-Rismark Index.

While there are differences between the three measures, they all tell a similar story about national house price growth over 2009. The ABS said it was 13.6%, APM showed growth of 12.1% and RP Data-Rismark was lowest at 11.5%.

In other words, a very good year.

Looks great for me. But tell me, why on earth do we need three different measures of house prices? All sounds a bit confusing.

The use of three different measures can be a little confusing and there has even been a bit of sniping between the representatives of the various companies. Essentially, the ABS and APM track median prices, while RP-Data-Rismark use something called a "hedonic" index, which it says more accurately tracks actual capital growth in housing.

This is because, as Rismark chief Christopher Joye pointed out in a media release he shot out after APM's latest results were released, the median measures can be affected by changes in market conditions. For example, Joye argues a big jump in the figures for the December quarter (up 4.8% according to APM) was skewed by the fact first home buyers were leaving the market as the grant was wound back and upgraders were entering the market, buying more expensive homes.

And what does APM say?

That its "stratified media price" methodology has been developed in conjunction with the RBA.

So should I believe one over the other?

No, take both into account when trying to assess the market.

However, the argy bargy in the last week or so did highlight some sharp differences in the way these two groups see the market heading into the new selling year.

The sharp 4.8% rise in median prices in the December quarter – particularly the 6.4% jump in Melbourne, the 5.3% rise in Sydney and the 6.4% increase in Hobart – have some commentators wondering if sections of the market are starting to look a little overheated.

However, the RP Data-Rismark index showed house price growth slowing in the month of December, with prices down 0.3%. Over the quarter, RP Data-Rismark saw prices up 2.1%.

There's a big difference between those figures, isn't there?

Sure is. On the RP Data-Rismark measure, the market's bubbling along nicely. On the APM data, there is reason for some concern.

That concern is underlined by another set of house prices figures...

What, another set of figures?

...Yes, another set, this time from the Real Estate Institute of Victoria, which look at Melbourne. It's a good snapshot of a market that does appear to be white hot. The median price of a Melbourne house reached $540,500 as of December 31, representing an increase of 15% during the quarter.

Some suburbs recorded unusually high rises. In the eastern suburbs, the median price of a home in Burwood, increased by 23% to $810,000 in just three months, while prices in the suburb of Ringwood grew 16%.

That's huge growth in just three months.

But are these markets overheated?

You'd have to say that the suburbs above are overheated. But the real question is, will these over-sized price rises spread throughout the market? And that's where opinions differ.

Matthew Bell, economist for Australian Property Monitors, told SmartCompany some areas of the country are undoubtedly recording overheated rises.

"The reasons behind these rises I view from a very macro level. It's a supply and demand issue, and there are definitely areas where prices will have been overbid and they are much more susceptible to things like the first home owners incentive."

Read more ...

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This article first appeared on SmartCompany.com.au, Australia’s premier site for business advice, news, forums and blogs.

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