What does it mean when they say “Australian property market”..?

Posted by Luke Graham

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You’ve heard it before.

“The Australian property market is set to boom in 2021”

“Australian property values fall after credit tightens”

“Australian property is in over/undersupply”

…and so on.

But what do they actually mean by the Australian property market? Can property investors be making money when Australian property prices are going down? Can they be losing money when prices are going up? Is the price of your asset changing if Australian property prices are flat? How about the supposed bubble?

A big problem with Australian property, especially when economists get involved, is that it isn’t a monolith. In other words, different markets across the country act in different ways at different times. Take the late-2010s for instance. During this period, dwelling prices in Sydney and Hobart skyrocketed. Perth, on the other hand, trended downwards over this time. Nevertheless, as a whole, Australian dwelling prices increased. An overseas economist might just conclude that Australian homes are more expensive today than they were a half-decade ago. They’d be technically correct, but this is far from the whole story.

Over the years, we’ve discussed Australia’s status as a highly urbanised country. We may be a land of sweeping plains, but they’re mostly sand and desert. As a result, 40 percent of our population is squeezed into Sydney and Melbourne alone, as are half of all home sales. In comparison, Greater Perth contains just 8 percent of Australia’s dwellings. Greater Hobart is even less influential, containing less than 1 percent.

When you think about it, Australia’s property performance is just a sum of its parts—but not all of those parts are equal. If Sydney and Melbourne experience a boom while the rest of the country is stagnating or even going backward, it’s likely the Australia-wide figure would still be increasing. The same goes in the reverse. Once Sydney dwelling prices reached a peak in 2017 and started trending downward, many commentators applied this to the rest of the country. As you can see on the above chart, this period of time saw Hobart dwelling prices skyrocket to all-time highs. The truth is that each market operates differently to another, which is what generates the squiggly mess in the chart below.

But what happens to that squiggly mess when we remove the smaller property markets? Things begin to look a whole lot more consistent. Sydney’s influence on the national statistic is so significant that the two lines operate in nearly perfect sync. In statistics, we call this correlation. Between 2010 and 2020, the correlation coefficient between Sydney and the nationwide figure was 0.988. In statistics speak, that’s about as close to a perfectly positive correlation as it gets.

There are a bunch of consequences to this. First of all, national policies aimed at managing the housing market are more effective in some markets than they are in others. Second, most people only see the negative attention-grabbing headlines such as the now infamous 60 Minutes “Bricks and Slaughter” special from 2018. This drives bearish behaviour and leads to self-fulfilling prophecies—if everyone’s too scared to buy a home, there will be no buyers. Unfortunately for them, few were listening. Third, it leads to massive errors in economic modelling. Take the argument that Australian housing is unaffordable. In Sydney, the price-to-income ratio is approximately 8.2. That means dwelling prices are 8.2 times Sydney’s median household income. In Melbourne, it is about 7.2. Brisbane, however, is only 5.7 and Perth is lower than that.

Be mindful in future that when they’re talking about the “Australian property market”, it probably just means Sydney. That means something entirely different could be happening in the next city or town. It’s just not big enough to grab their attention.

Posted by Luke Graham, on 9th Feb 2021