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Housing bubble talk popped

By Michael McMahon

NOW here’s what I call a great question from Commsec’s chief economist, Craig James: “Rather than a ‘bubble’, could it just be that home prices are lifting from a low base in response to very favourable influences, such as super-low interest rates?”

That, says James, is the sensible view and the right view. And if you have read last week’s Insider in relation to the Sydney market and concerns about escalating prices and a housing bubble, you’ll know that I couldn’t agree more.

Encouraging sets of figures continue to surface, despite any negative puff.

Overall, the Australian economy is showing signs of a lift. Consumers are spending again; and according to CommSec, the manufacturing sector is expanding for the first time in two years.

Construction is at a three-and-a-half-year high, thanks to the ongoing recovery of the housing sector – and driven mostly by stronger investor activity.

And, as we have reiterated of late, both home sales and home prices are rising.

But as the figures are churned out, it pays to understand what is really being said.

When it comes to house price reporting, for example, it’s important to be aware of the various nuances that can exist, especially if you are researching an area with a view to investing in property.

One of the problems is the way in which prices are measured and more importantly, what influences the rise or fall of both median and mean house price figures.

New development or redevelopment frequently causes the middle and average prices to rise, without much of an accompanying rise in resale values in the same area.

This often occurs around key infrastructure projects such as railway stations. It is not uncommon, for example, to see new projects lift the median and mean values of an area, while at the same time, resale prices remain flat.

The same can be said about weekly rents. Base property values and rents often rise faster when located closer to core infrastructure, but the overall residential cycle must be on the improve.

Redevelopment, such as that seen in many flood-affected areas across Queensland, has often seen a rise in median and mean values within those locales as new properties replace older stock.

Yet owners trying to resell flood-affected but unimproved homes in the same areas are not benefiting from the overall reported rise in house prices.

Often, in fact, they are unable to get more for their properties than they originally paid and certainly less than had they sold pre-flood.

A similar effect emerges in areas experiencing strong surges in house renovations. Median and mean prices of a locale may lift as a result of renovation activity; but the reality is that after renovation costs are factored in, the actual lift in financial gain is far less than the reported suburban price growth.

It is true, however, that areas with a high and consistent proportion of home renovation work throughout, are likely to see overall improved investment potential.

Such activity generally leads to more owner-resident resale interest; and ultimately, growth in the resale market, followed, in due course, by better prices on resale.

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