Email of the day (1)
Comment of the Day

June 06 2011

Commentary by Eoin Treacy

Email of the day (1)

on Australian housing prices:
"I thoroughly enjoyed your Sydney seminar. You mentioned that you thought the Australian housing was [Ed. Probably] safe from the bubble as long as the commodities held up.

"Today's Sunday papers (trashy...) are all calling for the bubble, so maybe I can take this as a contrarian view.

"I have checked the chart AUEHPI and this leg seems to be accelerating faster than the previous. Unfortunately the chart won't let me put a 200MA on it.

"Hoping you could expand on your seminar thoughts?"

Eoin Treacy's view Thank you for your kind words and I'm delighted you enjoyed the seminar. I have amended the data on the Australian House Price Index which had not downloaded correctly. In fact prices have paused over the last year rather than accelerated. The reason you could not add a 200-day MA to the chart is because it only updates quarterly. If you choose a 4 period MA, it should approximate the average of a year's data.

The Index only dates back to 2004 which does not give a particularly useful idea of how prices have performed. In order to create a longer-term chart, I took the old Australian Established Homes Index which was discontinued in 2005 and manually rebased the more recent data to update the chart.

Prices were broadly stable from 1988 to 1997 when they began to trend upwards. They paused between 2004 and early 2006 before pulling back in 2007. Prices rallied to a new high by 2009 and the current pause has lasted a year. A lower high and lower low have been posted within the range.

At the Sydney seminar, my comment with regard to the Australian housing market was prompted by a question posed by a delegate at one of the breaks. Housing prices are not our forte, concentrating as we do on exchange traded vehicles. Australian residents will know their own market best, however I will share my perspective as an outsider.

I was asked a similar question at a talk I gave to the UK's Society of Technical Analysis in 2006. My answer was that while I thought UK housing was overvalued, it would probably be OK until there was a problem with the banking sector. My reasoning was that banking occupied such a dominant position in the UK economy and investment banking bonuses were so important to the London economy that as long as these were intact, the bull market in property should remain in motion. The subsequent credit crisis has resulted in a correction in UK property prices.

The Australian economy is finely balanced between a booming commodity sector which accounts for the majority of exports and a challenging environment for the domestic, service dominated, economy. You will know better than I whether revenue from the boom in commodity prices is helping to support property prices in the cities which have been the focus of the property bull market.

This article from dated March 24th claims Chinese investors are active in Sydney property. This article from the Sydney Morning Herald dated June 1st makes the bearish case for property prices.

The RBA has raised short-term interest rates quicker than the rest of the OECD since September 2009 in an effort to contain inflationary pressures. At least in part as a result, the Australian Dollar has become one of the strongest currencies in the world. Australian property is expensive. At least a pullback is underway, probably in response to tighter monetary conditions. However, a significant deterioration in the wider economy, led by commodities and by extension the Australian Dollar, would probably be required to initiate anything other than a reaction.

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