There has been a lot of press dedicated to the Chinese and Australian real estate markets. Are they overvalued or is demand greater than supply. Here is an article arguing that Australia does not face a housing bubble or crash as demand greatly exceeds supply (h/t The Real Estate Bloggers).
The source of her frustration — a shortage of 200,000 dwellings — is helping fuel Australian home prices, which are 82 percent higher than in the U.S., and disproving investors such as Jeremy Grantham, who says they will fall 42 percent as interest rates rise in one of the world’s priciest home markets.
“It will take years to turn the shortage around,” said Matthew Bell, an economist at Australian Property Monitors, a researcher cited by the central bank. “When it comes down to it, that’s fundamentally what’s going to drive the market.”
Australia’s median home price was 6.8 times gross yearly income last year, compared with 5.1 times in the U.K. and 2.9 times in the U.S., according to the annual Demographia International Housing Affordability Survey. The nation of 22 million people has six of the 10 most unaffordable cities among the U.S., U.K., Canada, Ireland, New Zealand and Australia, the survey showed.
The median home in Australian cities cost A$468,000 ($395,000) in May, figures from real estate monitoring company RP Data show. The median price of a new home sold in the U.S. in 2009 was $216,700, according to government data.
The demand argument was used here in the States in 2005 and 2006 as demand did exceed supply. Eventually, people learn that housing is a manufactured good whose purpose is to provide shelter. As such, this manufactured good is tied to incomes. Everyone needs shelter, but their income limits the type of shelter they can afford. When the cost for the average home ends up exceeding the average income, a correction will take place. Once families start to realize they cannot afford homes and the demand/supply paradigm shifts, the correction begins. With an Australian home costing 6.8 times the average income, this market will correct. Then these people like Mr. Bell who are claiming the demand/supply dynamics justify current home prices will be amazed they didn’t see it coming.