A different perspective

With much of the media bannering headlines about falling house prices this week, it was good to see a different perspective from the global markets research team at National Australia Bank.

The NAB researchers looked at various valuation methods for residential property, with a particular focus on Tobin’s Q* (which asserts that an asset price should be anchored by its cost of construction or replacement value) and found that the market is, in fact, in a strong position.

“There is strong evidence to suggest Tobin’s Q has been alive and well in Australia’s residential property market”, says NAB Global Head of Research Peter Jolly.

“The surge in the Q-ratio for units to around 30 per cent above its historic norm by mid-2015 resulted in an equally large surge in dwelling supply, as developers took advantage of increased profitability.

“More recently the Q ratio has fallen, to now be 7 per cent over-econovalued, due to a mix of rising construction costs and flat/lower unit prices as this new dwelling supply has come on stream.

“Other valuations measures validate this conclusion, with the House Price-to-Income and House Price-to-Rent ratios both around 12 per cent above their long run trends at Q1 2018.”

Jolly suggests that these overvaluations don’t necessarily mean dwelling prices will fall by this amount.

“What they more likely mean is that nationwide dwelling prices will be flat to a little lower ahead as household incomes, rents, and/or construction costs catch-up with current dwelling prices”, he says.

The NAB group sees a further modest correction in some dwelling prices ahead, supported by the low level of unemployment and mortgage rates.

* Tobin's q, or the q ratio, is the ratio between a physical asset's market value and its replacement value.