An exchange of values

Upon request this is a reproduction of an exchange via letters to the editor that occurred in the Queensland Country Life. The exchange was about what influence the coal seam gas industry was having on rural property values. About what value sellers of land saw in including CSG infrastructure when advertising property and what value buyers of rural property placed on this land against any property without CSG activity.
The exchange also turned out to be a challenge to place value on factual representation of the situation and to take action to the value of treating landowners with respect.

The origins for this exchange was a radio interview that I heard on ABC's rural radio, The Country hour on the 12th March where Rick Wilkinson the CEO of the industry association, Australian Petroleum Producers and Explorers Association. (APPEA) made some statements that I knew not to be correct and this first letter published on the 21st March was the result.


To listen to what Mr Wilkinson said and what I took exception to go to this page on ABC Rural Radio, CSG industry claims mining is helping property values ; scroll down the page and look for the last audio file, 'The peak body for the coal seam gas industry says property values have not dropped in QLD.'

There was no surprise when there was a return to serve in the letters to the editor on the 4th April by Mr Wilkinson. If you read Mr Wilkinson's letter carefully you will see he negates his own argument especially in his use of the quote from the Valuer-General. He also refers to evidence on the Gasfield Commission web site to support his argument; this can be found on this page titled, Property ads start to list gas among property features.

In the rush to score a point it turned out to be no more than a high slow ball in which I could put away in a letter on the 11th April. Others too believed Mr Wilkinson's statements to be inaccurate and on 25th March in an interview on ABC Rural radio Country hour program, Market yet to make up its mind about CSG, rural property valuer. John Compton made it very clear that there was no evidence that CSG was contributing to any increase in rural property values.

"The coal seam gas industry's effect on land values has not been reflected in the market, according to a Queensland rural property valuer.

John Compton says the market has not had time to digest the CSG industry's impact because industry is still developing.

"At this time, whilst there is little disclosure of CSG development and impact on rural properties, there's no evidence that the rural property investor market is prepared to pay any premium for gas income," he said.

"Up until this point in time, disclosure of CSG development on rural properties, let alone income available, has not been widely advertised. Certainly it hasn't been a feature of rural property advertising.""

Home on the Sheep’s Back - Home on Ponzi Finance - or Home & Away?

Is Australia is experiencing an unsustainable housing bubble?

Is the growth in house values based upon sound fundamentals or are Australian house prices severely overvalued and due for a correction?

The property industry and industry experts and real estate “spruikers” would have you believe that Australia is different to the rest of the world and that our housing market is underpinned by a strong economy, high population growth and housing shortages as well as a strong banking system.
 
So who is correct?

Australia’s housing market is being underpinned by, what could be called, “Ponzi finance”, whereby the rental income from a property does not cover the debt expense incurred to purchase the asset, therefore, requiring perpetual capital growth, a supply of “greater fools” or subsequent investors to eventually purchase and ever-increasing levels of debt to perpetuate it?

According to the Australian Bureau of Statistics, real rents have increased by around 15 per cent since 1987 whilst real house prices have risen by around 165 per cent over the same period. It is no surprise, then, that yields on rental houses have plummeted from around 8 per cent in 1987 to 3.5 per cent currently.

Could our housing market then be a debt-fuelled time bomb or a bubble in search of a prick?

Prices of productive rural properties such as cattle and grain farms have, historically,   always enjoyed capital gain regardless of the return to capital being generated and over decades, prices rose and then levelled out but never dropped – until now where we have seen reductions in market value of around 20% common.

Rural valuers HTW report that “Throughout the year (2010) we have seen varying stages of value corrections, with most areas back a minimum of 10%, and up to 30% or more in some cases. Values may continue to decrease until they are at a level where purchasers can acquire these assets and achieve a reasonable rate of return….”

So back to the housing market and the “Ponzi finance” theory, where investors and owner occupiers have been leveraging up, and “negative gearing”  to buy property in the hope of achieving continued rapid capital growth  or ‘getting in’ before prices increase further.

With the significant low or negative income returns from holding residential property, the only way that house prices can continue to increase faster than incomes is if buyers believe that prices will continue rising and that large capital gains can be made by selling the same asset to other buyers (the ‘greater fool’ theory). Such a scenario requiring ever-increasing debt levels, could well be unsustainable.