Yet the listed companies that operate in the property development game are struggling to make a profit. As a result, they trade at massive discounts to the book value of the property they own. NSW based AV Jennings has lost a cumulative $3m over the past three years and currently trades at a 56% discount to its $143m of net tangible assets (NTA). Queensland developer Devine has managed to make $25m over the same period, but that’s a paltry return on its $337m of tangible assets and it currently trades at a 47% discount to NTA. Sunland has no net debt and trades at a 48% discount to NTA. Another Queensland company, Watpac, has a construction business that justifies the current stock price. The $240m worth of property assets sitting on the balance sheet (net of Watpac’s total debt) are currently being attributed a value of less than zero. It hardly sounds like a property bubble, does it?
Most housing bubbles go hand in hand with a construction bubble, as people try and take advantage of the inflated prices. There are still 3.95 million bubble-built homes unsold in the US; more than 12 months’ supply. Here in Australia though, we have a housing market that is overvalued in relation to incomes and rents, but not overvalued in relation to the cost of construction (otherwise these construction companies would be making a healthy profit).
The obvious explanation is that it’s the price of land that is too high, not the price of houses. And this is surely a function of government policy – it’s not as if we have a shortage of dirt.
None of this means the price of existing housing can’t fall. House prices are a function of people’s ability to pay, and unemployment and interest rates are the two key drivers there. But it does mean we’re not going to get many new houses built under the status quo. People can’t afford substantially higher prices and construction businesses can’t make a profit with prices where they are.
Don’t expect governments to fix the problem in a hurry – for all the talk of ‘affordable housing’, affordable means lower prices and that would be political suicide for any government that causes it. If we’re going to have 40 million people in the country, something will have to give, but I do find the whole situation is something of a conundrum.
Functional cookies Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.