September 10, 2018

Australian Markets Weekly – Tobin’s Q: Alive and well in Australian housing

Nationwide dwelling prices have fallen 4% since their peak in November 2017. How much further will prices decline? As you’d expect there is no simple answer.

For the full details, download the full report: Australian Markets Weekly 10 September 2018


  • We look at various valuation methods for residential property, with a particular focus on Tobin’s-Q. Tobin’s Q posits that an asset price should be anchored by its cost of construction or replacement value.
  • There is strong evidence to suggest Tobin’s Q has been alive and well in Australia’s residential property market. The surge in the Q-ratio for Units to around 30% 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% overeconovalued, 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% above their long run trends at Q1 2018.
  • 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.
  • NAB economists see a further modest correction in some dwelling prices ahead – the modesty supported by the low level of unemployment and mortgage rates.
  • The AUD/USD saw further selling pressure on Friday, thanks to the combination of heightened likelihood that President Trump will impose additional tariffs on Chinese imports and faster growth in US wages in Friday’s US payrolls report.
  • The President threatened to sharply escalate the US trade war with China, saying his administration could move “very soon” to impose tariffs on $200bn in imports from Beijing, with levies on a further $267bn in products “ready to go on short notice”. The AUD/USD tested 0.71 on Friday and has been trading close to that level this morning. While the USD benefited from safe haven and rates support, the AUD was Friday’s standout loser in the FX space.
  • While the market is on high alert to US tariff news, local and offshore data will also be closely watched. Locally, after today’s speech on evolving household risks from RBA’s Michele Bullock (Assistant Governor, Financial System), there is the NAB Business Survey tomorrow, the monthly Westpac-MI Consumer Sentiment on Wednesday (both of these releases were polled after the change in PM), then the ABS Labour Force report on Thursday (NAB forecasts 5.3% unemployment). Offshore, China releases its key monthly activity reports on Friday, while the US releases its CPI report for August, another key signpost for global rates and inflation watchers.
  • Australian economy forecasts: After last week’s Q2 GDP, NAB will release updated economy forecasts on Wednesday in NAB’s The Forward View – Australia. Please email the economists if you would like to receive a copy of this publication.

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