Australia has moved from fifth to fourth most overvalued global property market but the overall risk of a housing bubble has subsided, according to the internationally authoritative, but debatable latest The Economist magazine global housing index.

The latest index records only modest gains of 2.6% in Australian house prices over the past year to March (using ABS data), ranking the country 10^th best performing global housing markets out of 18 over 2012 with the top performing market being Hong Kong (24.5%) followed by Brazil (12.8%), South Africa (11.1%) and India (10.7%).

Last year, the index had house prices in Australia down 4.8% ranking it 18^thbest housing market out of 21 global housing markets rated by the magazine.

The magazine warns that housing markets are “notoriously prone to boom and bust” and uses “two yardsticks” to judge whether house prices are at sustainable levels.

“One is the ratio of prices to disposable income per person, a measure of affordability.

“The other is the price-to-rent ratio, which is analogous to the price-to-earnings ratio used for equities, with rents going to landlords (or saved by homeowners) equivalent to corporate profits.

“If these gauges are higher than their historical averages, property is overvalued; if they are lower, it is undervalued.”

The Economist calculates that Australian house prices are overvalued 24 times against average personal disposable income and 44 times against rents.

Last year the economist said Australian house prices were 28 times overvalued against personal disposable income and 38 times against rents.

On the personal income housing affordability measure, Australia ranks fourth behind France (34), the Netherlands (33) and Canada (32) while on a rents measure, Australia ranks third behind Hong Kong (81) and Singapore (57).

The Economist’s index from last year (pictured below) had Australian housing ranked fifth most expensive on the personal income measure and seventh on the rents measure.

Using these two measures, it warns that Canada’s housing market is “especially vulnerable” with a “large bubble now looks set to burst” with residential sales down 15% year-on-year and a steeply declining appetite among Canadians to buy a home in the next two years.

In Australia, surveys regularly report a strong appetite and desire for property, though the first-home buyer market remains subdued.

Looking at the performance of housing markets since the GFC (the fourth quarter of 2007) suggests that Australian house prices have risen relatively modestly  (up 12.2%) compared rampant – and perhaps unsustainable – markets like Hong Kong, where they have more than doubled (109.4%) and India (88.8%), where they are close to doubling in value.

Australia’s housing market performance since the GFC is also well below that of Singapore (24.8%), China (20.4%) and Canada (18.3%).

In comparison, the house price bubble has truly burst in Ireland with house prices on the Emerald Isle down 50% since the GFC followed by Spain (-26.5%), the US (-20.8%)

The Economist writes of a “patchy” recovery in global housing markets over the past year with house prices rising in 12 out of 18 markets.

It notes generally strong property markets in South Africa as well as two of the big emerging economies, Brazil and India.

You often hear that location is paramount when choosing a great investment property. But what makes a good location?

While a lot of factors come into play, easy access to facilities must be near the top of the list.

Walking distance to transport, shops and the café lifestyle is one the strongest trends attracting buyers and tenants. This is particularly so among the growing demographic living in apartments in our inner suburbs.

Australian cities have been ranked by WalkScore

Well, now you can find out how ‘walkable’ your suburb is.

Walkscore.com measures the number of typical consumer destinations within walking distance of a dwelling. It issues scores ranging from 0 (car dependant) to 100 (most walkable) and has recently ranked more than 100 Australian cities and 3,000 suburbs.

With a ‘walk score’ of 63, Sydney comes out on top in the ranking of The Most Walkable Australian Cities and Suburbs.

While a number of real estate websites have incorporated WalkScore and more are likely to follow, the ‘walkability’ index has a number of shortcomings.

Consider the low-scoring regional dweller who enjoys walking their dog on a rural path. Not to mention that what one person considers a ‘walkable’ trip may seem an epic hike to another.

Walk Score’s ranking of the top 10 largest Australian cities:

Here is how our cities ranked:

1. Sydney (Walk Score: 63)

2. Melbourne (Walk Score: 57)

3. Adelaide (Walk Score: 54)

4. Brisbane (Walk Score: 51)

5. Perth (Walk Score: 50)

6. Newcastle (Walk Score: 49)

7. Wollongong (Walk Score: 48)

8. Gold Coast (Walk Score: 48)

9. Central Coast (Walk Score: 41)

10. Canberra (Walk Score: 40)

While this is interesting, what is more important is that in every city some suburbs are more ‘walkable’ than others.

You can check out the complete list of ranked cities and suburb here.

Walk scores are turning up in a number of property portals and agent websites and you can expect to see more in the future.

What does all this mean?

Over the past decade, home values in Sydney’s ‘walkable’ neighbourhoodshave outperformed the rest of the city and can attract a 20% premium.

It was much the same overseas where studies indicate that properties with above-average levels of ‘walkability’ command a premium over homes with average levels of ‘walkability’.

It gets even better…

‘Walkable’ neighbourhoods offer a number of health and economic benefits. For example, a 10-year long study of Australians by the University of Melbourne found that ‘walkable’ neighbourhoods with proximity to shops, parks and public transit improve people’s health and wellbeing.

As our population grows and our cities become denser, I see the importance of easy access to amenities and ‘walkability’ becoming more important.

With more of us trading backyards for balconies and living in apartments, we’re spending more time in cafés and restaurants rather than entertaining at home.

Add to this the fact that 22% of our population are living alone, then the opportunity to stroll up the road to visit their favourite café for a coffee or a meal is particularly important to them.

So when you’re looking at buying your next home or investment property consider its proximity to amenities. As our lives become more hectic and our cities become more congested, many of us will be prepared to pay a premium to be close to – but not right next to – transport, shops and amenities.

There is no doubt that a heap of overseas investors buying new property in Australia is great for our economy.

It provides thousands of jobs in the construction industry and flows international cash into our coffers.

However, there can be a downside for local investors who get caught up in the hype.

International investors are largely uneducated to the ways and value of the Australian property market. They rely heavily on the advice from sales people who use slick marketing techniques to sell their wares.

Overseas buyers can and often do pay too much for property because they do not fully understand the market they are entering.

In addition, the motivation of overseas buyers may be at odds with their local counterparts. As a rule Australian buyers purchase property to provide a roof over their heads and to make money.

While most overseas investors want to make money they also buy property in Australia to assist with plans of migration into the country. They are often also motivated by the need to get their money out of the country they live in because the economy may be too unstable. Australia has a very well established system of property ownership and for foreigners, so even if their property loses value, at least they can be certain they will maintain control of their asset.

From afar they view the Australian property market as a safe haven that has held its feet while global property markets have faltered.

Australia has traditionally had stringent foreign investment laws and although these have been relaxed in recent years buying into new developments is an easy way for foreigners to get a foothold in the market.

Take for example this development (pictured below) on Mt Alexander Road, Flemington in Melbourne’s inner north.

These properties have been marketed to international buyers fetching prices well in excess of $500,000. Once a number of properties have been sold this sets a precedent to determine value of the remaining properties and gives the sales team very powerful tools to market the remaining apartments.

From here the valuers now have data to justify their valuations to the banks to allow funds to be lent against the apartments. The main concern is the valuations have been based on sales to players that are operating under different rules with a range of motivations.

As resales of these apartments begin to hit the market we start to see the impact on the investor. The problem is the foreign buyers who are lining up to buy Australian property are not able to compete in the secondary market due to foreign investment restrictions. Further the marketing incentives such as stamp duty savings and rental guarantees are no longer there. As a result the demand is significantly dampened.

The greatest danger an investor faces is the resale of a new property the first time around because the property value must adjust to a true market value.

For example, unit 1213 in this development was purchased in 2010 for $582,500 and while the market conditions where very strong at the time the recent resale price is out of whack with what happened in the broader market.  The property sold in late 2012 for $476,000, taking almost a 20% hit on its original sale price.

The lesson here is developments where the sales are heavily skewed towards international buyers should set alarm bells ringing for local buyers.

Today I’d like to talk about asset bubbles, but first a little about collectors’ items.

Back in 1986, a company called Pannini released an amazingly popular sticker collection book by the name of Football ’86.

The idea was that for a few pence (ahh, inflation) youngsters could buy a packet of stickers bearing the photos of soccer players from all the major British teams and the respective trophies for which they competed. The goal, of course, was to fill the entire book and show off proudly to your mates.

Cleverly, Pannini often gave away the actual books for free in order that eager kids then felt compelled to buy the stickers. It worked a treat!

Whether or not it was true, there were always rumours that Pannini printed fewer stickers of certain players, and these elusive few became hugely sought after.  A few stickers were made in a special silver colour, such as the ‘FA Cup’, and these also became must-have stickers.

After a while the craze passed, strangely to be replaced by ‘spinners’, which was how the ever-creative Coca-Cola company cleverly re-branded one of the simplest of all toys, the yo-yo.

If you still own a completed Football 86 book in mint condition it would retain some value (£40) as a collectors item, but the market today has once again become relatively small.

Tulip mania

The search for Pannini FA Cup stickers paled into insignificance when compared to what was perhaps the first ever great economic bubble, the Dutch tulip mania.

The tulip mania peaked in 1637, when the price of a single tulip had become as expensive as ten times an annual skilled salary!

While it may seem ridiculous in retrospect, at the time landowners were prepared to offer many acres of land in exchange for the in-demand item: the humble tulip. Such manias tend to be characterised by wild price volatility and hugely irrational exuberance.

Bitcoin bubble

The latest craze of the last four years or so has been the ‘bitcoin’, a virtual currency which owners can store in electronic ‘wallets’. Confusing? Yes, it is a little, although this article has a game stab at explaining the concept. Back in February, bitcoins were trading for only $20, but since then…

Since this chart was produced, over the last weeks, bitcoin prices have been all over the place. From a peak of well over US $200, the price quickly swung to a low of just $105, yet by Wednesday the price had rebounded to $175 before plummeting again to $120 on Thursday.

The extreme volatility caused one major exchange to call a 12 hour halt to trading and has caused skeptics to question whether an item with such wild swings in prices can even be referred to as a “currency” at all.

The total supply of bitcoins in circulation today is said to be worth around $1.3 billion. Where that figure will be in 6-12 months time is anybody’s guess.

The end of the gold standard

The problem with a virtual currency is that its value only holds up while those trading it hold a faith in its enduring value.

One of the greatest challenges facing us as individuals today is that our actual currency – our dollars and cents – are in a similarly precarious position. Since money is no longer backed by the gold standard, over time there is a risk that the value of cash diminishes materially.

History has shown us that over time, our currency becomes severely devalued as its worth is destroyed by the ‘silent thief’ inflation.

This is no accident, for the RBA in Australia has a targeted range of inflation of 2-3%: it is actually the policy to devalue our currency over time.

Confusingly, this presents us with a dilemma, and Ben Bernanke in the US highlighted how we often spend more time thinking of where to put our money (to avoid its value being inflated away) than we do thinking of how to put our money to productive use.

What to do? Assets of enduring value

With the gold price having been hammered by 23% since September 2011 and the great gold price bubble of the last 12 years finally appearing ready to deflate, investors are finding a need to look elsewhere.

The reason holding shares in the industrials index can be a smart idea is that profitable companies will always have value.

Every day people will up and eat their cornflakes, and as an owner of shares in all of Australia’s major food companies, you can breathe a great sigh of relief.

Others turn to residential property as another example of a ‘tangible asset’ in which to store their wealth. It is certainly a proven investment strategy, but I’ll add one caveat: real estate, just like bitcoins and tulips, is only worth what someone else is prepared to pay for it. Therefore, you should only own property where there is a huge demand and a growing population.

In recent years, some groups have tried to organise a “homebuyers strike” in protest against house prices being expensive in the major capital cities (at least, I assume they refer to those capital cities, because elsewhere in Australia, property prices can often be reasonably cheap).

The logic is flawed…

One might as well try to organise a strike on breathing.

People will always need somewhere to live close to employment and city centres, and as the population booms, so does the demand for quality property.

Surely the future for Australia’s housing affordability should be focussed on transport and infrastructure so that we can use the vast size of the country more effectively as the population looks set to increase from 23 million to a staggering 40 million by 2050.

But while we continue to obsess over how we can shoehorn millions more of us into a handful of popular beachside and inner-city suburbs, prices will continue only to move in one direction.

David Adams