A debate of sorts has broken out between various real estate data collectors as to whether Australian residential property is in a bubble, or whether prices have been affected by a perfect storm of first home buyers and wealthy investors.

Earlier this week, Australian Property Monitors, which is owned by Fairfax, reported that median prices rocketed nationally by 5 percent in the three months ending December 2009 – over the year, APM found that median prices increased by 12.1 percent. The rise appeared to be spurred by first home buyers who, courtesy of a ludicrous boosted Government stimulus and the ability to borrow upwards of 90 percent of the purchase price of the property drove low end properties higher. The increase was also partially furthered by wealthy top-end buyers who splurged on luxury properties as the stock market rebounded by almost 50 percent of its March 2009 lows.

If APM’s data is to be believed, there is little argument that certain suburbs are experiencing a once-in-a-generation bubble – led by East Melbourne (up 59 percent), Sylvania Waters (up 54 percent) and Perth’s Churchlands (which rose 44 percent). Remember – property prices have traditionally tracked inflation over the past century. Last year, inflation rose by less than two percent. Either there has been a dramatic paradigm shift as to how Australian’s determine the intrinsic value of residential property, or prices are due for a serious correction.

However, it appears that not all are in agreement. RP Data (a competitor of APM), which is set to report its recent price findings today, criticised APM’s figures. RP Data’s National Research Director, Tim Lawless, claimed that:

“the figures released by APM are unexpectedly high and are likely to reflect a change in the types of properties that are transacting rather than true capital growth…a resurgence of interest in higher priced properties combined with the fall back of first home buyers is likely to have played a role in inflating the latest growth figures.”

Crikey and Business Spectator commentator, Chris Joye (whose company Rismark operates a venture with RP Data) took a similar view, telling Fairfax that:

“the median price indices are being artificially boosted by the fading of first time buyers and the return of up-graders buying more expensive homes.”

Joye and Lawless are correct in pointing out the weaknesses in using a simple median price measure. A median value is not the ‘average’ of all sales but rather, the middle ranking of a data series. There are far more ‘lower’ priced properties in Australia than there are ‘expensive’ properties. It was these ‘lower’ cost properties which benefited most substantially from the First Home Owners Grant and therefore, would have led to a disproportionate effect on median figures. So while the median property price may have risen by 12 percent, that does not mean that on average, property prices increased by 12 percent in 2009. (This thinking appeared to escape APM’s Matthew Bell, who seemed to confuse the concepts of ‘median’ and averages, telling the Financial Review that “houses priced at more than $500,000…drove up median house prices at the end of last year.”)

Regardless of the exact numbers, prices in 2009 appeared to increase substantially after a weak 2008. Easy credit, low inflation and a surge in buying interest from overseas parties (especially China) led to a rapid re-inflation of a residential property bubble which never really deflated like the United States, England or Ireland. With the exception of Perth, every Australian capital city has recorded record high prices. Meanwhile, US property continues to slump with new home sales falling by 7.3 percent in December. Amazingly, the median price of a US property is US$178,000 – less than half the Australian median price level.

Whether or not APM or RP Data is correct, few would doubt that Australian property as an asset class has outperformed all its traditional metrics since 2001. Based on average yield or price-disposable income, it appears that residential property is obscenely overpriced, and sadly purchasers, nor their cheer-leading government, seem to care.