Picture du Jour: Should we worry about Australian house prices?

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I am the first to admit that I know little about Australia, other than that many South Africans have made it their home over the past few years and that the Aussies are as sports crazy as South Africans. I am also cognizant of the fact that the country has high debt levels and a huge exposure to resources and China. However, what I was unaware of are the bubble proportions that exist in Australia’s housing market, as illustrated by the graph below, courtesy of Steve Keen’s Debtwatch (via Clusterstock – Business Insider).

Is this a picture one should worry about? Let’s throw it open for discussion and hear the comments from our readers, especially those from Down Under.

Source: Clusterstock – Business Insider, May 28, 2010.

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8 comments to Picture du Jour: Should we worry about Australian house prices?

  • Paul Hanly

    Australia is not the only country with high house prices.

    The Economist interactive house price graphic:
    http://www.economist.com/business-finance/displaystory.cfm?story_id=14438245
    seems to show that if you look at 1993 Q1 as your start ( deep in recession in most countries) then Australia seems to be around the same as Britain, Spain, Denmark and New Zealand.

    If you add Germany the data needs a start date of 2003, also deep in a recession. With this new start date you see that Hong Kong is the big bubble, and Sweden, Belgium, China and France are up there with Australia, although some of the other countries have dropped away with the later start date.

    Then look at the fundamentals for some of those countries, particularly the Euro ones which are having austerity imposed on them because they don’t issue their own currency and Australia looks to have other company that is more vulnerable.

    Demographia’s recent survey of English speaking developed countries also finds that Australian cities are grossly overrepresented in the top 10 most UNaffordable cities, although Vancouver is the most UNaffordable.
    demographia.com/dhi.pdf

    None of this is to say Australia’s house prices might not also be vulnerable.

    Steve Keen has done a lot of work on the private debt impact on demand and on long term house prices in both the US and Australia and the potential effect of either 0 credit growth or actual deleveraging by consumers:
    http://www.debtdeflation.com/blogs/wp-content/uploads/talks/KeenHousingBubbleOrBoom.ppt

  • Anton Porzig

    Our (Australia’s) bankers, top economists and political masters all tell us there is no bubble.
    reason is that for many years and still currently, Australia has built fewer houses than its population growth required.
    we have a high growth due to immigration, especially over the last few years.
    so based on supply and demand this is not a bubble. (And I hope they are correct!!).

  • Hans-Peter Gassner

    There is a bubble in house prices in Australia as measured by affordability (average income/average house price). But that bubble has existed for 20 years. It will only burst in a high-interest environment. Eventually, we shall have that world-wide, but before that, we now have a deflationary environment with low-interest rates, world-wide. The causes of the house price bubble in Australia are several: high immigration, especially from Asia and in particular from China (far too high if you ask me), very high concentration of the Australian population in just a few big cities, social habits of large sections of the population to save predominantly in the form of property, etc. But like all things that are out of sync; eventually the balloon pops and comes down to earth. The longer it takes, the louder the pop. As a very rough estimate, I consider that Sydney house prices, as an example, will have to drop by about 1/3rd to get back into sync with the fundamentals.

  • Winston Wolfe

    I am an Aussie property investor, with skin in the game.

    Our lord and masters, Treasury and the Central Bank (RBA), have denied there’s a property bubble, until this month. Their admission has resulted in our Bureau of Statistics embarking on a major overhaul of how inflation is measured. Previously, it excluded asset prices. Now, the RBA is changing its monetary policy from a focus on containing cpi to 2-3%, to also containing asset price inflation.

    Well, too little too late methinks. We’ve been bubble bound for 7 years. What has driven it? Global credit growth has been greater than global gdp growth, and much of that credit has been attracted to our world’s highest rates and relative resi mortgage security….. Of course, our banks have profited enormously from the punchbowl, and been seduced to raise LVRs and DSRs, and lower documentation…

    In fact, Aussie’s big 4 banks now rely 25% on foreign credit to keep stoking Aussie mortgages ever higher.

    When you compare property price growth to our gdp, there’s no other conclusion to draw, than foreign credit has been the source of our property bubble.

    As you would expect, our current account deficit has found it difficult to reach surplus on the back of highly profitable mining exports….Why? Because our primary income account (which includes interest paid on foreign debt) is growing ever more negative…..it is the primary income account and higher imports, that are fueling our fast growing net foreign debt.

    It is an unsustainable burden for Australian households, a point confirmed by our ever declining household savings ratio.

    Nevertheless, a preoccupation with green eco indulgence is preventing our local governments from approving adequate new dwellings for our 2% population growth. Hence, we have housing undersupply and price growth fueled by foreign credit….

    but, something has to give….and we think occupants per dwelling is it….we’re starting to form larger households….and we’re ever more vulnerable to external shock to inwards credit flow.

    Most Aussie property investors accept the days of above gdp growth are over. However, undersupply has us hopeful yields will compensate.

  • Pedro

    Like every good bubble the growth in house prices was fueled as much by growth in credit as it was lack of houses. Prices started to roll over at the start of the GFC but were saved by low interest rates and grants. Without rising unemployment the bubble wont burst, but if that starts to kick up-look out!

  • Bob

    Eventually the house price value will be a function of income and interests rates. So a more meaningful chart would be a comparison of house prices to income over time. There can be bubbles but the price will always revert to the mean in the long run.

  • Australia is not the only country with high house prices.The Economist interactive house price graphic:
    http://www.economist.com/business-finance/displaystory.cfm?story_id=14438245
    seems to show that if you look at 1993 Q1 as your start ( deep in recession in most countries) then Australia seems to be around the same as Britain, Spain, Denmark and New Zealand.If you add Germany the data needs a start date of 2003, also deep in a recession. With this new start date you see that Hong Kong is the big bubble, and Sweden, Belgium, China and France are up there with Australia, although some of the other countries have dropped away with the later start date.Then look at the fundamentals for some of those countries, particularly the Euro ones which are having austerity imposed on them because they don’t issue their own currency and Australia looks to have other company that is more vulnerable.Demographia’s recent survey of English speaking developed countries also finds that Australian cities are grossly overrepresented in the top 10 most UNaffordable cities, although Vancouver is the most UNaffordable.
    demographia.com/dhi.pdfNone of this is to say Australia’s house prices might not also be vulnerable.Steve Keen has done a lot of work on the private debt impact on demand and on long term house prices in both the US and Australia and the potential effect of either 0 credit growth or actual deleveraging by consumers:
    http://www.debtdeflation.com/blogs/wp-content/uploads/talks/KeenHousingBubbleOrBoom.ppt

  • Winston Wolfe

    To clarify, if our property prices were purely the result of rates, wages, and supply/demand, then they wouldn’t have outpaced wage growth nor gdp in the last 10 years.

    Three things make the last decade different

    1. lenders loosened lending standards (100%LVRs, >30% DSRs, lower lo docs and no doc loans). Some of this was imposed by non bank lenders like Aussie, Wizard, and RAMS. Obviously, the banks don’t do this unless the mortgage insurers back it. And the MIs are generally US controlled. It is their risk appetite that governs the growth rate of Aussie houses. I remember when houses in Brisbane were being financed at 250k, painted and clean, then 6 weeks later, approved for finance for 80k more. That rate of growth doesn’t happen unless lenders let it.

    2. foreigners have channeled capital and yen and US carry trade dollars to our banks for world’s highest rates and low risk resi mortgages. Many see our banks are regulated better than most, our mortgages have full recourse, and our commodity economy is a good proxy for tapping Chinese growth, without the sovereign risk.

    3. Property speculation has increased as a sport. In 1990, investors comprised 14% of bank borrowing for housing. Since 2003, it has been over 30%.

    http://users.on.net/~thefirstbruce/Bank%20Lending%20by%20Sector.gif

    http://users.on.net/~thefirstbruce/banklendingOOPI.gif

    4. Between 1998 and 2004, growth exceeded nominal gdp across Australia, in areas where the population didn’t change.

    5. If the average household size is 2.6, then new dwelling construction growth has been higher than the demand created by popn growth for new dwellings.

    6. Rental vacancies in capital cities have been higher since 2007. i.e. Sydney

    http://www.sqmresearch.com.au/graphs/graph_vacancy.php?t=1

    Points 4-6 support that population growth and undersupply are not the primary driver of house price growth.

    I maintain that excessive global credit seeking optimal risk reward has driven Aussie property growth, with the support/consent of Australian lenders and mortgage insurers.

    The exposure of Aussie property to external shock, was highlighted early May, when the AUD plunged 13%.

    The best outcome as the world delevers, is for Aussie property to stay flat in nominal terms for a decade.

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