Australia's property bubble: it's here

Hi Chris,

Valid point you make about Australians changing the way they think to consider more property "sharing". I was listening to Ross Greenwood talking recently and he was throwing some statistics about. You may (or may not) be surprised to learn that Australia's houses are getting larger and emptier. In fact, as a nation we have the biggest houses with the least no.of occupants in them. More single households than ever before (in part due to increasing divorces and single parent situations) mean that there is less "sharing" going on, for sure.

Also agree that our cities aren't entirely unaffordable. It's just that many FHB's have to start off in areas a little further out than where they desire to live, or else buy a unit instead. Loads of suburbs in Sydney where you can still buy a house under $600K (Sydney's current median)- but hey, not everyone wants to live there. C'est la vie!

Definitely a rising market here in Sydney, at least across every single suburb I'm currently working in (and I cover a very wide area). Reminds me of 03/04 with high demand/low supply issues. I'm also on the selling end, attempting to sell some land lots privately and I've been inundated with enquiries. Sydney's waited some 6 yrs for a turnaround and this appears to be it.

 

Could someone enlighten me on basic economics, please.
The price to hire a trolley at Sydney International went up from $2 to $4 that is 100% increase.
The median price of houses in Sydney went up by 10% and we call it a “bubble”?
I have learned one thing over the years. You do opposite what media is telling you.
GFC - what a golden ride it was for me. Thank you Mr. Murdoch for your gloomy articles.
Current number of articles about booming RE in Australia is just to feel up the space and make exiting reading for masses. All to replace doom and gloom articles. Nothing has changed, nothing to see here, people move on
Prices of RE will always go up the same way as bread and milk. Why? Cos they made of materials which go up as well. It happened in the past and it will continue to happen for very long time to come.
Naturally after every dip there is a rise, after every rise there is correction but I wouldn’t call it “bubble” or the end of western civilization. I call it a cycle.

 

The main people that are suggesting that Australian property is in a bubble are not suggesting it's a recent issue - they are implying it is a multi-decade bubble that has built up, the recent 10% gains has just pushed a little more air into it.

Actually the cost of the materials doesn't go up at all, it's the value of the money that goes down against that material (fiat currency being debased by inflation). A cow is still a cow, bread is still just bread, and houses are still houses. They don't change - the money does.

The price only went up because the money supply grows, which causes inflation, but kicker about whether you are making "real" returns is how you calculate inflation. If you take the RBA at their word and say there is 2 - 3% each year then we are all making a killing with our house prices growing and stock portfolios rallying.

Of course if you look a little deeper into what is included, and more importantly, what is EXCLUDED from the RBA's inflation figure - you might not feel as wealthy given the real cost of living (for things like milk, bread and houses) tends to go up much faster than the quoted RBA's inflation figure.

Now I assume most of you were already aware of the obvious, in that that "inflation" (a symptom of a growing money supply) and prices are linked, but the question you really want to answer is what is causing this inflation? and is this cause sustainable?

You are right, and what goes up must come down, but what goes up normally comes back down to where it starts, at least in a "real" sense (as opposed to a nominal sense).

So the next question is, how far up are we? and where is the start in the nominal sense?



Also just for giggles I decided to whip out trusty excel and see if I could see some correlation between margin lending credit levels and stock market prices over the last 10 years, here are the results using the RBA's credit aggregates vs the XAO index:

​

Looks reasonably similar to me, who knows, maybe there is something to this amount of debt in the system and prices thing.

I'll leave those that are interested to mock up their own excel sheets to see if they can find a correlation to household debt levels and housing prices...

 

For those who think there is a bubble now, try this:

Business Spectator - Have Sydney house prices risen? - Blog - Christopher Joye

Although, I had thought we'd also made reasonable gains in the last year compared to Sydney's flat market for at least the previous 5 years (level or loosing against inflation).

Personnaly, I don't think there's much of bubble, where just heading up the cycle again (you can tell by the number of real estate shows coming back to the TV). Prices will keep going up (on average) because, as Chris points out, there's more money around and inflation will do it's job. If there is a bubble, it's in the ever inflating local and state government charges - they are beating inflation.

If the same logic was applied to wages, people could say we have an income bubble. Bet they wouldn't want to pop that one!

The challenge is really can you leverage up far enough with assets (eg, IPs) to keep ahead of inflation and holding costs?

my 2C, Dave

 

Based on what?

Yeah but for how long?

LOL - that's like saying we don't have an obesity epidemic because we have lots of shows on TV about losing weight!



I get your point, but TV isn't a leading indicator, it's a lagging indicator. It follows trends.

Sure TV may have a reinforcing effect, but TV doesn't play a role in changing financial realities, it only plays a role in manipulating market perceptions and facilitating manias.

That's not my point at all. I was just stating that was what has happened in the past - I'm in no way implying that is what will happen in the future (my longer term view is actually quite the opposite).

There is definitely an issue with government - though I wouldn't call government charges a bubble as they are not determined by supply and demand - though I would call government itself a bubble.

Government (like in most western countries) has it's fingers in way too many pies, and is just far to big/inefficient/ineffective to be justified in taxing the amount of economic resources it does.

But this is part of the end game of large bubble under a Keynesian system, ie the government steps in to bail out the bankrupt private sector, but in turn it bankrupts itself, forcing it be downsized just like everyone else.

At the end of the day all levels of society, individuals, households, businesses and government are all beholden to the realities of financial laws - in that debts must be paid, ie long term consumption cannot exceed production.

That's why getting rich quick off a negatively geared, buy and hold property strategy doesn't work in the long run, unless you are aware you are just speculating, in which case to make a profit you need to time the market, and your gain can only be achieved in aggregate with someone else's loss. Granted this winner vs loser prospect isn't apparent in the short run, and only becomes obvious when you look at a credit fuelled trading bubble over the long run.

Also the losses aren't necessarily born by one individual, as in that an individual who bought a deflating asset may be leveraged beyond their capacity to pay in which case they go bankrupt and pass the loss onto the lender (often a bank), and if enough people do this it will collapse the banking institution that lent the money which will mean loses for stock holders, and if the government bails them out the loss will be transferred to tax payers, who may refuse to pay the taxes at which point the central banks print money which transfers the loss via currency debasement (aka inflation) to anyone who is holding the currency - but ultimately the loss needs to be realised.

When it comes to speculative trading someone needs to lose, because nothing is being produced by trading, which is why it is such a problem for countries if everyone in an economy is resting on their lorals in that they are making a fortune from the credit fuelled growth of their housing or stock portfolios, and in this illusion of wealth they decide they can reduce how much work they need to do to sustain their lifestyle, but nievely do not account for the change in credit based money supply.

Of course when this credit based money supply contracts you have what is being experienced in the US and some countries of Europe, and on the flip side you have the Asian sweetshops who have been the creditors in most cases and are now the production centre of the world and as result will no doubt soon see reasonably large currency appreciation given most western countries have cornered themselves into position where they will have to debase or deflate theirs.

We do have a wage bubble! It's wrapped up in the same credit bubble driving other asset price growth.



And that is part of the reason why so many things are being outsourced to other comparatively cheaper countries.

Rest assured if a system wide credit contractions begins, there will also be downward pressure on wages because business profitability will fall, but most economist subscribe to the though process that "sticky" wages prevent wage deflation, but in instances where wages aren't allowed to deflated like other prices in the economy, you get rising unemployment - as has been seen around the world.

But at the end of the day wages are just like any good or service in an economy susceptible to price change given changes in the money supply, but once again people don't need to look at falling wages as a bad thing if you are still able to buy everything you used to be able to buy, but just with fewer dollars.

That's one way to do it, but this falls back under the category of being a speculating trader, in that if you take on more leverage than the average amount of leverage in the economy (assuming the average credit growth is positive) then yes it is likely you will be better off given that the leveraged gains you will make will be greater than the inflation within the economy, given that when people take on leverage this cause credit growth which causes inflation.

But of course this logic comes crashing down if average credit growth within the economy (holding the monetary base equal) turns negative, because then what will happen is you will have deflation within the economy given the contracting broad money supply. Thus the reason why people say debt is bad during a deflation spiral...

So if you want to be a good trader within a credit bubble you want to have as much leverage as possible on the upswing, but none on the downswing.

LOL his analysis has chosen quite a select window to sell an agenda, and his focus on Sydney is due to Sydney's property bubble being largely experienced in the 10 years prior to 2005.

I won't disagree that the Sydney market was very flat over the last few years, and was overdue for its turn on centre stage of Australia's property mania, though to imply that there is no "bubble" because of a couple of years of flat growth really misses the point of what a credit fuelled bubble is.

Here is a graph that tells the story of very strong Sydney price growth prior to Chris Joye's very narrow statistical analysis.

 

Chris,

Unforetunately I don't seem to have as much time to study econimics as you. But as you point out that's older data. It took until mid 2009 for Sydney to get back to that level when adjusted for inflation - ie it went nowhere in 6 years while wages went up faster than inflation. And now a slight step up makes a 'bubble', media frenzy and public hysteria - give me break.

While there's a shortage in supply (through bad policy), and people keep getting paid more, and so can loan more, prices will rise. And as the local and state governments (a bubble in themselves - I can relate to that) are addicted to the income from developments, new house prices can't drop unless they find a new drug (even building smaller houses gets hit with the same fees, and then let's add a carbon tax to push costs higher).

I'm not into speculative trading of property , its a long term game. It's not just economics, it's about time and leverage, and not getting caught out like a speculator might.

Let them print money - everything goes up except my loan amounts (caveat: so long as interest rates don't go back to 12 - 15%, that's not fun).

Cheers, Dave

 

The probable policy change that caused the lift in prices above the long term inflation rate:

Super changes 'pushed people into property' | The Australian

Not so much a speculative bubble as a reaction to policy - if it turns into a speculative bubble (like the one off the back of the FHOG in 2002) will be interesting to watch. I think Mr Stevens has is job cut out for him, trying to contain inflation with interest rates, when the government does these things.

Dave

 

Dave,

Thanks for the reminder. It also explains why Mr. Stevens goes to the extremis and appears on Sunrise show and tries to put out fires which government started. After all, he works for the government. I am also watching how people are tying to focus on Chinese buyers and blame them for the “bubble” Short memories, 1997 Honk Kong, thousands of citizens sold their 2 bedroom units and escaped with millions in cash to Australia. No problems then so why even worry about few overseas investors coming to Australia now?

I think Mr. Stevens knows he can't push interest rates too fast (economy still fragile) so he is doing PR job to create this "bubble" image so people are exercising restrain and don't jump into the RE.

 

Hi Dudek,

Interesting point on foreign investment, those from HK bought property and moved in. This time is different. There is a trend (apparently) for overseas buyers to buy property for their children when coming to Australia for study, even if the property is vacant for a couple of years beforehand - effectively taking houses out of the rental pool when there's already the lowest vacancy rates in years.

Chinese (and Indians) are identified and make an interesting example. They have been able to borrow for about 1% and the yaun is pegged to the $US. Some 'economic experts' are forecasting $AU parity with the $US by the end of the year (ie, we're putting rates up). Fancy a cool 10% gain in a year without needing a tenant or a rise in the market?

Also changes to tax rules - if you're a foreigner and own X number of properties (5, I think it was) you are carrying out a business and become an Australian resident. Makes you wonder how that can be used (other than the ATO getting taxes): 5 (cheap) IPs, Aussie Resident, bypass immigration queue?

I have no idea if either of these issues will actually impact prices compared to the changes in super - I can't find any stats and expect the numbers are too small to make a difference. ... I'd just like the leveraged 10% gain for myself!

cheers, Dave

 

And a cycle it is.
Property prices will go up, they could correct a little or stagnate for a few years and when rents and wages catch up the new property cycle will begin.

 

You speak of business cycles as if they are just the natural way of things. So what causes a "business cycle"? why is there deflation during recessions? what causes that deflation?

Why? Why won't they go up but 50% this year, or down by 50% next year?

I'm going to argue prices go up (or down) due to monetary economic variables NOT just because they have gone up in the past.

After all we are talking about "prices" and prices are set in a given form of "money". So if you are going to speculate on prices you are directly giving your opinion of "money" which it seems you have not made much mention of when it comes to your speculation of future property prices.

If housing "prices" can come down, so can rents and wages, because once again rents and wages are not assigned prices based on price history, they are assigned prices based on monetary economics (money supply).

However before you say, "but wages almost never come down", that may be true, but the repercussion of wages not falling is rising unemployment because workers refuse to take pay cuts to make the businesses they are working for profitable again, and if unemployment spikes high enough and stay high for long enough periods wages do eventually fall because people can only stay unemployed for so long. You will see this in countries like the US, Spain, Greece, etc

With rents it is the same thing, rent may be sticky in the short run, but if vacancy rates spike and stay high inevitably rents fall. This is often more frequent and obvious in commercial real estate markets, but the same principle applies to the residential rental market as well.

 

Because prices increase or fall in small increments and market conditions change during that time therefore resulting in a flatter response.

I agree

I agree, but as we all know the rental shortage is not being addressed
and at the rate of demand we're experiencing there is only 1 direction for rents to move and that's upwards...

 

Traditionally yes, price fluctuations tend to be small, but that is generally because changes in broad money supply also tend to be small.

However, quite often throughout history these price changes can be rapid in either direction (hyperinflation events or crippling deflationary depressions), to imply that prices only move in "small" increments ignores how the system really works in that when things are stable so is the money supply, when there are bubbles, manias, crisises going on changes can be rapid and extreme. We are presently in the later stage.

Though with this in mind, it's interesting to note the US Federal Reserve only recently exploded their monetary base (of course the quadrupling of the monetary base had little effect on broad money supply because the economy is the middle of a debt deflation spiral)... but in light of events like this, to imply that we are going to revert back to "normal" growth, "normal" levels of inflation, "normal" interest rates, or stable prices is highly unlikely. The ECB and BoE have also opted for similar strategies, and I expect in the not too distant future the RBA will be forced down the same path.

Now I'm not saying that Australian property will crash tomorrow, or we will hit hyperinflation on Tuesday, my point is simply that these are massive fluctuations in variables that are traditionally very stable and I think it's nieve to expect that there won't be future repercussions of these actions. And to assume that times are anything close to "normal" will be a very dangerous assumption to make over the next few years.

So I think people need to stop worrying as much about what the latest newspaper headline is telling you about our housing shortage or mineral boom - we need to start focussing on what value of money is likely to do over the next 6, 12, 24, 60 months, both here and overseas.

Once again it seems you are focused on the micro supply and demand situations, I'm trying to imply that there are macro elements, like "money supply" that also make a massive difference in what rental prices will be.

My point is, I know in economics 101 it says that if there is a shortage prices go up, but that is a VERY simple way of looking at an economy, the reality is much more complicated than that, you can very easily have a shortage of a product and its price fall.

This is a bad example, but look at the oil price - last time I checked we are still running out of it at the same pace we always have been the priced fell 75%? Why?

 

Chris

Bad example indeed, you could compare the price of oil to that of shares if you like but not to property.

I was talking to a REA today and asked them if they had any vacant properties. They did have 1 before Easter and it was vacant for 1 day.
50 people had turned up to look at it.

If your're renting and your landlord decides to sell you need to be in the right age group, to have a well paying job and to have very good reference or you won't be able to find another place to rent....

The rental situation out there is VERY scary.
It's a good time to be a landlord though because any tenant who causes trouble doesn't pay the rent on time etc etc he's out.
There are plenty of tenants to choose from and any vacancy will be minimal.

 

Well ironically I think oil has more in common with property than shares. Oil is a commodity just like houses. At least businesses "produce" some form of on going output.

This is just ancedotal experience. And more importantly has nothing to do with my point about prices being set my money supply.

I'm not saying that there aren't lots of people looking to rent at the moment, I actually agree that there are, and I actually expect that more and more people will begin to look to rent as interest rates go up, but inevitably if credit levels (broad money supply) begin to fall because interest rates are getting too high for people to want to borrow (or lending condition tighten), then rents too will fall, along with housing prices and all other prices in the economy. They won't fall as much as housing prices (because they aren't in the same bubble housing prices are in), but they are still likely to fall if there is a money supply contraction.

 

Guys another one = Chinese whispers: they're driving up housing prices

Chinese whispers: they're driving up housing prices

 

I was always under impression that 1% countries’ official interest rate does not mean banks will give away money for nothing.
I am not sure if anyone can borrow at 1% from the bank, I may be wrong but I think banks need to make some profits.
It all sounds very easy but if you walk to any bank in lets say HK or Tokyo how do you convince a bank manager that you should get A$600K to buy property in Australia? I would think some rules apply and not everyone walking from the street can ask for such amount.
I think this 1% borrowed overseas and invested in Australian RE is more or less “an urban myth” I am not saying that is does not happen but number of such as transaction must be minimal if you ask me.
If it can be done today, people have done it in the past and no one made such as fuss about it until now. I know large number of units at Gold Coast is owned by foreign investors, not necessarily Australian citizens.

 

What Is Carry Trading?

 

Chris
Was Steve Keen your lecturer?
Perhaps you should follow Steve Keen to Mt Kosciuszko and see if he's got any fresh ideas...

 

LOL - no he wasn't my lecturer! I wish...



I remember trying to engage my monetary economic lecturer in this very debate back when I was studying it, but he was a hard lined Keynesian, and had more important academic research to do. Typical...

That said he wasn't a bad lecturer, I just differ on the traditional Keynesian opinion that the current system is sustainable in the long run.

On the topic of Keen's walk - I was actually seriously considering doing the whole 200km+ run/walk with him, I even started training for it and started doing 10km runs every second day, but I have since decided I can't afford the time despite the awesome chance to spend a week with some of Australia's best and brightest.

... that and it is like 250kms over 8 days! I'd like to think of myself as pretty fit, and I'm sure I could complete a day, and maybe grind through a second - but backing up everyday!



I tip my hat not only to his gusto to challenge conventional wisdom, but also his fitness!

This is the RBA's way of saying, beware of the REI spruiking. I tend to agree - facts not opinions matter!