Australia's property bubble: it's here

... It’s official: 60 per cent of investors believe Australia has a property bubble. A confluence of housing shortages, low interest rates, speculative fervour and last year’s move by the Rudd Government to relax foreign ownership rules on real estate have turbo-charged house prices.
But as John Maynard Keynes famously said: “A market can stay irrational longer than you can stay solvent,” and those looking for an imminent correction will find little evidence for it in investor attitudes.

... Another Investor Pulse reader wrote: “So much for Rudd's 'working families'. Australians should get priority over foreign investors for what limited housing we have.
How can Australians compete when Chinese borrow at home at 1 per cent? The Australian property market is strong and doesn't need to be propped up. The Government should act now to stop this misguided and UN-Australian policy.
Shame on you, Mr Rudd, for selling out on Working Families.”
more... Australia has a property bubble: investors

 

Ahhh...The memories of "Working families" from Mr Rudd's '07 election...

 

The problem with property is the lack of liquidity, so even if you foresee the needle that will pop the bubble, you'd have to see it many months in advance to be able to get out before some nasty falls start impacting sales price.

I'm reading that many areas where property bubbles have burst that the average time on market can be in excess of 6 months+.

So whilst I'd agree that Australia property bubble might not necessarily pop in the short run, you still have to have quiet a bit of belief in both Australia and the world to think the bubble is guaranteed to have at least another 10%+ in it to cover transactional costs and ROE, and a lot of self belief to think that you will see the needle coming and head for the exit before everyone else.

Hell no. I say sell the property to foreigners and let them ride the slide! Let the Chinese banks hold the bad loans!

Houses should become our biggest export actually! That would help save our economy, not to mention also give our government incentive to finally deal with ridiculous government interventions in the housing market.

I say it's our patriotic duty to sell to foreigners!

 

I was reading one of the 140 replies to the news report and came across this item. We may have a housing shortage, but we are not filling houses efficiently. Hundreds of thousands of homes have empty rooms. Many houses are single occupacy. Even my home has an empty spare bedroom. Perhaps we should accept the idea of taking on boarders.



Johny.

 

This is actually why I believe that a housing shortage is non-sense given that if first home buyers can't afford to buy their own home, what do they do - they keep living with their parents.

There are always alternatives to buying a house, yet people that keep pushing the "housing shortage" argument seem to imply it with a sense that people MUST buy or live on the streets, therefore prices are supported.

For me personally, I'm 25 now, and I'd say at least 70% of people my age that I associate with still live at home, with less than 2% having purchased their own home. Why do we live at home? it's not because of mum's cooking... it's because it's just too bloody expensive to live out of home unless you NEED to live out of home.

I personally have live out of home on a couple of different occasions, but at the end of the day I always draw the same conclusion, I "want" to live out of home, I don't "need" to live out of home, and the small number of benefits of living out of home don't justify the very large cost.

And in our debt ladened society I think the penny is finally dropping for most that we need to forego our wants and focus on our needs if we are planning to effectively build wealth for our futures.

*end of personal rant about housing shortage*

 

You're right - it's never black and white - and there are a huge number of variables that come into play.

All I'm saying is that in life financial reality tends to have a habit of forcing people's hand, as in if people can't afford it they can't afford it. However this is something that is generally only experienced at the margin, it's not the case for the majority, as in your average family man that keeps his job won't notice any real difference other than a bit more pressure at work.

However it is often the deals that are done in the margin that set the prices for the majority, as in even if every single person who is currently renting is able to continue to rent (ie the majority) while just those looking (small percentage) stop looking then rents plummet. Of course the flip side is true if loads of new renters enter the market.

Anyway was just reading this...

Negative gearing creates investor boom

This could well be one of those needles spoken about above.

 

This is such an ongoing argument between investors and alike in Australia, and I agree the media certainly doesn't help the situation.
However it doesn't discount the fact that there is a massive under supply of property in Australia, Housing industry assoc. of Oz suggests that there is a current undersupply of 200,000 properties required based on current demand, and that we will need over 1 million properties over the next 5 years just to keep up with current demand. The unfortunate thing about this is that currently building approvals in Australia are only approx 145,000 PA. This means we are still falling 55,000 + properties short PA just based on current demand and with population increasing by 450,000 people last year alone, this isn't likely to get any better any time soon.

This along with the changing trends among households, the avg number of people per household has decreased massively and people are preferring to live by themselves. So no matter that buying is becoming unaffordable for many of gen Y and after, they will still tend to rent, which increases rental yields for investors.

There is a definite housing shortage, made worse by people preferring to live in smaller households and by themselves. Although Australia is one of the most unaffordable places to live in the world and there is expected to be far more growth and the property bubble may keep growing for a fair while yet. The current supply demand issue just can't be looked past.

Although I certainly don't believe that property will continue to grow 10% PA on average consistently and doubling every 7-10 years forever, for the foreseeable future, the growth seems to be sustainable, especially with consumer sentiment the way it is.

Anyway, just my two cents worth.

 

"Although Australia is one of the most unaffordable places to live in the world..."

Who told you that?

 

Todd your argument is the popularly held one in Australia at the moment, and it is probably one of the large reasons why prices are continuing grow. So I can't say I disagree with your logic in the present market.

However I think many of the popularly held beliefs I come undone when looking forward into the future by assuming that the way things have been will certainly be the way they are in the future.

I'm not saying that the bull run in Australian property won't continue in the short, potentially even medium, term. However actions have consequences, and financial realities will inevitably come home to roost (ie debts inevitably need to be repaid, and credit growth can't be exponential without inflation). When this reality is realised we will be left with a credit bubble that needs to either contract or be inflated away, but ultimately the "wealth" people had perceived to have built up will be shown to be what it is, "just credit based inflation".

Once again, just because recent trends (the last couple of decades) suggest that the number of people per household will decline, doesn't mean that will continue to be the trend of the future.

If credit growth is stifled or contracts, quite the opposite will happen out of necessity and prudence. But once again this centres on my belief that financial reality dictates decision for many people, which infers it doesn't matter if people would "prefer" to live in their own place, they can't afford to, therefore they need to share.

 

Hi Troppo,

There was actually a very recent report done on this, which talks about the most unnafordable places to live based on incomes, understand this is only based on a few countries:
Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. They surveyed 272 markets within these countries, Australia was found to be the most unnafordable

Of the top 6, australian cities held 5 of the spots,
1. Vancouver
2. Sydney
3. Sunshine Coast
4. Gold Coast


7. Melbourne
9. Wollongong
10. Adelaide

''The average household would be required to pay more than 50 per cent of its income to service a new mortgage on the median-priced house in Sydney or Melbourne,''

This is the link if you want to take a look, interesting reading

http://www.demographia.com/dhi.pdf

 

Boy did I get hit on the head, last time I mentioned Demographia!




J.

 

Toddp,

You can prove anything using statistics.
Those 6 countries you mentioned above do not paint the whole picture.
If you compare prices in Europe, you'll discover that OZ is still dirt cheap (incl. Sydney).
Sometimes I wonder why statisticians do not mention Europe...
Actually, the most expensive/unaffordable cities are Moscow,Tokyo and Hong Kong.

 

HI Troppo,

I agree, it doesn't paint an entire picture, and it is odd that Europe isn't included, as I mentioned it was only over 6 countries, so was a limited study based on the world.
Though I suppose the point is, it is a reality in Australia anyway, that property prices are very unnafordable for many people and that the growing rental rates is continuing, forcing rental yields up and putting more pressure on prices.

I believe this will have a further effect of increasing the gap between the Rich and middle class also. As prices keep going up, (even if only over the next 10-20 years) only the wealthy will really be able to afford investment properties, and everyone else will need to be renting. Rental yields will go up, investors will remain interested and Landlords will get wealthy.
I completely agree with you by the way from your first post here, I don't believe we should be selling so much of Australia to the Chinese. I hate seeing us sell our assetts. Scary stuff.

 

It is a market reality, that Australias population is booming and expected to double over the next 30 off years. At the same time, building approvals are down, and the government isn't be proactive about this population growth and are stifling supply even further.
This of course may change, however I agree with you, that this 'bubble' has the potential to keep expanding over the medium term.
I do find it difficult to believe that there will be a massive correction even in the future; a bursting of the bubble, but more so perhaps an extended period of stagnancy in the market might be more likely, while other parts of the market catch up.

I agree, this trend may change, however the question is when, I can't see it happening in yours and my generation (y) and the following generation any time soon. Also the credit generation that we live in, we as a generation tend to find ways to fulfill our immediate needs, by using credit.

I believe there may be a few smaller bubbles which may pop over the next couple of years. For some people the most recent government stimulus has given first home buyers the opportunity to get into the market, where perhaps, the reality is they shouldn't have in the first place, I believe there is a risk of a bubble to pop in some areas that have been flooded by first home buyers, where they may come a point where these buyers start defaulting on loans and a number of receiver sales might take place. I think this will only happen in certain areas however.

Something I was reading the other day is that 50% of all generation Y still live at home. Which is an afforadability thing being single, however once people tend to get hooked up, married etc. The 'want' for moving out, as Sim was talking about is very real and most often in my experience more real than whether they can afford to or not and people just tend to use credit to be able to afford it.
I understand that you still live at home for this reason, but I believe you are in the minority with a good head on your shoulders that can think with logic and realities rather than give into the 'I want it now' mentality that is so prevalent among most people our age.

Once again, people just get caught back up in the rat race and full of bad debt.
It is sad to see it happening to so many people I know, and no matter what you say to them or show them, the lessons they have been taught by parents and school, just is too strong.

 

If prices keep going up it will be because people have increased the size of mortgages they are willing to take on to buy properties, which will increase holding cost which will reduce net yeild, which will ultimately cripple cashflow (assuming that wages and rental growth don't grow ATLEAST as fast as the rate of capital growth), forcing IP owners to sell off equity to cover the short fall (of course they will have planned to still sell at profit), but of course if all IP owners are constrained by this financial reality this will greatly increase the number of sellers, with only few buyer being able to obtain credit to afford to buy due to very high prices, which would create a situation of lots of sellers and few buyers, prices would fall dramatically via a deflation spiral back to rational and profitable levels.

Of course I don't believe this will happen at all (or at least won't get too much worse than it is now), as things can't grow exponentially, everything operates in balance. Things can get out of balance, and stay out of balance for quite extended periods, but ultimately everything finds its way back to equilibrium.

I hate that we are selling out too, but unfortunately in many cases they are much more successful at being profitable than we are, therefore they deserve to be the ones running our businesses as they will maximise the returns.

And in many cases of forced sales we are the ones who made the malinvestments using debt, which ultimately made us vulnerable to those that use their capital more effectively without the need for debt.

So if we are to have any chance of stopping the buyouts we have to at least be in a position of power, which means we need to have the ability to say no without it affecting operations, and unfortunately many business sunk themselves into financial trouble which meant they had to negotiate from a desperate position, and we as a country are so indebted that we don't have the ability to fund our own local projects despite their potential profitability.

I completely understand your micro economic arguments, and I don't disagree that our population will grow and there may well be a housing shortage, but my arguments about property prices falling has got very little to do with micro economic variables (not that I haven't considered them).

I can't help but feel that so many of the advocates for property price growth completely ignore (or are unaware of) the macro economic variables, and in some case I can't help but question whether they have a even have an understanding of "money" and "financial laws".

To be honest I'd say less than 1% of people I meet really have a good grasp of Monetary Economics and just how much of an impact they have on the economy, yet the majority of people still have firm, confident to the point of righteous opinions on the future "prices" of houses despite a complete lack of understanding about the monetary system and the "money" with which those houses are priced.

In my day to day life personally pass judgement of people "having a lack of understanding" not by what they talk about, but what they don't talk about in their arguments.

I'm more than happy for someone to say housing prices will go up due to a "housing shortage" and "population boom" as long as their argument accommodates variables such as:

• What would happen if bank's lending criteria tightened?
• What would happened if they loosened?
• What implications does reduced credit growth (or potential credit contraction) have on the economy and house prices?
• Which sectors of the economic have credit growth and which are contracting? and why?
• Are price set by supply and demand? or money supply? or both?
• What is the Australian money supply doing?
• What's the difference between the currency levels? M3? and broad money supply?
• How can broad money supply have a growth rate higher than currency? Can this be sustained?
• What implications do commercial bank's reserve requirements have on the economy?
• Do we have reserve requirements in Australia?
• Does the RBA control reserve requirements? If the RBA doesn't then who?
• What are mortgage approval rates are likely to do to housing prices?
• What long term multiplier effects do government subsidies like FHOGs have on the economy?
• Under what circumstances do high levels of debt hinder future growth?
• Why can't debt levels grow forever?
• What is debt?
• Why is Australia's funding shortage an issue?
• Why do the bank's interest rate move around irrespective of the RBA?
• What is the RBA? What does it control?
• Why are US bond yields rising?
• Why are the rising US bond yields important to Australian interest rates?
• What implications do bond yield prices have on the prospects for the potential of a double dip recession?
• Why has quantitative easing in the US, UK and Europe not resulted in inflation?
• Why are central banks printing money as the solution to the problem?
• Why is debt essentially the same as real money in the economy?
• And why does paying down debt contract the economy?
• Is deflation a good or bad thing? or neither?
• Is inflation a good or bad thing? or neither?
• What is inflation caused by? rising demand? or increasing money supply?
• Is house price growth a symptom of rising demand or growing money supply?
• What is included in the RBA inflation figure?
• What is NOT included in the RBA inflation figure?
• What impact do threats like Greece, Dubai, California default have on Australia?
• What impacts do these have on bond yields?
• What impact to government deficits have on the economy in the short and long term?
• What multiplier effect does government spending empirically have on an economy.
• What affect does higher taxation have on an economy?
• Does the US government bailouts solve the banking insolvency problem?
• Why does the AUD strengthen against the USD?
• Is a stronger AUD good or bad? or neither?
• Which side of the carry trade is Australia on?
• What do long term current account deficits cause?
• Why does China own lots of US treasuries?
• What are the debt levels of Australian households, businesses and governments and how do these stack up with other nations?
• Under what circumstances do house prices fall? Is it only in situations of falling demand? over supply? or does money supply have an influence?
• What are the different schools of economic thought?
• Which school of thought do most western economies operate under today?
• Why can't government spending compensate for falling private demand in cases like Greece?

... meh I'll stop there. There are hundreds of questions I could pose that all have impacts of Australian housing prices beyond the microeconomic problem of a "housing shortage", and of course if someone has a firm and rational position on all the above question and still says Australian property is going up then obviously we just differ in interpretation of the data.

But of course the vast majority of Australians couldn't answer half, let alone the majority of the questions above - yet I'd argue all of them have not only a significant impact on housing prices, but many of them have a BIGGER impact that the short term micro economic variables of supply and demand in the property market.

Ultimately if I sense someone doesn't understand the macro economics of the issue then I tend to either suggest they broaden their information source beyond popular media or just smile and walk away (depending on how much I care about the person and how much time I'm willing to waste/invest).

It may well keep expanding, but of course this just extenuates the inevitable deflationary fall or inflationary monetisation.

So did people in Japan, US, UK, Europe, etc.

Australia is potentially in a better position for stagnation given our proximity to Asia and low levels of government debt which could partially compensate, though I'm still betting the fall will be swifter and much politically acceptable given the falls around the rest of the western world.

Then of course there is the other point of the faster we hit bottom the sooner we can get back to focusing on sound business and economic management.

It will change when it needs to change. No one wants to live like sardines, so they will avoid it until their financial reality doesn't allow it. So I expect the trend will reverse when credit begins to contract.

Also I think over the next two decades we will have the added problem of under funded retirees many of whom will be force to move in with their children if the government is burdened by massive debts which will limit its ability to provide welfare support via pensions.

I know I have already spoken at length with my mother, who is only 50 years old, about her needing to move in with one of us kids, because unfortunately at this stage it would seem that she just doesn't have enough savings, super, equity or earning capacity to be fully self sufficient when she retires, and I know she's not alone.

Once again I need to make the caveat, that I'm assuming that today's level of welfare will not be available to the retirees of the future, based once again on the financial laws of to offer welfare to one requires taxation of another, and with the growing ratio of retirees to taxable workers, in addition to the already highly indebted system will mean it's unlikely that levels of welfare to retirees will be able to be sustained given that Australian are already heavily taxed.

There are constraints to credit.

The notion of credit is based on spending tomorrows income, today, but of course we all have finite working lives, so you can't pull more than 50 years worth of earning capacity into the present day, and of course by pulling in future earning capacity into today you lower your spending capacity of tomorrow, but of course most people don't look at debt like this, they look at it as "leverage".

There will be some very big non Australian housing bubbles that will pop over the next few years, like the western world's sovereign debt bubble. It may not be Australia that defaults but rest assured when one of the bigger sovereign debt bubbles pops it will have big implications for Australia.

I'm expecting somewhat of a domino effect when it comes to sovereign debt, followed by a big wealth rebalancing from the west to the east.

Yes but even these defaults have implications on all areas, because if banks have to write down bad loans due to FHO's defaulting, then this will leave banks underfunded, and reduce their lending ability to all mortgage applicants, which will reduced mortgage approvals and induces tighter credit restrictions which will limit both the number of buyers and the amount those buyers can borrow (and spend), which pushes prices down.

So it's not a case of isolated problems, there are flow on effects, and of course if these "isolated problems" are big enough you get deflation expectations which creates a downward spiral which can be VERY difficult to stop.

Even now it's hard to tell if all the stimulus and support the US government and FED have offered the banks, home buyers, etc has done enough to reverse expectations. If the latest data is anything to go by it would seem that the US housing market is about to embark on the next leg down, but I have little doubt that the government and FED will step in and support it, but they can't offer unlimited support without other issues arising.

Desires, don't trump reality. There are a lot of people that want to eat whatever they want and as much as they want but they also want to be slim without doing exercise. Unfortunately for them reality prevails and they get fat and have heart failure.

The financial reality is that debts must be paid, and if you can't afford to pay them you go bankrupt.

So whilst I agree that young couples should want to be able get a place of their own, but they also need to be rational about what their lifelong earning capacity is, and how much debt they will need to put themselves into the enjoy that desire.

I might be the minority but people's experiences shape them, all through the roaring 20's people had an affluent mindset, but by the end of the 30's, the great depression had disciplined that same generation's financial attitudes for life.

So once again I believe that it is social culture that will adapt, because financial laws haven't changed for centuries.

I agree it is sad, but at the same time it is the way of the world, and once again is something that hasn't changed for centuries.

 

just got land tax assessment for one property...unimproved land value has gone from $460k to $600k over 2 years...property bubble or smart buying? don't much care...

Cheers
N

 

HI Chris,

Holy crap, that is one long post. I'll have to spend a little more time than I have right now to digest it.
The arguments you make are a reality I know and understand. However there are very few that understand it and the overall effect and so they really don't care.
People are driven by what they feel and what they hear from the media, and basically act as sheep in whatever they do. So I believe a lot of peoples actions are dependent upon how the media "tells" them to act.

The reality is, we have both agreed that property prices will continue to rise if only over the short to medium term and increase a potential existing bubble.

I understand you must work in the finance industry (or just have an intense interest in everything economics) and deal with the economics of Australia and the world everyday, and can look at everything from a very analytical point of view, and you are right, most peoples understanding of even day to day finance is extremely limited.
On the other hand I work with property investors everyday and understand what is happening in the market place from a person to person perspective and from a very emotional level, I see what is happening and the ups and downs of the market, and the emotions of hysteria and depression to go with it and see how the market reacts to all of this and how it has reacted for a bloody long time.
Despite the whole GFC thing happened, it hasn't had a dramatic impact on property prices at all, in fact prices still grew in 2008 (8% I think), and you can see where Melbourne is right now in its property hysteria and see where Sydney is heading. Consumer sentiment is back and charging, whether the fundamentals back it up or not, you would consider after an event like the GFC, that people will be far more cautious and pessimistic, in my experience this hasn't happened to a large extent.

 

Which is a real shame given how often media pundits are wrong, not to mention the vested interests that are rife in popular media.

I don't agree that they "will", I agree that they "could", though I might even be talked into using the words "it looks likely" that they will, but even then I find it difficult to see the bubble continuing to be sustained 2 years from now if the international dramas continue to play out. So my belief the bubble is sustainable is really only a very short term view, and over the long term I'm still very bearish.

But hey, I've been very wrong before.

I fall under the "passionate for economics and finance" category.

By day I'm involved in internet marketing, site management and web development, but I was lucky enough to at a young age to find myself in a very time rich situation given my somewhat automated income stream (I run an online business), which ultimately gave me time to go back to uni to graduate from economics, and gives me hours every day to spend on reading and studying all things related to it.

I have learnt a lot about the ways of the world from both my reading and my experiences in business to date. Though I'm still learning on a regular basis that there is still a lot I don't know.

This is the area that I lack perspective on most, the micro stuff, but being a recent buyer, owner and now seller of an IP has been a real eye opening experience for me.

On a year to year basis they didn't fall, but on a month to month basis there were quite a few months where they fell.

Australia definitely is the lucky country, it has a lot going for it, plus when it was just starting to look like it would fall into recession the other countries' fiscal and monetary stimulus packages kick in to revive the global economy - not to mention our own pre-emptive stimulus packages.

Of course that has supported the property market well, especially the FHOGB, and has seem to reignited a new mini boom, though I do have my doubts as to whether it can be sustained given rising rates (bond yield rates more than the RBA cash rate) and tightening lending restrictions. Even Glenn Stevens came out for an interview on sunrise to suggest Australians should reconsider their views on property investment...

The problem with the GFC is it never really hit Australia, the vast majority of households would have thought the GFC was a great event, there was no significant rise in unemployment, rates fell massively, oil prices fell massively and most households were getting free money from the government. There was nothing tough about the GFC for Australia.

As Alan Kohler said recently, the only way you could be bearish on the Australian economy is if you are following the international markets, because right now things in Australia look great.

However the underlying fear that many still have is, is the Australian economy susceptible to a second downturn in the global markets?