Leith and I have been having some fun teasing Callam Pickering of BS for the past month as he has correctly identified the speculative fervor in housing markets only to stubbornly insist it’s not a “bubble”. Over the weekend it was David Bassanese tying himself up in knots avoiding the “b” word but describing just that:
One of the few bright spots in the economy is the burgeoning strength in the housing market. Reflecting low interest rates, better affordability due to earlier house price weakness, strong population growth and increased foreign interest, housing demand and house prices have been on a decent upswing over the past year – particularly in Sydney, Melbourne and Perth. And while I have long argued that house pricest are not (yet) in a bubble – based on historic valuation metrics – one worry has been the growing imbalance between investor and first home buyer demand. In particular, investor demand has been especially strong and is already reaching the heights evident during Australia’s last real speculative property frenzy around a decade ago. Either the market is getting a little unbalanced or important structural changes are taking place.
How something can be a “speculative frenzy” and not a bubble is beyond me, the phrases are interchangeable. It’s a great Australian tradition to prefer the trees to the woods when it comes to the housing market and Bassanese embraces that with gusto:
“In October, the share of home lending directed at first home buyers had fallen to 7.1 per cent, broadly equal to the lows of late 2003…In other words, the composition of housing demand is now similar to that when Australia’s last clear case of speculative property excess finally came to an end. That might suggest a rerun of the house bubble a decade ago. But does this mean the housing market is about to implode? No – or at least not for a while yet. For starters, the 2003 bubble was pricked by rising interest rates – an unlikely event any time soon given the sluggishness of the economy. And as noted so far, house prices relative to incomes and interest rates don’t yet appear grossly overvalued, so the Reserve Bank won’t feel the need to bring forward rate rises to prick a bubble that is not yet evident.
Not yet evident…except for the “speculative frenzy”, sheesh. Whether rental returns are higher now than before is largely irrelevant given there is no return. This is a negatively geared frenzy as usual.
The MB view has always been that the great Australian property bubble is structural in nature. You can point to any number of supports for it, low interest rates, tax distortions, choked supply, high immigration etc. But each of these simply sets up the preconditions for repeated boom/bust cycles, each of which is a new episode in the history of the bubble, much like the UK. It does not mean that there is no bubble. On the contrary. It means it is enormous.
This should prompt a note of caution among housing bulls but bears should also be wary. If Australian housing does bust again, it is not likely to be the end of it. So long as the settings remain, the market will respond accordingly and, again like the UK, the politico-housing complex is now so entrenched and the economy so dependent upon it, that you can expect more and more extravagant market saves as we slowly but surely run out policy ammunition.
I would go so far as to say that Larry Summer’s recent musings about Western economies being unable to grow at all without bubbles is interesting. I Australia’s case I would finesse it to say that once in the bubble cycle, it is impossible to grow without it.
And so, what we have now, is the latest inflation in our bubble-without-end, a blowoff as it were, and yes, Bassanese is right to warn investors that it’s time be cautious. But he might just as well have said it is always time to be cautious with Australian property. You are always playing with an asset class that is about to boom and about to bust. That it is an illiquid asset exposed to such volatility makes it a terrible investment vehicle.
But if you’re a market timer then my own view is that it has a little way to run yet. The RBA won’t hike rates and its next move will be much louder jawboning and when that fails macroprudential tools. That probably gives it another year.
For longer term investors, the only question that needs to be asked is can it be bailed out again when it does pop?
