Australia’s land bubble goes nuclear

ScreenHunter_18 Jul. 05 10.22

By Leith van Onselen

I have shown previously that the escalation of Australian housing values since the late-1990s has been caused, primarily, by an increase in land values rather than construction costs (see below chart).

ScreenHunter_1680 Mar. 14 07.46

Now RP Data has released new statistics showing the extraordinary (literally) escalation of land costs across Australia’s capital cities, with median lot prices jumping by 6.9% in the year to August 2013 to the highest level on record ($249,000). Median lot prices have also risen nearly five-fold over the past 20-years:

ScreenHunter_1681 Mar. 14 07.50

At the same time as land prices have skyrocketed, lot sizes have shrunk, meaning that buyers are paying much more but receiving less in return. According to RP Data, the median lot size 20 years ago was just over 700 square metres, whereas today it is just 500 square metres:

ScreenHunter_1682 Mar. 14 07.55

Accordingly, the cost per square metre has exploded from $76.47 per square metre in 1993 to $507.70 per square metre currently – an increase of 564%!

ScreenHunter_1683 Mar. 14 07.59

A breakdown of costs by major capital is shown below:

ScreenHunter_1684 Mar. 14 08.01

If ever there was a time to relax artificial restraints on land supply and the first-user-pays-all principle, as well as introducing a broad-based land tax, it is now.

unconventionaleconomist@hotmail.com

www.twitter.com/Leithvo

53 Responses to “ “Australia’s land bubble goes nuclear”

  1. paulF says:

    Wow! Crazy numbers!
    No sane mind can look at such data and think that yeah this is sustainable in the long run and that house/land prices can’t go down!!!!

    • Schadenfreude says:

      I would argue that build cost has experienced its own inflation, the quality of product that you get for your money these days leaves a lot to be desired.

    • md says:

      “No sane mind can look at such data and think that yeah this is sustainable…”

      Yes, but back in 2000 and 2001 there was talk that the housing market was unsustainable after the run-up in the late 90s, and by 2003, there was talk of a housing bubble. Then by 2007, it was obvious we were in a housing bubble, and definitely unsustainable, but it keeps going on and on, due to the government prepared to do whatever it takes to keep it going.

      You know the old saying, “the market can remain irrational longer than you can remain solvent” and it definitely applies here. So in the long run, of course it isn’t sustainable but that run might be a lot longer yet.

      Never before have we had foreign investors given so much liberty to buy as many properties as they want. People keep comparing it to the Japanese in the 80s but this is on a much bigger scale, and in any case, the Japanese had much more stringent laws back then.

      In the meantime, there are still millions more people from China who want to buy here, and millions more immigrants to import. As long as there are buyers, it doesn’t matter about affordability. The government turned its back on Australians wanting to get into the housing market a long time ago. Now that they can’t compete, they are no longer even relevant – especially now that SMSFs can be leveraged into investment to compete with the Chinese. Who needs FHBs? They can’t keep the bubble inflated nearly as well as the investors of both local and foreign origins.

      • Royal Commission time says:

        True md.
        The government has ripped up the social contract. Shelter is now to be financialised, locals to be locked out of ownership unless they are investor grade.
        Recent 52% of sales going to investors is way over the 30% of a sustainable RE market they traditionally represented.
        I believe it is now time for a Royal Commission.
        Or else, what are we going to wait for?
        Investors making up 60% of RE market?
        Not enough, how about 75% of sales?
        Bit drab, how about 90% of sales go to investors?
        I have had enough.
        I have written to a number of government departments direct, using Registered Mail, asking policy specific questions and seeking an explanation as to why governments actions are counter to the intent of Mission Statements. Also in the process of writing a 2 page submission to the current Affordable Housing Inquiry. They know who I am, I know who they are.
        These are my initial thoughts on the matter.
        If anyone has some ideas on the best way to go about getting a Royal Commission off the ground, please advise.
        The name Abeid comes to mind as the weakest link.

    • Strange Economics says:

      I hope the RBA board members have declared their own property in a register, to declare any conflict of interest. (bubble, more bubble please). Sure you’ll find, like most baby boomers they have a couple of investment flats to unload !
      Compare the RBA to the RBNZ….who gets paid more and who does the better analysis?

  2. Pfh007 says:

    Those graphs need to be projected Batman style on the clouds above Canberra and every state capital.

    Urban activists fire up your colour photocopiers and acquire some sticky tape.

    The nations public spaces are full of quiet reflective reading rooms that would benefit from decent reading material.

    Use nice hard glossy paper with sharp edges to inconvenience any spruikers who contemplate retaliation. :)

  3. Andy! says:

    Thanks for the report – hideous data, my goodness. And yet the RBA chooses to encourage & celebrate the continued hyperinflation of land prices.

    • Even worse, they deny it!

      • Andy! says:

        Deny what? There’s nothing to deny? :p

      • krazy.galah says:

        Indeed. Land prices are unchanged. They have a graph that says so. Who as mere mortals are we to challenge the uber overlords that are the RBA.

        Alternatively, Stephens should resign allowing such “fraud” to masquerade as analysis from them. I personally think they replaced the guy from earlier years with a lookalike as he clearly isn’t the same person who talked sense on arrival.

      • An even more ghastly (honest) metric would be hours required at median wage to buy a square meter of godzone.

        To extend your nuclear metaphor, UE, land prices have gone critical. Yet all arms of government and the FIRE sector are still deliberately removing carbon rods, even though they can see the cooling water is boiling away.

        People acquire land to live and work on over the long term. Trading it is slow and expensive. We know there is a large cohort of owners able and willing to sell their holdings the moment a clear new down trend is established. It is only a matter of time.

        Don’t Buy Now!

      • Rusty Penny says:

        An even more ghastly (honest) metric would be hours required at median wage to buy a square meter of godzone.

        Peg the minimum wage in relation to the $/sqm price tag, that shoud do it.

  4. Janet says:

    At some stage Nick Leeson knew he had no alternative but to keep going. He knew the game was up; that there was no probable way back, so he had to keep ponziing away. The same applies to the land/property markets that haven’t corrected yet. Those even had the contemporary working models of failure available to them to study,and that might have eased the pain if action was taken a few years back. But now, we face a Barings Bros event. There is no other realistic option…..

    • Andy! says:

      What do you mean by failure?

    • pelych says:

      +1 Janet
      Thats it in a nutshell.
      Until some external shock causes a reset.
      Can’t be blamed for that!!

    • Phil says:

      Geez, sounds like the Sub Prime Crisis, I’m sure it will be tagged with another marketing term … when it bursts.

      I’d suggest the Chinese are buying at the exact wrong time … just like the Japanese did in the early 1990′s – and don’t forget the currency conversion loss that really taught them a lesson.

      My view, we are in for a minimum 25% bruising, but more likely somewhere on the way to a 50% correction as the USA loses another 25% from where they are now (of which would total 50%).

      Comparing the Aussie market to the USA market reveals our bubble is significantly worse (from the start of the bubble), so I have to run with a near 50% correction.

      That will teach the “new rich a few things.

  5. paulF says:

    Thought of comparing those graphs to wages and it seems like avg weekly wage goes up in the same trend as most of the above graphs from an average of 600AUD or so to around 1100 AUD.
    If you checkout http://www.tradingeconomics.com/australia/wages , you can see that from 2001 till now, the wages trend is very similar to the trends in the above graphs.

    Not too sure how to interpret that though :)

  6. MrMedved says:

    $500/sqm is for favela country. A decent suburb is closer to or above $1000/sqm. A nice suburb is $1500+/sqm.

    Yes, this is a credit-fueled mania, but given the internationalisation of land (land titles) and prostitution of government policy, are we seeing a genuine (paradigm) shift resulting in neo-feudalism, resulting in higher price to income ratios than 50 years ago?

    The ratio may drop from the current 8-10x but perhaps not as low as 3x during the current cycle.

    • It is both a credit/tax fueled mania combined with the strangulation of supply.

    • PolarBear says:

      Great comment re neo-feudalism and paradigm shift. I also wonder if, as part of globalisation, Australia will continue to sell citizenship and residential land to the highest international bidder because we are short of income. Also govts are now acutely aware of the importance of avoiding a housing crash at all costs.

      • Bluebird says:

        Of course they will. We have little to nothing else to sell. For me the proof and the giving up on our government was the Rudd and Juliar governments.

        How anyone who wants housing affordability could vote for Lib/Lab is beyond me. They’ve made it abundantly clear that house prices must rise at all costs and our future is to be thrown under a bus.

      • Slambo says:

        @Bluebird

        Agree. Then again the SPP received the number of the beast in votes at the recent Griffith by-election, for a grand total of 0.86% of the total.

        The majority of people don’t think, don’t care, vote the same as they always do, or are happy to leave things as they are. We are hoisted by our own petards.

      • RobW says:

        In politician’s defence, governments very rarely get voted back in Australia when house prices are falling! Even recessions don’t affect voting behaviour as much as failing house prices.

  7. davel says:

    The situation here is that our leaders don’t know how to back out of this problem (also the case in many other countries). Their only response is “extend and pretend” and hope the unwinding is not on their watch. While they’re doing that, they’re at the same time using denial as the more misplaced confidence they can engender, the longer extend and pretend might work. This is really the logical outcome of the political/economic system we’ve created where the maximum planning horizon is 5 years and in practice most leadership is working on much less than that.

    If their intentions are secretly more ambitious than this, then they may be waiting for a time when the economy is in better shape before attempting to start fixing this. But you have to be really optimistic to believe that.

  8. Slambo says:

    Where does the RBA get off lying about the increase in land values. I know why they do it, but it still gobsmacks me, and the MSM seem to leave it untouched.

    Meanwhile the lunacy goes on:

    http://smh.domain.com.au/real-estate-news/sydneys-beforeauction-sales-have-agents-smiling-20140313-34nsc.html

    Well of course they’re smiling – they’ve just made tens of thousands for a few hours work. Beggars belief that vendors don’t bypass these parasites more often in a sellers market.

    And 2.1 mil for a dog box on a 300 sqm block “with many wanting to subdivide the block”. Probably a nice spot for a dog box, but bloody hell.

    • Andy! says:

      That’s just it – The RBA is presenting absolute untruths. How GS is able to keep his ($1m) job and also not be legally liable for this and the corresponding financial repression is a disgrace of the system. We need scientific/ engineering types to run the RBA because they will actually read the data and act upon it accordingly.

    • foreigner says:

      Why are my comments being blocked ? I hardly comment that often, can you guys please check ?

  9. Explorer says:

    Sorry but these are crap charts for comparing over longish time frames.

    They ought be semi-log scale on the change and with a subsidiary chart showing distance to the time series regression from start to finish, and with showing comleted cycles, avoiding starting at a trough and finishing at a peak or similar distortion.

    You can do better UE!

    • I’m sorry, but this is a crap comment from a baby boomer with a vested interest in inflated house prices (and muddying the debate). The 500%-plus increase in land costs per square metre says it all, Explorer. Even your ageing eyes cannot ignore it.

      Oh yeah, and if you have complaints about the chart scale, take them up with RP Data. They are their charts after all.

      • Explorer says:

        Ok so you can’t do better because tht charts are someone elses. Fair enough.

        But the criticisms of the charts remain and you have not commented on whether the criticisms of the charts are fair. Are they a good way to present long term data or not?

        And you are correct about my status. I am not an aging Gen-X er and I hope not to stop aging for a few years yet. And yes I have a position on real estate that a significant nominal fall is so disruptive that it is undesirable across the board

        You talk about my muddying the debate.

        The problem is some people don’t want an alternate viewpoint expressed. Debate is the last thing wanted by some!

        I think we have been having this discussion about house prices since about 2008, initially at Seeking Alpha. I have consistently argued that house prices will fall only when there is some significant increase in unemployment and that a housing crash is such a disaster that it ought be prevented but that a long period of nominal stagnation might not be a bad thing.

        Now, will you answer the point on the charts, or just keep arguing ad hominem?

      • Explorer. There has been a 500%-plus increase in fringe land values. Enough said. Pedantic criticisms about chart scales, etc, is ridiculous when viewed in this light.

        As to wanting a slow melt, this is what I wanted too (for similar reasons to you). But unfortunately, Australians in their infinite wisdom have chosen not to go down this route, leaving the housing market and broader economy dangerously exposed if/when mining busts.

        The fact is, a series of policy blunders got us into this mess. Those same distorting policies need to be unwound carefully.

        Like you, I am a “landed” homeowner with a relatively small amount of mortgage debt. However, unlike you, I care immensely about future Australians (and my children) getting screwed over by Australia’s housing ponzi. It is inter-generational theft writ large.

      • flyingfox says:

        @Explorer

        that a housing crash is such a disaster

        Dude…look at the charts, the disaster is what has happened since 99.

        As to your criticism of the charts. Why should it be semi log scale? You are not expecting an extremely nonlinear function or difference between data points that are magnitudes apart.

        Similar charts over longer timescales have been shown by Philips Soos in the past and this period in the chart sticks out like a sore thumb and is not just cyclical.

      • Explorer says:

        You still couldn’t resist arguing against me as a person.

        You specifically state that “unlike you, I care immensely about future Australians (and my children)”.

        Can’t you address the issues (which you did) without also trying to denigrate me.

        PS, Some would find it extremely offensive to have someone publish a personal attack saying that they do not care about their children. I’d suggest that you ought not make such comments as I believe it reflects poorly on you. In addition the statement is probably defamatory (or would be if I didn’t use a Screen name):
        “Defamation—also called calumny, vilification, or traducement—is the communication of a false statement that harms the reputation of an individual, business, product, group, government, religion, or nation. Most jurisdictions allow legal action to deter various kinds of defamation and retaliate against groundless criticism.”

  10. Explorer says:

    If only our currency were higher so that we were getting more in international terms for the sale of our land, labour and commodities in the form of housing.

    The fall in the currency has reduced the value we are getting for these house and apartment sales to foreigners by about 15%.

    We’re almost runnning a 6 for 5 sale compared to last year, or would be if we hadn’t got the prices to go up so much in AUD terms to offset the fall in the currency.

    • Phil says:

      That must mean the dough invested before the currency loss of 15% is pushing some heavy SH*T up hill already …. oh, my heart bleeds for these investors!

  11. koreanseb says:

    There’s a clear change in trend in the price per square metre around the year 2000. Any ideas about what changed, UE? There must have been some change in policy relevant to land prices.

    Also, it probably is worth noting that since 1993, CPI has gone up around 70% (I think), wages have gone up substantially (not sure by how much, but I’m sure it’s a lot) and our capital cities have all grown substantially (and bigger cities tend to have more expensive land – although I don’t have data to support this). While I don’t think these factors add up to a 500% increase in the cost of land, I think they could easily account for say 200%, or maybe even 300%. Having said all that, I totally agree that it would be a good idea to remove artificial constraints on land (i.e. development restrictions).

    Thanks for posting this interesting data.

    • AB says:

      “There’s a clear change in trend in the price per square metre around the year 2000. Any ideas about what changed, UE? There must have been some change in policy relevant to land prices. ”

      Maybe the introduction of 50% discount on CGT?

      http://en.wikipedia.org/wiki/Capital_gains_tax_in_Australia#History

      “From 20 September 1999 indexing of the cost base was discontinued, and instead the present 50% discount on the plain gain above the cost base was introduced. For assets acquired before that date the taxpayer can choose between indexing (up to the CPI at 30 September 1999) or discount.”

    • “Any ideas about what changed, UE?”

      Causes:
      1. Halving of the rate of capital gains tax in 1999, which made property investment via negative gearing more favourable.
      2. Easier access to credit.
      3. Widespread adoption of urban consolidation policies by Australia’s governments (except Sydney, where such policies were implemented earlier), strangling land supply and increasing its cost.
      4. Front-loading of taxes and charges on development (the “first-user-pays-all” approach), also increasing development costs.
      5. Rapid population growth from 2005.

      There are probably others, but these are the main factors.

      • koreanseb says:

        Thanks for replying. Very interesting.

      • hamish says:

        It’s kind of like seeing a fully inflated inner-tube and deciding you need a bigger pump….

      • md says:

        Yep, hamish, we’re gonna keep pumping until we explode! But it might take a few more years or even longer….

      • Willy2 says:

        6. A lot of Baby Boomers reaching their “peak-spending” age of 47 in the late 1990s & 2000s. See harry S. Dent’s work. The same happened in the US & Europe.

        UE: Excellent work & analysis !!!

  12. emess says:

    Up to the eighties (I think), most jurisdictions in Australia did not have front loading of infrastructure charges. Front loading was seen as being a far better system, and pay as you go charges were dropped. This was universally seen as the way to go, both by all political parties and by administering officials as well.

    If you think that this should be reversed, you will get an almighty fight unless there are some pretty good reasons why the objections to pay as you go apparently no longer exist. The reason that those reasons need to be addressed if one wants to get anywhere is that the official advice given to Cabinets and Ministers will list out the many reasons against pay as you go, and if one has not anticipated those reasons and demolished them up front, at the least one will look as if one didn’t understand them, or at the worst, that one deliberately overlooked them.

    In short, if you seriously want to eliminate up front infrastructure charges, you need to understand why they were replaced.

  13. Willy2 says:

    Why is the RBA missing/denying this kind of developments ? Are they “joined at the hip” with the Abbott government ? Is there a ideological blockade in their braincells ?