Joye warns again on housing bubble

perfect_bubble

From Chris Joye at the AFR:

I believe that Australian home values measured relative to disposable incomes are currently breaching the all-time records set in both 2007 and 2010.

Yet I expect the current boom, which is arguably turning into a bubble, to continue until the RBA starts raising interest rates. Importantly, you do not require mania or double-digit credit growth to have a bubble, as some pundits claim. What you do need is asset prices way above reasonable estimates of fair value and high levels of leverage, both of which Australia possesses today.

Credit growth numbers are only meaningful relative to incomes and the level of leverage. Like house price appreciation, credit growth is running at multiples of incomes and increasing leverage, which should give us all pause.

Anyone not worried about current Australian house price dynamics is a fool. This only ends two ways: higher interest rates and/or macro-prudential brakes on lending.

Yep. But it can end several other ways: an external shock that implodes prices or a supply response that changes fundamentals.

That Australia took the housing inflation path despite the lessons of the global financial crisis is going to be seen in retrospect as one the great acts of economic suicide.

38 Responses to “ “Joye warns again on housing bubble”

  1. 3d1k says:

    Which path?

    • The Lorax says:

      The housing inflation path.

      We had no other choice because we bet everything on China and iron ore. The act of economic suicide came well before the current house inflation. The deed was done when we “made room for the mining boom” and allowed non-mining tradeables to be obliterated, in the mistaken belief they’d never be needed again.

      • Mr Tezza says:

        Ah, yes “to make room for the mining boom”.
        If I had a dollar for every time I saw/heard that…

        Who coined the wording? Was it the RBA Glans Penis?
        Or Pascometer/Ross Gittins?

      • The Lorax says:

        Ric “boom boom” Battellino.

      • 3d1k says:

        Read the NBER report on the manufacturing thread, USA did not have a mining boom and yet…

      • Wing Nut says:

        That fuck sticks been quiet of late. Probably a good thing really.

      • Gunnamatta says:

        @Lorax ‘we bet everything on China and iron ore. The act of economic suicide came well before the current house inflation. The deed was done when we “made room for the mining boom” and allowed non-mining tradeables to be obliterated, in the mistaken belief they’d never be needed again.’

        That sums up my view. Future Australians will be learning that as fact.

        There will be another paragraph on how we managed to channel the investment phase of a mining boom into Real Estate to create the worlds most insanely expensive real estate. Maybe a digression into how the debt expansion and taxation policies had already created a real estate bubble of epic proportions. Yet another on how they managed to deform the entire economy for a generation trying to maintain the fig leaf of residential real estate not being overpriced. And a final one on how stupidly expensive real estate (in the context of Australia being in a position to make real estate costs a competitive advantage) became a mill stone for a generation who were told ‘It has never been a better time to buy’ and had to work out how to pay off their real estate debt with a trashed economy.

        But those in the future reading about the Australian economy of the past 10 years – they will start with something very close to what Lorax has laid out there.

      • 3d1k says:

        You too should read NBER (and many similar reports) Gunna. This is a global phenomenon, not restricted to countries that enjoyed resources bounty.

      • The Lorax says:

        Manufacturing decline much steeper in Australia, especially during mining boom.

        Go spread your misinformation some place else.

  2. Gunnamatta says:

    ‘higher interest rates and/or macro-prudential brakes on lending.’

    Well I dont think the RBA will have the nads to push rates higher with inflation blowing bubbles, the AUD where it is, and unemployment ticking higher.

    I dont think macro-prudential would actually have all that much impact from here. The people it would most protect arent getting into the market.

    That leaves me thinking that we need the external shock, or maybe our own home grown real estate vinegar stroke and blowoff followed by implosion. But as I sit here and mull it over, I find it difficult to escape the suspicion we need a property crash one way or another. It isnt going to slow itself or reform itself

    • Ortega says:

      “You don’t require mania…” says Joye, as if we’re not maniacal about property investment.

      In fact, we’re at a very ‘reasoned’ stage in our mania, where we consciously believe were not maniacal! – even Joye.

      The Australian housing ‘market’ is a thermonuclear device, just sitting there, quietly, with lots of people walking around it, rubbing their hands together in its warm x-ray glow.

      It’s all very benign…

      Until….

      • PhilBest says:

        He can’t really believe that Aussie doesn’t have the mania; perhaps he is just trying to get through to the hardcore bubble deniers by breaking it to them first, that there is a bubble. Honesty about the mania might need to be the next stage of rehab.

      • jimbo says:

        CJ just can’t find it within himself to actually say it!

        ‘Arguably turning into….’ , ‘nascent’ etc etc. Then he actually convinces himself with the argument ‘What you do need is asset prices way above reasonable estimates of fair value and high levels of leverage, both of which Australia possesses today.’!!

        Be bold and just say it CJ. Once you’re 100% certain, the market might be more inclined to take heed of your warnings. It sounds like a touch of fence sitting otherwise.

    • moderate mouse says:

      ‘I dont think macro-prudential would actually have all that much impact from here. The people it would most protect arent getting into the market.’

      Agree – it would do little to stop the cashed-up specufestors from continuing to binge. But in the absence of any other option, what else can be done really….

      Interesting choice of word – ‘protect’. Your average punter would be scratching their head at that one, given that in RE world, buyers ‘take the opportunity to secure a place in the market’. Yeah, real secure.

      • Tassie Tom says:

        Loan to income macro might help.

        The specufestors might be able to find 20% deposit for each of their several investment properties, but if LTI on all loans combined was capped at, say, 5, then someone on $230,000 (top 1% of households) could afford $1.15M of debt. This is effectively their own home and 1 IP at 80% LVR.

      • moderate mouse says:

        Makes too much sense Tom. Megabank can’t look at more than one loan at a time!

    • Jagster says:

      “our own home grown real estate vinegar stroke and blowoff followed by implosion”

      Agreed… These current conditions wont last forever.

      As always the trick will be timing…. My best guess will be when property prices in key locales are racing away at +5% /mth. One would hope once you have 3 – 4 mths of that runaway growth the Gov and RBA will have to act. Then it WILL be a rush for the exits.

      However I believe this senario is many years away.

      But who really knows..

      • LordDudley says:

        It strikes me that timing is largely irrelevant to the current decision facing young people.

        If you are able to save, put it into a diversified internationally hedged investment. There are many of these.

        When owning becomes cheaper than renting (it has happened twice so far in my lifetime; I suspect it will happen several more times), buy then.

        If owning is always more expensive than renting in Oz (highly doubtful), your investment portfolio will beat buying anyway, plus will be liquid, providing you with future opportunities (possibly overseas).

        There’s really no reward for rushing into property ownership anymore; there was in the last decade, but if one did that, now is a good time to liquidate. Buy low, sell high.

      • Jagster says:

        Your talking about cash flow from an O/O’s perspective while Im talking about asset growth from an IP investors perspective, who currently dominant the market.

        Do you really care if you are losing $2000 pa cash flow on your IP if you are making $20,000 pa growth?

        I didnt think so..

      • jimbo says:

        ‘put it into a diversified internationally hedged investment’

        You wouldn’t be talking about the mother of all bubbles, the US stock market by any chance?

      • flyingfox says:

        @LD

        Don’t waste your time.

      • tmarsh says:

        Dudley
        Not everyone buys on an extreme numbers only basis

        Some people want the certainty a roof over their heads that they own provides.

        And if they can afford it — good times and bad — who are we to judge?

        (Notwithstanding you are right on a pure numbers basis).

    • coolnik says:

      ” But as I sit here and mull it over, I find it difficult to escape the suspicion we need a property crash one way or another. It isnt going to slow itself or reform itself”

      There is no other way. Unfortunately, you will be called a “crashnik” and be laughed at your idiocy of having this suspicion. Sigh.

    • md says:

      “… we need a property crash one way or another. It isnt going to slow itself or reform itself.”

      We do need a property crash if Australians are going to ever be able to get into the housing market. But who needs Australians to buy when there are so many Chinese who will pay far more than Australians ever can?

      And it isn’t going to slow down on its own, that’s for sure. But how can it ever slow down when we are allowing unfettered access by foreigners to our real estate? There would have to be a huge outcry by our populace for something to be done, and at the moment, it’s barely a whimper. Come to think of it, it’s not even a whimper – the celebrations are still in full force while the bubble continues to inflate.

    • Jake Gittes says:

      ” we need a property crash one way or another.” There is no alternative as all other options have been avoided. Instinct and judgement has been so bereft of sense and proportion that only a monumental disaster will modify the thinking.

  3. The Patrician says:

    55% overpriced against rents

    33% overpriced against income

    http://www.economist.com/news/finance-and-economics/21614167-easy-money-inflating-house-prices-across-much-globe-frothy-again?fsrc=scn/tw_ec/frothy_again

    Whose job is it to look after financial stability again?

    • ricsvtr says:

      The ‘fools’ at the RBA apparently

    • LordDudley says:

      The definition of financial stability is now 15% annual house price growth. Everything else is irrelevant.

      Make no mistake, the powers that be in Oz will feed the entire rest of the economy to the housing bubble.

      It’s epic!

  4. PhilBest says:

    A convincing thesis from Phillip J. Anderson, is that the great meltdown in bubbles finally comes when the central bankers are no longer in control of interest rates.

    The critical event, is the yield curve on all the sovereign debt instruments that are the main means of monetary inflation, “inverting”.

    This is because investors believe that inflation is inevitable, which is because of the buildup in money supply. Also a contributor, is the expectation among at least some investors, that there is going to be a default (government debt reaching unmanageable levels) but this is not essential.

    Mortgage lenders tend to then be guided by the higher interest rates on the long term securities that are part of the monetary system, and no amount of low-interest-rate money from the central bank here and now, will change them. Mortgage interest rates go up – and BOOM!!!!

    The yield curve can invert without this being the outcome, but the big bust always comes after such an occurrence. No yield curve inversion, no bust imminent.

    Another sad feature of this thesis, is that the time frame for this to happen is always so long that the bears have been made a laughing stock and no-one is listening to them any more. Hence, the absolute maximum number of people have piled in, including FHB’s who have given up waiting for the crash – and they will have been enticed in by some special offer in the form of subsidies or new ultra-tiny “first homes” (that will still cost them a million dollars and be worth $100,000 after the crash).

    It gives me no pleasure to concede that I have been persuaded by this thesis, against my earlier “bust sooner rather than later” position.

    • LordDudley says:

      So that means you get the timing wrong… surely if you think an asset isn’t worth buying and buy something else instead, it doesn’t much matter if the asset you didn’t buy stays overpriced for 3 years, or 10 years, so long as you don’t need to liquidate your other purchase to buy said asset?

      My feeling with overpriced housing is that so long as young people adopt a rational approach and don’t pile in, they’ll eventually be OK. As Mick Jagger said, ‘Time is on my side’.

    • flyingfox says:

      One small issue is that our yield curve is not dependant on our saving behaviour.

  5. ricsvtr says:

    Plenty of fools in Oz according to Joye!

  6. Charles Ponzi says:

    The end can’t be that far away now that the fat man is singing!

  7. ummester says:

    I have held a bearish view on Australian house prices for a long time. I’m no longer certain of a crash.

    Consider these points:

    Australian property is overvalued and the Big 4 are heavily reliant on it. A crash could render the Big 4 insolvent and Australia’s banking system would freeze.

    Relative to the developed world, Australian cities have low population to available land. We are the most urbanised developed country in the world, or something like that.

    Increasingly cash poor boomers, who represent the largest single demographic, hold the majority of urban land.

    State governments are opposed to spending on Infrastructure, let alone decentralisation.

    I think this will resolve via the Big 4 slowly taking ownership of urbanised land from the boomers, so that the boomers can fund the retirements they expect with reverse mortgage type products. More and more, FHBs will be coerced into new apartment builds closer to the city, so that government can save on infrastructure spending and the construction industry does not die off.

    Over time, this will spread out. People will eventually move from a 2 bedroom apartment in the city, to a 4 bedroom apartment in the burbs. The back yard will become a thing of the past and house prices will stagnate, as we get used to buying less for more.

    The most likely time for a crash, as I now see it, is when the boomers start to die. If Australian city population does not equal the fall off from boomer deaths, then the game could be up – until that time, I think banks and government can squeeze a bit more out of previous generations back yards.