The Economist warns on renewed bubbles

From The Economist:

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Since some recovery was bound to occur after the housing slump, how worrying are the renewed signs of exuberance? To assess whether house prices are at sustainable levels, we use two yardsticks. One is affordability, measured by the ratio of prices to income per person after tax. The other is the case for investing in housing, based on the ratio of house prices to rents, much as stockmarket investors look at the ratio of equity prices to earnings. If these gauges are higher than their historical averages then property is deemed overvalued; if they are lower, it is undervalued.

Based on an average of these measures, houses are at least 25% overvalued in nine countries. Judged by rents, the most glaring examples are in Hong Kong, Canada and New Zealand. The overshoot in these economies and others bears an unhappy resemblance to that prevailing in America at the height of its boom before the crisis.

55% on rents. 30% on incomes.

43 Responses to “ “The Economist warns on renewed bubbles”

  1. The Patrician says:

    33% on incomes

    • bskerr2 says:

      It will only go so far, then people in poverty will start to kill, Which just happened a few hours ago in NZ, a man without any chance to get affordable housing lived out of his car, until he had to sell it for money, brought a tent and lived in a park until the police pushed him out. WINZ did nothing much to help him, so today he went into WINZ (government agency) shot 4 people, killed two of them. He has just been caught, but it’s high lighting the growing poverty gap and housing which is not affordable.

      • macrofish says:

        And he now has someone to live for life.

      • dumpling says:

        See? Did you dig a double-concentric moat around your shack and plant mines in between?

        It’s coming.

      • Researchtime says:

        Its not just OZ or NZ housing – its everywhere and everything (http://www.telegraph.co.uk/finance/markets/11066137/Spectre-of-1929-crash-looms-over-FTSE-100-as-traders-take-on-record-debts.html). Some of the best quotes include:

        “The spectre of the 1929 stock market crash looms large for UK investors as traders borrow record amounts to invest in rising stock markets… The level of margin debt that traders are using to buy shares in the stock market reached the highest levels on record, according the latest data from the New York stock exchange… Traders are now more exposed to a fall in share prices than at the height of the dot-com bubble…”

        and

        “VIX often known as the investor fear gauge, closed last week at 12.05 points, only three points from a record low… The stock market crashes of 1929, 1987, 2001 and 2008 all happened in September and October. In fact the anatomy of the 1929 crash is worth reviewing. It started with the Dow Jones Industrial average hitting its peak on September 3. The stock market then started to fall two days later, there was no panic and no crash throughout the whole of September and early October just stock prices failing to make a move higher. It was on October 24, or Black Thursday, that the market finally fell apart dropping sharply…”

      • neil innes says:

        Big dip this week on world markets – all up 10% to 20% within a month; then all the world wide SNAFU’s (wars, economic down turns in China & the EU will lead to capital flowing back into USA equities. Big GFC2 is about a year away from now. You heard here 1st or 2nd or 3rd……

      • Researchtime says:

        Nah – we are in the midst of the the second longest run in history now… we are way over due. I suspect US Fed tapering will bring a lot of that QE capital back to the USD. It will be a 1997 Asia crisis all over again but with developing nations, Turkey, Brazil, China, India, South Africa, etc.

  2. Lothar Grosserschlongen says:

    ‘affordability, measured by the ratio of prices to income per person after tax’

    Sorry to ask a dumb question but aren’t most mortgages serviced by two incomes?

    • moderate mouse says:

      Yep – the market virtually demands it these days.

      • Schadenfreude says:

        Only those born and bred here.

        On the weekend I witnessed a 20 something male of Asian appearance rock up in his Porsche turbo and effortlessly outbid everyone.

      • AngryMan says:

        @Schadenfreude, yep your right.
        The 20 something ethnic Chinese male in the next cubicle to me, who earns 55k and drives a Mercedes regularly complains that his single story 4×2 (in applecross) is too small for him (lives alone) and the swimming pool isn’t large enough either.
        He also complains his parents make him regularly inspect the 4 other properties he owns on their behalf.

      • Tony says:

        Relax citizen, the FIRB will get right on it.

    • Andy! says:

      Another detail that shows these stats to be understated. If housing wasn’t so expensive then would both partners work full time? I think not.

      • aj. says:

        Bingo. Welcome to debt feudalism.

      • LordDudley says:

        People also delay having children, reduce the number of children they have, or don’t have any because “it’s too expensive”.

        But it’s all good… we have a limitless supply of immigrants to take the place of those children we never had because we were too busy paying our mortgages.

        Eugenics is alive and well in Oz.

  3. moderate mouse says:

    Not sure how they’ve found China’s property to be UNDERVALUED by 38% compared to income?! Doesn’t fit with other reports of late.

    No doubt they are using mean not median income.

  4. Housing is heading in to bubble territory if it exceeds 3.0 times household incomes. Real estate markets are local …

    2014 10th Annual demographia International Housing Affordability Survey

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

    DEFINITION OF AN AFFORDABLE HOUSING MARKET … http://www.PerformanceUrbanPlanning.org

    For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).

    The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – the balance the actual housing construction.

    Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

    • As noted above … in normal housing markets, pricing should not exceed 3.0 times annual household incomes. Another useful measure is the Total Housing Stock Value / GDP. Within the article below I plucked an excellent Table from an article James Gruber wrote for Forbes …

      New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News

      http://www.scoop.co.nz/stories/HL1404/S00166/new-zealands-bubble-economy-is-vulnerable-hugh-pavletich.htm

      At tops Total Housing Stock Value / GDP should not exceed 1.5 times … ideally 1.2 times. As the Gruber Table illustrates, Australia and NZ are running at about 3.2 times … the UK 2.8 … Canada 1.8 and the US about 1.2 times. Houston is about 1.2 times as well.

      The amusing thing is in US dollar terms at current exchange rates, the 1.6 million New Zealand housing stock units are worth MORE than the 2.2 million Houston units … even though in $US dollar terms New Zealand’s GDP is about $140 billion (population 4.5 million), while Houston’s about $500 billion (population about 6.1 million).

      There is about $NZ400 billion of bubble value in New Zealand housing … about $A2.5 billion bubble value in Australia’s.

      Talk about vulnerable !

      From 2007/ 08 Irelands Median Multiple sank from about 4.7 to 2.7. NZ and Australia’s are currently about 5.5. Chinas 100 major metros about 8.0 … with Honk Kong 15.0 … Shanghai slightly above that and Beijing north of 20.0 (latter 2 Reuters / Thompson data).

  5. Strange Economics says:

    Australia can now go from 55% overvalued on rent to 75% (like Canada, which also supported by those “non-existent” foreign buyers and low interest, and here as well the “non-existent” neg gearing effect).

    So bubble can go up another 10% more !
    Until the last punter is sucked in….
    (to 175/155 rent ratio).

    A nation of renters coming ….
    oh look property can go down -see Ireland, US..

    • AngryMan says:

      Did those other countries governments interfere in those housing markets with such a heavy hand as here ?

      throw open the borders to foreigners to buy and populate the ponzi.

      Put in tax breaks to support their own real estate portfolios

      etc etc

      • md says:

        Angry, our government has interfered with our housing market on several fronts. Not only do we have an “open for business” policy, and not only do we have unrestricted foreign buying where foreign investors who contravene the law never get questioned, let alone stopped or prosecuted, we also have other factors contributing to our housing bubble.

        The high immigration rate to “populate the ponzi” as you put it is quite right.

        We also have the most generous laws regarding negative gearing in the world, and we also allow SMSFs to be leveraged into housing. In fact, our whole tax system is designed to have everybody speculate on housing and drive prices up.

        In addition, we also have demographic factors like most of our population being squeezed into a few major cities, putting even more pressure on the housing market.

        So yes, the government interferes in more ways than one and prices are artificially inflated but that doesn’t mean that things are going to change, unfortunately. I used to think that because this bubble is artificially inflated and that the fundamentals don’t stack up, that the bubble would be unsustainable, but I was wrong. There is no end to the artificial stimuli that can be applied to keep this bubble inflated.

    • dumpling says:

      Yes, I don’t think our bubble has achieved its full growth potential just yet.

      10% more sounds plausible.

    • Mining Bogan says:

      Pfft…old bloke at the golf club yesterday saying property to double in the next five years. Lots of nodding heads.

      Hungry old bastards.

  6. permacuppa says:

    One has to wonder how long this madness will go on for…

    • Alex says:

      As long as relatively low unemployment and interest rates are maintained. That will keep the unwitting disciples of Ayn Rand satiated. When one or both of those is gone, many in the herd will be in trouble. Predicting when is crystal ball stuff given markets are so sentiment driven.

  7. Benderau says:

    Fairfax reporting winter prices have surged. Offer 3 tips for prospective buyers:
    1. Biggest winter surge since the gfc, get in now
    2. Up 48% in sydney Melbourne since q1 2009,get in now
    3. Rental yields are flat so you will need to rely on value appreciation, get in now!

    • reusachtige says:

      Good advice! It’s great to see so many winners from property, it has created so much wealth for people. Good stuff indeed! I hope none of youse have missed out, that would be horrible for you and would make you feel like a loser for sure.

  8. kevintxu says:

    When they say 50% over valued, is it a 50% fall in price to return to fair value or a 33.33% fall in price?

  9. EpicurusMaximus says:

    Anyone know the stats on $ lump sum super withdrawals pa?

    Judging by the grey demographic at auctions I’ve been to, I wonder if lump sum payouts going into IP are as big a driver of this bull market as money out of asia.

    That’s consistent with mild credit growth as these granddads don’t require much debt. Which is interesting in itself as it keeps the ‘headline’ credit growth low, while increasing systemic risk as retirement savings are gambled into a bubble.

  10. Jim says:

    Even this analysis by the economist is flawed cos it’s still looking at averages. I’m sure within. These averages there are so e very fat tails. So e very, very debt to income multiples and very very skinny price to rent ratios, both for anyone who has bought in the past 2 years. This is where the bubble starts popping, at the edges. Soon the market will loose steam and need some more interest rate support to prop it up again and I’m sure the RBA will oblige.

    Time to get off the soap box and do something about it.

  11. avatar99 says:

    The problem with the Economist numbers are that they are all computed “relative to long run averages” so comparing these across countries is like comparing apples to oranges. Most extreme is Japan where houses are still well over-valued relative to price-to-income norms around the world but they show as undervalued because their prices have been dropping for so long. I wish they would compute an average across all price-to-income (and price-to-rent) statistics and then show how countries compare – I guess that’s what the Demographia survey tries to do.

    • Commenter2095 says:

      To play devil’s advocate, why do we assume that price to income ratios should be mean reverting? If non-discretionary non-housing costs have gone down, and 2 incomes have become the norm, then why shouldn’t we except people to allocate more of their income to housing.

      Similarly, if the costs of maintaining and managing a rental property are lower, then an investor can take a lower gross yield to achieve the same net yield.

      Regarding cross country comparisons, there may be cultural factors regarding the price to income ratio in one country. The biggest one would be the number of income earners who usually reside in the house, but also the relative non-financial value place on owning your house, and also the tenancy laws.