“Mad” Adam’s bubble grows

Advertisement

believe-in-yourself-schmidt

By Leith van Onselen

“Mad” Adam Carr is back, this time slamming the notion that Australian housing is overvalued and that now might not be a sensible time to buy given the increasing risks of a property correction. Let’s examine Carr’s arguments.

The issue isn’t whether house prices fall; we know they do at times. The issue is whether purchasing property makes sense — whether it’s an intelligent decision and enhances wealth (for either owner-occupiers or investors) over a reasonable time period. The answer is an unequivocal yes and it’s foolish — not to mention extremely misleading — for Gonski and others to imply otherwise…

…anyone who follows the tripe sprouted by those who would try to talk down the property market are, quite simply, doing themselves and their children a grave disservice because on any reasonable time frame, prices do only go up. This is undeniable truism and you only have to look at a chart provided by the RBA to see this.

ScreenHunter_4075 Sep. 09 08.32

As you can see from the chart, the trend is up! It’s pointless to dispute that…

Against that backdrop, cherry picking short-periods where house prices have fallen or have flatlined — such as in Sydney from 2004 to 2009 are disingenuous…

The problem with Carr’s argument above is that he, too, has cherry-picked the data. Had he taken the house price series back even further, he would have discovered that Australian housing values fell for more than 50 years after the bursting of the 1890s property bubble (see next chart).

ScreenHunter_4073 Sep. 09 08.23

Advertisement

Hence, contrary to Carr’s claim, house prices can fall over long time periods, and housing is not a one-way bet.

Moreover, given the unprecedented boom in Australian house prices since the late-1990s, the risk of another sustained decline are arguably greater now than at any other time in history, making housing an increasingly risky investment.

 The axiom that “past performance is no guarantee of future performance” should hold just as true for housing as it does for other investments.

Back to Carr.

Advertisement

Now think about the macro settings we have today. Lending rates sub 5 per cent — you can fix sub 5 per cent for five years! Inflation is comparatively low (2.75 per cent on average). It’s a different world, and according to the consensus that world isn’t going to change too much. Inflation is dead…

Similarly, the RBA isn’t about to start hiking rates and indeed we have very vocal calls to cut rates further… Interest rates will remain low, even after they’ve been tightened — even if inflation rises…

In the meantime, land and property are a finite resource, the scarcity of which is exacerbated by deliberate policy decisions to lift population density rather provide adequate infrastructure into satellite towns and regions. Population growth is strong, and outside of a surge in inner city apartments, we’re still not building and nor is there any sign that we’re about to start building, adequate stock of detached housing or any dwelling stock really, outside of inner city areas.

Buying property is, quite simply, a no-brainier with the policy settings and the supply demand dynamics we have in place now… I don’t think anyone should be concerned about a sustained or broad-based price fall.

Let’s throw some other fundamentals into the mix, which weaken Carr’s argument.

First, wages growth is the weakest in decades (negative in real terms) and is likely to remain that way as the commodity price boom unwinds. Even the Treasury is tipping the weakest real per capita income growth in recorded history over the next decade (see next chart).

ScreenHunter_354 Nov. 21 11.52

Advertisement

Second, contrary to Carr’s previously bullish claims, the labour market is soft and is likely to deteriorate as the once-in-a-century mining investment boom unwinds and the local car assembly industry shutters by 2017.

Third, there are few other growth drivers for the economy. Other than a short-term mini boom in dwelling construction – which itself is likely to weaken house prices and will probably fade next year anyway – what else is supporting the Australian economy now that both mining and manufacturing are in decline?

Fourth, the forces currently driving house prices are likely to fade. Does Carr honestly believe that the investor-led boom, which has seen nearly one-in-every two dollar of mortgages (excluding refinancings) going to investors, is sustainable? Or that immigration and population growth will remain at its current high level once the domestic economy weakens?

Fifth, the banks are likely to suffer some kind of credit event in the not too distant future, which could reduce the availability of credit to borrowers. This could take the form of belated macro-prudential controls on mortgage lending, or reduced access to offshore funding via a ratings downgrade or an external shock.

Advertisement

Finally, over the long term the demographic headwinds that played a central role in supporting rising house prices in recent decades have peaked and are already reversing.

In short, there are enough risks on the horizon to counter Carr’s panglosian view that Australian housing is a one-way bet. Valuations are already at or near near all-time highs and housing is getting riskier by the day as prices continue to rise in the face of the slowing economy.

[email protected]

Advertisement

www.twitter.com/leithvo

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.