The history of Australian property values (redux)

By Philip Soos and Paul D. Egan

This chart pack presents the latest statistics for 2014, updating the dataset provided earlier last year. When adjusted for inflation and quality, housing prices have boomed nationwide since 1996, hitting a peak in 2010, before undergoing a slight fall and rise. On current trends, a new, higher peak is likely to be set in 2015.

Egan_Soos_01

Melbourne has been the epicentre of a number of historical real estate bubbles, with the latest iteration being no different. Compared to the other capital cities, Melbourne has experienced the largest escalation in housing prices, causing the gross yield to fall from around 9 to 3.5 per cent between 1996 and 2014.

Egan_Soos_02

The latest boom in Sydney has resulted in prices surging to a new peak in 2014, surpassing the previous peak set in 2010, with yields similarly compressing. It is probable the boom will continue into 2015, given the recent exponential rise in investor-related mortgage debt.

Egan_Soos_03

The other capital cities have not tracked the trend in real housing prices of Melbourne and Sydney in the post-GFC era; for instance, Perth has yet to regain the peak reached in early 2007. It should be noted that the ABS measure of housing prices is not quality-adjusted, so the indexes overstate the trend.

Egan_Soos_04

Hobart experienced a boom in 2004, with nominal annualised growth reaching 60 per cent, the single greatest rise of any capital city in recent times. Only the steep growth in Darwin’s housing prices may be somewhat justified, due to the strong rise in rents, alongside the highest gross yield of any capital city.

Egan_Soos_05

The household and mortgage debt to GDP ratios have boomed exponentially over the last two decades, driving the largest housing and land market bubble in post-WW2 history. A new peak was set in 2014 for the mortgage debt ratio. The complete history of public, private and external debts from 1850 to 2014 can be found here.

Egan_Soos_06

As debts have risen, so too has the debt to disposable income ratios. The overall household ratio peaked in 2006, remaining steady on the back of strong household income growth and conservative personal debt habits. In contrast, the housing and owner-occupier ratios reached a new peak in 2014 as Australians accumulated further mortgage debt amid slowing wage growth.

Egan_Soos_07

The best indicator of a bubble (bubble, what bubble? say the government and FIRE sector) is the divergence between prices and rents (price to earnings), which cannot be explained by any fundamental factor. Every asset bubble is evidenced by a rising P/R ratio.

Egan_Soos_08

Regardless of the source and methodology, gross yields have plunged dramatically nationwide. Expenses for investment properties constitute around 50 per cent of gross rental income, meaning net yields are half that of gross yields. The yield for owner-occupied housing is lower than for investment properties, probably reflecting tax advantages and quality for the former.

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Put another way, the P/E or P/R ratio represents the inverted yield, demonstrating how much an investor is willing to pay for each dollar in earnings. Australians are paying considerable premiums for residential property.

Egan_Soos_10

Numerous price to income ratios exist, with the most accurate measure provided by the RBA. In general, too much attention is given to the P/I ratio, considering it is a rather vacuous measure of affordability. The popularity of P/I ratios does not discount the marked absence of mainstream or heterodox research support to confirm its validity; nevertheless, the nationwide ratio has climbed since the mid-1990s.

Egan_Soos_11

Net rental income losses have mounted for investors, as rents have generally tracked the rate of inflation while housing prices and mortgage debt have simultaneously boomed. The losses are larger than indicated because the ATO does not record data on principal payments, as it is not a legal deduction. Two-thirds of investors were negatively-geared in 2012, a significant rise from the 1990s when only half of this cohort were in the same position.

Egan_Soos_12

The reason why property investors are negatively geared, on aggregate, is the rising interest payment burden on the exponentially-growing stock of mortgage debt. Housing-related expenses have remained steady at around 50 per cent of gross rental income.

Egan_Soos_13

The housing boom is driven by escalating land prices, reaching a peak in 2010 at 298 per cent of GDP. The land market bubbles of 1974, 1989 and today are clearly demonstrated in the figure below.

Egan_Soos_14

The cost of construction has remained steady for the last quarter century; the entire housing price boom has been in the land component.

Egan_Soos_15

As land prices have boomed, so too has the value of the total housing stock relative to GDP.

Egan_Soos_16

The Kavanagh-Putland Index compares the ratio of the total value of property sales to GDP, experiencing an exceptional rise since 1996. The fall in turnover after the GFC has caused the KPI to trend downwards, though the latest boom has led to a recent uptick.

Egan_Soos_17

The debt to cash flow ratio indicates how many dollars of debt an investor holds relative to net cash flows. Steady rents and the rapid growth in mortgage debt have caused these ratios to significantly increase, suggesting the total housing and property investment stocks are dangerously overleveraged.

Egan_Soos_18

Since 2000, almost all mortgages from both bank and non-bank lenders have allowed for a loan to value ratio (LVR) equal to or more than 80 per cent; in 2008, 26 per cent of mortgage offerings had LVRs equal to or more than 100 per cent. Loan offerings should not be confused with loan approvals.

Egan_Soos_19

Interest-only loans have reached new heights for owner-occupiers, and if the current housing boom maintains its strength, the ratio for investors may soon eclipse the peak set in 2008. IO loans are predicated on constantly rising prices, comprising a useful tool in every Ponzi speculator’s arsenal and thus should be banned.

Egan_Soos_20

The housing supply index compares the flow of new net dwellings to population, adjusted for replacements and demographic change. A value of one indicates balanced supply, while a lower or higher value indicates oversupply and undersupply, respectively. Almost three quarters (71 per cent) of the housing price rise between 1996 and 2014 occurred during the period of rampant oversupply between 1996 and 2006.

The recent period of undersupply may not be overly problematic if new households soak up some of the previous years’ oversupply. Rents are falling in Perth, Darwin and Canberra, and holding steady in the other capital cities (except for Sydney), suggesting a structural shortage is implausible.

Egan_Soos_21

The trends emerging in a host of housing-related indexes and ratios are symptoms of Australia’s largest housing bubble on record. A rupturing of the bubble was prevented in 2008, following radical intervention by the Rudd government to bailout the banking and financial system, including the provision of generous FHOB grants that reinflated the land market.

Previous governments may be excused for overlooking bubbles in both the stock and land markets which were obvious in retrospect. The current administration, however, is acutely aware of the risk in the residential property market, even though it predictably claims prices are rational due to a fabled shortage. Consequently, the government stubbornly refuses to implement policies that materially reduce housing prices, despite the oft-repeated recommendations of government inquiries.

The claims made by government and FIRE sector economists that there is no bubble should be dismissed on the grounds their assertions are predictable and therefore tells us no new information. The economics profession has never warned the public about any asset bubble in Australia’s history, so this should come as no surprise. In the US, only 15 out of 15,000 professional economists were competent enough to identify their bubble; in Ireland, it was only three.

What is the outlook for the housing market from here? Unless investors experience a ‘Minsky moment’ or a black swan event takes place within global markets, further housing price inflation is possible throughout 2015 and even into 2016, especially considering the possibility of a further interest rate cut. Any significant falls in housing prices will invoke the RBA’s use of the backdoor bailout mechanism (the Committed Liquidity Facility) to prevent lender failure, while the government could implement a new FHOB under the pretext of helping first home buyers.

Another reason for expecting further price rises is that the mortgage interest rate has fallen significantly since 2008. To measure the degree to which prices reflect expectations of capital gains, the ratio of the mortgage interest rate to the residential gross yield is a useful indicator. When the ratio is relatively high, prices are mostly reflecting expectations of capital gains; conversely, when the ratio is low, prices mostly reflect rental yields.

The end of the largest mining boom since the gold rushes of the mid-19th century (falling commodity prices, terms of trade and capital expenditure), rising unemployment and underemployment, and negative real wage growth will make further increases in the stock of mortgage debt difficult. As a result, Australians should expect the government to more aggressively court foreign investment: importing irrational exuberance to further inflate the bubble when domestic demand begins to ebb.

If history teaches us one thing, it is that history is rarely learnt from. Given the government, FIRE sector, academia, home owners and property investors have no interest in acknowledging the obvious, the bursting of the largest housing and land market bubble in post-WW2 history will result in immense economic and social chaos.

Comments

  1. Well done again, Paul and Philip. Paul has one of the best brains in Australia for dealing with the housing situation. He digs and digs and analyses exhaustively. His comprehensive and thorough posts on the old Bubblepedia used to leave me gobsmacked! 😯

    This article is another great contribution and paints a clear and damning picture!

    • R2M, What will paint an even clearer picture will be the printout showing the loss of value of super funds when the punters receive their valuations this Jan.
      The wipe out of stocks which comprise the majority of super fund investments has been huge. Probably the largest since records began.
      Many investment properties previously held in reserve will be on the market early Feb. Watch what happens then WW

      • @Wiley Wolf top post and a point to remember. I would add to the encouragement of foreign investment mentioned in this article that this assumes Australia is still regarded as a safe haven by foreigners. Foreign investors have a tendency to repatriate their cash in times of stress. What sort of fool invests in a depreciating currency? A Chinese fool? Any Chinese investor that bought in with AUD/USD @ 1.10 – 0.95 range has seen any growth wiped out if they have repatriated this cash overseas (not if the cash remains in AUS). The AUD cannot fathom the impact of capital flight to USD in coming years – a safe haven (eg. impact on RUS rouble). The Australian housing bubble has been funded by cash borrowed overseas and domestically with cash supplied by Australian banks but for the most part sourced overseas again impacted by depreciation of AUD. Australia is aligned with the Chinese business cycle, 16 Trillion USD equivalent + of money lending from QE needs to be addressed in China, Chinese growth is forecast at best 7.5% that figure is more likely to be 4.5%. Someone has to call in the debts and Australian banks in their entirety are caught up in funding their balance sheets (of 60% real estate) with foreign loans.

        Bill Gross mentioned the US of A will achieve no more that 2% growth in coming years.

        The greater fool theory in Australian real estate is the catchphrase of 2015 beyond. The party is well and truly over and the great unwind is already upon us, it would be a brave person to forecast another few years or more of groth in this bubble…..this means it is too late for those fools already engaged in the Australian real estate ponzi. AUS exists in a world economy and we have exposed ourselves to international capital….there is no hiding from this and the consequences will be imposed upon us and there is nothing any Australian government can do to prevent this. Dream on greater fools….no macro-prudential means will avoid what is already upon us. It is time to run for the exit and many I would presume will run for the nearest airport with tickets to Greece or some other place to hide from the debt collectors.

      • How do you know this wont just drive more people to add more property to their smsf ?
        If one asset class tanks people will move onto the other.

  2. No mention of the developer contributions that drove up the cost of producing land.

    No mention of the introduction of a GST which drove up the cost of producing land and construction costs.

    Those events are pretty clear in the first graph and they are irreversible.

    No mention of the fact that although the tax aggregate of housing income is negative, the aggregate rental income over interest cost is positive by about $9B according to the tax stats for 2012..

    • Meh, those extra costs are only a small part of the story, PF. Are you missing the woods for the trees?

    • They, GST and Developer costs, can be reversed in a second, Peter! Infrastructure Bonds, to remove the initial burden from the developers costs, and something as simple as GST exemption ( eg: like food) can do that. When “the bursting of the largest housing and land market bubble in post-WW2 history will result in immense economic and social chaos” happens they may be part of the mix….

      The ‘exciting’ thing about this article, is that even the authors don’t expect anything to happen in the near term. That, I guess, is what those denominated in roubles thought last week as well! When markets’ go’ it’s because even the doubters, doubt. And when they go, big % falls happen in the blink of an eye.

      • “The ‘exciting’ thing about this article, is that even the authors don’t expect anything to happen in the near term. That, I guess, is what those denominated in roubles thought last week as well! When markets’ go’ it’s because even the doubters, doubt. And when they go, big % falls happen in the blink of an eye.”

        Spot on Janet ! I’ve been waiting a l o n g time for the housing crash – – hope it happens soon as renting gives me the $hits at times :)

      • so when you don’t have a counter argument you merely attempt to discredit the messenger.

        Come on Leith you can do better than that.

        Explain to the readers how the introduction of substantial government cost inputs don’t matter to the end cost of produced land and housing.

      • Rent Seeking Missile

        Leith, probably not a good idea to go ‘ad hom’ on one of your regular contributors when you are running a commercial website.

        Pete, as usual, made good points that beg for a considered response – especially because they challenge the narrative presented in the main article.

      • Explain to the readers how the introduction of substantial government cost inputs don’t matter to the end cost of produced land and housing.

        Pete, as usual, made good points that beg for a considered response – especially because they challenge the narrative presented in the main article.

        I think Leith has noted enough times that supply and demand matters.

      • “Exactly Alex. Phil Soos and I differ very strongly on the supply-side”

        You have missed my point. I’m not talking about the effects of supply or demand. That will certainly affect price growth oscillations but it isn’t a cost for the land developer or the builder, that is only an opportunity to make an extra profit or when supply exceeds demand it will force them to sell at a loss if necessary. That’s a normal market force.

        What I’m talking about are the added costs put in place by the various levels of government that the manufacturer of land and houses cannot avoid or trim through greater efficiency. That has to be passed onto the end buyer, and if it can’t be passed on because the buyers can’t afford it, then no more land or housing will be produced until someone is willing to pay the price. Then your demand/supply forces come into play.

        That’s the problem that we are looking at. I could add on the added compliance costs, higher engineering standards, cost of impact studies, requirements to contribute land for the community enjoyment like parks and recreation centres, but I think that we all appreciate that we want those things and are prepared to pay extra per block for it. It is still an extra cost though.

        Then there is a further 10% added for the GST and usually another 5% added for stamp duty for non FTB’s.

      • That assumes that all costs go to the bottom line, Peter. What….if the top line takes the hit? You know, the purchase price of the land/site in the first place….

      • What I’m talking about are the added costs put in place by the various levels of government that the manufacturer of land and houses cannot avoid or trim through greater efficiency

        There is no argument there – never was. Leith and others here have noted these same factors many times although they are often bundled with others as “supply side distortions.” What I think you’re being called on is an overly narrow focus which fails to examine how demand is also being distorted by multiple policy settings. Some might argue that is due to bias on your part.

    • “…..Those events are pretty clear in the first graph and they are irreversible…… ”

      Peter are you developing a new theory of constitution law?

      “A law in relation to property is beyond the power of the state, who passed it, to amend.”

      What you really mean is that you believe they will be politically difficult to change while sensible reform is resisted by those who profit from the status quo.

      And of course that is correct.

      • Exhibit A of exponential increase in the cost of land due deliberate drip feeding Sydney and increase in demand due to investor activity and offshore money.

        Tidy Red brick 3 bedda sold for $300k in 1999
        Same Red brick 3 bedda sold for $990K in Nov 2014

        http://house.ksou.cn/p.php?q=Castle+Hill&sta=nsw&id=1422309

        Place has a updated kitchen but not much more improvements.

        This is what happens when the family home is viewed as another asset class.

      • Red

        You may call it drip feed, but hell we’ve had enormous population growth in that time – ill guess 20%+

        And had low interest rates, tax concessions etc etc
        Include GST and other upfront costs.

        Are you really surprised?

        Your figures reinforce a doubling every 10 years.

        PS. My Westpac insider tells me house prices have levelled or declined in the last 3 weeks. She tells me there’s a reversal taking shape

        FYI My house price hasn’t moved much in 5 years.

      • My RE contacts in Geelong are pointing to house prices going backwards in outer Geelong.

        I had a brief chat with HnH on Tuesday and he was talking about the possibility that parts of Melbourne are doing likewise.

        That said, I dont think it will be allowed to run far, and I think about the only impact of a rate cut in Feb will be to support real estate prices.

      • Gunna,

        “…That said, I dont think it will be allowed to run far, and I think about the only impact of a rate cut in Feb will be to support real estate prices…,”

        Well that is the ONLY objective of rate cuts in 2015.

        I notice that the Master Builders reckon construction might top 200,000 over the next 12 months.

        Without lower new home prices the govt and RBA must banking on keeping the population ponzi at full throttle.

        Or a lot of new construction remaining hygienically sealed by off shore buyers and thus off the market (unless the Bedroom Liberation Army score a few wins).

      • I tend to agree, the plausible objective of supporting aggregate demand (as opposed to RE) was a tad more plausible over the last couple of years – I think by Feb (and I think they will need to go twice in 1H 2015) it will be diminishing rapidly (so they will need to talk about bringing AUD down – and prepare for adjustments to the language of where they think it needs to be. I think there should be a nearest the Pin competition here at for the date at which the RBA first begins to mention as desirable/possible an AUD handle with a 6 in front of it).

      • PPS

        My Westpac insider is obviously based on contracts made 4 or more weeks prior.

        Say at least 7 weeks prior to her seeing the trend.

        I’ll also add, my real estate guy has been ringing me lately to sell me development property. ….

        Told him I won’t be looking for at least 6 months.

      • At 200,000 homes and average occupancy 2.6 that is housing for 520,000.

        At population growth just on 400,000 they must be looking for either a population ponzi expansion (50% rise in NOM) or a handy increase in offshore buyers.

        In my inner west of Melbourne neck of the woods, the Bedroom Liberation army does all right as little old ladies pop their clogs and are replaced by families of five or an equal number of house sharing twenty somethings.

      • Statsailor

        “..In my inner west of Melbourne neck of the woods, the Bedroom Liberation army does all right as little old ladies pop their clogs ..”

        Are the BLA accelerating the process?

        Has Mr Modest Mouse been seen in the area?

        Just waiting for nature to takes its course is not exactly what comes to mind when I think of an army of bedroom liberators. :)

      • Only by shocking and irritating them to death with their hair, their clothes , loud music and especially their lack of passion to get on the first rung of the property ladder.

        EDIT: It’s a war of attrition, siege warfare. Whoever lasts the other out is the winner…

      • Haha very funny PFH.

        I never called upon a mobilisation of the BLA….that is pure fiction. Yes I, like Egan and Soos believe the supply side argument is BS, but empty bedrooms have no role in this critique.

        And yes, Modest Mouse is where I derived my name….Fire It Up PFH.

    • No mention of the introduction of a GST which drove up the cost of producing land and construction costs.

      GST adds 10% (and that’s assuming other taxes weren’t removed at the same time).

      House prices have increased an order of magnitude more than that since it was introduced.

      • Look at Soos’ land and dwelling/GDP chart above to see the impact the GST had on construction costs. The GST replaced wholesale sales taxes, many at higher rates than the GST. ( I loathe the GST too, but for other reasons)

        What we have is land cost inflation, a brake on Australia’s productive activity.

        And check out Stiglitz’ view it is all in urban land prices, quite an insight. Remember, he has a Nobel prize and you don’t.

        http://www.nakedcapitalism.com/2014/12/joseph-stiglitz-economics-must-address-wealth-income-inequality.html

      • David prices to GDP is a complete BS measure when talking about prices themselves. Changes to GDP don’t immediately translate to house prices.

        Prices actually rose well before the GST date in July 2000 because anyone wanting to build a home wanted to get in early, so builders jacked up prices. Post GST price of construction fell even though the GST was added. Of course when demand for new construction normalised costs rose to reflect the added 10% cost.

        You may remember that the FHOG was introduced to compensate home owners for that added 10% price increase.

        Amazingly people are calling for an increase to the GST which will immediately convert to an increase in the cost of home ownership.

        Seriously David how long are you guys going to deny that over a couple of decades income taxes were reduced, but to compensate higher tax was added to consumer goods and housing.

        If you can’t effect a political change then housing prices will remain elevated forever.

        In the short term a crash can happen, and a few will get lucky, but long term house prices will remain where they are and track wage growth. There is nothing else they can do without any real change to the tax system, and in this country talk of introducing any new tax is a hanging offence – politically speaking.

      • “Seriously David how long are you guys going to deny that over a couple of decades income taxes were reduced”…

        And yet the share of total tax from income taxes is the same as the 1950s and is forecast to increase to record highs over the coming decade, thanks to bracket creep. Have you not read Dr Martin Parkinson’s many speeches on this issue?

      • “There is nothing else they can do without any real change to the tax system, and in this country talk of introducing any new tax is a hanging offence – politically speaking”.

        Yesterday you were saying that taxation should be used to mop up inflation.

        Any chance you could adopt a consistent party line from one day to the next?

      • Prices actually rose well before the GST date in July 2000 because anyone wanting to build a home wanted to get in early, so builders jacked up prices. Post GST price of construction fell even though the GST was added. Of course when demand for new construction normalised costs rose to reflect the added 10% cost.
        So the GST still impacted on prices which was the point being made. It still doesn’t explain the sharp rise in land costs does it? So your point is telling us “ ”

        You may remember that the FHOG was introduced to compensate home owners for that added 10% price increase.
        Here and elsewhere it has been noted more times than I care to remember that this was simply capitalised into prices thanks in large part to a multitude of policy settings that encouraged capital to gravitate to property.

        Amazingly people are calling for an increase to the GST which will immediately convert to an increase in the cost of home ownership.
        Why stop at the GST? It is fairly clear taxation can be reduced via property which seems to be a much bigger part of the problem.

        If you can’t effect a political change then housing prices will remain elevated forever.
        Where is the denial of this point? The issue is that you seem preoccupied with some changes and not others.

        In the short term a crash can happen, and a few will get lucky, but long term house prices will remain where they are and track wage growth.
        What about interest rates? Will they stay low for the long term? Is the “new norm” just a term some use to reassure/reinforce sentiment? I know there’s a lot of super money being funnelled into property markets but, I always find these assertions of certainty a tad flimsy.

        There is nothing else they can do without any real change to the tax system, and in this country talk of introducing any new tax is a hanging offence – politically speaking.
        Perhaps reform doesn’t always necessitate a new tax. That certainly has been argued here many times (ie: ending CGT concessions on IP, NG……)

      • “And yet the share of total tax from income taxes is the same as the 1950s”

        Again you have missed the point. The added cost of production of land and houses due to the direct targeting of housing via developer levies and other contributions is baked into the end price that homebuyers have to pay. What taxes people pay as individual wage earners on top of that is another issue.

  3. I would like to understand how the burst of the bubble will not drive unprecedented economic activity. There will be very large numbers of buyers foreign or domestic who can now afford to complete decades worth of renovations. If englobo land is freed at the same time. In one swoop, with a weak dollar, Oz is suddenly competitive again.

    • How are they going to afford that? What will be left is nominal debt far outstripping asset value ie; Mass negative equity like the UK had in the late 80’s; the USA/UK (again!) 5 years ago: Spain..to this day!. It took nearly a decade for the UK to recover from that; the USA less. In the meantime, jobs were lost; families broke up; houses were repossessed; etc etc. None of those is supportive of economic activity. Arguably, all that was ‘good’ for economic activity was lower interest rates – that stimulated more debt. And that…will be the problem for us all, going forward.

      • Maybe just today but is it always a given that house prices are a measure of economic prosperity? If there are economic activities more worthy of investment than housing who does it hurt? In the extreme the dollar drops to 40c. Inflation is then?

      • “..it always a given that house prices are a measure of economic prosperity.” Really? So why have German house prices been continuously undervalued on any measure that you care to look at, against one of the success stories of economic activity? Sure, they have dis-incentives to speculate; incentives to rent etc. But isn’t that the point? They know that house prices are not an indicator of economic success. Production, jobs and wages are!

        (NB: I have no problem with housing as a home, or even as a speculative vehicle IF it’s not underwritten by the rest of the economy. If you want to speculate…go for it! But don’t expect wider society to provide your profit for you. You get that from your own risks and skills :) )

      • A bit selective there Janet. You missed the word ‘is’. Australia is also not Germany, Spain or Ireland. I expect that here a protacted period of low interest rates and expecting that most housing is positively geared anyway will mean that any drop in prices will be halted by more investment. Would be FHB’s will forever be renters and recent OO’s will become renters and forced to let their owe homes. Otherwise like in the US funds will become landlords. In every way even with a crash those who are the losers now will still be that but probably with more company.

      • “Otherwise like in the US funds will become landlords” Ah! Now you see what’s coming.
        It’s the way it always was, by and large. Landlords rented to most of the population in times gone by. Landlords who funded the purchase of property from surplus funds from other, real adventurers. So it will be again. And who is going to be left holding the debt-baby, when all this happens ( if it is indeed the Hedge Funds who are today’s landlords?
        You…..(third person plural!)

        (PS: Australia is not Germany; you’re right. As Germany is not Spain. As Spain is not Ireland etc. Yet all have a different spin on property as an ‘investment’ in social well-being. Who is the winner from that lot? And who does Australia have the best chance of emulating? The answer, I’d suggest, is not Germany!
        Oh. And it’s not interest rates, the price of debt, that is important in home/property owning. It’s the capacity to service the debt. Low interest rates may keep some imprisoned in the properties, but the escape route – someone else to buy them out of debt – is all that matters. What happens when unemployment rises? Wages fall? Other can’t ‘hang on’ and have to sell and drag down the price of all nearby property? Imported inflation eats up the savings from lower rates etc)

  4. Thanks to Soos and Egan, for a dispassionate look at the metrics.

    Data tops the meaningless gesturing, the sneering and jerring, the steady gaze into the rear-view mirror by the property edifice.

    I am with Janet on the ‘when’. The irrational bullish sentiment will crack – it always does – at the most inconvenient time. A key task then is to prevent the heavily indebted transfering the losses and spent risk to government (read: taxpayers, wage-earners) to protect their well upholstered butts.

    PF, still no sign of the homework Gunnamatta set you. You have no credibility.

    • No I couldn’t be bothered, but they were all answered a long time ago by many others.

      Google it.

      • We’ll call that the soft option shall we?

        Though Peter has comprehension difficulties on anything more than 3 paras…

        Peter loves some obfuscation………..

        These Qs were posed to him some time ago. Generally Peter’s line is that nothing can be done that will in any way diminish the desirability of speculating in real estate, and that if anything might conceivably be done then it will be the longest most difficult option conceivable, with a view to implying that the situation we currently have is the best of all possible worlds…

        Do you think Australian residential real estate prices are in a bubble?

        What do you propose as measures to improve Australian housing affordability?

        Over what timeframe do you think this affordability could be improved?

        Do you think that renting is more expensive or cheaper than buying where a large mortgage is involved?

        Do you agree/disagree that the concessions for Australian real estate – Negative gearing, capital gains tax concessions in particular – are an effective use of Australian tax policy. Do you believe they help promote development of a better economy?

        Do you agree/disagree that the concessions for Australian real estate disproportionately benefit older Australians with more assets?

        What would you advise people thinking about buying now to do? take as big a loan as they think they can reasonably afford and plough it into a house, or save up?

        Would you agree if they bought now they would be paying off someone elses speculative position?

        In what context would you advise people against buying now?

        Do you think not addressing Australia’s real estate costs is a factor in Australia’s economic competitive position?

        Do you think lowering interest rates to prompt an expansion of aggregate demand will expand aggregate demand by more or less than it rewards those with a position speculating on rising asset prices?

        Do you think the Foreign Investment Review Board adequately monitors applications made by foreign nationals to buy existing Australian residential real estate?

        Do you think Austrac adequately monitors funds originating offshore coming into Australia to ensure the traceable probity and provenance of those funds?

      • You spout absolute drivel, PF.

        If you cant be bothered to address the facts – and you don’t have to accept our framing – then your posting here is simply pollution, or in internet terms, damage.

        Is this a personal attack? No. It goes to the basis of your argument, motivated by the desire to capture the life-time incomes of wage-earners simply for the passing commissions.

    • “A key task then is to prevent the heavily indebted transfering the losses and spent risk to government (read: taxpayers, wage-earners) to protect their well upholstered butts.”

      Yeah. How do you do that?

      • @littleguy
        Did Iceland achieve that? What they did took real courage standing up to the world financial thuggery.

        I believe NSW premier Jack Lang tried to do something along these lines but the FIRE sector (British Banks) had him fired.

        So I guess it wont happen here.

        No balls.

  5. Look at the upturn in debt/income from 1991.

    With the introduction of compulsory superannuation, people simply stopped saving in other ways and began to borrow against the value of their houses.

    Compulsory superannuation:

    a) failed to achieve its ostensible objective;

    b) costs the budget upwards of $18 billion a year (mostly in the form of tax concession to the wealthy); and

    c) costs (by coincidence or otherwise) almost exactly the same in fees.

    • yes the deviation of real savings (i.e paying off mortgage, having excess savings to fund productive investment in businesses, infrastructure etc) coincides exactly with the introduction of SGC

      While there is phantom wealth accumulated in the super pool (by my measure, its almost all property related in the form of direct property, bank shares and cash deposits (ie. realized gain from property speculation) with the remainder being mining shares) there has been next to no real wealth created by real investment in productive output.

      this is the legacy of trying to “force” people to save – we’ve forced them to speculate instead.

      • Precisely!
        Rising property prices have removed the need for us to actually work. Why would we, when all we have to do is borrow for that next Government encouraged/supported renter and wait for the guaranteed ‘income’ to hit our bank accounts once every X years….

    • This is why the Government’s suggestion of future Super payments being made as annuity type incomes as opposed to lump sums has the masses quaking in their boots. The new strategy of going into retirement with a mortgage and using a super lump sum to pay it out doesn’t look so attractive suddenly.

    • 1991 was also roughly when inflation targeting started, and when the recently deregulated banks decided to focus primarily on home loans after stuffing up business lending leading into the early 90’s recession.

    • Rent Seeking Missile

      Good points from Stephen and subsequent commenters.

      And as Chris says, the funds in the superannuation pool are vulnerable to rapid evaporation. What a mess.

  6. Only a quick guestimate, but if we accept the post WW2 boom/reshifting in property values (derived by increasing immigration and increased wealth in average household, and hence wanter more luxuries etc, offset by productivity gains), and consider the reasonable trend line from the 1950s through 1990s but then extend it through to now, wouldnt that bring property down around 40-50% to “real” value?

    Its quite easy to see that come the turn of the century, the housing market was goosed by a quango of colliding factors, all too easily explained, all too easily remedied but all too easy to wipe under the carpet when you’ve created a few extra trillion dollars of wealth for those who owned property up to that point.

    Bringing the bubble down to realistic levels is going to be the biggest challenge facing the Australian economy in this decade and probably the next.

    • Well as I was getting to the other day i reckon the issue of bringing down house prices is central to Australian economic competitiveness and the only way we craft an economy which earns a buck (sans another mining boom).

      So I reckon it needs to be quick.

      • The quicker the better but don’t we all know that it will never happen anytime soon?!
        Politicians with 300 million $ worth of property portfolio will never let that happen any time soon and as Chris mentions above, maybe a decade a 2 we will start seeing some change.

      • Yeah, I tend to that view. But I also think that without some serious (and fast) work on Australian competitiveness, short term sentiment and data is going to undershoot significantly to the downside.

        I reckon AUD needs to be at least 10 cents south of where it is, and as long as we are that heavy the employment situation worsens, running risks for banks etc

      • Skippy and pfh

        I like to think of it as retro….(I saw them live in concert at Dallas Brooks hall in Melbourne in 1980)

        True quality never goes out of fashion

    • The last four mining booms (starting late 60′s) without fail had housing booms lagging by four years. Since mining topped out in 2013, this charade could continue until 2017. The conditions seem to support it – more rate cuts likely, foreign buying still strong. Government intervention through MP and foreign purchasing inquiries are just hot air.

      There’s still a 40% hit coming, no matter how you analyse it……..rents, incomes, even charting past recoveries and gradients.

      LVOs chart of Mining Percentage of GDP up against Stapledon tells the story.

    • Yes 40-50% nominal is my calculation also. This should be the target, but our “leaders” aren’t interested. Meanwhile we get older. C’mon black swan – an Australian animal 😉

      • Geez Andy!!

        No leader would be interested in 40-50% hair cuts off the top.

        Nor should you unless you give an as long a time frame as it took to get there (and I’m talking real not nominal).

        Do you really want your kids or your parents not to work? Clearly you will continue to work or sell (what ever you’re in business for), otherwise you wouldn’t say such a thing. 😉

      • Esco the world worked fine when prices were cheaper and affordable… Arguably better than now.

        40-50% is nominal, absolutely. It will change as inflation/deflation (lol I wish) cause adjustments.

        Whatever happens if/when such a haircut occurs is warranted and fair. Interesting that you call a reversion to fair value a haircut although it is very common language.

        No stress though, I’m an idealist (I can already hear the chuckles) not a decision maker on this.

  7. What of the idea that we’ve experienced a once in a lifetime “maturation” of financial engineering, which has flooded markets around the world with credit?

  8. The best indicator of a bubble is the divergence between prices and rents (price to earnings), which cannot be explained by any fundamental factor.

    I disagree that the prices cannot be explained by any fundamental factor. I suggest that current and future rent and interest rates are fundamental factors that CAN explain current prices.

    Consider the weekly rental for a 3 bedroom dwelling in the Fairfield/Liverpool area
    In March 1987 this cost $128
    source http://www.housing.nsw.gov.au/NR/rdonlyres/7F9FB343-E887-4A4E-BF24-18CADCEEC14B/0/RentReport1JUNEQuarter1987.pdf

    In June 2014 Fairfield cost, $420 Liverpool cost $440, so let us call it $430 for comparison’s sake.
    source http://www.housing.nsw.gov.au/NR/rdonlyres/9E59396A-F829-4D7A-8AD2-4FC6F2E23309/0/RSReport108.pdf

    So rent went from $128 to $430 in 27.25 years. 2014 rent is 3.4 times what it was in 1987. I figure this is a 4.547% compound increase. A 4.5% compounded increase in rents over 27 years is huge.

    This increase in rents goes a good way to explaining and “justifying” current selling prices of housing.

    If an investor believes the following:
    1) The next 27 years will see a similar growth in rents AND
    2) Interest rates will stay low enough over this period AND
    3) The investor can make up any shortfall until the property becomes cashflow positive
    THEN
    Buying property at today’s prices and yields is sensible and rational based purely on rental return with no consideration given to capital gains.

    • Hey Claw, is that a bit like what FMG/BCI/MGX/AGO thought would happen to IO prices, that they would keep compounding?

      I guess they can make up the shortfall in prices until the next IO boom. :-)

      • what FMG/BCI/MGX/AGO thought would happen to IO prices, that they would keep compounding?
        I can’t speak for those companies.
        Speaking for myself I do not have sufficient faith in all 3 factors to make large geared investments in property – however many others do and are.

        As far as I know no one was predicting that epic rise in rents from 1987 to present.

        My point stands: Fundamental factors that CAN explain current prices.
        My second point would be: The epic rise in rents is an indication of some kind of shortage.

    • Claw,

      I think your analysis of RE is vastly greater than your average RE investor. If the ones I’ve meet over the yrs are anything to go by it’s pretty superficial.

      I don’t have your knowledge and understanding, but I’d have thought the rise in rents is nowhere near as great as the rise in prices. Would you buy a company where the profit is increasing, but the cost to purchase that company is outstripping the increase in profit. That appears to me to be the case in RE today. Obviously the purchase of 27 yrs ago has paid off in that respect, but for the life of me I just cannot see that continuing for much longer.

  9. From Janet

    “I have no problem with housing as a home, or even as a speculative vehicle IF it’s not underwritten by the rest of the economy. If you want to speculate…go for it! But don’t expect wider society to provide your profit for you. You get that from your own risks and skills”

    +1 Sister

    I’ve got about 600k equity in my Sydney Home, purchased 10-11 years ago but as i intend to live and raise my 2 kids (both under 6) here for the next 20 years, a 50-60% price correction wont affect me too much, though I will feel a little more financially insecure, so what.

    Negative gearing on secondhand properties and other property tax concessions must go, in the current economic situation they are immorally, excluding Young and working class people from the great egalitarian, Australian dream of, near universal home ownership.

    The way in which the Media and politicians don’t call out the FIRE vested interest for the wrecking of this universal dream is appalling.

    A total collapse or violent revolution seem to be the only possible way to “reset” this out of control, concentration of wealth in ever fewer hands..

    • Straya is a paradise, dont you know?

      A fools paradise.

      Soos and Egan will cement their place among those who vigorously and consistently called out the bullshit and the bullshit-artists.

      And kudos to them too.

  10. Awesome post, so, so depressing though too. This data is exactly why I hate specufestors and the Aussie RE culture.

    “rents have generally tracked the rate of inflation”

    Or have led the rate of inflation? Remember rents are included in inflation measures. How have rents tracked nominally over time?

    • How have rents tracked nominally over time?

      An epic rise.

      Supply of extra houses has been enough to trip Soos and Egan’s oversupply indicator, but has not been sufficient to keep rents or prices below eye-popping levels (see Soos charts and my data in above post).

      Each person has to ask themselves what would they rather see?
      1) Soos and Egan’s indicator showing that shortage is a myth.
      2) Affordable rents and prices so that young and poorer Australians can obtain decent shelter.

  11. Sigh…


    R is for Rentier
    April 5, 2014
    By Michael

    The latest instalment to the Insider’s Economic Dictionary.

    Race to the bottom: A term for dog-eat-dog competition by which countries compete by cutting wage levels so as to produce in the cheapest market, not by raising wages and labor productivity. The effect is to shrink the circular flow between producers and employee-consumers, leading to declining living standards. Under these circumstances productivity is increased only by working the existing labor force more intensively and cutting back medical insurance, old-age pensions and other social welfare expenditures. (See Free Market.)”.

    http://michael-hudson.com/2014/04/r-is-for-rentier/

    Skippy…. great glossary… imo.

  12. One of the best cynical assessments you will have seen yet in any mainstream media:

    Peter Lyons: Bet the house on city’s weatherboard economics

    5:00 AM Tuesday Dec 16, 2014

    NZ Herald

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11374675

    “Now that the annual growth in the price of houses in Auckland exceeds most of our annual incomes, it’s time we kicked back.

    There is little point in continuing to work when the weatherboard three-bedroom bungalow is generating such massive returns on an annual basis. Why rise at 6 in the morning to endure the commute to the factory or office when your house makes more dollars on a daily basis? It’s time we garnered the return for our wisdom in owning the roof over our heads. Life is short. It’s time to consider a lengthy OE while letting our houses do the work for us.

    It is amazing that we are the first civilisation to unravel the alchemists’ secret right here in Auckland. Some of the greatest economic thinkers throughout the ages failed to recognise a simple reality that is playing out in suburbs such as Avondale and Glen Eden. I knew that Adam Smith, John Maynard Keynes and Milton Friedman lacked real insight into economic affairs.

    The economic success of a nation is derived from the ownership of weatherboard villas, bungalows and granny flats…”

    Do read the whole thing…..

    • What a great article, Phil! ( I hadn’t seen it!)
      The only bit missing is the “…and debt is only a double entry book-keeping entry, after all. We will never have to return to work. Other peoples’ less wise than us, who don’t understand this, will feed us; clothe us and entertain us, all supported by book-keeping entries that can be written…well….forever”

    • My thoughts exactly. Why the F should we work?

      All the newly unemployed in Perth, just buy a house!
      All the languishing youth around the country, just buy a house!
      To the Treasurer and his black hole budget situation, Joe, just get out there and buy a few thousand houses!

      Nothing can possibly go wrong!

      We’ve worked out how to alchemise wood-rot weatherboards into 24 carat gold!!

      NOTHING CAN POSSIBLY GO WRONG.

      :)

    • Here I have been working, paying massive amounts of tax, and my niece in Sydney is watching her house go up in value by much more than my after tax profit, by picking lint out of her navel. I have given up.

      • “Here I have been working, paying massive amounts of tax, and my niece in Sydney is watching her house go up in value by much more than my after tax profit, by picking lint out of her navel. I have given up.”

        Its an illusion that WILL finish one day. Some back of the envelope figures follow to show how “smart” it is to be the “owner/landlord ” of an “investment” property. This in Perth & based on real life recent prices.

        Home Brand New 4br single story on 514 sqm including Aircond, alarm & large Double LU Garage in (nice) working class area , close to City (12min)

        Purchased 13/5/14 at $775k + S/D 31k — All Up $806,000

        Rented @ $700pw –$ 36,400 PA – Less 10% for Agent & round figures 10% for rates/water & maintenance
        (Still a high rent for this area)

        Net Rent $29,120 — Return 3.61% — FA isn’t it?

        If 80% of purchase price borrowed ($620k excluding S/D) at fixed rate for 3 years
        @4.8% = $29,760 PA interest. Income Net was $29,120. Loss – $640 !

        With rising unemployment & hopefully closer to a major housing adjustment – can you feel the pain to come?

        Renting with all its downsides is the preferable option until prices come down in a big way.

      • Blasphemy AU!!!

        Shame!!!!

        Go back to your own country!!!

        This is Speculanistan!!!

        House prices are all we have left.

        Please!

    • That’s a keeper! What’s astonishing is how many ‘believe’ it to be so!

      C’mon, whistle or hum along- makes the read so much FUN!

      Oh the world owes me a living
      Deedle dardle doodle deedle dum
      Oh the world owes me a living
      Deedle dardle doodle deedle dum

      If I worked hard all day I might
      Sleep badder when in bed at night
      I sleep all day so that’s alright
      Deedle dardle doodle deedle dum