The IMF has released a huge study of the Australian housing bubble. Interpreted within its framework of bureaucratic conservatism it makes alarming reading.
1. Australia’s real house prices have risen significantly faster than OECD average over the past two decades. After growing broadly in line with real GDP per capita from 1960-90, Australian real house price inflation picked up sharply in the mid-1990s, exceeding income growth by a wide margin (Figure 1, panel 1). As a result, the house price-to-income ratio rose sharply, despite the terms-of-trade boom that boosted Australian incomes over the past decade, also exceeding the average increase among OECD countries (Figure 1, panel 2). In view of the strong price increases, many common measures of housing valuation based on deviation from long run historical trends, such as price-to-rent and price-to-income ratios, suggest overvaluation of about 20-25 percent. 2. Household debt-to-income ratios have also risen. The household debt-to-income ratio tripled from 47 percent in 1990 to a historic high of 154 percent in 2014 (though high
internationally, it is broadly in line with comparators such as the UK, Canada, and New Zealand). The household debt-to-income is a key variable from a financial stability and macroeconomic risk perspective as this reflects the risks borne by households and the possible amplification of house price declines to the macro economy (see paragraph 24 for further discussion of these effects).
3. Using differences from averages across countries of house prices changes to derive estimates of over- or under-valuation is problematic. One reason is that it assumes that the starting period was an equilibrium. It could be, for example, that house prices were particularly low in Australia at the starting point, and thus a faster increase represents “catch-up” not “overshooting”. One way around this problem is to compare on the basis of actual house prices rather than changes in house prices.
4. House price-to-income ratios have been rising for all measures. Nationally, house prices correspond to between 4 to 6 times income, depending on which housing type is used (see chart). However, housing markets vary significantly not only across borders but also within countries.
5. International comparison of absolute price-to-income ratios. Comparisons of price-toincome ratios are difficult owing to different national definitions of housing coverage and household disposable income. Fox and Finlay (2012) show that comparing equivalently defined price-to-income ratios across countries, Australia’s experience appears to be broadly in line with those of other advanced economies. Using OECD data shows a similar picture, where the Australian price-to-income ratio has risen above OECD average, but broadly comparable to comparator countries.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
1. Australia’s real house prices have risen significantly faster than OECD average over the past two decades. After growing broadly in line with real GDP per capita from 1960-90, Australian real house price inflation picked up sharply in the mid-1990s, exceeding income growth by a wide margin (Figure 1, panel 1). As a result, the house price-to-income ratio rose sharply, despite the terms-of-trade boom that boosted Australian incomes over the past decade, also exceeding the average increase among OECD countries (Figure 1, panel 2). In view of the strong price increases, many common measures of housing valuation based on deviation from long run historical trends, such as price-to-rent and price-to-income ratios, suggest overvaluation of about 20-25 percent.
2. Household debt-to-income ratios have also risen. The household debt-to-income ratio tripled from 47 percent in 1990 to a historic high of 154 percent in 2014 (though high
problematic. One reason is that it assumes that the starting period was an equilibrium. It could be, for example, that house prices were particularly low in Australia at the starting point, and thus a faster increase represents “catch-up” not “overshooting”. One way around this problem is to compare on the basis of actual house prices rather than changes in house prices.
5. International comparison of absolute price-to-income ratios. Comparisons of price-toincome ratios are difficult owing to different national definitions of housing coverage and household disposable income. Fox and Finlay (2012) show that comparing equivalently defined price-to-income ratios across countries, Australia’s experience appears to be broadly in line with those of other advanced economies. Using OECD data shows a similar picture, where the Australian price-to-income ratio has risen above OECD average, but broadly comparable to comparator countries.
