Bubble Bubble on the Wall, Who’s the Biggest of them All?

Regular followers would remember the below chart from my Battle of the Bubbles article, measuring potential overvaluation of the housing market by reference to total residential housing value to GDP.

Well now AusHousingCrash has provided an even better chart comparing the aggregate land values (residential + commercial + rural) to GDP/GSP from the Australian Bureau of Statistics State Accounts (see below).

The data shows that the 2010 Victorian land bubble (3.19x GSP) is currently the largest in the country. It is also the second highest of all time, behind the 2004 NSW land bubble (3.32x GSP). At a national level, land to GDP is the highest it has ever been at 2.81x GDP.

Since the housing bubble is actually a function of the land bubble – since construction costs have remained fairly stable – this chart provides another useful measure of potential overvaluation of the housing market.

And, although my residential housing value to GDP and AusHousingCrash’s land value to GDP uses different data, its the overall change and trend that matters. In this regard, both metrics clearly suggest that Australia is experiencing an unmistakable housing bubble.

With house prices flat in the September quarter, positive GDP growth, and rising interest rates, Australia’s housing/land values relative to GDP/GSP are likely to have peaked, particularly given the significant headwinds facing the market over the coming decade (see my Australian Housing Bubble post for an overview of these issues).

It’s now a question of whether we’ll experience a slow deflation or a sharp correction. I’ll have more to say on these matters in future posts.

Cheers Leith

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  1. Leith, this provides nice corroboration of your previous positions, but I think as far as your audience is concerned, if it walks like a duck and quacks like a duck, chances are it's a duck.

    You do however hit upon the real question, which is how will this unfold? Crash or coast in for a clean, albeit emergency, landing?

    I'm not aware of any situations of such extreme overvaluation having "worked itself out" so I am bracing for the former rather than the latter.

    Additionally, the move to have the federal government guarantee more non-bank RMBSs and their contunuing purchase of same suggests that they are desperate to keep the you know what from hitting the fan for the sake of the economy as well as their political futures.

    Sounds like more bubble bubble toil and trouble to me but I look forward to hearing your thoughts on the prognosis.

  2. Unless something drastic happens that's beyond their control, I'm tipping a slow correction. The government and banks have too much vested in it and are already frantically working to slowly deflate the bubble.

    Despite the cooked books, lies and propaganda spewed forth, surely they must watch the news? They can't actually believe their own bullshit? Portugal, Italy, Ireland, Greece, Spain, USA, Japan, the UK, they've all had their credit binge and/or housing bubble and are now staggering around looking for the Panadol and Berocca.

    Unfortunately it's been decided that more cheap credit is the answer, sort of like weaning a heroin addict off their drug habit with, oh I don't know, more heroin, so I don't see how it can't get worse before it gets better.

  3. Hi Leith,

    I have been reading this blog for a few weeks and something that struck me since coming to Australia was the cost of land as percentage of the total property price.

    I came from South Africa where the rule of thumb was that if you buy a piece of land, you would add improvements of at least 3 times the value you paid for the land, ie the land will be 25% of the total value.

    I have since tested this with people I converse with all over the world and that rule seem to be generally accepted all over.

    For me this makes sense from an economical growth point of view, as growth is as a matter of fact value added. From an Australian property perspective thus, the value added to a piece of land is not the main driver of the growth in relation to the rest of the world.

    Spruikers have said that property in Australia is overvalued by 40% based on the affordibility ratio, but I would like to put the following forward that comes to the same conclusion.

    From what I have seen developers advertise building a basic 4 bedroom house for between $160k and $200k. I will use the $200k in my calculations. Let's now say that the land to property ratio is 33%. I use the higher ratio as to take into account the so called higher demand in Aus. That means that in total that the land with the house should be no more than $300k. Taking the median house prices in Brisbane (540k) currently, that tells us that a 4 bedroom house is overvalued by 44%.

    I realise that the median price can be deceiving, but even if the median is overstated by 10%, it still leaves us with the property overvalued by 38%.

    The question for me however is, based on the overpriced land, will the bubble burst? Surely the governments (federal, state & local) have too much of a vested interest to allow that to happen? The worry is, if they do not allow the correction, how long will it be before the natural correction take place and will the economy be able to withstand the pain that will follow?

    Will be interesting to hear your take on this.