Just say it, Shane

AMP Capital Investors chief economist, Shane Oliver, is a curious beast. Recently he has been arguing that Australian housing is not a bubble. Here’s an example of Dr Oliver’s “no bubble” thesis from an article published yesterday in SmartCompany:

I don’t regard Australian house prices as a bubble. While there was probably a bubble seven or eight years ago, apart from overvaluation there has recently been little sign of the excesses that characterise a bubble: housing credit has been soft, investors have been sidelined, buyers have been restrained and lending standards have not deteriorated. Just as Australians have been sceptical about shares in recent years, they have also been sceptical about real estate, with only 16% of Australians seeing real estate as the wisest place for savings. Hardly the stuff of bubbles!

So confident is Dr Oliver in his “no bubble” thesis, he has even signed-on to appear at a housing debate in June, where he will represent the “no bubble” camp.

Yet, in the same article published yesterday in SmartCompany, Dr Oliver’s made the following observations:

That said, I still regard high house prices as Australia’s Achilles heel. And the reason is simple. Reflecting a huge surge in house prices into 2003/2004 and solid gains since, Australian housing is way overvalued. This has gone hand in hand with a massive increase in household debt.

Signs of overvaluation are evident virtually everywhere:

  1. Despite recent softness, Australian house prices are still running around 25% above their long term trend.
  2. According to the OECD, the ratio of house prices to incomes is 34% above its long term average, and the ratio of house prices to rents is 50% above its long term average, both being at the top end of OECD countries.
  3. According to the 2011 Demographia International Housing Affordability Survey, Australian housing trades on a median multiple of house prices to annual household income which is double that of the US.
  4. To give some examples, in Los Angeles median house prices are $US345,600, whereas in Sydney they are $US634,300. In Austin, in oil rich Texas, median house prices are $US189,100, whereas in Perth in resource rich WA, median house prices are $480,000.
  5. Finally, housing looks expensive relative to other assets. It has been argued the surge in house price to income ratios over the last 20 years reflects the adjustment to lower interest rates, which have made higher debt to income levels possible. This is clearly part of it, but it’s worth noting that rental yields on housing have fallen much more than yields on other investments which have also adjusted to low inflation. Right now the gross rental yield on housing is around 3.4%, compared to yields of 7% on unlisted commercial property, 6% for listed property (or A-REITs) and 5% for Australian shares (with franking credits). So for an investor, these other assets represent much better value.

Related to this the debt to income ratio has gone up much more in Australia than in other comparable OECD countries which also went through an adjustment from high inflation to low inflation over the last two decades.

So then, let’s go through a bubble check list. Historic overvaluation. Check. Income returns that in no way rationalise capital prices. Check. A massive run-up in credit. Check. What is this if it’s not a bubble?

Just for fun, below are some metrics confirming Dr Oliver’s points from above.

Severe over valuation:

Exhibit 1: world-beating house price growth:

Exhibit 2: strong rise in the size of the housing market relative to Australia’s GDP:

Exhibit 3: huge increase in Australia’s Median Multiples (median house prices divided by median household income):

Which has resulted in Australia having 9 of the 20 most unaffordable housing markets in the latest Demographia international housing affordability survey:

Exhibit 4: significant increase in household income going into mortgage interest payments:

Poor rental returns:

Exhibit 1: sharp decline in gross rental yields to a level far below both term deposit interest rates and mortgage interest rates:

Exhibit 2: reflecting the poor rental returns, a significant increase in negatively geared housing investment since 2000:

Huge increase in housing debt:

Exhibit 1: massive increase in Australian housing debt levels relative to income, assets and GDP:

Exhibit 2: also relative to most other developed nations (chart from IMF):

OK, that’s enough showing off. Back to the article. Dr Oliver goes on to address key risks to the housing market:

The overvaluation in Australian housing leaves it vulnerable to anything that leads to an increase in dwelling supply or threatens the ability of homeowners to service their mortages. At present there is no threat on the supply side….

The two threats to watch out for are China and interest rates. A sharp collapse in Chinese growth could trigger reduced export income and higher unemployment. China has been battling an inflation problem, and there is a risk it could over tighten. While this seems unlikely given its track record of wanting to avoid the social unrest that goes with a hard landing, it’s worth keeping an eye on.

The interest rate threat is more worrying. The Reserve Bank has indicated interest rates are likely to rise “at some point” if the economy unfolds as expected. In other words, if the global recovery carries on and the mining boom continues to heat up, its likely rates will need to rise again to make room for the mining boom without causing the economy to overheat. Four interest rate hikes, as some are suggesting, would knock affordability to a new record low.

The problem is that the combination of poor retail sales, low levels of confidence regarding household finances and falling house prices suggests households are struggling with current interest rates. Australian banks are now indicating that while overall mortgage arrears remain low, they are rising, with older home borrowers rapidly reducing their debt while newer borrowers are starting to fall behind in their payments. Further interest rate hikes, particularly before the economy has recovered from the current soft patch, risk knocking households over the edge and with them house prices. It would be best for the RBA to wait a while and then assess.

First, Dr Oliver should perhaps check up on his no supply-side threat with unsold inventories rising across the nation. Second and more significantly, mortgage rates are still far from levels considered historically “tight” yet Dr Oliver sees widespread household stress. How did all of the housing bubbles in the GFC burst? In the US, it happened as Alan Greenspan raised interest rates to levels still below what was considered historically tight. Other markets were then caught in the fallout as global credit seized up but most were also in tightening cycles.

For Australia, let’s also not discount a large number of property investors selling en masse following the retirement of the baby boomers and/or as the prospect of continued capital appreciation disappears.

Dr Oliver finishes the article warning, as I have, that there is little upside potential for Australian house prices, but lots of downside risks:

For house prices, the most likely outcome is an extended period of constrained range bound prices so income levels can catch up, but the risks are on the downside, particularly if interest rates rise much further.

Thanks to massive overvaluation and poor affordability, Australian house prices remain vulnerable to further weakness. A Chinese hard landing and excessive RBA interest rate hikes are the key things to watch.

To my mind, Dr Oliver has offered a good description of the demand side of a “bubble”. An over valuation based upon cheap credit in an asset class that keeps trading despite lousy underlying returns. As I’ve said many times, there are supply side issues too but none that destabilise the bubble moniker.

With Dr Oliver representing the “no bubble” camp in the upcoming housing debate, it looks like its going to be a pretty one-sided affair.

Cheers Leith

[email protected]


Unconventional Economist



    Dr Bernanke has a Nobel Price and he missed it too. They should be counting “for sale” signs rather than being burried in academic coddswallop!

    • Ranier Wolfcastle

      “Dr Bernanke has a Nobel Price ”

      No he hasn’t. You may be thinking of President Bartlett from West Wing.

        • I dont think we can count Paul Krugman among those economist who missed the tell-tell signs of downturn. He has been pretty accurate of late, actually.

          • Bernanke is the CEO of the debt based money system. Reserve bank heads never see any problems when the economy is taking on more debt. For every dollar in existence, there is a debt. No debt = no money. For every debt there is interest to be paid to the banking system which is privately owned (including RBA). More debt = more interest and interest slaves and hence there is never any mention of bubbles.
            Our reserve bank is trying to restore an ounce of creditability by increasing interest rates. However, the horse has bolted and interest rates are much too low considering the excessive and unreported inflation. The game is a ponzi scheme when you always have to have someone taking on more and more debt to sustain it. Welcome to the debt based money system – the most unsustainable scam on the planet.

    • David Gorovic

      G’day Arthur, came across your comments and thought I’d say hello. Get in touch. It’d be nice to catch up. regards

  2. Do other countries that have experienced real estate drops have the same type baby boomer generation as Australia? This website has previously commented upon the fact that many baby boomers will be flooding the market with real estate assets over the coming years which will lead to an oversupply situation, very dangerous in a receeding market.i dont hear many so called economic experts taking this in to account which i believe is very logical.

    i didnt say this, but i did.

      • Yes i have read UE previous report which i beleive was very factual and accurate, i’m talking about all the other so called experts, the “we are not in a housing bubble” and the “housing prices are just stagnant ahead of a 2012 boom” types.

        • Hi Oz. I plan to write more on the Baby Boomer retirement issue. I have found some excellent ABS data which should, once decomposed, provide some further insight into the expected impact of the Baby Boomers’ retirement on asset prices. As for why other economists are blind to this issue, I don’t know. Maybe it’s ignorance.

          • UE, i look forward to your report. i certainly think that CGT reform is a significant factor to the rise in capital values over the past ten years. But equally, may also control the deflation/burst over the next 5.

            keep up the good work.

          • Yes Leith – this is the elephant in the room – but PLEASE don’t peg the baby boomers in the period 1946 to 1964, instead be unconventional and show the birth index immigration adjusted from 1933 to 1962, this was the period of birth expansion, then overlay the spending cycle (use the US data as their isn’t on for Australia??? It is the same as far as I am concerned).

            The grey army are already marching and have been, the old ones now are in their late 70’s and the number increases at a rapid clip for 30 years.

            People in their late years are a drag on the economy (just stating a fact … nothing else).

            Please leave the conventional dates of 1946 – 1964 out of the discussion and concentrate on the actual dates of birth expansion and decline

            1933 – 1962 – up at a rapid clip
            1962 to 1975 – down at the same slip
            1975 up and leveling off

            I haven’t seen a recent graph … but up until the early 2000’s, 1962 was still the greatest number of births.

            The talking heads cannot afford to talk about this enormous drag … instead the best you can get out of them is 6 to 9 months. Mmmm, I wonder why???


  3. Ranier Wolfcastle

    If it looks like a duck, and quacks like a duck, it appears that Shane Oliver would call it a magpie.

  4. typical one foot in each camp, sitting on the fence comments from Oliver. He’s a whimp and never takes a veiw on anything.

    • I hope someone is noting down all the “no bubble” claims and protestations in some great Doomsday book somewhere, so that these shysters get their comeuppance one day. Not that The Bernank’s foolish utterances on housing have hurt him much, mind you. People seem ready to forgive any sort of bizarre inexactitudes from economists…

  5. When Shane states that there was a bubble here 7 or 8 years ago, 7-8 years ago he was telling Japanese investors there was no bubble in Australia. Behind his back, the Japanese potential investors believed Australia was in the midst of a housing bubble. Experience brings wisdom I guess (I think, I hope).

    Come towards the end of 2007, Shane wrote in his (monthly) report (I still have it, I can dig it out from an old Outlook file), nothing wrong with the U.S. Economy, no problem here, the massive debts in the U.S. only count for 2.7% of their economy. Keep investing people. On this note I changed my AMP Super Fund to a pure cash account. I wish I had the audacity and the bad taste to email the good Dr. Oliver and ask him how he structured his AMP superfund.

    Dr. Shane Oliver demonstrating once again education is imposed ignorance. Or he knows what to say to keep his prestigious job.

    • “education is imposed ignorance.”

      This is exactly correct when people are educated in neo-classical economics.

  6. “So confident is Dr Oliver in his “no bubble” thesis, he has even signed-on to appear at a housing debate in June, where he will represent the “no bubble” camp.”

    That will be funny if the bubble has bursted by then. LMAO

  7. I read Dr Oliver’s 2008 paper on housing, “House Prices and Debt – Australia’s Achilles Heel” where he said,”Australia had a bigger house price bubble than the US and UK”, Page 1. and it is the only instance of the word ‘bubble’ in his analysis.

    The reluctance may lie with Dr Oliver’s company.
    Yesterday, for instance, AMP released an upbeat and frankly preposterous assessment of the retail industry in Australia.


    The whole exercise is desgined to instil confidence. Not convincing.

    • Thanks for Dr Oliver’s 2008 paper, Jake. It can be downloaded here. Given that he did in fact call Australian housing a bubble in 2008, I have amended the first line of the post from “For years he has been arguing that Australian housing is not a bubble” to “Recently he has been arguing that Australian housing is not a bubble”. I don’t want to publish something that is factually incorrect.

  8. Is it just me or is the spruiking from the vested interests becoming more and more shrill as it becomes obvious the bubble is collapsing.

    They are increasing clutching at straws to try and justify our sky high house prices.

    It won’t work.

    • Ranier Wolfcastle

      No, I think you are on the money. What has been interesting is observing the comments to various website publishing bullish articles. They seem to be overwhelmingly what I would categorize as realistic. In other words the punters seem to get it, even if the bullish pundits don’t.

      • I’m particularly fond of Dr Andrew Wilson on fairfax websites. Earlier this week, Dr Wilson published two articles with the following comments over two consecutive days:

        May 17: ‘The property market will remains stable but interest rates are the key.’

        May 18: ‘Jobs the key to housing growth’

        The thrust of each article was somewhat different, but it just shows how convoluted the analysis by spruikers is getting.

        The good Dr’s articles are now parody, but I don’t think fairfax gets the joke just yet…

        • And now today’s effort ‘Rays of hope shine out of the gloom’
          Best laugh of the week! Dr Wilson has also been seen spruiking on TV recently.

    • Personally I can’t wait for CJ’s smugness to rapidly evaporate when the housing market dives contrary to his plateau thesis. That alone will be worth the admission price.

  9. If housing exceeds 3 times household earnings it is in bubble territory.

    If the economics profession had been trained in structural urban economics these past few decades, it would have been equiped to warn the public and policymakers of the dangers and destructiveness of these unnecessae=ry housing bubbles.

    I covered aspects of this issue some years back within an article “Housing Bubbles & Market Sense”.

    Its extremely heartening to me to see young economists such as Leith and the other contributors on MacroBusiness being socially responsible, informing the public of the realities of these unnecessary housing bubbles.

    As a long term developer, one is keenly aware how peoples lives can be destroyed by them.

  10. Leith – you need to understand AMP’s position in the housing market to understand the “bias” Shane Oliver is “forced” to support.

    I have a very (very very)senior cousin in AMP who was happy to set up a meeting with Shane mid 2007 when I sent a set of slides showing the economic cycles and the ageing effect of of the population on GDP (as I have sent to you – actually the majority of those slides were sent). Whilst their was broad acknowledgment of the “possibilities” (through email exchanges) I did not make that trip to Sydney as I was too busy with other things – plus the GFC turned up a little early – Oct 2007 and the window of speculation closed!!

    I am not trying to get on my soapbox, just stating what happened almost 4 years ago.

    For those skeptics reading this post, let me make this prediction – we have a 10 year period of contraction in front of us – THERE IS NO GROWTH BEHIND THE CURRENT STIMULUS – NONE!!!!!!!

    In other words, nothing has changed – and why would it, we do not have enough people coming through their spending lifecycle to grow the economy while the ageing group – born 1933 to 1962 drag productivity to its knees (demanding to be housed and kept alive for longer).

    This decade will be the “forgotten decade” like the 1990’s in Japan – for the exact same reason (no not contraception in the mid 1940’s – just the drop in birth rates due to the Japanese decimation in WW2 which caught up with them in the late 80’s/early 90’s).

    All countries in the western world were introduced to the pill in the early 1960’s – add 47/48 years and there marks the turn in GDP – for 12/13 years before Y Gen marked the pivot and increasing births in 1975.

    Look out!


    • Thanks Phil. I am in the process of crunching data on the ageing effect for a series of future posts. Those slides that you have sent me are spot on and will be put to good use.

      Hary S Dent’s work in this area has also guided my thinking on the ageing issue.

      • Leith
        Is it possible to send a link to Phil’s slides again, wouldn’t mind a refresher.

  11. I clearly remember this guy predicting around 10% share market growth for 2008 (at the end of 2007)… so maybe this is a clear indication that the property market is on the cusp of collapse. Doctor needs to prescribe himself a shot of reality.

  12. The SMH states there are 122,000 unoccupied houses in sydney. I imagine with an end to capital gains some of these will either be sold or rented out, further softening house prices and rents.

    • The Census showed quite a few unoccupied houses around in 1970. One could have imagined they would have been sold and “occupied” by now. One would have been wrong.

      • Oh dear, Claw,

        I don’t think you read Adams’ post very well.

        He said “…SOME (my caps) of these will either be sold or rented out….”

        I think it would be fair to assume that SOME of the houses that were vacant in 1970 were also subsequently sold or rented out, although you seem to be suggesting that they will remain empty ad infinitum.

        So by saying as you do:

        “One could have imagined they would have been sold and “occupied” BY NOW (my caps). One would have been wrong.”

        you appear to be suggesting that the houses that were vacant in the 1970 census, are still, to this day (by now) empty and unused. You no doubt have proof of this assertion?

        Also, Adam gave an actual number of houses vacant (122,000), where you were content to go with “quite a few” in 1970.

        Not quite the same is it?

        So, come on Claw – tell us why one would have been wrong to assume that some of the houses that were empty in Sydney in 1970 might by now be occupied?