The Economist global housing comparison

The Economist has released its annual house price survey and on most measures Australia remains in the top category for most overvalued. I’ve extracted some charts from the interactive graphics to give you an idea of The Economist’s guide to relative merits. First, a straight comparison of house prices:

Australia comes in second behind one wildly expensive South Africa. On prices in real terms we also come in second:

On price against average income we come in at a more respectable 4th or 5th, with recent years strong income growth making a dent:

On price to rent we come in fifth, again benefiting from recent years strong rental growth, which has now stalled:

The point of this post is not to question the methodology. It’s the same for everyone so if offers a useful guide to relative value. These charts say to me that Australia actually has two problems, not one. First, we have a housing bubble. Second, we have an incredibly expensive country generally that means we are in no way competitive on anything beyond historically overpriced dirt.

Houses and Holes

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 fouding 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. At the first chart:

    What the hell! What’s the deal with South Africa? I guess they’re benefitting substantially from the commodities boom, but how is it their index is 50% odd higher than us who’re coming in at second?

    • I’m surprised too by the South African market. I thought they had all moved to Perth. House prices should be collapsing.

      • I think the first graph is actual, inflation included prices while the second deflates the prices by inflation.
        Sa has had a high inflation rate which would have pushed prices high over time(graph 1).

        Support for higher priced property comes largely from overseas holiday and investment demand and lower priced properties poss from newly enriched black buyers moving up.

        Also with a high inflation rate property is likely to be one of the few investments in SA an individual can make that would protect his capital.

      • Diogenes the CynicMEMBER

        That was the time when Zimbabwe was having a collapse or threatened collapse and the Rand went falling through the floor. Property prices in South Africa fell and were super cheap, nice 2 bedroom flats in Capetown were US$25-30,000.

        Pity I did not buy some at the time.

    • If the figures were avaialble for China ( they’re not, according to the actual article) you’d probably see similar? RSA, like China, has a mass of poverty line people vs a few well off, so any price index worked of an average wage will show ‘those at the bottom’ can’t afford anything!

      • NB: I’d also guess that RSA goes way back before H&H’s zeroing of the graph at 2001, perhaps as far back as ’94, when the country let out a sigh of relief after the elections that saw Mandela elected, and the racial tensions diminish. That propably saw a renweal of the buying interest in property there, that until the result was in, was a mass exodus of funds from all assets, property especially, via the Financial Rand.

    • Had the chance to visit Sth Africa in 2008. The housing bubble was going strong, with fractional ownership being the mechanism for keeping house prices extremely high.

    • yes. heaven forbid we are ever forced to modernise our country by focusing on those industries that will be the dominant forces in the global economy for the next century.

      Thank god for that dirt.

      • Oh we will probably have a go at them too. No matter what our resources will remain in demand, a necessity for modern life, the essential building blocks of any green clean energy future.

        • Are you serious? The money swallowed up by a Ponzi scheme in DIRT, could have financed a heck of a lot of enterprise start-ups.
          It also would be better for the economy if household discretionary spending for the next 20 years was a bit higher, instead of the younger cohort paying the banks through the nose for the privilege of participating in the DIRT Ponzi.

          • “First, we have a housing bubble. Second, we have an incredibly expensive country generally that means we are in no way competitive on anything beyond historically overpriced dirt.”

            Exactly, exactly, exactly. “Houses and Holes” is one of the enlightened. Far too many people remain on the dark side still.

        • PhilB, usually when HnH refers to ‘dirt’ he means our resources sector (particularly iron ore) and I responded on that assumption. But you well may be correct, perhaps on this occasion ‘dirt’ means ‘land’.

  2. HnH,
    How come none of the above data (or any other charts I see) mentions anything about India? Is Indian economy not worth a mention in global scale or do they suppose that bubble theory does not hold good with Indian economy?

    • Good point. I figure India is almost as bad as China. I also figure that most of the officially-derived figures from both countries seriously understate the size of their bubbles and the debt overhang from them.

  3. It’s kind of hard to imagine anything other than a stronger housing market within countries who are performing better economically, as opposed to those countries who are failing economically.

    That is the normal outcome.

    As an exercise, imagine if we were not surrounded by negative global news which affects market confidence – where would the market be now?

    • Imagine Germany and Switzerland Peter. Strong housing market for positive yield investors, weak for speculators, yet very strong economies overall, so they are abnormal. But how do I wish this was the norm, where house prices don’t go up and you can invest with positive cashflow, just like a normal investment.

      Agree on sentiment and confidence however.

      • Prince – when have we had a mining boom that didn’t cause an upward trend to house prices?

        Ref –

        Look at the 1st graph re mining investment share of GDP – any bets as to whether they roughly co-incide with house price rises, and falls when the boom is over. My point isn’t that prices are where they should be, but where they are pushed to during certain cycles.

        Switzerland and Germany may be strong but they don’t swing the way our economy does.

    • Many of the countries that are failing economically now are failing largely because their housing markets have collapsed (not the other way around).

      Remember the Celtic Tiger? It’s economy was the talk of the world…it still is, but for very different reasons. The US economy was also performing strongly with low unemployment until their housing market starting dropping.

      I don’t see any reason why things will be different here. House prices are a leading indicator for me.

      • Not sure I’d agree with this.

        Global economic activity is falling due to a credit crunch, period.

        The credit crunch is the natural follow up to a reckless, massive, unsustainable 20 year credit expansion by central banks… most of this new credit went towards speculative frenzy across many housing markets.

        House prices are the symptom, not the cause.

  4. +1

    “The point of this post is not to question the methodology. It’s the same for everyone so if offers a useful guide to relative value. These charts say to me that Australia actually has two problems, not one. First, we have a housing bubble. Second, we have an incredibly expensive country generally that means we are in no way competitive on anything beyond historically overpriced dirt.”

    When I returned to Australia last May I was struck by the cost of everything. From food, cars, houses….if fact I can’t think of one thing that was cheaper. My Peugeot 307 HDi 2006 model was $15,500 more to buy here in Melbourne. That is a lot of shipping and taxes.

    • A friend of mine who returned from London recently commented on how expensive everything is in Melbourne – public transport, petrol, food, rent, houses… everything. And this is someone who resides in London. Personally I’m not sure why… particuarly housing, we seem to have an abundance of accommodation options here in Melbourne but why are they all so dear?

      • It used to be called rip off Brittan, but it’s definitely rip off Oz. As MB showed (DE) in VIC the land component vs the construction costs is a problem for housing. I found that I could by the same car in Sydney a few thousand cheaper than Melbourne (state taxes maybe). Maybe wages are more here…I don’t know, but in general we’re being squeezed more each month it seems with more to come on energy for one. I’m waiting for my next electricity bill as they put a smart meter in and I’ve heard a few horror stories about them.

      • I’ll echo that , I returned here from Ireland this year and everything reminds me of ‘Rip off Ireland'( as it was called by the population ) around about 2007 ; government coffers and banks way too dependent on property , expensive housing , food , cars….and we know what happened to the celtic tiger shortly after – everything is a lot cheaper now!
        All the same guff from the vested interests too, ‘different here’ , ‘new paradigm’ etc.
        I don’t think we are different .

      • I lived in Melbourne for 9 years, leaving in 2003. Spent a couple of years in another Aussie capital city, then several years in a rich European country.

        My wife and I recently had a look at returning to Melbourne, maybe just for a couple of years, maybe longer. But the rental prices have really exploded in our old neighbourhood – I would estimate they’ve doubled. However, I would seriously doubt I could get much more than 10% above my old salary.

        Here we’ve saved plenty of money on one income. Our Melbourne idea is well and truly off the radar now, given we’d probably both have to work full-time to continue saving.

        And of course house purchase prices are even worse compared to rents. $750K for a 2-bedroom dump… no thanks.

        • Saving on one income … We are pretty frugal but even that slips from our grasp some months in Sydney. Okay, most months

    • dumb_non_economist

      I spent 8 yrs away (M.E. + HK) and on coming back realised just how much we get ripped off in every field, from housing to cars to white goods to IT, to telecoms to every bloody thing.

      Australians will pay whatever the price is, never, ever so NO!!

  5. “On price to rent we come in fifth, again benefiting from recent years strong rental growth, which has now stalled:”

    Really? NSW housing are reporting Sydney rents up 2.3% last quarter and up 7.1% YOY.

    The ABS rental component index of the CPI was up 1.2% just for the last quarter.

    The Economist have been regularly predicting the popping of Australian house prices since at least 2003. They even wrote that the boom had fizzled out in Australia in 2005.

    • Sydney isn’t all of Australia… and I say that as a Sydneysider.

      Unfortunately Sydney may have a genuine shortage which is supporting rents, but this is not the case in other parts of the country, especially Melbourne which has been lucky enough to have booming construction ensuring a decent level of supply.

      But there are promising signs of Sydney prices starting to fall, and hopefully this will be reflected in rents flattening out.

      • No.. No.. CJ is a great economist and I have been following his inflation and interest rate predictions. He gives the Pascoemeter a run for his money as a contrarian indicator.

      • MONDAY, MAY 16, 2011: Where to for Australia’s housing market?
        Having said that. I would not be in the least bit concerned if they were. If the doomsayers on the domestic economy are right, rates are not going anywhere (I obviously don’t agree with them).
        Doomsdayers (Bullhawk speak for MB) were right.

        In this case, we will get mild nominal house price growth over 2011, which will likely underperform inflation (ie, real declines, as we have seen for the last year).

        If rates do rise a few times this year (as I expect), nominal dwelling prices will go nowhere or retrench modestly (eg, 0-5% year-on-year), depending on the number of hikes.
        Well, we got one rate cut instead!

        • True, if you hold everyone to exactitudes then they will all walk to the summit barefoot, but he was right when it counted, whilst the limelight seekers fell miserably short.

          I hardly think that his overall predictions could be called contrarian.

          But stick to your little wins, and rejoice in them when you have the opportunity.


          • But stick to your little wins, and rejoice in them when you have the opportunity.
            Do I see a hint of bitterness there?
            I don’t see why you have to be bitter when I point out when a self-styled “economist”/public identity gets it so badly wrong.
            True, if you hold everyone to exactitudes then they will all walk to the summit barefoot
            A certain economist did walk to the summit even when his predictions haven’t even been proven incorrect yet (he still has 12+ years to go). Yet, here you are, complaining about holding this particular “economist” to a far looser standard of exactitudes 🙂

    • The internet never forgets! Or at least those with our own archival systems never forget 🙂 Disk is so cheap now – a Google box and bob’s your uncle.

      My favourites so far:

      Victoria Still Short of Homes
      Date released: 26/02/2009

      or this
      Prospects for a Housing Recovery in 2009/2010
      Date released: 28/02/2009

      or this
      Housing Shortages Persist
      Date released: 24/03/2009

      I could go on
      First National predict market recovery
      Date released: 27/03/2009

      As Yogi Berra said: “It’s tough to make predictions, especially about the future.”

          • Well the shortage was a little more difficult to quantify, but prices did increase, that is certain.

            Supply is a very difficult thing to measure. When prices are rising, people don’t sell, and when they are falling, the same potential sellers list their house for sale. They herd, and that creates false shortages, and false surpluses.

            The truth will be somewhere in between the two arguments.

          • The boost to the HSG wasn’t the catalyst, it was just one positive factor, it was the large cuts in interest rates that made the difference. Although I think it had a greater benefit in Victoria and the other high stamp duty states.

            In fact if the RBA had reduced rates to zero as Steve recommended, the boom would have been greater.

            Buyers look at monthly repayments on the loan they need, and compare that to their current rental. It really is that simple, and when rates fall, all of the ducks line up for buyers when repayments fall lower than monthly rentals.

            I doubt that we will see a housing boom if rates fall heavily this time, but the market will get a boost all the same. If it doesn’t, then I would say we were genuinely in a housing crash, even if the medians hold flat.

            The yet to come rate increase cycle will be interesting.

          • Ok , did they predict the interest rate cut. Dont you know as the private debt keeps increasing the “real” interest rates will keep structurally heading down.

            The higher the house prices go , the higher the private debt goes and lower the interest rates have to go. What happens when the interest rates get to the point where they are the lowest and cant be cut no more to boost housing.

          • Yes once everyone could see what was coming, predicting large rate cuts was easy, although the RBA did seem to be a little behind the curve initially.

            Private debt won’t increase in real terms, in fact it should decrease, although business debt may increase in real terms, which should be a good thing for the economy.

            We are at the tail end of a once in a 100 year event where debt was cheap and accessible, it won’t happen again in our life time.

            That has caused a number of stresses in almost all economies throughout the globe. Any large changes to supply and/or cost creates imbalances that take years to unwind. Even in the USA it will take years to work through the system as they get used to the new normal.

            All each of us can do is our best as it will affect everyone differently depending on age, continuity of employment, home owner or non-home owner etc.

            All the best…

        • Good stuff from Jenman – particularly like his managing to quote Gertrude Stein, “Everybody gets so much information every day that they lose their common sense.”

          As Peter (above) refers to the herd – seems the behaviour in the markets and RE are reflecting that common sense does not appear to be all that common.

          I know GB (and others with similar views) are lambasted often in these discussions but they makes some strong points about the fundamentals not really having changed. Others argue strongly against his views with equal value. From my work in system dynamics and related practices we are taught the truth is outside our current thinking.

          We are all seeing our part of the same system. What we have in common is that we influence that system with our behaviour whether willing or not.

          I think the work that Steve Keen is doing at present may be momentous in helping us remove the scales from our eyes.

  6. No data for Hong Kong on “prices against average income”. Odd. Data should be available. Did they just forget to put that in?

  7. Weird… I’m just back from Athens, Greece, and I’ve been looking at all those property price drivers over there:

    A) Unemployment & inflation: through the roof.
    B) Rental revenue: down the drain, most tennants are renegotiating their contracts or moving out.
    C) Bank credit: none whatsoever, no liquidity.
    D) Govt subsidies: forget it, Govt is bankrupt.
    E) Demand: dead, for obvious reasons.
    F) Oversupply: Massive. Theres new estates/suburbs with 2-3 storey buildings sitting vacant for more than 2 years now.
    G) Cost: In athens about $1m for something that looks like the average australian home in the average australian suburb. melbourne houses are cheap by comparison.
    H) Average house (a $350k flat) to average wage ratio: ~15. Based on pre-crisis wages, probably more like 20 now.
    I) Taxation: additional council rates implemented in 2011, about 1k euro for the average home (average gross salary was about 24k euro pa pre-crisis)

    So all possible negative drivers are maxed out. And what happened to residential property prices? dropped 12%-15% cumulatively since 2008. WTF? Why isn’t there a US style collapse?? I mean there’s tax evasion so average wage is probably not indicative of some peoples wealth, but still…

    PS Spain has not been hit anywhere near that hard, and I think I read that their propery prices dropped 25% in the last couple of years.

    • Not sure about this, but possibly due to their simply not being any turnover in Greece? Prices only fall (or rise) if people are selling, if the market has completely seized up then I guess that would choke the extent of the falls. Parallel to that, in the US case people had to sell (same with Spain).

      • I dont know… Greeks have to sell too, it’s getting a bit desperate over there for a lot of people. And there is always *some* demand from those who actually need a place to live in and can afford it, but talking to a couple of them they cant seem to bargain prices down.

        In my view it might have something to do with psychological factors and the nation’s collective memory. Lots of families went through wars, foreign occupation and various disasters that left nothing standing but their homes and land (which they actually lived off). I think over there in most peoples’ minds investing in property has more to do with wealth storage and survival rather than wealth creation.

    • I seem to recall reading that in Greece, all properties have two prices: the tax man price and the real price. When you buy a property, you get two loans: a legit loan for the tax man price (which is what you pay stamp duty on) and a black market loan to cover the remaining 2/3 or so of the real price.

      It was discussed in the superb Vanity Fair article which was part of a series on the various sick nations of Europe. The others I recall seeing were on Ireland and Iceland.

      • LOL no, there’s a tax man price only used for the calculation of taxes and rates but the loans are real and based on true market value, banks generally dont f*ck around. However you have a point, at the moment tax values are higher than market values, so that might be a factor that keeps prices up eg who would sell a property for 200k and pay CGT for 400k?

      • Michael Lewis published all the articles into a book called Boomerang. Highly recommend, it’s a great read. And then you remember it isn’t fiction and it’s chilling!

        • Thanks. Might be worth buying. The ones I read were excellent. BTW, have you read Lewis’s The Big Short.

          • Certain comments of mine at Macrobusiness get deleted every time I make them: the ones where I am airing my suspicions that the RBA is already feeding “QE” into the Aussie banks specifically to prop up mortgage lending; cheating the market, which has probably shied away from MBS’s etc long since.

            If this was going on and I was a hedge fund operator shorting the Aussie banks, I would be very pissed off indeed by the “Underarm tactics” being employed by the Aussies – people like Chris Joye taking the “long” side of the transactions are probably secretly in the know that the Aussie trading banks “CAN’T FAIL” because they have bottomless “QE” flowing into them.

            I am wondering if I am just a lone idiot conspiracy theorist, because there is simply no comment along these lines by any of the antipodean “experts” out there. How good are they anyway? In the USA, people like Gary North and Kurt Richebacher would be all over it long since.

  8. Why would anyone expect Melbourne to be cheaper than London?.We dont have economies of scale based on 300 million(or so) customers, we have small pockets of people separated by vast spaces and high logistics costs, we have rent seeking unions in some key sectors and we have oligopolies everywhere in the supply chains. That doesnt add up to a low cost environment.(Oh..and then there’s the tariffs and handouts to keep the local motor vehicle”industry”going)

    • Melbourne could and SHOULD have cheaper urban LAND than London, though. ANY city that allows rural land beyond the fringe to be converted to urban with a minimum of “planning gain” will have lower urban land prices than one that does not, irrespective of the other factors you mention. And this represents an economic “secret weapon”. This is another reason that heartland and southern USA is so resilient.

  9. “Second, we have an incredibly expensive country generally that means we are in no way competitive on anything beyond historically overpriced dirt.”

    And that is really the most worrying thing. Having recently visited the USA and UK I was surprised by their costs. Perth more expensive or on a par with what we saw, except for fuel in the UK which was very expensive.

    With our cost structures we basically cannot export any manufactured products or expect other foreign currency earners such as inbound tourism and education to expand much if at all. So its basically minerals and gas to earn us foreign exchange. Unions and regulations will not allow our cost structures to be reduced so basically our future is to sell expensive stuff to each other.

    Many years ago in Taiwan I watched a local english language programme featuring a number of young Taiwanese US educated engineers talk about their US education. The points they made were that in their courses most of the students were Chinese or other foreigners and that the US was exporting their education and loosing the benefits of highher training of their own people. But that did not matter they said as the USA wanted to become a service economy- serving each other at MacDonalds (much hilarity).
    Is this our future? I would love to read experts views on practical measures we could take, not high faluting verbiage and goverment type phrases, to ensure our children and grandchildren have a future in our country.

    • While the US does educate a lot of foreigners (who of course pay for the privilege) many of the best and brightest of them end up staying in the States. That is still where the big research money is, where the most innovative companies are and where most of the world’s scientific and technological advances happen.

      The importation of bright foreigners is one of the reasons dumb US born people end up serving in MacDonalds. I wouldn’t see the latter as indicative of weakness in the US economy, quite the opposite. Even in its current weakened state, the US is a giant economy.

    • PS Unfortunately, none of that applies to Australia. As far as the rest of the world is concerned, we are a big mine.

        • Get a lot of immigrants from wealthy ethnic Chinese background. Let them loose with minimal restrictions. They will turn us into a trading powerhouse. The north of Australia is where the action will be. Arthur Sinodinos is right.

        • I also agree with Alex, we are seen as a great big mine (with wheat and sheep!). What can we do, realistically? We’ve spent the past decades throwing ourselves into FIRE sector activity. Until recently most urban Australians never gave mining a thought.

          It remains that our comparative advantage IS our natural resource base. In nearly all other spheres we are somewhere in the middle of the global pack. We’d have to come up with something pretty special – a land of 22 million competing in a region of several billion to succeed globally a century or so ahead. Much of our natural resource base will be depleted, perhaps we can do food, but unless we engineer a robust economic role of some sort (ideally on the back of the boom (although it may be over…It will resume)) the future for generations hence may be less glittering than our own.

          Houses will be very cheap though…

          • Cheap urban land IS an economic secret weapon. That is why heartland and southern USA “owns” the future of Western Civilisation right now.

            The UK is the world’s leading example of what a few decades of something like the “Town and Country Planning Act” does for an economy’s productivity and growth. The Conservative Govt has finally “got it” which is why they are enduring a storm of protest because they are opening up “the green and pleasant land” to developers.

            Thatcher’s reforms ONLY “failed” because she failed to reform land use over-regulation. The UK economy will fail WHATEVER ELSE is done to it, if they don’t get this right. The UK economy is basically London and its high finance sector, with a bit of grossly under-competitive productive industry tacked on.

            High finance melts down, London is a goner and so is the whole UK.

            The McKinsey Institute absolutely put their finger on this in their 1998 report, “Driving Productivity and Growth in the UK Economy”. Lots of academic papers since, agree and advance the argument.

            Why would Australia want to do the same to ITS economy?