Housing swallows economy

By Leith van Onselen

RPData, provided and interesting tidbit of information in its 2012 Capital Markets Report (available for download here), where it noted [my emphasis]:

The Australian housing sector is the country’s largest and, arguably, most important asset class. The total value of homes across the country as at December 2011 was $4.54 trillion.

Admittedly, RPData’s estimate of the value of Australia’s housing market is above the official Reserve Bank of Australia (RBA) estimate of $4,13 trillion as at June 2011.

Australia’s expenditure-based GDP in calendar year 2011 was $1.44 trillion, meaning that the Australian housing market was 3.15 times the size of the Australian economy according to RP Data! (or 2.95 times as at June 2011 according to the RBA estimate)

In order to put the sheer size of Australia’s housing market into perspective, the below table compares RP Data’s estimate against other Anglo nations, namely; New Zealand, the United Kingdom, Canada and the United States:

As you can see, Australia leads the pack with New Zealand close behind. Australia’s housing market relative to the economy is also roughly three times that of the United States.

Not surprisingly, given the above data, Australians and New Zealanders also have a far higher proportion of their wealth tied-up in housing rather than financial assets (charts from the IMF):

With so much of the economy tied-up in housing, let’s hope that the old adage: “you can’t go wrong with bricks and mortar” holds true.

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Comments

  1. So, does anyone believe the pollies won’t do everything they can think of to keep it afloat?

  2. Holy smoke. I repent !

    Big Australia is good !
    Negative gearing is great !
    FHOG isn’t big enough !
    Rates should be lower !
    Land supply issues are a beat-up !

    Just protect the value of my f***ing property.

    • Let’s face it, a property crash will help no one, not even those waiting for sensible prices. Hard for the kids to snap up a bargain when they’re unemployed.

      For my kids’ sake, I hope for real property price deflation, without nominal deflation.

      • +1. Of course, I am biased given that I am a home owner. But a full-blown crash would be devastating. I suspect the RBA is quite happy with the current state of affairs – i.e. the ‘slow melt’ of house prices.

      • Why should you be biased as a home owner? If the housing prices crash you can buy new house for less, so is you sell yours for less, there won’t be any problem. For one side is loss, but on the other side is a gain and the equation is zero.

        Ya, only the investors will loose, but this is the way how all markets behave – up and down, up and down. Why would someone expect for housing to be different.

      • a property crash will help no one
        It would be great for someone who has saved enough cash to pay 1/2 today’s prices.

      • reusachtigeMEMBER

        Whoops, my reply to your above post was meant to go here. Teach me to not be logged in when I go to reply.

      • Sure, provided they arent one who loses their job in the aftermath.

        Everybody expects a recession to affect their neighbour.

      • Stormy WatersMEMBER

        I’d imagine that a full blown crash might lead to some very positive reform of taxation, state vs Commonwealth relationships, strategic policy initiatives, etc. I’d doubt there’d be enough motivation for the same under a slow melt which would leave us more open to bubbling up again in the long term.

      • Yes Stormy I’m guessing the ‘slow melt’ scenario will result in no real reform so we will be left with an economy still badly structured ready for all the old mistakes to be repeated.

      • “Yes Stormy I’m guessing the ‘slow melt’ scenario will result in no real reform so we will be left with an economy still badly structured ready for all the old mistakes to be repeated.”

        Yeah like the crash caused by the GFC changed anything if aussie housing crashes sure as eggs it will be you and me bailing out the greedy and stupid, let the slow melt continue as far as I am concerned.

      • I do not think that there will be another bubble, at least not in the next 20-30 years, not while the current massive debt burden for the world economy exists. When that comes apart, and it will, there is going to be a new world order.

      • It might not help anyone in the immediate term, but it will definitely help many in the long term. Devastating is part of the financial cycle and you can’t prevent it any more then the lunar or menstrual cycle. Anything done to prevent it is only going to make the situation worse.

      • thomickersMEMBER

        I have some great mates in their late 20s who have saved hard and can buy in with a 60-50% LVR mortgage. further lower prices mean that they can free up cashflow and bring their business ambitions forward 5-8 years sooner.

        High debt levels generally starve innovation and makes everyone want to become an employee than an employer, to pay off their debts.

        Housing really will swallow the economy, if prices beyond 2010 levels.

      • I agree completely! Debt really is becoming a dirty word! Who wants to be a debt slave anymore, when you can have the resources to fund business growth and creativity.

    • 🙂

      Thanks monsieur…I gel a laugh out loud most days around here and your post gave me one today!!!

    • Nobody can say with any accuracy how it will pan out unless they have a Phd in fortune telling.

      However the fundamentals of the economy are looking very strained… I can’t imagine the Commonwealth coming to the rescue this time (as they did in 2008) simply because the money isn’t there. I understand that a lot of people might expect a turbocharged First Home Buyers to come out later this year but I really can’t see it happening because revenues are looking really soft and any money they spend would have to be borrowed…

      • Sean I think in a world where people try to do the right thing I’m sure you would be right.
        This Govt has just found that it can get cheap overseas funding as a result of monumental money printing in the US and Europe. I reckon they might just try it once again!

      • all it takes is the government to realise that they really can’t make a surplus next year so if they are going to go into deficit, may as well get some brownie points out it!

      • Jumping jack flash

        They can’t do that. A surplus must be had at all costs. The rating agencies demand it.

        No surplus, and they start pressing the downgrade buttons. That would be pretty horrific. I’m sure the government aren’t a complete pack of morons (ahem?) and they know what trying for a surplus will ultimately mean, but their hands are tied.

        They are an extension of the banking system now.

      • I wouldn’t say they are totally out of ammo.

        They could start raiding our savings by allowing people to add their super to their deposit…

    • Yes indeed, shocking to hear this truth.

      But he went on to spout some nonsense:

      “Johanson said the grants were “bad policy”, and that the housing market had succeeded because of economic prosperity rather than government intervention.

      “The investment in housing was really driven by the prosperity rather than government policy. I think it was a waste and a distraction,” he said”

      Easy credit = economic prosperity?

  3. For Gen Y and younger generations a full blow crash is needed. Why? because a slow melt or a mild crash wont knock the mantra of property being a path to riches from peoples phyci.

    Sure, for 3-5 years things will be hard but it will be a big wake up call for older generations to stop pushing property down their children’s throat as the only way to be responsible money managers.

    I for one welcome a full blow crash to bring people back to reality and the dismatnling of this ponzi scheme.

    + thankyou for the table, I have been looking for one for over a week for my assignment 😀

    • Sure, this is not only the case for Gen Y. I and my Gen X friends who have saved enough fund would be happy also to have the CRASH. Others may mention that nobody will be winner if economy tanks, unemployment gets higher, etc but for me if you’re prudent in your financial and career life, the upside of the CRASH is still more than the downside, so I surely welcome it.

      This is mostly required to shut-up the arrogant “home-owners” and “property-investors” in the society and get back to normal, healthy attitude towards residential property as just another asset class compared to the current fetish-like worship to it.

      • The funny thing is that it would be so easy to intentionally crash the market. Just limit the amount of money that can be lent for any loan on a residential property. Make it 95% and then minus 2% every quarter until you reach 80%. This will limit people’s ability to borrow and hence force prices down.

        You can keep all the irrelevant tax concessions such as negative gearing, 50% capital gains exemption etc but a minimum 20% deposit with LMI payable if your deposit is not 30%+ of purchase price would be so simple to fixing the problem.

    • I don’t believe the sheeple will ever learn. So I don’t see much benefit in killing the economy for societal education.

      Having left school during the last recession (early 90s), I well remember that it was the younger generation in my area that felt the most pain in terms of unemployment. Housing became relatively cheap, but most young people couldn’t buy it. No inter-generational help there from my experience.

      I would personally be in a position to profit from a property crash now (no debt and good income) but it isn’t all about me. My kids are just about to get a start in this game of life.

      I see no benefit in a crash, other than for those who already have the means to do ok.

      • “killing the economy”

        >< Didnt we just established that Australia's economy IS residential houseing.

      • For what it’s worth, I’m expecting and prepping for a crash. I just hope it doesn’t happen.

        There’s no “me” in macro.

      • This time it’s different. It is true that bubble and bust cycles are usually long enough that people forget meanwhile. But there has NEVER been a bubble cycle like this one. Median multiple house prices USUALLY TOP OUT at around 4 in historic bubble episodes, and cycle around 3.

        But median multiples going above 6? Come ON, anyone who doesn’t see this as foreshadowing econ armageddon. The USA’s bubble was actually the MILDEST one among all the nations with serious bubbles so far; it was restricted to only SOME States and nationwide median multiples did not go much above 4 (individual cities went over 6).

      • I’ve been too busy to get on MB much lately, so excuse me if this has been covered here already:

        http://www.thebubblebubble.com/european-housing-bubble/

        And the home page:

        http://www.thebubblebubble.com/

        Astonishing…..!

        A whole lot MORE nations having housing bubbles SINCE 2007……….!

        As the author of that web page, Jesse Colombo, concludes:

        “……..It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage. The Western and Northern European housing bubble is proof that we are living in the era of The Bubble Bubble (a bubble of bubbles) as well as an era characterized by the most outrageous arrogance and hubris that humanity has ever experienced.

        The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late…..”

        He seems to be picking bubbles in commodities, college education, healthcare, emerging markets, and social media, too. He is worth a watch, I reckon.

      • That college education bubble is a cracker. Lots of people in the US are going to end up with big debts for their education and no prospect of a decent job to show for it. The jobs they might have taken are being outsourced to India and China.

      • Yep I talk to Jesse regularly – really love his acronyms! Amongst all the bubble spotting, the healthcare and education bubbles in the US are the most interesting….

    • +1 also consider the finacial and political system that punishers prudent savers with interest rate cuts and quantative easing

      (is the Feds purchase of Aussie RMBS a quasi form, did they strike a few keys on the keyboard or foraged for funds in the real world) ?

      Bring on the crash….

  4. Jeebus, those are awesome figures.

    I see the ASX has a market cap of 1.2 trillion. Its ratio with housing would also be interesting. Back of the envelope says it’s now 3.5 and was probably about 2 in ’06.

    • I know it would be hard but a 2006 comparison would be extrmley helpful so we can see what america was like before the crash and how much a property has increased due to Ruddprime stiumlous.

  5. Diogenes the CynicMEMBER

    The figure is horrifying. It seems to suggest we would see a 40-50% reduction in housing to bring it down to something similar to say Canada.

    This would mean rental yields would finally be equal to or above mortgage interest rates which is also probably where they should be.

  6. “This would mean rental yields would finally be equal to or above mortgage interest rates which is also probably where they should be.”

    Don’t forget your huge tax deduction!

    The question is, what does a house price correction do to GDP? What’s the relationship? 20% house price decline = 2% decline in GDP?

  7. Is there a register somewhere that shows how much property a particular politician owns? Or a register of other investments?

    I think if you could see something like that, then you’d see why politicians don’t want a crash.

    Or am I just being cynical?

  8. State govt pollies are probably the worse. NSW had a housing minister that specialised in buying ex housing commision propertys, I believe he had about 17 of them

    • So glad he’s a lightweight, I thought he might have been talking his own book there for a moment!

      He must be looking for the NZ holdings to bail out the pasting he’s copped around the rest of the world. You’ve gotta love that geographic diversification strategy. He needs to read more Jan Somers……’put ALL your eggs in one basket and WATCH that basket’.

  9. Good effing God!!,

    so all the houses in Australia (little more than sheds in European terms), are worth about the same as all the high quality houses in Germany, ( a country with almost four times the population.)

  10. A lot of the commentators/ bloggers have softened the bearishness reteric in recent times (perhaps with one eye on what happened to Keen, and perhaps a little chastened by how easily the bubble was reinflated after the GFC.

    But doesn’t this show how precarious the houses economy is. North Qld has gone off the cliff and Sunshine/Gold Coast are sliding to the precipice. Australia’s economy is urban development and this engine is stalling.

    (Above comments clearly exclude V.raptor!)

  11. Wow! I just did a quick calc and look at the housing assets per capita in local currency- shocking:

    Australia 201,778
    NZ 136,222
    UK 67,619
    Canada 89,275
    USA 50,667

  12. People – just a thought to throw a spanner in the works

    Yes I agree that no sane government would want a full blown property crash – though a mild deflate for a few years could be on the cards

    Should we really be asking the question – can they stop it sliding?

    I have been in markets long enough to see what reversion to the mean after a bubble looks like – once the slide is on – and it is on – and more and more people pick up on it these things can be difficult to stop

    If it continues the only way the government could stop the market reverting 40-50% would be to make people believe it is a good idea to take on more debt –

    Has anyone here got a real example of a government being able to stop a major property correction?

    We can be very strange very predictable herd creatures funnily enough…