Shane Oliver on the housing slow melt

Here’s a reasonable take on the housing market from Shane Oliver echoing many of my own thoughts on the slow melt.

Aust House Prices – OI #21 2012

Leith van Onselen
Latest posts by Leith van Onselen (see all)


  1. Only 28% above long term average house price to income ratio and 10% above price to rents…c’mon! Sounds a tad low to me…?

    • I personally believe that prices are more overvalued than that, particularly given that incomes and growth have been ‘juiced’ by the sky-high terms-of-trade, which is not sustainable at current levels.

      • Hey UE I enjoy you analysis on MB. I have an opinion that prices will be flat in real terms for an extended period. But do you think the driver of this spike between roughly 2000 and Hey UE I enjoy your analysis on MB. I have an opinion that prices will be flat in real terms for an extended period. But do you think the driver of this spike between roughly 2000 and 2008 could be explained by enforced super with people retiring with more cash then in the past thus increasing their risk profile in their working life. You don’t see much analysis taking into account the position of those who retire today as opposed to 20 or even 10 years ago.

    • The Patrician

      The Economist house-price indicators – 31 March 2012


      price to income – 28% overvalued
      price to rent – 48% overvalued
      average – 38% overvalued

      • I don’t disagree that house prices are somewhat overvalued. However, be careful about using such ratios in isolation.

        For example, if either income or rents rise over the medium term, due to cost push inflation (caused by something like a ‘carbon tax’), it may be that prices are simply reflecting future growth in income and rents. Same thing happens with P/E ratios in the equities market.

  2. Should one expect that prices can continue rising in an exponential fashion (implied by drawing trend) when measured in REAL prices (adjusted for inflation)? I wouldn’t have thought so.

    • Yes, real price increases can continue exponentially (ie rise in proportion to the price itself) indefinitely.
      Income or GDP/capita increases are not constrained by the government constructed CPI.
      For example, we can do stuff more efficiently. Not saying we always will. But there’s no fundamental reason why we can’t.

        • rob barrattMEMBER

          I know I’m coming from behind here, but did I miss a reference to Aus’s failure to fully capitalize on Bernoulli’s theorum of Hydrostatic Thermodynamics somewhere in the discussion?

          • Great link! I recall my first year Physics lecturer was married to an economist and he would bang on ad infinitum about the blurred line between science and economics.

            There are plenty of examples in nature where the boom/bust dynamic is seen. The year 10 petri dish experiment is the first you’ll come across. Exponential growth for a short time, before the unsustainable demand for limited resources (nutrients) results in the whole colony dying off.

            I actually saw this in real life over a couple of years at Lake Eyre. I flew up there after the floods one year to see an amazing array of bird life. The local operators told us the numbers were growing steadily, most evident being the pelicans because of their size. I went back just over a year later and it was carnage. The growth in numbers put immense pressure on the environment, food sources were depleted and it was tragic to see dead pelicans all over the place and many others weak and unable to move to a new environment.

            In short, in a finite system, unsustainable growth levels always go bust. To me dead pelicans represent entities that have gone bust, the weak and unable to move are those who have failed to get out in time and have no options left. It’s an uncanny parallel between science and the economy.

        • I cannot stand using scientific references in a “economic” discussion.

          Economy is not scientific by any mean, and making references to gravity/thermodynamic or other scientifically demonstrated theory is dumb.

          • Economics takes place in the real world – the way the world works affects the economy.

            I know you’ve repented above, but it still needs to be said.

    • It’s consistent with his other comment about adjusting the PE ratio to inflation. Bonkers.

      • UC,
        The latest article on Keen’s website indicates how just such a hard landing might unfold.

        What will be the indicator of the China hard landing? Coal and Iron Ore prices. While that demand (for bulks) remains sufficiently elevated, China’s hard landing will not eventuate.

        If Australian UE gets to levels that induce substantial liquidation of investment properties, Aussie property prices will suffer a significant fall , much faster than the “slow melt” scenario which is already occurring and a given. It would not be pretty.

      • in the US stagnating housing prices was the catalyst – our economy is far more tied to a property bubble than the US ever was.

      • “but they do need a catalyst”….not always, some cite the withdrawal of miras (tax relief) being the catalyst for the UK 1990 property crash, but in truth all it did was bring demand forward similar to the first home buyers grant here, the melt down was ‘self catalysing’, once the word got out in the media that ‘it was over’, it was difficult not to get crushed in the rush for the exit!

        The major “it’s different here” scenario, is the lack of independent media, except of course for MB

  3. I’m always amazed how commentators refer to the economic uncertainty in Europe as “short term”.

    By my count these issues have been lingering for 4 years with no signs of a resolution.

    Has somebody found a solution and I’ve missed it?

  4. I just rented a two bedroom apartment within the old walls of Cartagena Colombia… A renovated apartment is $512 US a square foot…comparable to the very best suburbs of Sydney…all this in a country that is going through serious economic growth thanks to it’s free trade agreement with the US and vast amount of fresh water and commodities….$512 US a square foot in a country with the average income is around $6000 a year…then again the old city in Cartagena Colombia is a world heritage city and it is very difficult to re-build a 16th century Spanish designed building…Amazing how expensive real estate is the world over….

      • About the same to rent a waterfront 3 bed apartment in the docklands…it is actually cheaper to buy than rent due to the large demand of US, UK holiday makers. The Old City is specifically geared to the tourist market.

    • How’s the Oaky Doky over there, bit cheaper than old OZ i bet? Oh for a square foot of Columbian Oaky Doky.

    • Cartagena has been a bubble for at least 5 years – hell SoBe Miami is cheaper than bocagrande. But Centro en Cartagena does not represent the cost of an average house in Colombia, it is merely an extreme. Like comparing the Hamptons to US proper. Also its an area with alot of hot money sloshing around, which makes commercial returns not a real consideration.

      On your buy v rent comment for average appts/houses in normal city areas your looking at a yield of b/w 0.5 to 1% a month with a cost of debt generally 1-1.8% pm

      • Rich, That was my point I was articulately trying to make.
        How expensive property is in the Old City of Colombia.

        Especially compared to what many Australians complain about.

  5. $512 US is to buy…rough calculation in my head…average Aussie house at $500,000 Aud would be roughly $130 Aud a square foot.

    • I would guess that the average place in cartagena is probable less than 500.000 COP sqm, so about $26 a square foot.

        • MsSolarFelineAU

          Bogan, and MineBot, I MEANT that if one wishes to have one’s _chronic health needs taken care of properly_(I’m talking about *my-self* here), It.Is.Best.To.Live.In.A.First.World.Country.
          That.Is.Where *I* Am.Coming.From.

          What is fine for _you_ may not be fine for everybody else. 🙂

          For further explanation, I am self-employed, have a brain, and am not a drain on anyone’s taxes.

          • I would offer that it is only best to live in a first world country if you need others people’s money to take care of your health needs.

            If you’reloaded, you can access world class heatlh in thrid world countries.

          • MsSolarFelineAU

            Just to clarify further Rusty Penny, **I would offer that it is only best to live in a first world country if you need others people’s money to take care of your health needs.

            If you’re loaded, you can access world class heatlh in thrid world countries.**

            I do not need a first-world *orthodox* health system to keep me alive, paid for by the taxes of others/other people’s money.

            What I require is access to Amino Acids/Vitamins/Minerals. Purified Nutrients. Don’t think these are accessible in a 3rd World Country. Oh, and clean water. 😉

            Are people “getting it” now?? 🙂

          • As someone who has worked in third world countries for a reasonable period of their professional life, I can assure you, almost any pharmaceutical product you require available at a price. Unfortunately the ‘price’ is beyond the ability of average citizens and in desperation they bring their sick to hospital, to die if not even very basic drugs are supplied. Until we have all sat in a military hospital in abcd recovering from cerebral malaria, witnessing the stainless steel trolley running through the ward every morning to collect the dead, we have no clue. And yet, we continue to obsess about house prices and interest rates.

          • MsSolarFelineAU

            Mine Bot, *why* would I need to move to a 3rd World Country when I have everything I need in Australia? (That is a rhetorical question, by the way, one you do not need to answer/defend).

            We have falling property prices in Australia, we *are* the same as the rest of the world.

            So, you’ve survived “cerebral malaria”. Okay, you’re a hero. I deal with MS with CFS chucked in for good measure, but due to the **access to Amino Acids/Vitamins/Minerals. Purified Nutrients** I’m doing better than any of the *orthodox* specialist who’ve treated me & had their brains in their own paradigms. Oh and Malaria?

            *And yet, we continue to obsess about house prices and interest rates.*
            Yes, because that concerns *us* _here_. In. Australia.


            I am *just* defending myself. I do not know what is up your derrier.

            The Prince, if I have overstepped the mark, then my comments will be moderated to suit the forum. It is a privilege, not a right to be posting here. (No, I am not sucking up to you. 😉 )

          • Ms Solar,
            Are you seriously recommending Citric acid and sodium chlorite for malaria?

            I am a PhD student working on drug resistance and developing new drugs for malaria. There is no scientific basis for making this recommendation. I find this even more reckless and irresponsible than the tweet from APM below.

            Millions of people die each year from malaria, usually children and pregant women from Sub-Saharan Africa. They do so not because we don’t have a cure, but because there isn’t the funding or access to the medicines they need. Often they can’t afford the correct treatment and end up buying counterfeit medicines and other snake-oil remedies. This only serves to hasten the emergence of drug resistance, and undermine efforts to control the disease.

            Organisations like the Bill and Melinda Gates Foundation are doing their best to get treatment to where it is needed, and are doing great work funding innovative research that wouldn’t otherwise get a look in. This is an organisation that has the backing of Warren Buffett’s fortune – if only our local billionaires had the same desire to contribute back to society. Instead they’d rather buy up the media to further their own agendas or build bloody great big boats…

            3d1k – you ARE human aicmfp.

            Prince, feel free to delete if too o/t.
            [disclosure – I’m dependent on your tax dollars to do this work]

      • Don’t think that, just because you choose to put “Ms” in your psuedonym, everybody assumes that you are actually a Ms.

        I’ve heard of a few blokes who thought they were talking to gals on the internet……turned out to be thumping great AFP coppers instead 🙂

        • MsSolarFelineAU

          I *am* a woman, Julius. Not that you (or any other person) are actually going to meet me in person.
          Just to prove it to yourself, you *could* email me!

        • Mining BoganMEMBER

          Doesn’t have to be the internet.

          My fellow bogans have many a similar story to tell when they come back from Thailand 😉

          • Have I got a story for you!!!

            (I think this innocuous comment was accidentally deleted in a sweep of directorial enthusiasm.)

            P, come on, this is jocular but harmless? Please?

          • If its got anything to do with media, mining, environment, vested interests, or anything else covered by your CV, then no. If not, fire away Botboy.

    • Colombia is not a 3rd world country.
      Have you been to Colombia?
      You might be interested!

      Moody’s Investors Service rate the Government(s) bond ratings of Colombia and Spain equally…at Baa3.

      The only difference is the OUTLOOK – Colombia Outlook – STABLE and Spain Outlook – NEGATIVE.

      According to International Monetary Fund estimates, in 2011 Colombia’s GDP (PPP) was US$471.964 billion (28th in the world and third in South America).

      Colombia is rich in natural resources, and its main exports include petroleum, coal, coffee and other agricultural produce, and gold. Colombia is also known as the world’s leading source of emeralds, while over 70% of cut flowers imported by the United States are Colombian. Also has the worlds 4th largest supply of Fresh Water.
      Principal trading partners are the United States (a controversial free trade agreement with the United States was approved on 11 October 2011 by the United States Congress), the European Union, Venezuela and China.

  6. Cognitive Dissonance

    I like this bit “a sustained hard landing in China seems unlikely given China’s low tolerance for social unrest and falling Chinese inflation”

    Governments have a long history of failures not successes, he comments that because the Chinese government are on the case one of the ‘all bets are off’ situations are unlikely, as if to say that all the other disasters were because governments were looking the other way or not paying close enough attention.

  7. Look out kids… Australian Property Monitors – have handed out some asset price advice on the MEL housing market on their twitter feed tonight… apparently theres a FHB surge??

    Recall in March 2011, they mentioned explicitly “Prices WILL rise” last time

    APM ‏@APMnews
    ABS says Melbourne home ownership fell 1% to 69% from 2006 to 2011. Still best capital and will rise this year with first home buyers surge

          • MsSolarFelineAU

            I stand corrected. So, this is classified as “general advice”. But, some people are going to believe these opinions.
            Yes, we are, of course, responsible for ourselves – but, do people know what I am saying?

  8. An interesting article on the Bris high rise apartment market.

    Although the piece has a “business as usual” feel, my experience is that there is more of this new product on the
    market than I have seen in 20 yrs…and it is moving very slowly

    HRH alone has 3 res towers on the CBD fringe (not mentioned in this article)each around 80 floors high due to be completed in the next 12 mnths.

    I have some personal knowlege of “the Milton”.Units there have been on sale for over 18 mths and are not yet 50% sold.I enquired in February this year about a build commencement date and was told definitely April. To date we have no activity.
    I would be interested to hear from anyone who has knowlege of the Bris market

      • MsSolarFelineAU

        The Patrician, could you please clarify the “HRH” abbreviation. Thankyou.

        I have no knowledge of the BrisVegas market, having just moved home (Brisbane) 2 weeks ago…

        I was last home in 2008, and I’m clearing out boxes of articles regarding property (and other subjects) and it is extremely interesting (well, to me) to note the failed projects.

        It is interesting that “The Empire Square” did not proceed. (I know it’s old news)

        • The Patrician

          HRH is High Rise Harry Triguboff, chairman and managing director of Meriton Apartments Pty Ltd traditionally a Syd/Mel player but currently jumping into the Bris market with both feet.

          The 2 towers above carry 546 and 464 apartments each. On current sales that is about a years worth of Bris CBD supply.

          • MsSolarFelineAU

            *HRH is High Rise Harry Triguboff*

            When I was studying Real Estate in Sydney in 2000, we just called them “Meriton Monstrosities”.

            Thankyou for enlightening me as to nickname “up here”. 😉

            Designed for the oveseas students. (and, where are they now??) I’ve lived in 5 of these “buildings” in Sydney CBD, so I do have first-hand knowledge of living in them.

            Let them be built, and we have an over-supply, rents come down and we’re all happy!

    • Developers in Brisbane, like anywhere else won’t commit to a construction until they get at least 80% presales, and they would prefer 100%. Without a high percentage of presales, with quality contracts, financiers won’t commit.

      No money – no build.

      Existing units appear to be selling much faster now, so the new builds may attract more attention soon.

      • The Patrician

        “Existing units appear to be selling much faster now”

        Have you got the data on this?

        • Well you did ask to hear from anyone who has knowledge of the Brisbane market – I do, so I gave you some advice. You are quite free to ignore my advice if it doesn’t suit your mindset.

          • empirical data follows, it doesn’t precede. Pick a suburb that you are interested in, and watch the listings. Stock on the market is probably your best guide before the data is available from RPData etc.

          • LOL – can’t you wait a few days – is your mindset so blinkered that it can’t accomodate a different POV.

    • The “quality” show Real Estate News (yes, seriously) on the Foxtel business channel has been spruiking “The Milton” for a while now. And, I’m guessing, not very successfully. HRH does have good form in drip feeding the massive supply of his apartments onto the market, or quietly renting them out when they fail to sell.

      In reality, Real Estate News is a weird mix of (paid advertorials) pimping off the plan sales and “prestige” developments, coupled with blatant spruiking on the state of the property market.

      • Thanks booboo. I haven’t had the pleasure of spruik TV.

        re “The Milton” spruiking, one of their major marketing lines is a 12.4% p.a. capital gain via Micheal Matusiks data/commentary, billboards, website etc. 12.4% p.a., wow. Read the fine print. BYO magnifying glass.

        re HRH drip feed, from the source the 81 floors of Infinity in Bris are divvied up into first 24 floors Meriton serviced apartments, next 40 floors for sale (30% sold after 18mnths) and top 15 floors “for Harry”.
        Building is now at floor 27. Currently building at one floor per week! Wow.
        Harry must operate in a different world to PF’s 80-100% presale developer mates.

        • Harry is largely (perhaps entirely) self funded. So yes he does operate in a different world to other developers.

          That allows him to act whilst others would just like to act.

          In the initial stage of a cycle when product is scarce, banks won’t lend. When banks see units selling they start to lend again. Hence we get periods of scarcity, followed by periods of oversupply. Banks are not smart enough to pick their timing – Harry is.

          Harry can navigate around those periods – he is smarter than our banks in this area of finance. I would take note of what he is doing – Harry doesn’t like losing money, so he backs winners.

          • Yes – so HRH can afford to drip feed and hold on as long as “necessary”, or at least until he needs to free up further capital until the next project. If worst comes to worst HRH just rents them all out, like he did in Sydney.

            In that regard HRH is unique from the pressures on other developers to offload stock to keep their bankrollers happy.

        • Interesting, if you do the math on the Infinity presales, 30% sold of 50% of the total no. of apartments we are down to approx 15% presold of the total.

          The units have been selling off the plan for nearly 2 years.

  9. Minebot/Solarfeline etc that’s enough now.

    And if the former asks “why are my comments being deleted” I’ll just delete every single one as long as I’m awake tonight. Which will be probably all night…

    • Fair enough Prince… 🙁 but you took away the fun part…and I know you know what I mean.

      Cheers, feel free to delete – bugger it – you do anyway!

      • The comments thread are not just for your amusement – remember 95% of our users don’t comment.

        Although I do enjoy the occasional stoush, let’s keep it above board m’kay?

        And I’ve got work to do and I need the screenspace at the moment, not moderating comments!

        • MsSolarFelineAU

          Thankyou The Prince.

          Mine Bot, *but you took away the fun part*

          *I* did not think your comments were **fun**.

  10. Not sure he follows his own reasoning. On the one hand he does not think existing investors will sell en masse as they are in it for the long term, but then he points out that shareas/commercial ppty are much better investments. There is your answer as to why they would sell. He needs to also be aware that it is not only mass sellings that precipitate crashes, mass buyer strikes also lead to crashes as they have the same effect on the supply / demand dynamic. if there is no incentive for new investors (as he admits) then tht removes a large portion of the demand that has driven prices to this level. There is currently an in built premium for NEW investors entering the market – if they are no longer there then further drops are to be expected. 3% yields for Pete’s sake, thats pathetic!!!

  11. Not much mention of how employment could affect the prices. Looks like the general assumption is unemployment is going to stay at 5%. Let’s hope so.

    Also I don’t understand how mining applies to most Australians and how we should all be fine because they are doing so well in WA. Last I read mining was only 10% of the economy. I live on the east coast and it is mostly services, construction, and the retail industry. I don’t know anyone working in mining. Half the people I know are concerned about their jobs.

    • as has been proved time and again around the world unemployment lags house prices not leads