The history of Australian property values (part 2)

ScreenHunter_01 May. 13 07.31

Back in February, Phil Soos created an epic chart pack on 150 years of the Australian housing market. Now Philip is back with part 2 of his chart series. Philip is a research Masters candidate at the School of Management and Marketing, Faculty of Business and Law at Deakin University, and is a researcher for the Land Values Research Group, Melbourne.

Presented here is another comprehensive chartpack illustrating the Great Australian Land Bubble.

01

The most obvious indicator of a housing bubble is the long-term trend in housing prices, adjusted for inflation and quality. Prices increased by 123% between the trough in 1996 and apparent peak in 2010.

02

Between 1996 and 2010, real prices increased by 77% and 178% for Sydney and Melbourne, respectively. The growth in housing values for the latter city has far outstripped the former, which may be the result of Melbourne’s lower housing prices at the outset, allowing for higher prices before the interest repayment burden hits a wage-financed ceiling.

03

This is the “recovery” the spruikers are foaming about: housing prices tracking the rate of inflation. Further, the ABS index does not control for increases in the quality of the housing stock which would result in a .5 – 1% downward adjustment on an annual basis and does not take into account townhouses, apartments, and units.

04
05
06

 All of Australia’s capital cities have experienced a boom in real housing prices beginning in the latter half of the 1990s. At the top of the table are Melbourne and Perth; although Perth’s boom was 2 per cent greater than Melbourne’s, quality adjustments would deflate the index, resulting in Melbourne as the top performer.

07

More specifically, the housing bubble is a land bubble.

08

Strong falls in nominal land values have proven to be extremely destructive, especially when growth turns negative. The worst on record was during the Great Depression, and the 1990s fall resulted in a recession and the worst financial fallout since the 1890s depression. It again dipped in 2009 due to the effects of the GFC, and is currently at the lowest point in history bar the 1930s.

09

The 1990s bust was centred in the commercial land market and the bubble today is within the residential land market.

10

The entire land market is now worth $3.7 trillion, with residential land at $2.8 trillion.

11

The residential land bubble has resulted in abysmal gross yields, falling to a record low in 2007.

12

The price to earnings ratio for residential property indicates severe overvaluation. Just as economists and the “experts” ignored this fundamental metric during the Dot-Com bubble in 2000, it is treated the same today.

13

ABS estimates of residential yields show negative returns, only made tolerable by gains in real housing prices.

14

The latest ATO taxation statistics shows property investors have made their second-largest loss in history in 2011.

15

In 2011, the estimated cost of negative gearing as a tax expenditure was $3.7 billion.

16

Much of the housing boom has been fuelled via absurd tax expenditures (nominal prices), with differing methodologies explaining the variance in estimates.

17

The level of interest-only loans demonstrates the speculative impulse of property owners.

18

That 26% of all loans on offer had a loan to value ratio of 100% and above in 2008 illustrates the reckless nature of the banking and non-banking financial lenders.

19

The average LVR has remained at around 65 to 70% while housing prices have boomed, explaining why the average loan value recently reached $400,000 across Australia.

20

Despite the utter drivel disseminated today about public debt blowing out of all proportion, it is easily sustainable.

21

Public foreign debt is likewise at low and manageable levels, unlike private debt.

 

Leith van Onselen
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Comments

  1. Wow! Just Wow! Another great contribution to the debate from Philip Soos. This isn’t opinion. Or cant. Or perspective. These are the demonstrable facts.

    $3.7 trillion tied up in land, mostly residential. What for? Is this a good placement? Are we using it to its potential? Oblivion beckons.

    Don’t Buy Now!

    • Tiliqua scincoidesMEMBER

      Some good points made by Steve Keen in the below article.

      As a potential FHB, the below quote pretty much sums up what worries me about getting into the market right now:

      “Before the price boom, … debt was relatively small compared to GDP, and a large variation in how long people took to repay loans had a minor effect on debt servicing costs as a percentage of total income. During the price boom, this wasn’t a major issue: you could struggle with repayments for a while and then repay by selling your property into the rising market seven years after you bought it. But after the boom, repaying mortgages as fast as Australians have done in the past will be prohibitively expensive. Mortgage durations are therefore likely to blow out, which will make the thought of taking out mortgage debt that much less attractive.”

      http://www.businessspectator.com.au/article/2013/5/13/property/housing-rally-have-when-youre-not-having-rally

      • Keens article today was a well timed reminder (and reality check) for the spruiker-element desperate to see house prices continue their stratospheric rise in this country following on from last weeks rate reduction. He’s been ridiculed, day in day out, but the slap-down is happening, despite the clayton’s bull trap he describes.

  2. “That 26% of all loans on offer had a loan to value ratio of 100% and above in 2008 illustrates the reckless nature of the banking and non-banking financial lenders.”

    I wonder what Peter Fraser has to say on this. 26% of all loans is not a negligible fraction that can be ignored.

    • 26% of all loans taken up over a very short period. Over the 2006-2008 period it may have averaged around 10-15%. Probably more important is what these borrowers have done since… they’ve had 3-6 years to pay down their mortgages, have they done so?

    • Am I reading that correctly: in 2012, 65% of all loans are 95% LVR and above!

      Oh dear. That leaves no room to maneouvre. If lending standards tighten, prices will fall.

    • 100% loans were simply never popular, although 95% and 97% plus LMI loans certainly were. The math on 100% loans just don’t add up to a desireable product, and they are certainly no longer available in the mainstream.

      High LVR loans (95% and 97% LVR) were taken up by FTB’s in 2008, and as a group, default levels are remarkably low.

      • 100% loans were simply never popular

        …and yet 26% of the loans during that period were 100%.

        So, are you disputing the data (or merely waving your hand)? Yes or No answer will suffice.

      • Peter,

        I fail to see how much difference there is between a 97% LVR and 100%. It’s an exorbitantly excessive amount of leverage that puts both the borrower and the bank at great risk.

        We all know mortgage protection insurance is effectively a joke because the insurers don’t have the funds to cover when TSHTF.

        Default levels are low…at the moment…but what happens as the mining boom collapses and nothing much takes its place? Terms of trade fall, incomes fall, but the debt is still stuck there and far too much of it relative to incomes.

        No doubt you sell the finance and pass the risk on, washing your hands of it. Bully for you. But the risk has to sit somewhere.

      • No mav – if you read the text you will find that Soos said that 26% of loans on offer were 100% or more, but he isn’t saying that 26% of loans taken up were 100% of more, actually I’m countering the emotive handwaving.

        I’m sure that someone will have taken the product up, but I have never written one. Economically they didn’t make sense, the LMI cost was too high.

        mdsee asks a relevant question – it is splitting hairs to a degree, because a 97% plus LMI loan is about 99% but again most buyers did put in a fair bit of cash when they bought, even if that cash was gobbled up by their state governments in statutory costs such as stamp duty. That varied from state to state.

        In the end it’s the result that counts, and those who bought in late 2008 bought at great prices, they had the benefit of low interest rates, and their default level is very low.

        Added later – As the mining boom ends and as our dollar falls, employment opportunities for the non-mining sector should increase, which stabilises house prices in the currently down beaten areas.

        I think that you have the wrong take on what the future holds, but I guess time will tell.

      • @PF: “those who bought in late 2008 bought at great prices”

        Soos’ chart, ‘ABS Australia Real Housing Price Index 1986-2013’ doesn’t suggest that 2008 home buyers got ‘great prices’. 2008 prices seem only marginally lower than today’s prices. Higher P/E’s back in 2008 too.

        Great work by Soos.

      • I’m sure that someone will have taken the product up, but I have never written one.

        Soos was precisely stating what the statistics say, nothing more, nothing less. Do you have any statistics other than “I didn’t write any sub-prime loan, so there mustn’t be any” anecdotal and emotive handwaving to counter that?

      • Oh stop it mav, Soos did not say 26% of loans written were 100% LVR loans, that is simply false. In fact he has absolutely NO data on how many were written, he simply threw that pseudo-fact in for a bit of emotive giddy up.

        csfn – off the top of my head I think that the median price in Melbourne rose about $100K over the next 12 months. Other capitals experienced different results, but nation wide they went up. Those buyers also receive far more generous Grants and in some cases lower stamp duty costs. They are certainly ahead in dollar terms in most capital cities and densely populated areas, although there are exceptions such as the Gold Coast.

      • PF, stop throwing a tanty when you are challenged and you don’t have any data to back up your hysterical handwaving.

        That 26% of all loans on offer had a loan to value ratio of 100% and above in 2008 illustrates the reckless nature of the banking and non-banking financial lenders.

        I will ask one last time. Do you have any data to counter this?

      • Sigh – I repeat there is ZERO data to support the statement made by Soos, or at least your incorrect interpretation of his words.

        He made it up – don’t you get that? Probably collated from a quick survey of what is on the internet.

        I don’t need data to support my challenge, but you need data to support the factoid that you are now hanging your hat on.

        100% LVR loans were widely advertised but rarely written, now you prove that 26% of loans written at that time were 100% LVR loans – but of course you can’t, can you?

        Just email Phillip, I’m sure that it will be in his files under “F” for factoid.

      • russellsmith55

        You really need to provide some kind of answer to this Peter, or its going to undermine the good things you have said in the past. You’re starting to sound like a politician on this.

      • I don’t need data to support my challenge

        LOL.. Umm.. May I suggest you are posting on the wrong blog.

      • “He made it up – don’t you get that? Probably collated from a quick survey of what is on the internet.”

        Peter, the source for the data is right there on the chart, RateCity. If you think it’s inaccurate then why not contact them for methodology?

        [Edit] Key point highlighted by snagard below, the 26% is % of those offered, not necessarily the take-up rate.

      • I’m not sure that graph is saying that 26% of loans that were WRITTEN were 100%, merely that 26% of loans OFFERED were 100%.

        It’s worth noting that the source for that data is, according to the chart, RateCity – I doubt they would have much info on how many loans were actually written; only those offered. Indeed, they would likely treat a loan offering by CBA the same as a loan offering by some smaller lenders, which would skew the results somewhat.

      • snagard – exactly.

        Within the industry they were considered gimmiky advertising pulls, nothing more. A 97% LVR loan plus LMI gave the borrower more dollars in the hand, so why would anyone take a 100% LVR loan – it just doesn’t make sense.

        It is Phillip who is doing the handwaving. I don’t know why any of his supporters would want to make this a focal issue, it’s an unimportant factoid. You are weakening his argument Mav, if you want to help Phillip Soos, stop trying to help him.

    • I am sorry to say Peter, but it seems you have just been caught naked with your lies and obfuscations.

      • Well coolnik, it was your comment that caught my attention initially. You clearly misinterpreted what Soos wrote, and I tried to clear that point up in what I though was a friendly manner.

        As it turned out a number of people also misunderstood the point, so I tried to explain that further.

        Now exactly what is it that you still can’t understand, because I struggle to see what any English speaking person would misinterpret from the original statement and the resultant conversation – but I’m willing to listen.

  3. Every day in every way over valued property is damaging the economy by increasing the costs of business and everyday life.

    For all the talk about Australia being a high cost country due to labour costs and red tape the biggest elephant in the room is the high cost of land that it gets added into every transaction from a cup of coffee to the weekly groceries.

    For a country of 25 million people living in a place the size of western Europe this is a policy failure of the highest order.

    But what action is being taken?

    Sweet nothing.

    The fools in the RBA go so far as to spend their time publishing papers denying that land prices are high or that household debt presents a problem.

    Instead the RBA use their carefully constructed alternate universe to justify interest rate cuts to keep the cost of land and residential housing high and rising.

    Perhaps we should drive up the costs of cars and trucks as well so that we all feel ‘richer’ while stuck in the traffic.

      • Well spotted TP!!

        It is very pleasing as a proud Aussie to see that we are right up there in medal contention in another high cost of living category.

        With a bit of new car rationing to force up the price of new cars and eventually used cars we could get a nice little RBA approved ‘wealth effect’ happening.

        Perhaps people could buy a boat with the “equity maaaate” they create when their clapped out Commodore just keeps going up in value every year.

        Eat your heart out Cuba. 🙂

    • Free_Market_Delusion

      The cost of land has come to my attention lately on a topic I never gave much thought too.I have been looking at renting small factory for storage of my tools and equipment and to have some space for projects.

      The cost to rent a factory in and around Melbourne starts at $20,000 pa. There are some cheaper ones at around $15,000 but you get what you pay for.

      However it made me realise how much a small business needs to make just to cover the rent that’s before any other costs are included. We wonder why things are so expensive in Australia and the cost to have a business is a huge factor and this is all ultimately linked back to land prices.

      I have seen modest factories renting for $40,000 pa again I keep thinking of the amount of product or services sold just to keep the roof over your head.

      • Absolutely!

        Halve the $40K rent cost and there is potential for the owner to employ someone part time or casually to work in the business.

        There is a reason we pay completely over the top prices for coffee and anything else sold from an over priced shop front.

        The rip off in its finest form is when a council (encouraged by the landlord of the local Mega-mall and other rent seekers) makes it almost impossible for low cost competitors to open near by.

        Judging from the streets of Sydney and Melbourne it was easier for a small business to build a shopfront and start trading 100 years ago than it is now.

        Back then if you wanted to start a business you just bought a corner block and put a shop in the front and house at the back.

      • The Patrician

        +1

        Productivity = Output/Costs of production

        Land is a cost common to all forms of production.

        Increasing land prices kill productivity

      • Halve the $40K rent cost and there is potential for the owner to employ someone part time or casually to work in the business.

        +10 .. Instead of targeting insecure workers and penalty rates, some retailers are slowly cottoning on to this.. DJ boss signals fight over leases. I hope to see some customer service staff on my next visit to DJ !

        ..while other retailers are simply fleeing from the Australian market if they can help it.

        Dressing down local rag traders

        BTW, I heartily welcome Michael West to the Anti-Negative Gearing bandwagon 🙂

        Yet those the retailers charge as rapacious landlords are supported by government policy – the favourable tax laws. Were there no negative gearing, there would be less incentive for landlords to leave their shops empty for months at a time rather than reduce their rents.

    • Chuchi-Chaschtli

      For a country of 25 million people living in a place the size of western Europe this is a policy failure of the highest order

      you are so spot on!

  4. yes – but the difference now is we also have 1.2 billion Chinese on our doostep who also like irrational investments. Where this will end I dont know, but I think the days of housing being an investment that reflects earnings may be some way off. There is no question that our govt is using low rates and higgh immigration (and foreign investment) to keep the market afloat. I HAVE NOT BEEN TO ONE AUCTION IN THE LAST MONTH THAT HAS NOT GONE TO SOMEONE WITH A FOREIGN ACCENT.

    • You also have to remember that the same irrationality which goes on the way up is responsible for the going on the way down.

      And when you have people with no interest in the local community – the state of affairs becomes even more unstable. This will be akin to spooking horses in an open field – once spooked they’re gone – there are no fences to hold them in.

      • ino – u may be right, but frankly i am sick of waiting, hence the anger. And my anger is exacerbated by the fact that alternative investments are either loss making in real terms (deposits) or inflated by low rates (property/shares).

      • Squirell, yeah – To tell you the truth – it no longer matters to me what happens to this rigged game. I’ve decided to step out of this vicious waiting circle.

        As I said – I’ve got better things to do with my money. As a matter of fact I’m just speccing up a horse-float as we speak. It’s not cheap – but then I have the money to afford it.

        Would I be able to do that if I was in debt to my ears (95% of my body height)? Hell no.
        Would I be able to take a 2 months holiday and crank off south and do some serious horse-riding with some very good coaches out there? Hell no!
        Would I be happy that I “own” under those conditions, knowing that if something happens there won’t be any money to spare on anything? Hell no!

        So you see – I get on with doing what I value and what I think it brings us peace and enjoyment of life. It’s not a perfect recipe, but it floats our boats. It doesn’t mean that the money is spent indiscriminately, it is still saved with the view that some disasters will happen and you will need to draw upon the savings. And what is purchased – is purchased money down, no credit, not interest, no arguments! Ever.

        Quality of life is more important than amassing “things”, and amassing things does not bring quality of life.

    • Are you an indigenous australian? I guess no!
      I guess you have also accounted for yourself when you counted people with “FOREIGN ACCENT” because you certainly have one!

      • Virus, indigenous Aussies had no choice and if they did I am sure they would not have so easily sold their futre off as we seem to be doing. WE DO HAVE A CHOICE!!! Our govt is voted in by Australians to represent the interests of AUSTRALIANS NOT bankers/agents/foreigners.

      • Mining BoganMEMBER

        Once upon a time you could buy a wonderful t-shirt that had Australia overlayed with the aboriginal flag and the words “F… Off, we were full 230 years ago!” written underneath.

        If anyone could point me in the direction to where I could still get one of these I would be extremely grateful. It would go down a treat in camp amongst my associates…

    • Mining BoganMEMBER

      Meh, this is what they used to say in Canada as well yet their housing market is crumbling under its own weight.

      Used to say it in Queensland too when the Japanese were running around with chequebooks the size of Holdens. That market still crumbled under its own weight.

      Can’t see anything different happening here. History is always a good teacher.

      • +100.. a sane bogan voice amongst the, IMHO frankly, hysterical noise.

        Yes, the pollies ARE selling us out.. But no, we are not doomed.

      • Mining bogan,

        yes – and you watch the govt in canada open the immigration gates further and take rates down to historic lows. Ask me in 5 years whether canda has collapsed under its own weight. I hope so, but dont discount how far losses can be transferred by govts.

      • Mining BoganMEMBER

        It all comes down on how you view life squirrel. I prefer to collect experiences, not assets. Whether there is foreign buyers or not doesn’t concern me. They won’t have any effect on prices in the long run anyway. Things always return to the mean.

        You can run around trying to run a scare campaign if you like. You’ll probably get some supporters. I think you’re just being hysterical. And somewhat sad.

    • dumb_non_economist

      Squirell,

      Many here talk about how the Chinese aren’t interested in what happens to their “investment” in RE, my counter to that is go look at HK RE price history, when trouble hits they dump and run very fast.

      • i am forever hopeful dumb_non, but at least in HK and Singapore the govts try to do something to limit the impact of Chinese money.

        … and as an aside, clearly this is not a race issue given the complaints from Singaporeans and Hong Kongians regarding Chinese investment.

  5. Whatever happened in the late 1940’s?

    The property yield rate and the P/E ratios both went insane at that time, yet there was nothing going on in the land value to GDP ratio.

    • Off the top of my head: war-time controls on land sales and rents, amongst other things, were lifted.

      • But the P/E ratio went up almost vertically, by 100%, and the property yield rate went down almost vertically, by 50%.

        Did the lifting of controls result in rents falling rather than rising?

        The graph for land ratio to GDP doesn’t show anything abnormal at that point in time, so it can’t have been price inflation that did it. Did earnings collapse, and why?

  6. The remarkable Mason Gaffney (born 1923), published a paper in Jan 2012 entitled “Reverberations Between Immoderate Land Price Cycles and Banking Cycles”, in which he offers a range of possible reasons for “what kept us out of trouble for so long” following 1945. Gaffney says (talking about the USA, of course):

    “…..postwar gloom capped land prices. Affordability of land ran high, e.g. for housing and farming…….Loans were mostly for production and use; price/earnings ratios ran low. All kinds of taxes remained high, stifling any kind of long-term irrational exuberance and any ‘reverberations’ between land prices and bank expansion……Soon came the Cold War, the Korean War (1950-53), the costly Interstate Highway Program, urban sprawl with need for new infrastructure……(airports, water projects, other infrastructure projects) all costing huge sums and presaging continued high taxes, meaning continued low land prices……”

    What this misses, while still a very insightful comment, is the “automobile based development” phenomenon, and the near-elimination of “planning gain” from the process of urban development.

  7. The Patrician

    Comprehensive work Phillip. Well done.

    2 suggestions.

    – Numbering the charts would aid discussion.

    – LVO’s capital city cost per sqm of land time series chart would be a worthy addition.

  8. BubbleyMEMBER

    Phillip Soos articles are a lot more digestible than Steve Keens.

    I like his writing style, it is succinct.

  9. A 0.25% cut increases average punter purchasing power by 25K thus producing 25K property rise. So 3 cuts till 2014 produces 75K or 13% rise on average 500K house.
    Housing is similar to inflation adjusted bond, when rates go to 0 bond prices sky high (usa style)

    RBA contrary to wider belief only cares about its fellow banks balance sheet growth, and will keep them going as long as it can.
    So my bet RBA will be delivering housing growth all the way up to Zero interest policy. When that day eventually happens they will run out of tools to stimulate fast and it will produce a spectacular bubble blow up.

    • Someone on this forum once argued that it would be possible to keep cutting interest rates by a certain percentage, and it would continue to have a stimulatory effect.

      You could cut from 0.2 % to 0.1%, and then to 0.05%, and so on ad infinitum.

      I suggested that this sounded a bit like the ancient philosophical sophistry about the arrow never QUITE hitting the tortoise……