Australia’s huge property market gets bigger!


By Leith van Onselen

Yesterday, RP Data’s Cameron Kusher tweeted that the value of Australian housing stock had hit round $4.8 trillion at the end of 2012. A quick glance at a PowerPoint presentation released earlier in the year by RP Data also shows that Australia’s housing stock was worth roughly 3.5 times Australia’s total superannuation pool or Australia’s total sharemarket capitalisation (see next slide).

ScreenHunter_11 Feb. 27 15.08

Australia’s total GDP was $1.49 trillion in the year to December 2012, meaning that Australia’s housing stock, according to RP Data, was also nearly 3.3 times the size of the Australian economy.

Interestingly, RP Data’s estimate of the value of Australia’s housing stock is $575 billion higher than the Reserve Bank of Australia’s (RBA) official estimate, which valued Australia’s housing stock at $4.29 trillion as at March 2013, or roughly 2.9 times Australia’s GDP.

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:

ScreenHunter_07 Jul. 23 08.00

According to RP Data’s valuation, 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.

Using the RBA’s more conservative estimate, Australian housing values (2.9 times GDP) is behind New Zealand’s and roughly in-line with the UK, but well above the North American nations.

The above data is consistent with estimates from the International Monetary Fund, which showed that Australians and New Zealanders have a higher proportion of their wealth tied-up in housing (and lower proportion of wealth stored in financial assets) than is the case in other Anglo nations:

Along with Australia’s banking assets being highly concentrated in the Big Four:

ScreenHunter_02 Nov. 19 09.50

And seemingly mortgaged to the hilt:

ScreenHunter_08 Jul. 23 08.09

One can only hope that the old adage: “you can’t go wrong with bricks and mortar” holds true, as any significant housing correction could disproportionately harm the Australian economy.

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Unconventional Economist
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  1. reusachtigeMEMBER

    If you’re not investing in property, you’re not investing! It’s a system built only to win!! There are no losers, so get on board and ride the easy way.
    (ps – we need even lower interest rates to make this even better!!)

    • The government and the banks must be crapping themselves and it looks like they will sell their souls to prevent a housing price collapse.

  2. I sent a version of that last slide to some people in banking in London and Frankfurt earlier this year.

    They simply didnt believe me at first (then they dug up their own versions)

    • Did the also share their versions with you? And if they did – are they commercial in confidence?

    • They just replied with various other nations – same charts, similar to what are found in Leith’s chart pack from earlier this year, or the Phil Soos stuff.

      The interesting thing is that there the default expectation is that Australia is a well run contemporary democracy with sound macro fundamentals – its only when they think to ask (although all my mates know my views) that they get the facts, and then generally you have a jaw drop sort of moment.

      The closest thing to Australia in terms of bank lending to real estate is what happened in Ireland.

      • Gunna the lending constraint that our banks have here and now are credit worthy borrowers. If there are no business/commercial clients asking for loans who have the necessary security and capacity to repay, then banks can’t lend.

        The culprit is more likely to be a lack of government policy. If you go back to the fifties, sixties and seventies states had lending arms to promote new initiatives and industry within their borders, and the federal government had the Commonwealth Development Bank as well as export initiatives that helped fledgling industry.

        That’s all gone. Maybe there are other tax incentives or grants that would be better suited rather than direct lending via specialist lending arms, but I doubt it.

      • I actually agree with that.

        There are two sides to the equation, and one side certainly is positioning an economy for being a credible place to invest – In Australia’s case (at the risk of sounding like a Stalinist) I think that will involve a fairly overt industry policy which probably will involve its own set of economic misallocation risks.

        What I tend to think has evolved in Australia is a situation where the remnants of what was once industry policy (see Ford – manufacturing in general – etc) has been allowed to die off or been crimped severely. This process has not left Australia with a different business makeup so much as having left Australia with the situation Peter identifies in that Banks face a dearth of credible things to lend to – while the set and forget of negative gearing and capital gains (which both sides of politics simply dont want to touch) means that Real estate in one guise or another has filled the gap.

        The other side for mine certainly involves identifying and managing the real estate issue. A simple statement of what sort of role real estate is currently playing and what impact that has on the Australian economy would be a useful place to start.

      • The banks are more than happy to make a profit lending to commerce, they don’ withhold money from that sector and push it into real estate.

        I don’t see a graph that says we ware lending too much to RE – I see a graph that says we are not developing and encouraging commerce.

        The USA for example sinks a hige amount of GDP into defence which gets spent in local industries and development of new technology, which brings in future export income.

        We just need to get smarter.

      • ‘I don’t see a graph that says we ware lending too much to RE’

        Well logic pretty much says that investing in RE is non productive (if we set aside discussion of RBA and government policy to stimulate demand through housing construction)

        and if our banking sector is lending 2/3 for non productive purposes surely you have to start wondering.

      • And I do wonder – as I said before we need mechanisms to encourage new industry to get it to the point of borrowing from banks for expansion.
        Banks don’t set policy, governments do by investing in future industies and the education of our young, and they aren’t doing a very good job of it at the moment.

      • I m not sure why you would think that 60% of loans to property is not the right level for Australia.

        We dont have much industry and the ones we have, are huge and use international finance, not local banks.

        Is there a rule that dictate the right level ? not sure.

        Australia is fairing quite well so far compare to others.

      • dam:

        ~63% of our eggs are in ONE BASKET. This shapes policy to protect this basket which creates deformations in the economy, which some are “fixed” with further deformations… lather, rinse, repeat.

        Is there a bright line, where X% is ok, but X+1% is bad juju? Doesn’t matter if you ask me, but a lack of diversification into ANY asset IS bad juju.

      • @CampbeIn

        Diversification is totally overrated, correlation is pretty much one when the shit hits the fan, property is probably not the worst bet for the banks.

  3. ‘Australia leads the pack…’

    Try turning it around. With $4.8 trillion tied up in real estate values, we produce $1.5 trillion in new value each year – ie equivalent to one third of what’s tied up. The US does almost three times better.

    When we talk productivity, we’ve got to talk about real estate values.

    • +1 Thats my view.

      Real Estate has the nation in such a grip that no matter what they do in terms of supporting aggregate demand or trying to free up capacity or just stimulate initiative, the payoff goes first and foremost to real estate interests – and the real estate world has gone quite a long way to cultivating a society wide view that this is somehow ‘normal’ – until they get to grip with what is or isnt ‘normal’ and the way in which any given efficiency, productivity or even simple demand stimulus proposals interact with real estate interest they will all be twisted and deformed to suit real estate rent seeking interests.

      • So, in short, it’s akin to an oil tanker. That is, it builds up a lot of momentum, doesn’t stop quickly and has got a very wide turning circle when it does decide to turn around. Due to the sheer size that the beast has been allowed to grow to, any change will be slow and gradual. If at all.

      • I know a guy whose judgement I quite respect on non-economic matters, and he says that it doesn’t really matter who gets lent money or given it by the government, it goes around in circles anyway.

        My argument against this in the case of urban land values, is that this part of the money-go-round is like a feedback loop, with the amount flowing to the rentier class being the only part of the entire money-go-round that is steadily growing. The rest of it is pretty much stagnant or shrinking, and that should really, really bother us, because the wealth-creating part of the system is to be found in “the rest of it”, not in this bit.

        You might as well be a sound engineer who says “feedback is good”, it results in higher volume… pity the volume is useless.

    • That’s not a valid way to look at things. There is not $4.xB “tied up” in real estate. If every dwelling in the country was bought/sold tomorrow, for a total of $4.XB, there would be the exact same money left flowing around the economy tomorrow as there was/is today.

      A purchase of an existing dwelling is a zero-sum asset swap – money in exchange for title on a property. There is a bit of “resource consumtion” (tracked in GDP) via real estate agent fees, advertising, conveyancing etc, but that’s it. The bulk of the $$$ is simply transfered from buyer to seller. No money is left “tied up” in the macro-economic sense, in that no/little actual resources are used to effect the transaction.

      What we can say though is that the higher values may well be resulting in the larger debt burden on average across our households than in other countries? Some may propose this may impact household consumption spending etc. However the bulk of the resulting expense (ie interest) incurred by a household is simply transferred to other households via the financial system (interest payments to depositors, wages of bank staff, dividends to bank shareholders etc), so the net impact may actually be minimal (in aggregrate).

      So given all of that, I think it is hard to say what the implications of this data really are? Probably simply really another way to present an aggregrate household debt/GDP chart in effect, with similar implications – no more, no less?

      EDIT: I also note that based on the RBA figures, our R/E to GDB value is less than NZ, and about the same as the UK. That doesn’t make us look like such an outlier really I think?

      • China-Bob – excuse me? No trolling there mate. If you have something intelligent to say about the points raised, please put them out there. Otherwise, keep your trolling accusations to yourself.

        PS: The irony of course is it was actually *your* post that is trolling, and I have fed you by responding…….

      • from an operational POV gonderb is correct. Every dollar spent is a dollar collected by the vendor, so the net change within the banking system is zero.

      • IF the Aussie financial system were a closed system then their might be a grain of truth in what you are saying. In reality the Aussie financial system is open because foreigners can both buy Aussie RE assets and create loans indirectly through bank lending and and more directly through Mortgage broker lending.

        When the RE assets are sold the proceeds fuel consumption, well in excess of that which would have been possible without external financing, the whole process impoverishes our nation. In the end, both the populace and the finance system gleefully spend their unearned wealth. Such is their addiction to unearned wealth they even try to create new Super taxes specifically targeted at the few externally productive industries that somehow manage to succeed. [email protected]#$%inglievable!

        So no mate nothing wrong here.

      • No – gonderb was just pointing out that money isn’t lost through RE transactions, or through any transaction whether that be done via a cash swap for money coming from overseas or a loan internally.
        What a vendor does with his money is his business, but whatever he does it isn’t lost to the banking system, it can only ever change hands.
        You may not see an RE transaction as being as desireable as a commercial transaction, but it doesn’t take funds away from commerce, it’s a net sum transaction as long as the loan doesn’t cost the bank through bad debts, and at the moment they are not.

      • When i read that, here’s what is going through my simple mind..

        1) I bought a house for 4 trillion dollars..
        2) I only have 1 trillion in the bank…
        3) so i must have borrowed 3 trillion from somewhere…..

        if i can’t service that 3 trillion, I’m cactus…

        am I reading this right?

      • Rodney – yes. If $3T was borrowed, and could not be paid back, then we would have a BIG problem.

        The actual total amount of household mortgage debt is about $1.4T though by the way. So perhaps when considering this articles data, the real question is, what is the risk that the $1.4T or so of residential mortgage debt in Australia won’t ever be paid back? Current and historical arrears & default data would indicate that this risk is low, but real for a proportion of that debt none-the-less.

        Which get’s back to my point, that the whole “aggregrate value of propertyto GDP” is really just another way of looking at risks associated with household debt to GDP ratios.

      • Zero sum my ass… What about the ‘friction’?

        You know, the stamp duties, the Relitter fees and all the rest of the transfer costs? The movers, the lost productivity? Or are we going to perpetuate the broken window fallacy and claim this friction is a good thing even though it doesn’t add value?

      • The question is whether it is really worth $4.86 trillion…so how much of a debt default and/or taxation shift will it take to wipe off a who knows how big slice of that…?

  4. The significant house price rises and their stubbornly high plateau has disproportionally affected the Australian economy and many Australians, so let’s hope bricks & mortar does not hold!

    Fascinating article but despicable metrics.

    • I tend to agree. All the changes to the sector demanded here by regular commenters whilst likely to directly benefit them and perhaps even be preferable in the long term will be to the detriment of many if those already in the game.

      Such is life and the law of in intended consequences.

      • It will remain pointless until enough first home buyers are locked out of the housing market altogether. We’re not that far off.

        ‘Condemned to a life of renting’, I believe the man said.

        Then perhaps we can change Australian renting laws so that they are reflective of peoples’ true aspirations: homes, not wealth, through housing.

        Once we do that, the ‘gearers will quickly wander off to wallow in some other swill, and there’ll be no controversy at all in dismantling it.

  5. Krugman has written a series of three interesting articles on urban sprawl and how that might promote entrenched poverty by putting barriers up that inhibit access to support and reducing upward mobility. He also looks at the rust belt scenario very evident in Detroit, but also evident in many other cities in the USA.
    Also a quick look at the difference between Atlanta and Boston who have markedly different median house prices. Sure a different median income, but the difference isn’t commensurate with the difference in house prices.

    Perhaps in Australia and New Zealand, and to a lesser extent the UK we have cities and towns that haven’t yet hit the “Lewis Point” that so many US cities have hit, thus forcing the national medians to lows which simply don’t reflect prices paid in more vibrant and growing towns and cities within the USA.

    I know that you point to the examples in Texas, but Texas isn’t representative of the majority of the USA either. It’s a one off that needs study, but perhaps it can’t be so easily repeated globally due to nuances not so easily seen or understood.

    Not that I ever want to see Australian cities with falling populations, dying manufacturing industries and rusting assets of little future value, but at some point in history I do expect it will happen.

    To what degree do the figures reflect the socio-economic differences rather than just the difference in median incomes and median home prices? I can’t answer that question, but it’s still a good question and it must make a real difference.

    I can buy a house in Detroit for $500 but I would never go there after dark, so what value is it compared to a much higher priced house elsewhere that I would be happy to put my family in?

    There is a difference between bring well priced homes to the market and house prices that have been driven lower through a growth in poverty in a community. The two are not the same.

    • “Perhaps in Australia and New Zealand, and to a lesser extent the UK we have cities and towns that haven’t yet hit the “Lewis Point” that so many US cities have hit, thus forcing the national medians to lows which simply don’t reflect prices paid in more vibrant and growing towns and cities within the USA.”

      Many places in the UK, especially the north, are rust buckets. But unlike North America, they are also expensive relative to incomes.

      Also, why did you leave out Canada? Vancouver aside, it’s still way more affordable than Australia. Yet its economy is vibrant and it is no rust bucket.

      • Honestly I don’t know a lot about Canada, but I would think that they have benefitted from their close proximity to the USA for the last century, they are major trading partners, and they have adopted many of the business practices used in the USA – neighbours influence each other. I suspect that Canada has better community support via welfare as well and that makes a difference.

        Britain is a small island with a large population compared to Australia, and they have much more generous social security mechanisms than they have in the USA. I have no data on life at the low grinding poverty level, but somehow I imagine it to be worse and more widespread in the USA than it is in the UK. I’m happy to review that if you have data though.

        I went back to my home town some years ago in NQ. There were once jobs in the sugar industry and everyone was employed. Not anymore and the old residents have moved out, replaced by permanent welfare recipients. On the surface it looks the same, but it’s not. Still it’s not bad because we have support mechanisms in place. I can assure you that many small Victorians towns with houses for sale well under $100K will be the same, I talk to many who want to buy in those towns.

        Those little rural communities attract the less well off because of cheap housing but don’t reach the Detroit point because we have support.

        If we concentrate our poverty in an area, then that poverty will spread to the residents who don’t get out early. That affects desireability and thus prices.

    • Peter, your assertions are all over the place. You are also completely ignoring the facts that we have established over and over again on this forum.

      When it comes to median multiple house prices, Texas is entirely typical of “the USA” and it is California that is the ridiculous outlier. In fact the highest elasticites of housing supply in the USA are to be found in Kansas and other States – Texas is merely middling among the elastic supply data set.

      It is nonsense to talk about “more cities finding their Lewis point” after a crash, in the USA, when by far the most of them never had a price bubble in the first place.

      It is also nonsense because a median multiple of around 3 was entirely normal in all cities in the USA for decades, including in California when it was growing twice as fast as Texas is now (i.e. in the 1950’s and 60’s).

      It is the adoption of anti growth policies that results in the median multiples doubling – and more – and this even as the size of sections in new developments shrinks. Everything else is a sideshow.

      Detroit’s house prices are what SHOULD happen to a city as stuffed as Detroit. This will help Detroit recover. The UK has “rust belt” cities too, but their house prices somehow remain unaffordable, thanks to urban planning. As a consequence, those cities, such as Liverpool, will never rebound economically, like, say, Pittsburgh already has.

      • Phil – assertions are not facts.
        There are a number of cities in the USA that won’t rebound in our lifetime, so comparisons with healthy cities here are useless.

        Maybe in 50 years it will start to make sense.

      • Peter, you have to be being deliberately disingenuous with your statements. You have been following this forum for long enough to know what the “facts” ARE.

        Out of about 250 cities in the USA: there are about 60 anti-growth price bubble cities. These cities have had house prices go to similar heights as Australian housing currently has, then they have crashed again to sensible prices levels (but some of these cities are commencing yet another bubble cycle right now). This bubble volatility has been bad for these cities. As are unaffordable housing and land prices, period.

        There are also about 20 US cities with economic problems stemming from things other than anti-growth policies: eg Detroit and other rust belt cities (mostly ruined by their Unions). These cities have house price median multiples down around 2 and even lower, which is where they should be for economically busted-arse cities. These cities probably will mostly rebound economically over the next 30 years UNLESS very badly managed politically (like the UK’s permanently busted-arse cities have been).

        You talk about “healthy cities here”. The “other 170 cities” in the USA are probably a match in economic health, for Australia’s cities on average. It is utter garbage to suggest that they might have lower median multiple house prices than Australia “because they are not as healthy”. They are healthy BECAUSE they have NOT had a house price bubble. Australia’s cities on the other hand, have artificial bubble “health” right now, and it is not helpful to be continually disingenuous about where this is going to end.

        And the USA has dozens of genuine economic boom growth cities for which Australia simply has nothing whatsoever to match them. NONE of Houston’s economic boom, for example, is artificial house-price-bubble-related. It is all REAL demand-driven construction and energy extraction and processing and manufacturing and health and other spin-offs.

        The ABSENCE of house price inflation is a GOOD sign, and a sign that these parts of the US economy are going to leave your Australian “healthy” cities for dead over the next 30 years. All the cities in Texas. All the cities in the Carolinas. Atlanta. All the cities in Tennessee. Salt Lake City. Des Moines. Omaha. Kansas City. Oklahoma City. Columbus. Indianapolis. Minneapolis. North Dakota will soon have cities coming into the Texas league.

        The US economy as a whole, has something Australia sadly lacks. It has genuine inter-state and inter-jurisdictional competition, with a considerable proportion of jurisdictions positioning themselves to “get the basics right” and go for sound and real economic growth. The bits that rest on their laurels and the bits that go for NIMBYism and conservation and bubble mania, do not drag the entire economy down with them, because there is plenty of other places for businesses and individuals seeking a fair go, to escape to.

        Only a completely hopeless bubble bunny is incapable of recognising the truth of all this.

      • Fair go Phil, I said a “number of cities in the USA” not every damn one of them.

  6. Wowser. Those stats are disgusting. I’m sorry I don’t want to live in a country where morons in the real estate sector are on the top shelf. It wreaks of the US during prohibition or some sort of criminal latin American country.

    “as any significant housing correction could disproportionately harm the Australian economy.”

    I’m 99% sure it would be very good for my economy. Let it burn to hell.

    • Why such a strong reaction? If we use the RBA numbers (which we should when comparing countries as they are all based onc entral bank data), then we are less than NZ, and about the same as the UK in terms of property value to GDP. Both very similar countries to us in terms of GDP/capita and “general” living standards etc.

      I reckon our housing stock and quality of life is far superior to the UK, and probably also better than in NZ? So if you chose not to live here, would you go to either of those countries instead for “more of the same”? Or would the US be your choice?

      • the US would be my preference. Consider how much more you have to earn to service an additional 500k on your mortgage over 25 years. Its around 80k before tax. I can think of better things to do with my money. As for comparisons with the UK and NZ, they are both ridiculous as well, but we are the worst of a bad bunch – our lives could be a lot better if we reduced this property v gdp ratio, and our economy would be a lot less risky. If other countries can do this (and we used to do it), why cant we?

      • Pointless statement. The UK, NZ and Canada still have bubbles. The US probably does too.

      • gonderb, the UK is an absolute disaster, and illustrates the logical consequence of pursuing this “strangled supply, inflated economic land rent” racket for decades.

        You are quite right that this has absolutely destroyed the quality of the housing stock there. That is all the more reason to stop the nonsense in this part of the world before we get this bad.

        The US ratio is the sensible, equitable one.

  7. This is great news. Everyone knows property prices double every 7 years, so Australia is perfectly placed to boom for decades. Buy now before you miss out forever!

    Nothing can possibligh go wrong.

  8. I wonder how our ratio of Residential Real Estate Value vs Commercial Real Estate Value ($4.86T / $0.7T = 6.94) compares against the rest of the OECD.

  9. Explains why nothing will change with the way property is treated by the banks, government or the people. It’s property, not the banks, that’s too big to fail.