The history of Australian property values

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With the commentariat locked in a debate over whether the Australian housing market is facing a bubble, brought about by near record low mortgage rates, intense investor participation, and rising prices, it is worth revisiting the work of Philip Soos, masters research student a Deakin University, who has recently updated his chart pack tracking 150 years of Australian housing data on his website.

Below are a selection of Soos’ charts, the remainder of which can be viewed here.

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The most obvious indicator of housing over/undervaluation 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. After retracing over the next two years, prices are now back on the rise.

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According to the ABS, all capitals experienced strong growth in real house prices from the mid-1990s trough to the peak in the 2000s, with Melbourne leading the way.

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As at the 30 June 2013, all capitals except Darwin were still “underwater” in real inflation-adjusted terms, with house values nationally around 5% below their June 2010 peak.

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As argued previously on this site, the strong growth in Australian Australian housing values has been caused by escalating land prices, which roughly doubled as a percentage of GDP from the trough in 1996 through to the peak in 2010.

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In the mid-1980s to early-1990s, the froth was in the commercial land market, whereas today it is within the residential land market.

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

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Another popular method of determining property valuation is comparing housing prices to rents. In a fairly efficient market, the costs of buying and renting should closely match each other; although due to factors such as taxes, risks, and interest rates, it is unlikely that costs will equal. As you can see, this ratio is currently highly elevated suggesting housing is significantly overvalued.

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A key determinant of the boom/bust cycle in the land market is the availability of credit/debt used to fund housing. The ratio of household debt to GDP (the majority of which is mortgages) has more than quadrupled since 1988, rapidly accelerating during the 90s and 2000s. The ratio peaked in 2010 as did real housing prices, which is clearly no coincidence.

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As household debt has climbed, so too has debt as a percentage of household assets. It has tripled from 1990 through to 2008 before the GFC, falling and then resuming its upward climb.

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Despite mortgage rates falling to near record lows, the proportion of aggregate household income chewed-up by mortgage interest is still well above that of the late-1980s/early-1990s, when mortgage rates peaked at 17%. This is because of the inflated housing values and the corresponding high debt loads carried by Australian households.

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Australia does indeed appear to be over-invested in housing. In addition to housing’s lofty valuation compared to GDP (see earlier chart), nearly 60% of Australian household assets are tied-up in housing, making it by far the dominant asset class in Australia.

While most mainstream commentary is focussed on whether or not Australian housing may be entering a bubble owing to current conditions, a long term perspective makes it clear that the base from which current prices are rising is already dramatically inflated.

Comments

  1. Great charts!
    It’s a bubble.
    When will it top? Has it already topped? No way of knowing.
    One thing I do know is, having studied charts of many bubbles in many markets, the remarkable thing is, when a bubble bursts, the market in question invariably works its way back to the price it was at when the bubble began.
    When did the Oz bubble begin? Early 2000s, possibly mid 1990s.

    • Which would be an early beginning, relative to where the bubble is now, do you think AC?

      And what does this tell us about the idiosyncrasies of this particular bubble?

    • Indeed, terrific work; as Ronald Coase famously said; “I never said anything that was not obvious. Why it was not obvious to others before me, I don’t know”.

      Australia has a house price bubble. Why this is not obvious to others…..

      THIS sort of spruiking is another sure sign:

      Laying Housing Affordability Myths to Rest- Michael Matusik

      http://propertyupdate.com.au/laying-housing-affordability-myths-to-rest/

      Prices are really the only indicator we need. If he disagrees with an index that says the multiple is “7” now and uses one that says it is still below 5, how about admitting that the first measure said the multiple used to be 3, and the latter one said 2?

      • “Also, if you use the ATO figures for income & not the census…you will find household wages are actually 14 times higher than the ABS reports.”

        Um, 14 times…really?

      • You know, Phil, over the years I found that many things that were obvious to me were not necessarily obvious to others. That is why I might sound too lengthy in some posts because I have no idea as to how much my readers already know…..

        I am also finding that you do not need to be Einstein to be successful in share trading, you only need to remember several obvious facts…..

      • I am also finding that you do not need to be Einstein to be successful in share trading, you only need to remember several obvious facts…..

        We can’t remember them if you don’t first tell us…

      • That Matusik article is laughable.

        He argues that our houses are expensive because we’re wealthy.

        (In fact, we appear to be “wealthy” because our houses are overvalued, and they are counted as part of our wealth).

      • @The Claw

        I have been a huge fan of baseball and read Moneyball back in 2005 (you should, too, if you have not already done so). I still re-read it from time to time for entertainment. Better still, there are a lot in common between baseball and share trading. Baseball is a game of adjustments and so is share trading.

        From Moneyball; Billy Beane’s 5 rules in trading baseball players;

        1. “No matter how successful you are, change is always good. There can never be a status quo. When you have no money you can’t afford long-term solutions, only short-term ones. You have to always be upgrading. Otherwise you’re fucked.”

        2. “The day you say you have to do something, you’re screwed. Because you are going to make a bad deal. You can always recover from the player you didn’t sign. You may never recover from the player you signed at the wrong price.”

        3. “Know exactly what every player in baseball is worth to you. You can put a dollar figure on it.”

        4. “Know exactly who you want and go after him.” (Never mind who they say they want to trade.)

        5. “Every deal you do will be publicly scrutinized by subjective opinion. If I’m [IBM CEO] Lou Gerstner, I’m not worried that every personnel decision I make is going to wind up on the front page of the business section. Not everyone believes that they know everything about the personal computer. But everyone who ever picked up a bat thinks he knows baseball. To do this well, you have to ignore the newspapers.”

        Pretty good, don’t you think? I think the same goes for share trading;

        1. No matter how successful you are, do not become complacent. When you have no money you can’t afford to buy all the stocks on your wish list, only the discounted ones. You have to always be upgrading your portfolio.

        2. The day you say you have to make a trade, you’re screwed. Because you are going to make a bad trade. You can always recover from a stock you did not buy. You might not be able to recover from a stock you purchased at a wrong price.

        3. Know exactly what every stock in the market is worth to you. You can put a dollar figure on it.

        4. Know exactly which stock you want and go after it. (Never mind which stock in your existing portfolio you will need to sell to raise the fund for the purchase.)

        5. Ok. This does not apply to me, so I would not worry about this.

      • dumpling,
        Thanks for the reply. I have copied that away for reference.
        I have “Liar’s Poker”. “Moneyball” here I come.

      • dumb_non_economist

        Hey dumpling,

        I think # 5 is relevant. Ignore the financial press, what they say is crap and written from actual ignorance/vested interest.

    • One thing I do know is, having studied charts of many bubbles in many markets, the remarkable thing is, when a bubble bursts, the market in question invariably works its way back to the price it was at when the bubble began.

      A rather useless observation that. If price does not work its way back then you can always claim it was not a bubble.

      Sydney median house went from 4x salary to 8x salary in approx 1986-1989. What price will it return to?

  2. There seems to be no acknowledgement of the developer contributions and GST added to land and construction costs.

    Those costs simply cannot be absorbed by developers and builders and must be passed on. It seems unlikely that they will ever be discarded, indeed many push for a higher GST.

    How would the findings look if those factors were allowed for in the calculations?

    • Peter, long term experience in the UK has shown that these fees are just a “share of planning gain”.

      If you abolish them, developers will merely bid more for raw land. The only people who benefit are the original vendors of the land.

      It is different if there are no urban growth boundaries. In this case there is not much of a problem with housing affordability, even if there are fees of $30,000 or so per dwelling. The cost of land being tens of times lower makes the crucial difference. The $30,000 is an add-on to the cost of houses, not just a “share” of some quarter of a million dollars in “planning gain” related inflation.

      • Well in that case Phil lets double or triple them and increase the GST on land and housing to 100%. After all they do it so well in the UK we should emulate them more.

        It’s for the greater good of all so new home buyers won’t mind.

        That should force down the price of broadacres.

        Sorry Phil I shouldn’t be flippant, but I’m in serious disagreement with you on this issue.

        If we put a $2 levy on a kilo of bananas would that push down the price that a grower gets or would the housewife pay $2 more?

      • Well Peter you would reasonably expect less people to buy bananas, of course by current australian thinking:

        People would buy more bananas because they saw the price increase and they hope that it does again so that they can sell the contents of their fruit bowl for a profit, the increased demand for bananas would mean the shops would raise banana prices to increase profit from the limited supply (it takes a few years to increase the supply of bananas and councils for some unknown reason try to prevent people growing their own) and as this happens more people would buy based on the further price increases. Then when the early buyers noticed their ‘investment’ rotting they would be wary and eventually when most people found out they weren’t going to make a profit by reselling their bananas, the demand for bananas would drop drammatically. The shops would have to reduce prices to move their inventory, but the new fields have started producing and investors browning bananas would be returned to the market at low prices as well so now there is a glut of bananas and prices continue to fall due to oversupply despite the added taxes.

      • “If we put a $2 levy on a kilo of bananas would that push down the price that a grower gets or would the housewife pay $2 more?”

        It would push up the price that the housewife pays and would push down the price that the grower receives.

        In short, the $2 burden will be borne by both parties. The share of the burden which will be borne by each will depend upon elasticity of demand and supply.

        For example, if housewives MUST buy the same quantity of bananas regardless of price (highly inelastic), the supplier can simply increase price by $2. The housewife in this example bears the full burden and no disadvantage to the grower.

      • PF you can point to lesser problems and solutions until Christmas, but that won’t change the fact that Oz land prices are wildly overvalued by every conceivable measure. Soos’ charts clearly demonstrate this fact (visit his site for more).

        This is the very worst time in Australia’s short history to be long and geared RE. Cajoling the naive to borrow big and buy at this climacteric is unconscionable, if not criminal.

        The looming financial catastrophe threatens more than the innocent. We have four giant banks stuffed to the gills with consumer mortgages that will be revealed as unpayable when the market turns. We have two LMI’s that will have to be nationalized or bankrupt their parents and void the risks they assumed.

        These economic realities are as plain as a pimple. I am accused of being an alarmist crashnik, but if I can save some FHB’s from these fires of hell, I will have made a greater contribution to the common good that a lifetime of arranging finance and clipping homebuyers’ tickets.

        Don’t Buy Now!

      • Peter, long term experience in the UK has shown that these fees are just a “share of planning gain”.

        Stoking Demand and Choking Supply

        Government has done something very bad to the supply and demand of starter homes which has led to outrageous prices of starter homes, and supported much higher prices of better homes. In short, government has stoked the demand and choked the supply of starter/marginal/extra homes.

        Stoking Demand:

        * Government brings in many immigrants

        Choking Supply:

        * Government rations permission to build extra housing on the fringe or extra units in the city, and new cities
        * Government allows landbankers to monopolise the permission and dribble it onto the market to inflate prices
        * Government adds taxes, charges and levies to extra housing
        * Government requires onerous compliance with regulations
        * Government creates delays in approving dwellings.
        * Government neglects transport and other infrastructure which reduces the area in which well-located and well-serviced homes can be built

        There is much debate on which of the six chokers (refusal, cartel, taxes, compliance, delays, neglect) is the biggest and baddest. Interestingly, if refusal is the big one, then lowering taxes will give a windfall to developers, whereas if refusal is a small one, then reducing taxes will cause a drop in prices. This debate is fascinating from an academic point of view, but rather pointless if the aim is to solve the housing crisis.

        It is like watching a man being attacked by six dogs and debating which dog has the bigger bite. Far better to chase off ALL the dogs and save the man.

    • I would just point out that to the extent that land is a “positional good” it is not possible to increase the supply.

      It is plausible that in Australia (in contrast to, say, the United States) land has a positional element to it. Under a system of concentrated political power, access to economic rents depends upon access to political power . . . which is centred on the Cabinet in the state and territory capital cities.

      This would help to explain why other towns in Australia (even those like Newcastle or Mackay or Townsville which serve prosperous hinterlands) have never grown into major metropolises.

      Applying non-positional theories to positional goods may lead to (apparently) inexplicable outcomes.

      • A major part of the housing disaster in Australia is that something forces most people to live in one giant city per state.
        Figure out what this is and fix it, or just divide each state in two to buy some more time.

      • Stephen, you can in effect increase supply in the centre of big city locations “close to political power” by

        – building apartments (visit New York)
        – improving transport links (bringing many more suburbs within reach of “politically powerful” locations)

      • Part of the reason for this is that State Governments have relatively little taxing power compared to the Federal Government. So while the Feds (who have the tax money) can happily increase immigration, it is the States (who do not have any money) who have to provide the infrastructure and services. It is economically insane for States to increase their liability for further infrastructure when they don’t have enough money to service what they have now. Far better to restrict land supply so as to restrict liability to service the infrastructure).

        Now, at this point, it might be worth introducing a land tax of some sort. However, that would require the co-operation of the states (to ensure a uniform rate – otherwise there would simply be bidding wars driving revenue down), and of the Commonwealth (who could just reduce state grants if it did not agree on the land tax proposals, putting states back where they started – better off not to allow infrastructure liabilities to increase).

        Do you see either the States or the Commonwealth co-operating to the extent that a land tax could work? Hmmmm. I am a doubter.

      • you can in effect increase supply in the centre of big city locations “close to political power” by

        – building apartments (visit New York)

        – improving transport links (bringing many more suburbs within reach of “politically powerful” locations)

        It depends on what one means by “close”. A reduction in mere physical proximity wouldn’t make people “politically closer”.

        Imagine a hundred people in a room trying to speak to a Minister to put their case for some favour. If one were to put them in a room half the size it wouldn’t increase their ability to speak to him.

        The thing about a “positional good” is that it cannot be increased. Only 1 in 10 people can be in the closest 10%.

        It should not be inferred that Australian cities exist only for positional reasons.

        But there does seem to be something odd about a settlement pattern that is so tightly concentrated around the centres of political power on a continent which is largely empty and where the industries which enjoy a comparative advantage are thousands of miles from the political capitals.

      • Stephen, your original argument was that physical proximity to power is necessary and is the reason our cities are concentrated.

        Now you are arguing that access to power (irrespective of location) is what matters.

        You are contradicting yoursef.

      • Groan.

        There is no contradiction at all. It is the property of a positional good.

        The notion that physical proximity can increase “political proximity” for everyone is a Fallacy of Composition.

        Just as a single person in a crowded room, acting alone, can be heard more clearly by speaking more loudly, so a single person, acting alone, can gain greater political proximity by moving closer.

        However, if everyone in a crowded room speaks more loudly, it cannot make everyone be heard more clearly. Likewise, if everyone seeks to move closer to the Cabinet it cannot give everyone greater access.

        But . . . that doesn’t stop people trying!!!

        Just as people in crowded room speak louder and louder until constrained by some physical limitation, so people seeking proximity to power will push in closer and closer until constrained by some physical limitation.

        To suggest that higher density housing and improved transport will provide greater political proximity for all is like offering to give every guest at a party their own amplifier system!!! Or moving them into a room half the size.

        There is a way to reduce overall noise levels: break the party up and have it in more than one location.

      • “There is a way to reduce overall noise levels: break the party up and have it in more than one location.”

        Six states made sense when Australia’s population was only 3.8 million (at federation). Increasing the number of states makes a lot of sense now.

        PS, the other way to achieve a similar result is to devolve state functions to lower levels of government.

      • Alex,

        I’ve address this in the article on GST.

        In theory it might work.

        But it would depend critically on whether the cantons had constitutionally protected autonomy.

        The Commonwealth megalomaniacs who spent a century seizing power from the States are hardly likely to give it away to smaller cantons!

        This change would require a complete overhaul of Australia’s political system.

      • Stephen, as you will see on the other thread I agree that it would likely only happen in the event that our whole political structure was rejigged.

      • Stephen, economic theories of land and transport, explain how the price of the “positional good” of land is derived.

        The lower the real cost of the transport system, the more land in lower value alternative uses can be brought into the higher value urban economy.

        Your arcane theorising does not explain why one city in the UK might have 6000 people per square kilometer and land rents 300 times higher than a city of the same population in the USA with 1000 people per square kilometer.

        Without taking into account regulatory distortions, you are effectively arguing that the “positional good” of the centrally located land in both cities should be around the same price, not 300 times different. And you have no explanation why one city spread out a whole lot more, because after all, all land is “positional”, and if one city does not spread out merely because land is “positional”, why did the other?

        The transport system costs are similar in both cases. The cost of daily accessing land at a given distance by road is similar. In fact mixed land use as the US city has grown, has resulted in travel distances, or at least times, not a lot different to those in the smaller city.

  3. Does anyone know what went on from about 1948 to 1952? It looks like the biggest and steepest boom & bust in Australian history!

    • There were price and rent controls put on the market during WW2 that were lifted, hence prices jumped by over 100% after 20 years of stagnation.

      • It doesn’t show up much in aggregate land values to GDP ratio though…..

        Possibly a lot of it is in the “structure” somehow? Probably not a lot had been getting built for a while and of course wages and hence building costs would have been lower.

        I am also confirmed again and again regarding my belief in the role of land values in the 1920’s and 30’s bubble and bust.

  4. Episode 7

    Not so long ago, in a galaxy not so far away …..

    Darth Stevens: I’m looking forward to completing your training. In time you will call *me* master.

    Luke Joye: You’re gravely mistaken. You won’t convert me as you did Lindsay Tanner.

    Darth Stevens: Oh no, my young apprentice. You will find that it is you who are mistaken, about a great many things.

    Luke Joye: Soon my credibility will go up in smoke and yours with me.

    Darth Stevens: Perhaps you refer to the imminent ads blitz by the Fairfax media? I assure you, we are quite safe from your media friends here. All the MPs in Canberra are under my control with their life savings as hostage.

    Luke Joye: Your overconfidence is your weakness.

    Darth Stevens: Your faith in media influence is yours.

    Darth Stevens: Come on, boy, see for yourself. From here, you will witness the final destruction of the financial system as we know it and the end of your insignificant rebellion.

    Darth Stevens: As you can see, my young apprentice, your media friends have failed. Now witness the power of this fully armed and operational ultimate financial weapon of mass destruction. Fire at will, Darth Oliver!

    *Huge explosive sounds from Portugal*

    Darth Stevens: It is unavoidable. It is your destiny. You, like Lindsay Tanner, are now mine!!!

  5. Wow!!

    Just look at the turning point in about 1960:

    – for the first time real housing prices began to rise and continued rising;

    – the ratio of land value to GDP reversed its decline and began an uninterrupted rise lasting 50 years;

    – in comparison, P/E ratios were volatile but showed no secular uptrend (suggesting a real rise in property rents??); and

    – the ratio of household debt to GDP began a steady increase, rising 10-fold over 50 years.

    Conclusions?

    Is this phenomenon a consequence of more “efficient” capital markets which have allowed easier access to debt?

    Is there a demographic factor at work (population growth in the post-war era)?

    Steady movement of population into the politically powerful metropolises?

    Whatever the cause, these trends do not look sustainable.

    • This rise came later in the USA, but in parts of the USA, it has never come. The real cost of land has steadily fallen, with average section prices falling even as the sizes have increased.

      When this effect is absent, it is necessary to look for the hindrances.

  6. innocent bystanderMEMBER

    ” is the long-term trend in housing prices, adjusted for inflation and quality size”

    fixed that for you.

  7. I totally disagree with these charts! We know that properties double every 7 to 10 years, so these charts are wrong and have been manipulated. LOL. Spruikers come up with some justifications for these I am sure. Eg, yes but you consider this and that etc, etc, it still works out to be doubled every 7 to 10 years. And as Peter Fraser said: majority of us have <80 IQ, so we believe them, is this correct Peter Fraser?! Lol.

    • If Gen Y just buckled down and were to forgo their Ipads, morning coffee, booze, smokes, microwaves and partying then they too could be on the path to wealth!

      • In the old days boomers would often disconnect 3 or 4 spark plug leads on their Kingswood or Falcon to save money on fuel.
        I’d like to see today’s spoilt X,Y or Z’ers trying something similar.

      • Erhh, disconnecting spark plugs doesn’t save fuel, it’s actually less fuel efficient….

        are you taking this piss out of boomers here?

      • “I’d like to see today’s spoilt X,Y or Z’ers trying something similar.”

        You mean like on average working longer hours than the prior generation? Like both partners working? Like having to place your child into childcare in their most formative years because you need both jobs to bring sufficient income?

        Claw, don’t become focused on trivialities