David Bassanese has a questionable analysis of house prices this afternoon:
As should be clear, house price cycles have differed across states. Relative to average weekly earnings per worker in each state, the peak in Sydney house prices came in 2003, followed by peaks in Hobart, Brisbane and Perth just before the financial crisis in late 2007. Melbourne and Darwin’s peaks did not come until 2010.
All up, interest rate driven cycles have tended to be led by Sydney – to be then followed by other States. The resource boom has added an extra dynamic to price trends in Perth, Brisbane and Darwin, while Melbourne appears to have had a population-driven boost-bust cycle peaking in 2010.
…If interest rates stay low, I suspect Sydney and Melbourne house prices in particular will soon start to underperform those of other states.
House prices are not only about interest rates. They are about the underlying economy and this is not 2003. I see the entire market as a huge bubble simply because it is so grossly inflated versus incomes over an historical stretch. But even chaps with shorter time frames like Chris Joye see the current up leg as a bubble because the income growth from a strong economy is not there like it was in earlier mini-cycles. And won’t be as the terms of trade fall.
Bassanese is effectively defending the durability of major capital bubbles by arguing that smaller capitals are going to embark on the same departure from value.
That isn’t sensible in either investment or economic terms.
In terms of investment, who knows when prices will stop rising if the driver is cheap credit not value? Animal spirits can run wild and free for many moons.
In terms of the economy, it means kicking the asset price can without fixing the structure that is supposed to underpin prices. What’s more, if you don’t have a strong economy – with growing productivity and incomes – when animal spirits do run dry, all of those rising house prices will reverse in unpleasant fashion, severely hobbling your already stumbling economy.
That this needs to explained in a post-GFC world kind of beggars belief.
