Australian bubblenomics

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By Leith van Onselen

Paul  D Egan and Philip Soos have published an epic 800-page report entitled Bubble Economics: Australian Land Speculation 1830-2013, which provides a comprehensive examination of the Australian land/housing market, drawing on over 150 years of available data.

The table of contents is listed below, providing a snapshot of the types of topics covered.

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Due to its length and time constraints, I have only read section 3.1, which deals with an array of Australian housing market valuation metrics and includes a plethora of long-term charts illustrating the level of overvaluation currently.

Below is the Overview section (3.1.9), which provides a taste of the types of topics covered in the study:

One of the primary stumbling blocks of property analysis is the failure to distinctly define an asset bubble, so debate on the matter is kept necessarily vague. If specific criteria are not carefully delineated, then no one can say with certainty if a bubble exists or not. This plays nicely into the hands of those making a living from the manipulation of asset prices, including neoclassical economists who like to think the neoliberal program of deregulation, liberalisation and privatisation of the financial sector has resulted in a more efficient market economy where asset bubbles do not form. To this day, housing bubbles are still poorly defined, if at all, on the basis of ‘irrational exuberance’ or ‘chasing capital gain’. The definition articulated by Hyman Minsky decades ago, it would seem, has been routinely ignored. Since 2001, all three conditions of Minsky’s bubble definition have been explicitly met: an increase in real housing prices, a rising mortgage debt to GDP ratio and net rental income losses.

For the handful of economists who publicly identified asset bubbles and predicted the subsequent economic downturns in recent years, only a couple of housing-related metrics were needed to identify a bubble. Those metrics are now considered commonplace when investigating the housing market: nominal price to inflation, price to income and price to rent.671 The analysis in this section of the book provides an additional array of metrics and data to identify bubbles in the residential land market: mortgage debt to GDP ratio, net rental income flows, Kavanagh-Putland Index, total land values to GDP ratio, housing stock value to GDP ratio and the housing debt to cash flow ratio. Rarely have so many metrics been brought together in one place to overwhelmingly prove the existence of a land market bubble. The following tables list each housing valuation metric, noting the rise from trough to peak and the percentage fall required for a reversion to trough in housing prices. These estimates are a general guide only and not precise predictions, for the future is inherently unknowable.

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It is unrealistic to expect real housing prices in the capital cities to fall back to indicated trough levels following the strong increase in real rents between 2007 and 2010. The rise in rents, however, is not large enough to offset the surge in housing prices, causing a marked elevation in the price to rent ratio. Despite the resurgence of housing construction since 2010, rents are likely to continue tracking inflation or fall in real terms, compounded by weakening household income growth as the ToT falls and mining capex wanes. Australian economic history and recent international events illustrate collapsing housing bubbles can quickly increase the number of unsold properties (stale stock), shattering the pervasive myth of a deleterious shortage. Should this occur alongside rising unemployment and underemployment, falling aggregate demand, and calls for government to slam shut the immigration door, the combination of declining population growth and an oversupply of investment properties would place further downwards pressure on rents. Falling prices, rents and sales would be a doomsday trifecta for investors as they suffer losses in both capital prices and net rental incomes.

This calamitous outcome is especially likely in Melbourne where rents have not increased in real terms since 2010. Melbourne is primed to become the epicentre of a legendary housing market crash due to the combination of a staggering boom in real housing prices (178 per cent) and a similar trend in the total land values to GSP ratio. Historically, this city has tended to bubble more than Sydney, despite the latter capital’s larger size. Perth is also in a serious predicament following price stagnation and substantial net income losses since the market peaked in the March quarter of 2007. On average, investors purchasing after the peak have lost in terms of both prices and rental income. Worse yet, the end of the largest mining boom since the gold rushes of the mid-19th century will bear down further on Perth’s prices and rents, making it and Melbourne the leading candidates to post the greatest housing price correction. Other cities will experience a downturn, though not as large as Melbourne and Perth.

The majority of metrics point to the beginning of the housing boom in 1996 and peaking in 2010. As housing prices have steadied or fallen slightly across most of the capital cities, barring Sydney which has experienced another boom, the rampant overvaluation has eased somewhat between 2010 and 2013. Nevertheless, housing prices across all capital cities remain grossly inflated relative to rents, income, and total land values to GSP/GDP. What event or set of events triggers the beginning of the end of the housing bubble is not yet known.672 A bloodbath in the housing market, however, appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals. The largest residential land market bubble on record is truly incomparable and dwarfs earlier speculative episodes in the commercial land market.

Regardless of whether you agree with Egan’s and Soos’ views, you have got to commend them for undertaking such a comprehensive study – the most detailed of its kind – and, more importantly, making it freely available to the public.

[email protected]

Unconventional Economist


  1. Thank you from me too, Egan & Soos. I am still reading this 800pp opus. The intro chapters on the 1840, 1890 and 1930 bubble busts and depressions are a real eye-opener.

    The book has 115 data sets. Their diligence cannot be faulted. Their recommendation to migrate taxation onto the land is soundly based.

    The conclusion? Don’t Buy Now!

      • I find it amusing when people write things like this on a 20w/h screen with a 50w/h PC.

        I especially chuckle at all the “think of the environment before you print!” addendum to emails.

    • Yes, well done Paul. He was a tireless contributor at bubblepedia and his excellent efforts and insights (along with those of Soos) are now available to all.

  2. The only thing that matters is interest rates and their relationships to rent

    Falling real rents dont matter if interest rates are falling too.

    House prices are going up if interest rates go down, this is the new paradigm in investment: the worse the real economy is, the looser monetary policy will be, the higher asset prices will go

    • I agree. But how does that end? ( badly, of course). At some stage the Real Economy cannot recover, and will be overwhelmed by the debt, even at 0%, that cannot be repaid. Once workers, living ‘rent free’ – ( the ultimate extension of 0% interest rates) have nothing left but debt to survive on ( no real economy left to employ them) then the only path left is ….asset depreciation. Assets fall to meet interest rates ie: $zero, because there will only be a tiny pool of buyers with means ( those who can still raise debt!), at any price.

      • Japan is the model I guess. The can has been kicked for nearly 30 years and doesnt look like there will ever be a reckoning

        I am interested to know why when Japan entered this death spiral, they did not have the same asset (in particular, housing) inflation

      • Strange Economics

        Japan had massive house price bubble – Tokyo tiny apartments for $1 million in the 90s. Gone down 50 % in the 20 years since. No cleanout crash though, as the govt funded the bankrupt banks, and instead deflation and stagnation ever since.

        The question in Australia is can anyone wait until the bubble ends (which may be years). And like many bubbles a last blowoff can occur. For example if you are from China, a 3 % yield here looks great value, compared to 1% in the chinese bubble.
        Meanwhile families gotta live (and buy) somewhere. As Keynes said – Markets can stay irrational longer than you can stay solvent. (or in this case wait to buy).

      • Population is the fundamental reason to drive housing. Japan has negative growth in population, housing market hardly be recovered until they change the immigration policies.

        Each year Australia added a few hundreds of thousands of people, the house price can’t really fall too much.

      • Good point clubman. Population growth (and supply restriction) drive rents up, which in turn drives housing up

      • @Coming – What do you mean Japan has never had a reckoning? Property prices have been underwater for decades, is that not a reckoning?

        If Japan is the model, then 30 years from now, Aus RE prices will be significantly lower than they are now. (and could apply that statement to many other countries also).

        Good on these two guys BTW, awesome job.

      • Japan isn’t selling off its real estate to foreigners. In Australia, it’s a mad scramble to see how quickly we can sell off the whole country.

      • House prices track the RELATIONSHIP between interest rates and rents.

        There is a reason why yield on property is ~3%. Guess what interest rates are?

      • The housing market in Australia is not particularly irrational David. Surely after all these years of being wrong you would be ready to accept.

        It responds to changes in interest rates, and changes in rents. These are the only inputs that matter.

        If you think interest rstes will rise, then yes house prices will fall.

        If you think rents will fall, then yes house prices will fall.

        Unfortunately, the two inputs tend to move in opposite directions

      • Coming, the rational explanations for market behaviours have been proven vastly inadequate time after time. Why do you cling to a logic that suggests complex markets can be understood based on a few variables?

      • @Davel isnt this 800 page masturbatory folly attempting to rationalize houses as overpriced?

        And yet it completely ignores the main driver: the cost of money.

        Why dont you show me a period of time in australian history where the relationship between house prices, interest rates and rents (a proxy for wages and supply) have broken down?

      • Coming, at least they have approached the subject in detail. Im not sure why IR left out as I have not read report.

        I would agree they are material.

        If you’re looking for an example of the breakdown in the relationship I’d look at SEQ post 2007. Prices fell even as rates were falling and record low rates have not really brought prices back.

        Perth in the next 2 years would be another good one to watch I think.

      • Any discussion of Australian housing without mention of foreign speculators (who provide an endogenous shock of sorts) is incomplete

      • innocent bystander

        yep. Perth rents are dropping while (asking) prices are all over the shop – depending if a seller wants to get out at market price or what they think it should be worth (significantly higher)

    • If there are no people employed, if government benefits are inadequate there is no money to pay rent or any interest…..we have seen this before in Melbourne and the house prices collapsed.

      • Rents are affected by incomes. Obviously rents will fall in the situation you are describing

        But the same situation will trigger a fall in interest rates, and house prices will be maintained to some extent so that yield = interest rates.

        Previous falls have been seen in the setting of higher interest rates ie the late 70s and mid 90s

        Obviously we reach a singularity when interest rates get to 0. I have no idea what happens then, probably extraordinary government intervention in the form of handouts and supplements

      • Same thi happened in the late 80s. House prices had a massive spike.

        Why? We were in a recession

        Interest rates were cut from 18% to 4%

        It will require an external shock (oil prices or war) to significantly raise inflation to take us back to higher interest rates and lower house prices.

      • fitzroyMEMBER

        Coming- there is a floor under negative real interest rates and that is the price of the dollar and the reaction of our foreign funders. Were it that the interest rate was lowered shrinking the gap between the rates here and in our creditor countries, the appetite for $A would fall and inflation would be imported. Rates would have to rise in such a scenario a la Turkey to support the currency. RE bloodbath.

      • Sorry Coming,

        House prices flat-lined/went down in Perth from the late 80s to the early 90s.

    • “The only thing that matters is interest rates…”

      Of course. It’s all about the Usury.

      Ban it. Again.

      Next year would be good. 500th anniversary of (Medici bankster) Pope Leo’s ending of prohibition, and all.

      Problems solved.

    • BubbleyMEMBER

      You have forgotten the importance of unemployment.

      During the height of the recession of the 1990’s, unemployment rose to 10.8 percent.

      Imagine if 4% of the current Australian working population couldnt afford to pay their mortgage or rent? Or had to sell their homes.

  3. moderate mouse

    ‘Australian economic history and recent international events illustrate collapsing housing bubbles can quickly increase the number of unsold properties (stale stock), shattering the pervasive myth of a deleterious shortage.’

    Booyah bitches!!

  4. Strange Economics

    Great analysis, showing its a finance bubble, and sensible recommendations (if politically unlikely as they all offend the FIRE business, Australia’s major remaining industry).
    Rents have not increased but asset prices would need to regress 50% to normal value.
    Also skewers the shortage of supply and planning restriction arguments.

    The real question though is what could end this bubble. Exit of foreign buyers due to Chinese property crash would only correct 5 %. The lower income of locals (unemployment, lower wages) doesn’t matter, as rents are not related to price any more.
    Perhaps the end of the carry trade from the US QE?
    But the RBA would just reinflate one last time by lowering interest rates.

    The bubble can continue to inflate way beyond this and for a long time.

    • If Ireland can be crashed by their reserve banker wearing a cardigan to an interview, anything can prompt the turn. We just have to watch and wait.

      Keep renting, everyone!

      Don’t Buy Now!

    • I kind of agree, and I am this close to capitulating on my bearish views.

      The one thing holding me back is that the above arguments sound a little too close to “permanently high plateau”, and “new normal”, setting off alarm bells in my head. On the other hand, that objection looks a little soft in light of the real-world evidence from the last six years.

      Maybe all of these debt-bubble economies, macro and micro, really can levitate forever…? Or at least for decades more yet. I’ve been giving it “one more year now” for about four years, and it’s getting a little tiring to be honest.

      • Yam, I have been bearish on this for years, as followers of this site will know.

        I have recently been horrified to discover from “economic cycle” theory, that 2007 might have been Australia’s last “drop” and we are now on the way back up again until around 2024.

        This is horrific because by then, it will have become regarded as a “new normal”, the bears will have given up, and most of the FHB’s will have given up waiting too, and just entered the mortgage trap with its super low interest rate bait.

        I am sorry if this makes me look like I am covering myself against being made to look stupid by predicting a crash based on current price, debt and return-on-investment levels, which is what I admit I was doing before. I am afraid that there is convincing theory out there on “cycle length” that states that cycle length is completely predictable absolutely regardless of price, debt and return on investment.

        Ireland crashed with median multiples merely between 4 and 6.5. Nothing on Aussie’s now. But Ireland crashed at the perfectly predictable time according to its economic cycle. Aussie was due for one at about the same time, but its crash was insignificant by comparison due to differing factors such as Ireland’s oversupply of housing, and its powers that be were caught by surprise instead of deploying every bubble-perpetuating dirty trick in the book in anticipation of it happening.

        It is not just me – I have been having long email arguments with experts in cycle length and I am ready to capitulate. Probably 2024, and probably an utter bloodbath. I think Ludwig Von Mises warning in the monetary connection applies regardless of which asset class is being pumped – endlessly creating credit to “stimulate the economy” after each downturn, will ultimately result in a full collapse of the fiat money system itself.

      • PhilBest

        I saw you mention this view the other week, and wondered if perhaps you have been dealing with Phil Andersen because he has the same view (although cannot exactly remember what year he went out to but it was all based on china and discovering new energy). If not PA then are you willing to elaborate on which other experts you are referring to as I would be interested in reading their views.


  5. -Short term property movements are largely unpredictable. People can intellectualise and analyse all they wish, their predictions appear as accurate as a toss of a coin. Yet people persist in making them.

    If you are going to take such predictions seriously, my advice to you is to look at the wealth of the person making such a prediction.

    -In the long term property has a strong tendency to rise. No 100% guarantee, but barring economic disaster that is what mostly happens. It’s pretty likely that in 10 years prices will be higher than today.

  6. Freely available. Can’t wait to see the conclusions splashed across the front page of Domain.

  7. “Australia is
    Greece or Latvia with minerals. ”

    Page 563, I was just skimming and saw that bit. Brilliant.

    One of the reasons why the smugness in this country is insufferable.

  8. No time to read 800 pages, though I subscribe to Harry Dent newsletter etc.

    Things worth noting:
    1) Bubbles when they burst, by definition go back to the start point (1996 in this instance), history would suggest it gets close, though not all the way back.
    2) The Chinese are buying up here, and playing a part in pushing prices up. The same as when the Japanese were buying international real estate assets in the late 80’s – then sold to protect assets in their home land. Could be the same thing happening again? Though if both countries (CHN & AUS) real estate ‘bubble’ burst at the same time???

    Only time will tell. Personally when the bubble does burst, and I feel it will – hey, I subscribe to Harry Dent : ) I’m preparing for a 40% drop. Making my dream suburb of Middle Park more affordable ha ha

  9. When the bubble bursts, me and all my friends will be buying more.
    Thats how I know the bubble will never burst.

    Buy now, or rent for the rest of your life.

    • migtronixMEMBER

      I’ll take rent, I’ll put in a grow house to pay it and have fun if things go wrong for me…

      • Renting is simply not silly for as long as renting remains significantly cheaper than mortgaging.

        I am now saying the crash might take till 2024 to come, but when it comes, even if not till then, you will be smelling of roses if you had the balls to remain a renter meanwhile.

        Shamubeel Eaqub is a well known economist in NZ who makes no secret of his “renting” status. He gets a far better house in a far better area than if he bought with a mortgage. This is actually the most cost effective way to get your kids into a good school zone.

    • Yeah, I’m sure they said that in Ireland, Spain, Portugal, Japan and the US.

      When the bubble bursts rates will likely rocket rents fall and you’ll be rocking in the corner crying for mummy.

  10. Hugh PavletichMEMBER

    From Page 689 of the Report … RECOMMENDATIONS SECTION …

    Recommendation #17: Germany’s ‘right to build’ laws are adopted. This policy encourages
    timely development of residential and commercial property, while thwarting the NIMBY
    attitude (Not In My Back Yard) prevailing in Australia. Planning delays and uncertainties
    raise land costs.1292 Under this arrangement, developers and home builders have the right
    (positive presumption) to develop, within specified local and state government guidelines. If
    a development is opposed, then the onus is upon the aggrieved party to take the developer
    to the civil tribunal to prevent construction.

    Recommendation #18: Eliminate onerous infrastructure charges and levies imposed on
    developers by state and local governments. Government reverses their preference for direct
    developer charges to finance local infrastructure, lowering housing costs. There are two
    ways to achieve this: governments can return to the original system of issuing municipal
    bonds to finance local infrastructure and pay down debts through council rates or adopt the
    Texan Municipal Utility District (MUD) model.

    Recommendation #19: Zoning processes should be considerably streamlined to decrease
    the cost to developers and home buyers. Extensive delays in land subdivision projects and
    zoning vacant land for residential use in capital cities can take well over a decade,
    generating considerable costs, uncertainty and reducing developer competition.

    Recommendation #20: Removal of all UGBs except for ecologically or culturally sensitive
    regions of land. There is no sound rationale for UGBs, as less than 1 per cent of Australia’s
    land mass is urbanised.

  11. The first four recommendations are to increase the tax burden!

    Nobody else here feel that is a somewhat statist response to a problem caused by the state?

    Is there anyone in Australia in favour of free markets?


  12. Sydney Plumber

    Well if intervention of somekind is nessary,
    How about a bit of state engineered wage inflation.
    That’s how all the babyboomers got bailed out in the good old boom/bust days.
    Jack up the interest rates at the same time and the nongambling savers can get a win to.