Australia’s boom to bust

By Leith van Onselen

Find above an interesting video interview on The AFR with Lindsay David, author of the new book Australia Boom to Bust.

In the interview, David slams Australia’s record high mortgage debt (see next chart), claiming that “no one in the Western world has ever done what we are doing”.

He also claims The AFR article attached to the interview that the three pillars of the Australian economy: real estate, resources and the banks will eventually collapse:

He says that as Chinese authorities appreciate, they’ve built more houses and apartments than they need, demand for Australian ore will grind to a halt, triggering a weakness in the economy that will expose the banks.

“There are going to be more apartments than people in China and all of a sudden if [the construction] stops, then what is the floor on the spot price of iron ore? We don’t know what that is,” he said.

While I agree with David’s overall view on the Australian housing market – specifically concerns around its overvaluation and mortgage debt levels – as well as his view that the underlying pillars of the Australian economy are fragile, I strongly disagree with him that supply-side barriers have not played a role in increasing land/house prices, raising household debt, and increasing financial stability risks.

One only needs to look at the below charts showing the decline in housing construction rates over the past 20 years to see that housing supply has become less responsive to demand (price):

ScreenHunter_34 Aug. 28 10.27
ScreenHunter_35 Aug. 28 10.27

Alternatively, one could look at the huge escalation in fringe capital city land values, which is bona fide proof that supply-side barriers have become increasingly obstructive (see next chart).

ScreenHunter_1683 Mar. 14 07.59

Ultimately, however, unresponsive housing supply is a key determinant of price volatility, and tends to lead to bigger boom and bust cycles than in markets where land/housing supply is relatively responsive (elastic) to changes in price.

Miami, Florida, which David notes in the interview to debunk the whole supply-side argument, is a perfect case in point (see here).

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Comments

  1. “the warnings signs of a toxic Australian credit bubble could not be any clearer—they have simply been ignored.” (Lindsay David). Says it all…..the real tragedy isn’t that the masses have ignored it; they may not know too much different – having lives to live and all. But the RBA? The Government? The Opposition?Disgraceful; one and all.
    “But we delayed the inevitable as long as we could, so you could all get your houses in order” will be the justification – Literally…..

    • Yeah probably. Still, it’s only for those who “got in” – Too bad if you weren’t born in time or are/were unwilling to take on the highest debt in history – Meanwhile we age. Fk them all.

  2. Hugh PavletichMEMBER

    Leith … I’m very grateful in how you explained the supply strangulation situation above … with the excellent build rates per 1000 population graphs as well.

    The consent / build / completion per 1000 population per annum is a critically important measure that should be employed as a matter of course in the public conversation. It illustrates clearly the intensity of building in specific areas.

    It is extremely helpful in the second graph how you broke out units from houses … illustrating clearly the dramatic and dangerous fall – off in “market demand” housing and the lift in “bubble demand” unit construction.

    There is a world of difference between market stock and bubble stock.

    At my archival website http://www.PerformanceUrbanPlanning.org is a clear structural definition of an affordable housing market. Critically important Development Ratios are just so distorted in Australia and New Zealand of course.

    Artificial land scarcity is the bubble “trigger” … finance (in all its forms) is simply the “fuel”.

    Lindsay David may like to explain why it costs on an all up per square metre basis, in excess of 2.5 time to build a starter home on the fringes of Christchurch and 3.5 times plus on the fringes of Auckland … in comparison with Houston, Texas. Refer the Andrew Atkin THE REAL DEAL poster …

    http://2.bp.blogspot.com/-Wvy3jZaQ3rs/UTEmx-GDJ-I/AAAAAAAAAXE/mA3sBLWlMho/s1600/the_real_deal.JPG

    A response from Mr David on this MB thread would be much appreciated.

    Hugh Pavletich
    http://www.performanceurbanplanning.org/

    • Artificial land scarcity is the bubble “trigger” … finance (in all its forms) is simply the “fuel”.

      Yes. That is correct. I wonder why Lindsay David’s research did not discover that!

      • The Claw … What part of “3.0” don’t they understand ?

        A CLEAR and SIMPLE Structural Definition Of An Affordable Housing Market …

        DEFINITION OF AN AFFORDABLE HOUSING MARKET

        For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).

        The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – the balance the actual housing construction.

        Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

        2014 10th Annual Demographia International Housing Affordability Survey

        http://www.demographia.com/dhi.pdf

      • I wonder why Lindsay David’s research did not discover that!

        Perhaps its not true?

        Given that you’ve been running around intertubes spruiking the shortage for as long as I can remember, you’d be the last person I’d ask for an unbiased opinion.

        Asking The Claw if there is a housing shortage is akin to asking 3d1k if mining is good for Australia.

      • @ Lorax – there certainly has been a supply shortage, however there has also been a huge supply response due to the rising prices, so much so that we may be moving towards an oversupply situation of certain types of dwellings in some major cities.

        We will have to wait and see on that issue.

      • @Lorax – of course the mining boom has been good for Australia, we all know that.

        Hot off Sky (if you haven’t got it you’re in the Dark Ages)

        Andrew Leigh, when pressed be David Spiers on removing negative gearing

        “There are a range of other things to go to first”

        ALP No action on NG; Libs, await the tax review.

    • Artificial land scarcity is the bubble “trigger” … finance (in all its forms) is simply the “fuel”.

      Wrong. Speculation pre-dates UGB by oh, 100 years.

      “Alternatively, one could look at the huge escalation in fringe capital city land values, which is bona fide proof that supply-side barriers have become increasingly obstructive.”

      So specufesting is confined to land with houses on it? Land is all part of the frenzy. Rising land prices is NOT ‘bona fide’ evidence of a shortage.

      • What drives boom and bubble is the perception that scarcity exists – aka FOMO. For a housing market, UGBs certainly help create this perception.

        During the dot.com frenzy, the bidders were chasing the limited number of internet company shares. Had the internet companies kept issuing new shares to satisfy the increasing demand, the dot.com boom would have never reached the bubble territory.

        In other words, by restricting land supply, the authorities are making a housing market behave like a share market.

      • Thanks Dumpling, I agree. Housing is actually a necessity, and should not be made to behave like the share market, any more than food and clothing markets should.

        I am not sure that it would be possible for a share market to be made more stable during high speculative demand by issuing more shares, because what counts is the P/E ratio. By issuing more shares, the P/E ratio is driven in the same direction as it would be by the share price going up.

        You could have just as much “equity” in the share market wiped out either way when the crash comes.

        Your insight is good, that it is the perception of “scarcity driving price inflation”, that attracts speculators into the market. The secret to stable-price housing markets, is that there is never enough sustained inflation to attract speculators. This is because they do allow house-building to respond very rapidly to demand.

        But it is also possible that a quite substantial supply of new houses can be brought onto the market over a period of time without bringing the prices down; and the reason for this is always that there is a quota-type mechanism at work – the “releases of land” for housing development are predictable and easily able to be made the subject of a bidding war. Even an alleged “10 years supply of land” for a city’s growth can actually be not a lot of value in the context of the hot money in the market.

      • Phil, of course, a company would never issue new shares for free (and at the expense of existing shareholders), so the above simplified analogy is purely hypothetical.

        In reality, when a company issues new shares, it raises funds in exchange. So, e.g., doubling of the number of outstanding shares with the share price unchanged is not equivalent to the doubling of the share price with the number of outstanding shares unchanged. The market capitalization of the company should be materially higher in the former case (i.e., if the company has the same market capitalization then it is much less overvalued in the former case).

        As such, as for the first part of your question, if a company is allowed to issue new shares at inflated prices during high speculative demand (i.e., if the shareholders are wise enough to approve “calculated dilution”), and if the management are not silly enough to waste the proceeds, then the impact of the subsequent crash will be much milder.

  3. Lindsay David’s book is a great read and coupled with the work of Soos and Eastlake make compelling reading.

    I agree that the Supply Side issue isn’t tackled correctly and I would also looked at the cycle of demographics and reduction in consumer demand arising from over-investment in property. These two factors in my mind will also contribute significantly to the headwinds Australia faces.

    I disagree that the banks will suffer a wipe-out – as they will steal borrowers capital first before any of their own capital erosion.

    For me the BIG question is CHINA demand.

      • Stomper … The Aussie housing market is currently valued at in excess of $A5 trillion with at least $A2.5 trillion of bubble value in it … to be wiped out at some stage.

        In New Zealand the housing market is about $NZ700 billion with about $NZ400 billion of bubble value to be wiped out at some stage.

        This incorporates about $NZ100 billion of bubble mortgages … with the Banks Capital Base just $NZ29 billion.

        Irelands metros Median Multiples collapsed from 4.7 to 2.7 … wiping out a quarter trillion euros of bubble value … putting the Banks to the wall … unemployment 14% … residential construction vols collapsed 90% … massive emigration by the young and the Polish construction workers … and so it goes on … and on …

        New Zealand and Australias major metros are currently sitting at about 5.5 Median Multiple … significantly more Multiple Stretch that Ireland.

        I covered the New Zealand situation with …

        New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News

        http://www.scoop.co.nz/stories/HL1404/S00166/new-zealands-bubble-economy-is-vulnerable-hugh-pavletich.htm

        What is the capital base of the Aussie Banks ?

        How much estimated Government debt will be needed when the bubble bursts in Australia ?

        Have the Aussie Authorities learnt anything from the Irish experience ?

    • Yep, it’s China, which is why the regular updates on China re: ore, housing, consumer sentiment, corruption are useful

    • I think the supply side is important in that you can’t speculate on something unless it’s in limited supply. As Leith says it increases the amplitude.

      So I can imagine a situation of localized bubbles in say Sydney harbor property, which is inherently limited, but Greenfield development staying reasonably priced if there was ready supply.

      • So I can imagine a situation of localized bubbles in say Sydney harbor property, which is inherently limited, but Greenfield development staying reasonably priced if there was ready supply.

        This is exactly the way things should work. The price of a rare car can boom, bubble and crash, but common cars continue to sell at the cost of production – which is great for someone who needs transport instead of a speculation on scarcity.

  4. Yes typical Boom to Bust LNP policies where the only game is privatization.
    I never voted for privatization

  5. Robert Sherlock

    the unemployment rate in Miami has surged from 3.6% in January 2007 to 11.1%
    Update it is now 6.2 now lower than the average and also Australia. There are many homes in beach side suburbs for under $100,000.
    All you need is the requirement for a 20% deposit instead of 5% to drop the prices in Australia to drop to that level quickly.

    • I am afraid it doesn’t work like that. Median multiples in Seoul seem to remain stuck at between 10 and 16 even as LVR regulations are tinkered with by a few percent either side of 50% every so often. All that happens is that there is a hiatus of FHB’s for a while until they have had time to save a bit more.

    • DodgydamoMEMBER

      dunno but the poll ‘are houses overpriced’ was a resounding 91% yes when I looked earlier. That’s a bit surprising TBH

      • migtronixMEMBER

        There’s a hole in my pocket, dear RIA, dear RIA
        There’s a hole my pocket dear RIA,
        It’s you!

      • Yes often happens when the comments go against the interests of the advertisers. Can’t be too harsh on them about that I suppose. I was disappointed that noted property bear “Allan from Prahran” did not get a comment in on the page. A consistent doomsayer on Fairfax comments pages. And one generally who has the facts at hand to ward off the “it can’t happen here” bulls, that rally to the flag whenever he appears.

      • To be fair those who are pissed about house prices are going to be attracted to those articles like flies to shit. Half the specufestors are probably living in some blissful la la land reading new idea.

        I’ve been meaning to stake out any number of newly built “luxury” apartments to see how well tenanted they are. But I’m lazy, and I’d look like a weirdo sitting outside for the 5 hours or so it would probably take, from say 4-9pm.

        You do it Mig.

        Or I guess you could just go and buzz all of them on the intercom.

      • migtronixMEMBER

        Bluey mate I do it all the time because in my neighbourhood (Leighton Hewitt lives in apartment buildings behind me) there are rows of those apartment block lining St Kilda Rd and I hardly ever see anyone coming in or out — a few in the morning walking their piss-ant excuses for dogs, and classy cars rolling in and out pre/post work, but when surveying lights on my living room window, I’d say less 40% in most buildings.

      • Easy to bump into unoccupied property close to Melbourne CBD, but genuinely surprised by such low occupancy rates in that specific area.

        There are properties in that area which swing between being office buildings and residential depending on which has greater demand – only about two months ago print AFR was forecasting a lot of the offices being converted back to housing as commercial occupants went under or moved on.

      • migtronixMEMBER

        @Stat: Interesting tale of the death of the other economy, Novell has been replaced by BIC – with the BIC flag flying atop a mast — and two doors down Symmonds with the happy roof-and-chimney motif now emblazons a building formally occupied by a large mining exploration firm.

        Oh two doors down the other way ProBuild have setup shop.

        The same story repeats all the way down St Kilda Rd where once stood the Tech giants…

      • eA are still there though aren’t they?

        Agree the businesses the replacements are in tells a story.
        Still, you’ll never be short of a writing implement.

      • but when surveying lights on my living room window, I’d say less 40% in most buildings.

        You can get some sort of timer thingys that will switch lights on that are affordable.

        When we used to go on holidays my dad would set it up so the lights would be on for a while at night.

      • What are you saying bluebird, ’cause if a fair proportion of the lights Mig can see are being switched on by robots, we’re looking at vacancy rates approaching 75% in his neck of the woods, which is about as close to Melbourne CBD as you can be without actually being in the city.

      • migtronixMEMBER

        I think Bluey just enjoys reminiscing.

        I think ea have gone from that corner too ill have to check later.

      • cause if a fair proportion of the lights Mig can see are being switched on by robots, we’re looking at vacancy rates approaching 75% in his neck of the woods,

        So? If you had a bunch of units you couldn’t sell you’d do the same.

        I know of a unit block where only two units were sold and the rest are still owned by the developer and are rented to drop kicks.

        They go for about 700k-900k.

        The thing is we don’t know. Property data is as dodgy as a 3rd world country.

        In Sydney people who actually have to work for a living in the city mostly can’t afford to live in the city. Lol. They bring in the peasants from an hour away like cattle.

        If I remember rightly this contraption or whatever it was couldn’t turn the main lights on, you had to have a freestanding light and this contraption was plugged in between the light and the power point. Which explains why when I’ve driven past these new developments at night the lights that are on look rather dim.

      • “All these empty apartments … but don’t we have a SHORTAGE?”

        That depends on what you mean by SHORTAGE.

        Remember, there is always the same number of sellers as buyers. You can always buy a house. You just need to pay more when somebody else is willing to pay a lot of money for the same house.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • dumpling,

        according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them.

      • Stat that’s just a hypothesis. I need proof though. I need Mig to go and buzz everyone on their intercoms. Preferably every night for a month. Take his tablet and enter data into a spread sheet.

        Maybe we could all chip in and hire a PI.

      • “I posted that exactly once!”

        I can see that from the identical time.

        “according to bluey’s analysis there isn’t anybody who wants to buy any of these apartments, located walking distance from Melbourne CBD – not at the irrational prices the owners want for them”

        In other words, shortage of bidders.

      • Perhaps I did not clarify enough earlier.

        During the dot.com frenzy, the bidders were outnumbering the potential sellers. The bidder needed to pay premiums faster than the other fellow bidders to get to one of the few potential sellers. After the pop, the situation was reversed. The would-be sellers were outnumbering the bidders. The seller needed to discount faster than the other fellow sellers to get to one of the few bidders.

        You see, the shortage is about that of bidders and potential sellers.

        I doubt that the number of shares of a particular internet stock had changed much, if at all, in the few years between the boom and the bust.

    • The Age have completely stopped comments on any property or real estate related articles for some time now, because the public sentiment is the same as in this article. Whenever article publishers ‘slip-up’ and allow comments, they are quickly shut down, like in this example.

      It is fkn clear what is going on.

    • Stomper … interesting to see the poll on the article page asking … Are house prices overvalued ?

      A whopping 90% of the 6,800 who responded said YES

      So there sure is a strong awareness of a problem.

      Why isn’t it a major political issue in Australia ?

      Are the media, political and commercial interests holding hands to suppress the issue in Australia ?

      It sure is in New Zealand … indeed the Number One election (20 September) issue !

      • Hugh, like in NZ expect our political masters to do whatever necessary to fuel the bubble. We have the REIA and Senators suggesting accessing our super accounts to use as a housing deposit.

        At least your RBA equivalent had the nouse to implement macro-prudential – while our dimwits are looking to pre- GFC tricks to keep the Ponzi going!

      • Stomper … I am heartened overall with the political progress being made on the serious housing issue in New Zealand.

        Indeed it is the global leader in politically progressing these issues … something well understood by international researchers and advocates on this issue.

        New Zealand … mainly due to its small size, relatively simple governance structures, engaged media and dynamic democratic environment, has a long history of often being the first in getting political reforms in place.

        It is full on here mate !

        Hugh Pavletich
        Co-author Annual Demographia International Housing Affordability Survey
        http://www.PerformanceUrbanPlanning.org
        Christchurch, NZ

      • Are the media, political and commercial interests holding hands to suppress the issue in Australia ?

        Is the Pope Catholic?

        Even the ABC and SBS suppress it. The chardonnay socialist scum!

    • Darn I usually get a word in on those articles before comments are closed. Didn’t see it on WAtoday

      • Then … why is the Aussie MSM not taken to task for deliberately suppressing free speech ?

        The article poll result noted above speaks for itself.

        Deliberately suppressing free speech is a very serious matter indeed. Surely this can be investigated and reported on through other media.

      • Mig … then why do Aussies tolerate this nonsense from their elites ?

        It most certainly does not happen throughout the rest of the Anglosphere … UK, Canada, USA and New Zealand.

        Is there something “cultural” with respect to Australia, you and other MB readers can enlighten us about ?

      • migtronixMEMBER

        I can’t enlighten you Hugh I just suffer it. You’re right, back in London everyone tells what they think…

      • Thanks Mig !

        Possibly a solid dose of Daniel Hannan MEP is in order … to remind them of our democratic values … our forebears fought for …

        VIDEO: Daniel Hannan Explains Why the English-Speaking World Is the Most Committed to Individual Liberty

        http://dailysignal.com/2013/12/02/video-daniel-hannan-explains-english-speaking-world-committed-individual-liberty/

        … and …

        Inventing Freedom: How the English-Speaking Peoples Made the Modern World: Daniel Hannan: 9780062231734: Amazon.com: Books

        http://www.amazon.com/Inventing-Freedom-English-Speaking-Peoples-Modern/dp/0062231731

        Remarkably, the Chinese and their Authorities appear a way more candid than the Australians … particularly on housing issues.

        Are Aussies afraid of their Great Leader Tony Abbott ?

        Its nuts !

      • Actually the “New Zealand Herald” is disgracefully censorial of this issue, but it is an aberration, Hugh is right about the rest of the media in NZ.

      • For example … here is a Fairfax New Zealand journalist Wednesday … David Killick at The Press, Christchurch on planning issues …

        Land key to housing crisis … David Killick … The Press Christchurch / Fairfax New Zealand

        http://www.stuff.co.nz/the-press/opinion/perspective/10427489/Land-key-to-housing-crisis

        I am really impressed with the Fairfax people across New Zealand … and other media here too.

        These are REAL journalists in action … not fake ones .

      • Then … why is the Aussie MSM not taken to task for deliberately suppressing free speech ?

        All the media and politicians are corrupt. There is no outlet except for a few forums like this.

        Boomers for the most part don’t want to know about it. Couldn’t give a shit. I suppose that would be an admission of being total fuck ups. I had my head bitten off by this silly old 80 year old QLD’er dick head when I had a bitch about a 70s, 2-1-1 house go for just under $1m not long ago.

        Australians are lemming morons. Saying anything bad about housing feels like saying bad stuff about the government in communist East Germany. People just go all quiet or give some bs and say something like ‘that’s just how it is’.

        However Alan Jones, pretty much our most famous right winged shock jock, had a bitch about Chinese buyers just recently, but that’s probably just dog whistling.

      • I think you guys are complicating matters. Corruption and restricting freedom of speech implies there is a great will to change things that the overlords are preventing.

        But look at the poll. It asks ‘are houses overpriced?’. It does not ask ‘do you want house prices to go down?’.

        I’m not kidding and I’m not nitpicking, there’s a massive distinction. The rational investor will still buy an overpriced asset if they believe it can become even more overpriced yet. And the problem of overpriced assets disproportionately affects youth, who care greatly about it between the years of starting work and buying a home. But the day they buy the home they jump camp and no longer want prices to go down (heck if you have a $500k mortgage on a $525k property do you want to see its value drop in half?). I’m 30, I’ve seen this all around me dozens of times over the last 5 years.

        So we might all think they’re overpriced, but the desire for change is strongest in the relatively small percentage of prospective home owners who aren’t in yet. The majority within the larger cohorts of home owners and especially investors do not want a change.

        There may be a great awareness of a looming problem, but gravy is still being served on that train and there are many who are willing to take a seat and play musical chairs for the hope of a free serve.

  6. there are so many homeless people who cannot find empty home to lie in!!!

    rubbish

    10% of all homes in this country are vacant – no shortage on site

    prices are going up because people think: it doesn’t matter what I pay I will be able to sell for more. A typical greater fool scheme, no fundamentals behind

    • “10% of all homes in this country are vacant”

      None of the rental vacancy figures are within a bull’s roar of that.

      More like 2.3% which of course is why landlord’s face little pressure to discount other than in isolated pockets. A healthy vacancy rate has at least a 4 in front of it.

      I suppose you are including holiday houses, spare bedrooms and houses the owners choose not to rent.

      And perhaps believe the Bedroom Liberation Front’s finest days are yet to come.

      Fine by me – you deliver the ‘secret gardens’ of unused space to market so the available vacancy rate climbs from 2.3% to 10% and we will both be happy.

      Good luck!

      • 10% of all established homes are not used for living. This percentage is almost the same in all suburbs. Sure you can call them “holiday homes” but that must include all of “Highrise Harry’s” properties he holds for few years before sale to offset tax.

        once prices start falling all these holiday homes will be for sale and rent

      • To be fair, the ones in locations with a beach or trees 90 minutes – 150 minutes from the city, the ones that are actually holiday homes, might not be. The ‘holiday homes’ in Braybrook, West Footscray, Tottenham, apparently South Melbourne, that I see, yes they will be sold when their owners are forced to sell.

        The fly in the ointment is that they can stubbornly hang onto the idea that because they bought them for x they must be worth 2x when they’re sold. They can die thinking that I guess.

        The unemployment rate’s the thing to uncover the conscience of the market. (exit)

      • Empty properties in the middle of a house price bubble, while young people stay at home with their parents, or flat several to a room, is no different in its inherent mechanism, to an oligopoly in a primitive economy controlling the supply of food to keep prices high; and while people are starving, they are dumping unsold food at sea and claiming that this means “there is no shortage and we are not responsible for the prices being too high for the people who are dying”.

      • Yes but growing more crops is not a solution if oligopilists just buy up more crops at still more ridiculous prices to dump at sea.

        If there is a cartel preventing the supply of food reaching people, the cause of the problem is not a lack of food production, it’s that a cartel has come into existence, and so far it hasn’t been removed.

        As houses have become trading tokens, people have removed them from circulation, creating the appearance of a shortage, that is all. We are just China on a micro scale. When they go under, unemployment is going to hit 10%, IPs are going to be dumped, and NOM is going to be negative. Then we’ll really see where housing demand is at. So far both unemployment figures and NOM are pointing that way, but like any VLCC we have a large turning circle.

      • migtronixMEMBER

        It’s neither of those things IMO, food is a perishable and doesn’t have cap gains value.

        What we have is people wearing the holding costs of empty property to reach for the capital gains in the long run.

        Its entirely perverse and its entirely driven by credit and capital growth demand.

        Janet is right, most of this debt will never be paid off, it will just be rolled into the loan the greater fool ticks up…

      • @mig,

        RE capital growth has become a meme which has totally destroyed the ability to rationally judge property. Look at South Korea and China – inflated property markets in countries were the population will peak in the lifetime of many RE investments. Then what – ask the Japanese and the Germans about RE capital growth in a nation with declining population.

        Australia seems to think that housing demand is ever increasing because – quelle surprise! – during a five year period when we had the lowest Anglophone unemployment rate, immigration was very high. We’ll see how that goes now we’re nearly the highest Anglophone unemployment.

      • “.,,once prices start falling all these holiday homes will be for sale and rent..,”

        How is that an argument against reducing restrictions on people building houses?

        We are not talking about forcing people to build houses we are simply talking about

        1. Reducing restrictions on the use of land

        2. Removing the first user pays all approach to financing development.

        If what you say is true and there will be a flood of housing available to buy and rent then people will stop building new houses on a dime.

        What is bizarre is that when prices are at record highs you want to block and prevent people building houses if they choose.

      • it is hard to imagine 7 or 8% of empty properties in sydney’s west or around sydney airport are holiday homes.

        most of them are speculative investments waiting for price to double

  7. Improve the supply side? What heresy is this? How will the Boomers cope?
    Big 4 will hit back with 110% no-doc loans and a free trip to Bali.
    Keep those frantic auctions rolling I say…

  8. There is something deeply ironic about watching a RAMS ad (featuring a large sheep) spruiking property investment loans..

    If a bank were to spruik 400k loans to buy fully/overpriced shares they’d probably be complaints, but for some reason it is ok to push investment loans. A lot of people are going to get burnt, and we’re all going to be dragged down with them..

  9. Based on the chart of Rolling median quarterly rate per metre of vacant capital city land that land price has increased only 5% pa over the last 5 years.

    Yes it is higher than inflation and no it is not sustainable in perpetuity but in reality all the damage in land prices was done from 1998 to 2008.

    The use of a chart without semi log scales for long term comparisons is misleading in relation to percentage increases and RP data ought change their practice if that is what they are trying to show

    1/12/1998 100
    1/12/2003 200 5.0 100% 15%
    1/12/2008 400 5.0 100% 15%
    1/12/2013 500 5.0 25% 5%

    • Yes – funny we don’t about that permanent new plateau of house prices as a result of interest rate cuts much these days.

      Probably because they have finally worked out that when an economy’s level of activity is driven by debt growth it does not reach a plateau.

      When the debt stops growing, economic activity declines and the existing debts cannot be paid.

      The plateau is cracking and the edges are poised to crumble.

      Which is not good news for those who relied on the debt merchants for geotechnical advice when constructing their visions splendid.

      But they can at least take comfort knowing the RBA and the government stand ready to throw everyone under the bus to protect the banks and their ‘clients/punters/victims’.

  10. Lindsay David is a lazy analyst and quite frankly a pathetic researcher.

    He is far too eager to write and speak, and too lazy to listen and learn.

    The evidence of housing shortages and its causes is easy to find for any genuine researcher with an Internet connection.

    Real estate agents tell him there is a land shortage in the Northern Territory. There is. There is a shortage of land WITH PERMISSION TO BUILD A HOUSE ON in the Northern Territory. The shortage is not in square metres of land. The shortage is in permission to build.

    If Lazy Lindsay compared the price of a large plot of land with permission to build one house against the price of a small plot of land with permission to build several houses, then he could easily see where the cost (and shortage) lies.

    No, instead of some actual analysis that requires a simple calculation and a tiny bit of brain power, his case appears to be based on “Oh people said there was a shortage in XXX, later prices fell in XXX, therefore if people say there is a shortage here, prices must fall here soon and there can’t be a shortage”.

    Smug know-it-alls like Lindsay have been assuring young Australians for years that there is no need to build housing, improve transport, or decentralise workplaces since sufficient housing with good transport to workplaces already exists. Young Australians continue to suffer high rents and outrageous commutes and the mythical abundance of housing somehow never finds its way to those who need it. Lindsay David appears blind to this suffering yet his “research” has determined that the shortage is a myth. How so?

    I have come to realise that people like Lindsay David are a far more dangerous enemy to Australians seeking shelter than are the actual NIMBYs, council planners, immigration boosters, and credit-pushers who create the shortage and high prices. At least they can be easily seen as biased and talking their book. Lindsay David, as a apparently unbiased researcher, legitimises the shortage-creating activity and places all the blame elsewhere.

    Researcher – no. Shortage-denying parrot – yes.

    • Even if we didn’t have a shortage we should be building as much as possible.

      This should never happen again. I remember when I was growing up re agents were just these crappy guys in crappy suits in shitty shops.

      We need to put them back where they belong. Barely a step above a McDonalds worker.

      • +1000000 !

        Oh, thinking of overpaid people, I spoke to a guy who drives a courier van in Adelaide. Cleared over $100k last year; over $140k gross.

        That’s more than teachers/engineers/nurses/etc… in Adelaide get paid.

        Clever country.

  11. Rent Seeking Missile

    “I strongly disagree with him that supply-side barriers have not played a role in increasing land/house prices, raising household debt, and increasing financial stability risks.”

    I agree with you that the residential property shortage doesn’t help.

    However I think what he’s saying is that the key contributor to the nutty prices that we are experiencing isn’t the shortage, but the fact that the banks are chucking money at anyone with a pulse.

    • reusachtigeMEMBER

      Exactly! It’s the credit growth way moreso than any shortage (which doesn’t help of course).

      • If it weren’t for the shortage the credit growth would be able to provide holiday houses instead of only a single dwelling!

        And many of those who are forced to rent at the moment would be able to afford to buy their home!

        The shortage is the underlying problem and it is caused by planning laws and land banking.

        But the status quo will prevail until it doesn’t and no politician will bring on a house price slump for the benefit of relatively few peiople who aren’t already home purchasers at the same time threatening the bank shareholders and the geared home owners.

      • The shortage is the underlying problem

        And yet Bluey and Mig (above) are moaning about all the unoccupied apartments in their neighbourhood.

        Frankly, I think you could drop 100,000 unoccupied houses on Sydney or Melbourne tomorrow and prices wouldn’t change. They’d probably go up.

        As for The Claw he’s been spruiking his “shortage denier” meme around the intertubes for as long as I can remember. My guess he’s a “specufestor” with at least a dozen investment properties.

      • migtronixMEMBER

        @lorax it’s 7pm, check out my Avatar, that building – the Yves building – has 1200 apartments.

        How many lights are on?

      • (Patiently) How come in countries with little-developed mortgage markets, 50% of the population lives in “informal” housing (or in rural subsistence) because “formal” housing would cost them 20 times their annual income?

        Nearly every developing nation in the world fits into this category. As did our own first world nations a century ago.

        It is “supply” that determines price and who will miss out. Credit merely determines whether those who don’t miss out, will borrow, or will save up, often for a LONG time.

      • migtronixMEMBER

        Have a look at my avatar Phil and tell me why it costs ~$3k/month to rent a 1 bdr in a virtually empty building?

      • Because it is a quiet neighbourhood?

        The doorman knows your name?

        Perhaps the lights are out because they are all out enjoying those famous European style lane way cafes.

        Where is that building, I am in Melb in a few weeks and I would like to check out some of the famous ghost buildings.

        Getting a room was pure extortion so I wish some of those ghosts would join Air BnB and make a few bucks because there is plenty of demand for short term stays.

  12. 2big2failMEMBER

    Using price to income ratios is flawed because in some areas of Melbourne and Sydney, the demand is predominantly coming from overseas. Factor in median income from the wealthy in Beijing and Shanghai when calculating this ratio for Sydney and Melbourne (good luck with that). This is what Lindsay is missing.

  13. doctorX claimed
    10% of all established homes are not used for living. … once prices start falling all these holiday homes will be for sale and rent

    Shortage-deniers have been making this claim for years. It is an interesting theory. I ask the shortage-deniers to provide evidence of this happening in similar situations – Spain, Nevada, Miami, Ireland, Japan, perhaps.
    I want to see evidence that the number of empty houses increases from say 5% to 10% during a bubble, and then falls back to the 5% as house prices revert to normal levels.

    • I think a lot of our thinking on ‘housing shortages’ is confused and muddled. I think our supply issues are that new houses on the periphery are far too expensive relative to the cost of existing houses, not that we have a shortage of houses to support our population.

      I recall pre the last census we had all these numbers on shortages. I think we got to 300,000 houses short at one point (and that included the number of extra houses to get rental vacancies to 3%, and all our homeless people and everyone who was living in a trailer park or staying on a friends couch. i.e. the argument was spurious in the first place as the homeless and unemployed would still have no means to afford even a cheap house).

      Then the census came out and it turned out that a) there were more living in each house than expected and b) our population was lower than expected. Immediately articles came out saying ‘even if we take the 300,000 shortage argument as true, it was based on a level of demand that we now know was not true. If we apply the level of demand we know exists against these old reports even they would show there is no shortage’.

      Since then those number estimates went away and I haven’t seen one reproduced since.

      Remember around 97% of investors buy existing dwellings rather than build. This may push prices up as investors all compete with each other and with home owners over existing stock, but it doesn’t mean there are not enough houses for people to live in. Investor demand has basically no affect on the underlying population: housing ratio.

      The argument on the supply side is that if supply were loosened then homeowners would say ‘screw those investors im gonna buy further out for half the price’ and flood the market with new builds, affecting all prices everywhere. Supply restrictions seem to be tight enough to prevent this (as the costs of building on the periphery are not nearly as cheap as they should be), but not so tight as to create actual housing shortages. It is a relatively well managed artificial scarcity.

      • There is indeed a lot of sophistry and trickery used by shortage-deniers. Misuse of statistics is one of their main tricks.

        Instead of all that nonsense just ask yourself. Does a young family seeking shelter face abundance or scarcity? Unless the family is rich they face scarcity.

      • That’s garbage reasoning claw. Was a serf faced with insufficient quantities of housing or a lack of access to own that housing?

        Your argument shows that house prices are out of reach for young families, nothing more. I don’t disagree with that proposition at all.

        Supply restraints have pushed up the cost of production of new houses in order to maintain high house prices across the board, but they have been lax enough to still allow for population shelter requirements. I’m not saying supply issues shouldn’t be reviewed, I’m saying you gotta really understand the problem before you try and fix it.

        Stamp duty is one of the primary sources of revenue for state governments and we should expect and understand they will release land at a rate that keeps house prices high. That is what we’re seeing.

        But this is not to say we don’t have enough houses for our population or that we’re becoming homeless. For instance, the ACT government has reigned in land release with their new lower growth forecasts. This will not cause homelessness – there will still be sufficient houses to shelter people – but the reduced land release is to try to prevent new homes from flooding the market and thereby maintain house prices across the state.

        Effectively supply is constrained to a point where only investors and higher income earners can afford houses, and the investors then rent out the houses to the lower income earners and take a nice tax benefit to do so. There are still enough houses, we’ve just engineered the system to create a publicly-subsidised rent seeker class. Our system has cut off the low-price source of new housing supply – the natural mechanism to correct imbalances in real-estate overspeculation – but still released enough land to house the population.

        If we had an outright shortage and severe homelessness you could bet there would be a lot more civil unrest on the matter. Instead you get a lot of people who would like to buy a house but can’t afford it, but can still access a house to rent (and so they whinge but keep voting and being relatively compliant).