SQM: No national housing bubble

By Leith van Onselen

SQM Research’s managing director, Louis Christopher, released his weekly email newsletter last night, which once attempted to dispel the notion that Australia has a housing bubble:

I’ve noticed increasing media chatter about a national housing bubble that we apparently have, here and now! Let me tell you it’s wrong to take a broad-brush stroke on the housing market when all the evidence suggests there is no national housing bubble currently in existence. Sure, you could make the claim that Sydney property is overvalued and in bubble territory. Perhaps you could make the claim that parts of Melbourne are also experiencing a strong run up in prices as well.

However, please try telling residents of Adelaide that they are in the midst of a property bubble when prices have been almost stagnant for the past 12 months. Prices haven’t done much better in Brisbane, Hobart or Canberra for that matter. Or the Gold Coast and Sunshine Coast which have recently bottomed out after a housing price crash.

Are they currently in a bubble as well? Are they really experiencing a “run-up in housing prices fuelled by demand, speculation and the belief that recent history is an infallible forecast of the future.”?? Clearly not.

There are also literally hundreds of other smaller townships and residences dotted around the country which have not experienced capital growth in a very long time and are running at discounts to incomes. These localities are influenced by local factors. No matter how cheap mortgages are, prices in these localities will still rise and fall, largely as a result of the fortunes of their local economies.

So no, the evidence of a current national housing bubble is very weak indeed. And for those people that don’t believe our asking prices charts, here is a table from the Australian Bureau of Statistics that very much shows the same thing. Note the one and ten-year annualised results for most cities appear rather benign.

ScreenHunter_6825 Apr. 01 06.50

So to those who have claimed there is a national housing bubble in this country, by all means make a point about excessive debt and the banks increasing their grip on our economy and indeed, the global economy. I believe in this notion too. But let’s not make a broad public statement on the current national housing market when it is simply not based on facts. Such claims reek of sensationalism and attention seeking and fundamentally take away from some other solids points that deserve to be addressed and resolved by our leaders.

But that does not rule out that we won’t get a housing bubble in future. Our forecasting modelling does suggest that the current low rates and low Australian dollar will be increasingly stimulatory to at least the Melbourne and Brisbane markets on top of the already booming Sydney market.

ScreenHunter_6858 Apr. 01 21.03

Source: 2015 Housing Boom and Bust Report

The above table covers our forecasts for this year made back in September. For the record, given the interest rate cut we have had and the fall in the Australian dollar, we now believe our ‘Scenario Two’ forecasts are increasingly in play over the base case ‘Scenario One’ forecasts. And on those numbers, Melbourne and Brisbane house prices could take off, particularly later in the year.

In recent weeks, the RBA has made it clear that monetary policy will not be dictated by what is happening in Sydney. However, if we were to throw Melbourne and Brisbane into a housing boom, that could very well change. The three largest cities all in a boom would create significant concerns for the RBA and in my opinion would certainly stop the easing cycle. Indeed, the RBA would likely raise rates to stop the excessive property speculation unless APRA finally took some real action.

In Sydney itself, I recognise the market is trading in overvalued territory. Our chart below is clear on this point. If our forecasts are right for this year, the market will move to a point which would suggest it is 40% overvalued. That would be the second highest point we will have reached since the 1980s.

ScreenHunter_6859 Apr. 01 21.04

On the flip side, I would like to point out that there are some very logical reasons for this which are not in any way associated with cheap mortgages. Sydney has, for example, strong population growth. The city expanded by an estimated 90,000 people last year. With this population increase the city has still been underbuilding even while building approvals have picked up. NSW has a strong state economy and the future is looking good on infrastructure spending, presuming the ‘poles and wires’ sell-off goes through state parliament. Sydney unemployment is lower than the national average.

So there are quite a few positive things happening in the city that help explain the large premiums being paid for housing. Sydney is very much like a bluechip listed company trading at a high price-earnings multiple.
That said, eventually the good news will be well and truly priced in and that could be in the near term, particularly if our forecasts for this year come into play.

I strongly disagree with Christopher’s analysis. Just because the bubble is centred in Sydney and Melbourne does not mean that there is no national housing bubble. Using the same logic, the US never experienced a housing bubble since around half the markets there (most notably Texas) never experienced a sharp run-up in prices and never became overvalued.

When talking about whether Australian housing is a bubble, it is the weighted-average that counts. And here, the evidence is strong.

The total value of Australia’s residential dwelling stock owned by households was 3.2 times GDP as at December 2014. Further, it is rising fast and is only a smidgen off all-time highs (see next chart).

ScreenHunter_6826 Apr. 01 07.00

The same goes for valuations versus incomes, which are pushing all-time highs (chart from Barclays):

ScreenHunter_6301 Mar. 02 14.02

Then there is Australia’s household and mortgage debt, which also hit all-time highs in December 2014 (see below charts).

ScreenHunter_6817 Mar. 31 13.17
ScreenHunter_6818 Mar. 31 13.18

Christopher’s analysis also lacks context, in my view. Just as housing values and debt are pushing all-time highs, the mining boom is unwinding fast, causing real national disposable income and domestic demand to fall (see below charts).

ScreenHunter_6828 Apr. 01 07.09
ScreenHunter_6827 Apr. 01 07.06

Wages growth is also at record lows:

ScreenHunter_6829 Apr. 01 07.12

Meanwhile, unemployment and underemployment continues to trend higher (see next charts).

ScreenHunter_6830 Apr. 01 07.14
ScreenHunter_6831 Apr. 01 07.15

The data speaks for itself.

The outlook for the economy is also poor. The once-in-a-century mining investment boom will decline sharply over the next few years as large mining projects are completed. Then there is the ongoing income shock as the terms-of-trade retreats back to historical norms, not to mention the closure of the local car industry by 2017, which will further increase unemployment.

So we have an alarming situation where Australian housing, albeit led by Sydney and Melbourne, is already pushing all time high valuations and is speeding towards the (mining) cliff. This would suggest that the risk of correction sometime in the near future is arguably greater now than at any other time in living memory.

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