Triguboffonomic panic 4.0

From the soon to retirement Robert Gottliebsen at Dad’s Army:

So what would happen in Australia if there were a 20 per cent fall in dwelling prices, led by Sydney and Melbourne?

…When this has happened previously (e.g. Melbourne in the early 1990s), it slashed consumer confidence and retail sales and boosted unemployment…One of the hardest hit groups would be the banks…The next big victims would be state governments and councils…in Victoria, in 2014-15 property taxes and stamp duty accounted for an incredible 41 per cent of the state’s revenue…Finally, Meriton’s Harry Triguboff points out that the owners of many commercial properties would be hit hard by a fall in prices. And in some cases, so would their bank financiers.

But Harry Triguboff tells me that Chinese buying, which accounts for 80 per cent of demand for his Meriton new apartment development, is not slacking. So in Sydney, banks, the state government and councils can relax; Treasury’s so-called housing bubble is not about to burst.

Can we cut out the middle man and just get Highrise Harry to write directly? It would surely be cheaper for Rupert.

A few notes in reply. If the Chinese are still buying Highrise’s new apartments then that is expanding supply and will help burst the bubble not support it.

As well, as we know, mooted supply shortages do not prevent price collapses anyway. Economics 101 tells us that inelastic supply markets hit by a surge in demand do not only see price rises but increased volatility. Such a situation can be explained using basic supply and demand analysis, as shown in Figure 1.

Q0 and P0 represent the initial equilibrium situation in the housing market. Initial demand is provided by D0, whereas supply is shown as either SR (restricted) or SU(unrestricted), depending on whether land supply constraints exist.

Following an increase in demand, such as a surge of investors following changes to tax rules (e.g. Australia’s CGT reduction in 1999), the demand curve shifts outwards from D0 to D1. When land supply is restricted, house prices rise sharply from P0 to PR. By contrast, when supply is unrestricted, prices rise more gradually from P0 to PU.

The situation works the same way in reverse. For example, if there was a sharp fall in demand following a contraction in credit availability or a sharp decrease in Australia’s Terms of Trade, causing demand to fall from D1 to D0, then prices fall much further when land supply is constrained.

The key point of this analysis is to show that declines in demand can bring sharply falling house prices even when supply is constrained and housing shortages exist.

This has already happened for the last two mini property cycles in Australia, up to 2008 and up to 2011. Each time had house prices been left alone they would have fallen despite claims of under supply. The decisive factor that prevented it was massive policy intervention in the market. Therefore, when considering the future of Australian property in this cycle (Chinese and all) the only question that really matters is can authorities bail it out again?

With fiscal policy headed for sovereign downgrades and monetary policy nearly exhausted, my answer is no.

Houses and Holes


  1. Joe Hockey’s attitude to NG can be summed up in these lyrics by Offspring:
    “I won’t pay, I won’t pay! No Wa-a-a-ay! Baby, Why don’t you Get a Job!”

  2. Haven’t seen a graph like that in 20 years.

    “the only question that really matters is can authorities bail it out again?”

    Is the term “bail it out” a good fit?

    Was it that bad in 1999 and 2008 that the housing industry needed bailing out or was it merely an attempt to stimulate the entire economy including Harvey Norman etc. We (the govt) demand full employment and real wealth in order to borrow against or outright sell property to buy that new thingamajig. Anything less and we go into our shells and change govt.

    The fact that govt interference in tax, interest rates and foreign property purchases was too deep for too long should be what’s on issue here…. because I suspect each successive “bail out” measure will bring diminished returns from now on.

  3. Brett Edgerton

    The really useful piece of information that Gottuboff could add to the debate/market is what proportion of these 80% of apartments being sold to the Chinese are actually being utilised as dwellings…

    If a fair proportion are not being lived in – and I would expect that might be a reasonable assumption given it appears the case when Chinese invest within China – then the only demand that is being met by building for this market segment is investor/speculative demand… And if/when that demand reverses – for whatever reason – than there will be an awful lot of supply come onto the “for sale” and then rental markets all at once…

    • Correct. Such is the way in supply constricted markets:

      -not enough built when demand hits
      -too much built as it wanes
      -a rush of empties as prices fall

      Bigger price rises, bigger price falls.

      • And my cash is just waiting for these big big big price drops. I am more than willing to move to an area that’s not 100% to my liking in order to score a substantial discount and minimize the amount borrowed. I’ll do what it takes to get this done.

    • Great point. If a dwelling is not able to be lived in it is a complete waste. Squatters rights need to be changed to 6 months.

  4. Land tax brings Commonwealth income from empty properties and continued pressure to let or sell.

    • Yep – and there was a Commonwealth Land Tax from 1910 until 1953.

      If Hockey wants to get supply moving all he needs to do is to to offer the states to pay for the servicing and development costs of bringing new blocks to market with the proceeds of a small commonwealth land tax.

      That will get supply happening and side step the problem of states whingeing they don’t have the money (yes – the states could just as easily impose a state land tax and use the proceeds to fund the servicing costs of new subdivisions as an alternative to the current first user pays all approach)

  5. States already charge land taxes, and can move the rates and thresholds around as they please. They have just all chosen to only apply the current land taxes selectively, mostly to commercial property which often gets stung, while primary residence and farm land is exempt. It is politically easier to charge hefty transaction taxes.

    And councils levy property rates by way of an ad valorem property tax, so movements up and down in a property’s value do not directly affect the amount paid in rates, which are set each year to raise a specified amount.

    Gottliebson is a dill. It’s not that complicated