Pundits and spruikers conceal the risk in Aussie housing

The Australian housing market is crazy. Plenty of pundits are calling for the bottom of the current housing downturn now that a “house price friendly” federal government has been elected but there is little recognition of how messed up the current cycle is and why that makes any sort of forecasting extremely unreliable.

A Typical Housing Boom/Bust Cycle

A typical housing boom/bust cycle usually has the following elements, roughly in order:

  • a big increase in the amount of credit available – usually through the loosening of lending standards which leads to increases in housing demand and house prices
  • a big increase in construction activity, which decreases unemployment and increases inflation. But there is a lag before the houses are finished and so house prices keep rising while the building occurs
  • rising interest rates from the central bank to cut off inflation
  • slowing housing prices as borrowing capacity is reached and the supply arrives
  • house prices turn down, but as there is a lag in construction, new supply comes onto the market as demand is falling which increases prices falls and curbs construction
  • falling construction leads to rising unemployment which means more defaults
  • increased bad debts lead to a re-evaluation of risks, then credit growth slows even further as banks pull back on lending, turning the downturn in house prices into a crash

The Sydney/Melbourne Boom

First, a quick redefinition. I’m going to focus on Sydney/Melbourne where most of the price rises and building have occurred because other parts of Australia are different – especially Perth.

The loosening of lending standards comes in many different forms, in the US it was the rise of the shadow banking sector, in Ireland it was partly low interest rates in Europe being inappropriate for the Celtic tiger and partly weak regulation – the source of credit rarely the same housing cycle to housing cycle but the effect is the same: lenders want to lend as much as possible to people who can’t afford it. For the first ones in the game, the additional lending works well while property prices are rising, but you don’t want to be the last one in.

For Sydney/Melbourne it was a mix of the Household Expenditure Method (often called HEM) which let the banks assess borrowers as if they had the expenses of someone on the poverty level and a big increase in interest only investor loans that led to the Australian version of a credit boom.

Additionally, Australia then added to the demand through:

  • tax incentives (allowing superannuation funds to buy property, reducing capital gains, first home buyer stamp duty exemptions)
  • dramatically increased population growth (from averaging less than 100,000 per year in net immigration in the 90s and early 2000’s to well over 200,000 per year)
  • allowing foreign buyers free reign
  • refusing to implement money laundering laws while most other developed nations did

So, Sydney/Melbourne super-charged step 1 of the process.

Also, Sydney/Melbourne had a few wrinkles to step 2 of the process – the construction boom. Australia is the least populated continent (ex Antarctica) on the planet. However, it is also highly urbanized and has some of the most restrictive land use laws which means supply is less adaptable – it takes longer to build and is more expensive. The Sydney/Melbourne construction boom also focused on the delivery of apartments rather than houses, which also increases the time taken for supply to come on as both the planning and construction phase for apartments is far longer. The effect was still a record number of houses and apartments built, which is a typical outcome for a housing boom, but the supply lag was greater.

After that, comparing the Sydney/Melbourne housing boom to the typical housing boom timeline falls to pieces:

  • Interest rates have been falling rather than rising as the mining boom ended and wage growth stagnated in Australia.
  • Sydney/Melbourne skipped forward to step 7 of the process as the Royal Commission into banking prompted a premature end to the credit cycle.
  • As much of the building was centred on apartments which have very long lead times and construction times, Australia has not yet seen the increase in unemployment which is typical once house prices start to fall – it is coming but the effects are delayed.

In the interim, a Federal government has been elected that ran on a platform of not letting house prices fall, helping first home buyers borrow as much as possible (by adding a government guarantee to let then borrow up to 95%), reducing lending standards (APRA cut the loan serviceability requirements) and quite probably more to come. It is my expectation that the Coalition will consider trashing the budget a few billion to keep the housing market from falling part of their “mandate”.

Sydney/Melbourne still unaffordable

Demographia estimates Sydney and Melbourne to be top 5 for unaffordability across major developed markets.

You can fix affordability three ways:

  • rising wages
  • falling interest rates
  • falling house prices

The first looks unlikely – we believe a mix of secular stagnation, inequality, falling union membership, increased automation and high levels of immigration mean that wages are going to remain weak unless something changes unexpectedly.

The Reserve Bank will work on the second but has very limited scope as interest rates are already at record lows.

The government is trying desperately to stop the third – but if there is to be any return to affordability, prices are most likely of the three factors to change significantly.

Where to from here?

A range of factors affect supply and demand – here is my estimate of what the key factors were and how they are looking to change (for more on each of the factors, see this recent podcast):

Housing Boom Bust Factors

A few important factors to note:

  1. Credit availability is extremely important. The Royal Commission into banking reversed the credit boom and was enough to see house prices down around 10%, even while most other factors were still positive.
  2. Employment is extremely important. During the boom years, the Perth market faced largely the same factors as Sydney/Melbourne except for (a) slightly weaker population growth and (b) rising unemployment. And Perth property prices fell more than 10% while the rest of Australia boomed.

Both of these factors remain uncertain.

Credit Availability

The handbrake on lending from the Royal Commission is still in place, but politicians and regulators are busy trying to get credit flowing again. Quite incredibly, less than 3 months after the Royal Commission harangued APRA for being too trusting, not enforcing lending standards and being too close to the banks, APRA loosened lending standards to allow banks to set their own rules on mortgage serviceability. So, you have to expect there is more to come on the regulation and policy front to try to keep the credit party going for a little longer.

Having said that, property booms quite often have politicians trying to find new ways to shovel debt out to the masses at the peak, and only rarely does that prevent a bust.

The question is momentum. Either

  • enough policy support comes (and quickly), investors and foreign buyers “keep the faith” and we see the property market stop falling and maybe even grind higher or
  • the support is not enough or is too late and house prices resume their fall. At this point the additional credit becomes “pushing on a string” – banks can offer the credit but if no one wants to borrow then the additional credit has no effect.

It is hard to find a middle ground, the outcome looks relatively binary and very much a study in behavioural finance. Can ScoMo convince enough first home buyers to take on 95% debt burdens to save the rest of the housing market? Can the banks and developers convince investors to borrow far more than they will make in rental income in the hope that capital gains will give them a good investment?

Employment

Employment remains the wildcard. With stagnant wage growth and dramatic drops in housing construction approvals, my money is on a significant rise in unemployment.

In Perth that was enough to see five years of falling house prices. I’m not sure why so many economists are convinced that east coast house prices won’t be similarly affected.

International Shock

Keep in mind that all of the above is predicated on benign world growth. If the trade war spirals out of control, or there is a debt crisis in any one of a number of over-indebted countries then the negative scenarios for Australian housing become the base case.

Net effect

The net effect is that the Sydney/Melbourne housing cycle is messed up.

While I can understand the arguments of those who say that house prices have bottomed, given the complexities above I am skeptical of the level of conviction displayed.

The base case might be a grind sideways/higher in prices, but there is far greater risk that house prices fall sharply than rise sharply.

—————————————————–

Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
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Comments

  1. You have a habit of putting out cracking articles DK and this one is simply top shelf. Great analysis. Many thanks.

    • Yes, agree. Just goes to show that analysis can be nuanced but still have clarity.

    • DominicMEMBER

      I’ll throw in some Bob Farrell quotes for good measure:
      1. Markets tend to return to the mean (average price) over time.
      2. Excesses in one direction will lead to an opposite excess in the other direction.
      3. There are no new eras – excesses are never permanent.
      4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
      5. The public buys the most at the top and the least at the bottom.

      I could go on, but you get the picture …

  2. So we should or shouldn’t buy a house as an OO? Conflicting other posts saying you should buy

    • Depends on whether you want to still be on this blog in 5 years, whinging about your lot and shaking your fist at everyone, warning them how, in 18 months, they’ll finally get their comeuppance.

      • I’ve said this before. If you’d bought a house on day 1 of this blog instead of reading it, you’d probably own the property outright by now.

    • Well according to a conversation I witnessed just now, now is the time to buy a $1.6 million house in Beecroft before prices rise again. The basis of the decision being those damned socialists didn’t get elected, so your negative gearing and tax perks are safe and interest rates will not rise in the next year or two. Clearly the kool aid isn’t just being drunk, it’s being sculled by some.

      • Oh, hey JD.are you the same guy that had the same post about a house in Beecroft at $800k and how it certainly wasn’t about to boom. And was going to $500k? 10 years ago or so.

        Or was it another JD?

      • I think these same punters forget elections come every 3 years. So those socialists might get a go in 3 years time, mortgages of that size are 30+ years.

      • Gavin – you are kidding yourself.

        Negative gearing reform was killed three decades ago. Silly Dunderhead Shorten exhumed it and discovered…. that it’s really REALLY dead!

        It would take a Dunderhead of Farken Amazing Proportions (Dun-FAP) to try to exhume that rotten corpse for a second time. Even Albanese isn’t that stupid.

        So remember ….dun-fap!

  3. Australian propery buble is a textbook example, nothing is weird about but extreme willingness of ruling elite to postpone its bust at any cost risking extreme consequences.
    Fortunately or unfortunately there us almost nothing left to be used to prevent bust once again. Droping IR used twiced recently against business cycle in 2013 and 2015, subprime lending reached unprecedented levels (mass IO liar loans), cash bribes (fhg’s, stamp duty discounts, etc), tax bribes (NG, CGT discount), confidence boosts (total media and cultural brainwashing), psychological pressure (medieval-like tenant laws , second class citizen labeling, spreading fear, etc.), artificial demand boost (unprecedented immigration policies, money laundering safe haven, …), …
    Because of all of this our bubble just became so big and took so long to be compared to a typical bubbles, so its consequences are going to be as big and so lasting even if with some miracle Scomo manages to delay its bust a bit (very unlikely because ammunition left is to little too late).

    • Medieval Rental rules –

      A thorough examination good doctor,

      When I lease out my property,
      I always state Pets Welcome when advertising
      Not only because I value my own pets.
      Most people are responsible pet owners (Having a pet is extra work) .
      It doesn’t hurt that I can ask extra for rent because pet owners are glad to lease a pet friendly property.

      It’s an underserved market peeps

    • You underestimate what we have left – house prices must be the constant because all our debt is backed by them. Everything else must adjust to keep houses afloat. We’re still enjoying first world standards aren’t we? People haven’t felt the pinch yet – we’re still going on holidays, eating at cafe’s and buying flat screen tv’s. That’s a lot more than our parents were doing – we’ve been living beyond our country’s means for awhile on the foreign credit card.

      We’ve still got some currency strength to trade off after all. This discretionary income still needs to be used – houses can adjust via the currency not necessarily the nominal price. The side benefit will be this is also good for the economy rejigging it to more productive export orientated things.

      • Actually a lot of the consumption you’ve mentioned is through the floor.

        The ammunition that will be used is our tax dollars, our currency and (if they really lose their minds) our super.

      • JojoyubbyMEMBER

        All sounded good except our banks are already borrowing heavily from overseas. A falling currency will also devalue the collaterals of all these loans or asset-backed securities. Could our banks still get overseas fundings like they used to? Can the housing market absorbs the extra finance cost?

      • AK
        You said “That’s more than our parents did” What rubbish! When I bought my house in 1986 one of the first things I bought was a National Panasonic VHS video recorder. The cost was over $1000 which is about $3K – $4K in todays money. That would buy you a mighty good flat screen today plus a lot of avocado sandwiches. I sold the house last year for 7X what I paid for it and do not and will not buy another until the current rubbish works its way thru.

  4. Good work Damien but the legal system as regulator by default is a thing, as is fundi sources, capital destruction is not even across banks.

    The bust is organic not mechanical

  5. Quite incredibly, less than 3 months after the Royal Commission harangued APRA for being too trusting, not enforcing lending standards and being too close to the banks, APRA loosened lending standards to allow banks to set their own rules on mortgage serviceability.

    Friend. You misread the RC quite a bit.

    The RC didn’t say anything about APRA’s prudential standards, per se. Taking prudential and other regulation as being set at a given level, It only said stuff about whether the regulators were applying their own standards suitably. It thought that regulators were a bit lax.

    The most obvious solution to THAT issue, as has been already said here, is “if at first you don’t succeed, lower your standards”. APRA is not dumb. They’re doing what Hayne incentivised them to do.

    As long as APRA hold the banks to the prudential standards -however loose they choose to make them- they will be blameless in Ken Hayne’s eyes.

    • Good work Peachy!

      We must resist the endless attempts to turn a manky sows ear into a silk purse fit for a bear.

      When policy and media (and rent seeking spruikers) are singing from the same sheet and the tune is “Pump up the Bubble” there is only one risk.

      A falling AUD.

      And only one thing that will really send that on a slide.

      Falling trade terms and volumes.

      And that does not seem likely while China is building toys for boys and Aussie pollies make the Ferengi sound like people of principle.

      http://noelgreen.com/ferengi/Rules-of-Acquisition.pdf

      • SweeperMEMBER

        Can you point to one bubble in history where an election result has been able to turn around FONGO during the bubbles collapse?

      • MountainGuinMEMBER

        @sweeper.
        stopping FONGO will be even harder if Q1 economic growth data comes out negative. Sure we’ll still get OO home purchases, but im not sure how many investors will ignore data on a pending recession just because of hard spriuking by the property sector.
        A few high profile companys going bust or making large cuts will also keep fear in the market.

      • SweeperMEMBER

        And OO were never the marginal buyers anyway. That’s why focusing on “affordability” and OO is not really useful.
        It was a speculative market.

      • Sweeper,

        Remember the GFC?

        The fall in house prices was ‘treated’ by the ALP with such success that they were able to remove the treatment by mid 2010 and prices did very little until the arrival of the LNP in 2013 and serious bubble blowing got under way.

        I do not detect ANY acknowledgement by the LNP that they should not try to reinflate the Bubble.

        Will they succeed provided vacancy rates are kept under 4%….probably.

        If under 3%…..very likely.

        The AUD is the ultimate source of fuel for bubble blowing and it is holding up.

      • SweeperMEMBER

        It wasn’t a bubble before then. Prices were high but were supported by strong growth in incomes and falling interest rates. Abbott and Hockey deliberately inflated the bubble to the speculative phase.

      • Sweeper,

        Abbott and Hockey?

        They just stood by as the RBA cut rates, APRA snoozed and the FIRB allowed foreign capital to flood in.

        Late in the day the Liberals actually threw a bit of sand in the gears.

        But right to the end the RBA have been in full denial and tomorrow they will throw some tinder on the embers to go with the jiffy fire lighters dispensed by APRA last week.

        Scott Morrison is not a sandy type of guy.

        Expect a fine mist of lubricant.

        It is bubble blowers v Sweepers faith in rational expectations.

      • SweeperMEMBER

        Not rational expectations. Faith in irrational expectations. A RE argument would be along the lines. Prices are at intrinsic value because (insert fundamentals shopping list) like this website. Morrison getting elected improves shopping list so prices will go up. And to get clicks we will call this a bubble even though it has nothing to do with being a bubble. We just think prices are high but at intrinsic value because of shopping list and will call this a bubble. High prices are based on RE due to shopping list and will go up further because shopping list has improved.

  6. SweeperMEMBER

    All the analysis at the moment with the exception of the jolly swagman podcast is getting this wrong because they don’t fully appreciate what a bubble is.
    You can run through the shopping list of fundamentals. Interest rates = positive, employment = negative, lending = still negative. Inflation = negative, NG and CGT = positive.
    But it’s total beside the point because those things only impact the assets intrinsic value.
    The bubble is deflating because the asset was trading way above intrinsic value factoring all of those things in because speculators had capitalised into current market prices expectations of CG not supported by a realistic forecast of cash flow.
    So the question is how or what is going to delete the past 2 years of speculators memory and convince them that prices will increase double digits next year and the year after and the year after etc. otherwise they are not going to buy at bubble prices and the bubble will continue to deflate. Because it was a bubble.

    • Yeah this.
      Investors look for yield, and to begin with there may be a few dipping their toes in, but the change in momentum may not be enough to reverse trend and lure masses of speculators back.
      Bull trap ahead.

    • “..So the question is how or what is going to delete the past 2 years of speculators memory ..”

      The same sort of nonsense that always plays havoc with the ‘rational decision making’ circuits in speculators brains.

      High quality BS.

      Actually low quality BS is usually sufficient.

    • Once interest rates are lowered and there’s more money circulating in the economy (more income) combined with lower mortgage rates (particuarly fixed once the current fixed investor mortgages expire) all those negative yields will become positive especially if they do QE and let inflation rip. Political economy suggests they will try one thing which won’t show, then try another and another until that last one tips the scales and it goes the other way – it’s always what happens both down (RC, land rezoning, NG/CGT removal threats, APRA restrictions being added one by one until prices move 10% down in a year at once) and on the way up too.

    • It is not different.

      All it had was a higher vacancy rate and that makes selling speculators fairy stories much harder.

      But even higher vacancy rates did not produce a crash in an environment of super cheap credit.

      Just a slow decline over about 5 years.

      Super cheap credit and tight vacancy rates are effective in protecting bubbles.

      That is why APRA and RBA are easing credit access and price and ScoMo loves a Big Australia.

  7. The market in Sydney and Melbourne simply reflects a global trend of urbanisation and rising house prices in areas of proximity to good jobs. No different to London, Singapore, Paris, Hong Kong, New York, Seoul. Trying to make out that there’s a special bubble in Sydney and Melbourne is fake news. And you’re having to focus on these cities to make your fake point about a bubble in Australia. Perth, Hobart, Canberra, Brisbane, definitely not in a bubble. Brisbane prices relative to incomes have flatlined for a decade. We’re now entering a period of very supportive monetary and regulatory policy – we’ve been explicitly told so. That nice 750k house 7kms from Brisbane CBD is easily going to be 1m in 5 to 10 years time. I wouldn’t put a single penny on it being lower in 5 years.

    • The question is how many of those good jobs are dependent on us taking on private debt and transacting property to one another? If significant, is it sustainable and would you define this economic activity as ‘good jobs’? I am sure there are good jobs in Syd and Melb, but skeptical there are so many that anyone who comes here gets one. If this is truly sustainable and these cities don’t have a ceiling on number of jobs for newly arrived people, then we have uncovered some holy grail economic model that other world cities with much bigger and more diverse economies haven’t.

      • It’s irrelevant over a 15 / 20 year time span. You’ll own your own home by then, and frankly it’ll be worth a heck of a lot more than it is today. Remember when everyone freaked out about 100k house prices? They said it was a bubble.

    • There is certainly no chance the number of good jobs in the world, or in Australia, could recede.

      There would be a word for that.

      Recession.

      They never happen. Pure fantasy!

      So – Andrew is right.

      • Recession is calculated based on GDP. The government controls that number. It could borrow 200 billion to build transport links and avoid a recession, at will.

      • My point exactly. We can’t possibly have a recession. Therefore jobs and house prices can never fall.

        Also we are disconnected to the rest of the global economy. So even if they have a recession, we won’t. (please see above).

      • You’ve got it backwards.

        The whole reason I hate the bubble is that it punishes those who work and save.

        It rewards those who took on massive leverage at high risk, and (even more) it rewards those who simply owned a house already (mostly boomers), rode the wave and now think they are geniuses for their good fortune.

        I don’t pray.

        I do understand bubbles though.

    • BabundaMEMBER

      We’re now entering a period of very supportive monetary and regulatory policy

      Monetary and regulatory policy has been exceptionally supportive for the last decade. Wake up.

      • Rates to 0.5%. Removal of the investor speed limit. Reduction in the serviceability threshold. Removal of the threat of negative gearing reform. Removal of the threat of CGT reform. Tax cuts. Another 1 million people into the cities during the term of this government. Do you want Scott Morrison to send you a personalised road map?

      • Don’t be too proud of this geographical terror you’ve constructed. The ability to read Scomo’s personalised road map is insignificant next to the power of the Force.

    • Lol. Canberra’s not in a bubble. Lol. I was looking to buy in 2017 and saw a townhouse in Mawson advertised for around $750K. Three quarters of a million for a 30+ year old unrenovated townhouse in an ordinary street in an ordinary suburb. It sold for $850K before the auction. Then another one in the same block sold for around $950K a couple of months later, and then another one for over a million a few months after that. If that’s not bubbly behaviour I don’t know what is. Even the idea of the first place being worth $750K is ludicrous.

      Interestingly, the Corelogic data for May (for what it’s worth, which is not much) showed “All Dwellings” down 0.25% for May, so maybe the market here has finally got the memo.

      • You can get a house in Mawson on an 800sqm block for 650k. You can get a unit for 190k. In a national capital city with great access to recession proof jobs. People in Mawson should be buying their first property with 50% down. Bubble – that’s a belter.

      • I just checked Allhomes for properties to buy in Mawson.

        https://www.allhomes.com.au/sale/mawson-act-2607/

        $190K will get you a 1 bedroom apartment. 2-1-1 apartments are going for $255-300K. Ignoring the pitiful dump at $650K, and the place that’s been divided into 5 apartments, houses start at $730K and go up to $1.195M. Ex Mr fluffy bare blocks of land are being offered for $825K – $925K.

        In 2015 I sold a 4 bedroom house on a 1200sqm block in a nice street for $600K. Now $825K (plus costs) will get you a piece of dirt. But there’s no bubble in Canberra.

      • Of course, start ignoring available properties because you don’t love them. Ignore all properties sub-1m and then claim there’s a bubble because there’s nothing suitable at less than 1m. All I hear are excuses.

  8. And the FOMO crowd has gone, everyone I know who invested has woken up to falling prices can happen

    • You mean, what goes up can also come down? Must be the discovery of the century!! Who could have known?

  9. Great analysis. This is what some other articles put out on the site lately are lacking.

  10. reusachtigeMEMBER

    Our great Liberal Nationalist party will make sure that they extra-boom our housing market now that their superior values will take hold.

    • Absolument Mon Vieux
      What with the bloody yacht only half built (incompetent Frogs) the last thing I need is a drop in the price of one of the spare Winter Palaces, or God Forbid, a bloody Socialist government. Now, where’s that damned butler got to…

      • Bill didn’t win because no-one wants their children suffering from malnutrition and head lice.

  11. One factor not mentioned to drive the housing boom to 2107 was the ability of SMSF to gear up 50% to but property, This is not possible now.

  12. Worst case scenario is looking more and more likely; that our housing “bottom” in 6 months time or so coincides with a global downturn and potentially a good old fashioned market crash

  13. BabundaMEMBER

    The base case might be a grind sideways/higher in prices, but there is far greater risk that house prices fall sharply than rise sharply.

    Totally agree. There is negligible likelihood of sharp rises. Apart from anything else DK said (which was all gold) we have quite simply arrived at peak debt – we’ve got no discretionary income left because we’ve brought it all forward and spent it already. We can’t take on any more debt to keep consumption going, let alone reinflate a housing bubble.

    • Yeah. Nobody’s getting massive wage rises and there’s a sh1tload of punters out there already with massive debt. Even with the ongoing flood of hostile invaders immigrants prices have been going down, and I reckon they’ll continue to do so. Who are all these people and where are the highly paid jobs that are going to fund the debt spree that will keep this going?

      • Importing people leads to lower wages – only so far you can push on that particular string. We are importing new people to be Uber drivers and 7Eleven attendants – they aren’t going to compete effectively at auction with a homegrown teacher or lawyer (or 7 Eleven franchisee)

  14. Of the 7 LONG stages mentioned, we are just starting level 6. This is where it went pear shaped in ALL 8 house bubbles last 30 years that led to banking crises as construction crashed (japan finland norway thailand malaysia ireland spain usa) . I disagree on your chart-
    Credit availability 2 reds (expense check, DTI, super funds, use of equity. 5% guarantee only replaces loan insurance and fhb’s are mostly exhausted from duty cuts and price falls)(3 reds as banks get impaired)
    Price credit 1 green (1 then 2 then 3 reds as banks get impaired)
    employment 1 red (soon 2 then 3)
    population growth shouldn’t exist outside of the supply situation
    foreign buyers 1 red
    tax incentives 2 green
    money laundering (part of foreign buyers)
    land release (part of supply)
    under/over supply 2 reds (goes to 3 in recession as we have airbnb, 1 in 4 households single occupier, 1 in 10 households empty)
    new column otp disaster = 3 reds (over 50% of settlements are valued below the purchase price which smashes supply, future construction, and banks)

    • “After that, comparing the Sydney/Melbourne housing boom to the typical housing boom timeline falls to pieces:”
      Garbage. It’s textbook 7 stages, you just need to replace rising rates at step 3 with tightening credit.

    • Yep this ain’t over till our banks say it’s over, at which point there will be no force known that can resurrect housing.
      It’ll boom and bust and boom again and bust again until all the money in the system is absorbed…that’s when the real fall happens, that’s when we all rediscover what Fundamentals really means.
      In today’s market our available Aussie labour supply is not focused on solving the supply side of the equation, building material costs are way inflated over costs 5 years ago …this all needs to reverse before housing prices really correct. Land speculators need to be taxed out of existence (yeah good luck with that, given the political climate)
      In the end we’re not ever going to get Housing affordability through some linear continuous improvement process, it’s just not possible because we’re stuck at a local minima. It’ll take an enormous shake up to get our economy out of this local rut and back on a sensible path towards a different (maybe sensible ) optimization point.

      • +1 to building costs being out of control… It’s literally through the metaphorical roof that I don’t own over my head.

      • St JacquesMEMBER

        The more I look at it, the more that local minima looks like a friggin black hole. It’s that political climate you mentioned….I cannot see anything less than a real revolution or world war changing things. In short…maybe when I’m about to die. I just tell young people with beans, get out of here before you’re sucked under foreva.


  15. Employment remains the wildcard. With stagnant wage growth and dramatic drops in housing construction approvals, my money is on a significant rise in unemployment.

    The other factor here is the flow on effect from the stamp duty bust being seen in both NSW and Victoria. Both state governments are going to in the end cut services, unless the Commonwealth Gov’t bails them out (seems a slim chance) in which the Commonwealth will be the ones to cut services. Either way, less employment and spare cash.

    • Yeah but the Irish were just stupid, we’re much smarter than they were. 😀

    • That article about the Irish parallels is great. And in it, the author talks about the low quality and risk of failure of mortgages where debt was more than 5 times annual earnings. It is almost to laugh, when one considers people taking out million dollar mortgages over here with sub $100K pa incomes. A mortgage at 5 times income over here would be premium quality.

  16. fitzroyMEMBER

    What happens when wages are unchanged since 2011 and the house prices go up markedly? Interest rates have to go down, credit needs to rise and then what happens? Can this end well? Steve Keen got it right IMHO when he said a bubble collapses under its own weight. I just may die of old age in the meantime.

    • A bubble collapses under its own weight because it always does!!

      It is like hanging an elephant over a cliff with a thin rope. You cannot predict exactly which part of the rope will eventually fail or when that will happen. Winds may blow in unpredictable ways, the elephant keeps growing and his dinner time is irregular.

      • Supreme with anchovies

        Stick to eating dog meat dumplings. Your simplistic argument is laughable. Have fun waiting another decade

      • Don’t eat too much human meat, Supreme with anchovies. Excesses are not good for you.