Australian property is one the widest and deepest asset bubbles in the history of capitalism. Any objective assessment of this “market” can lead to no other conclusion.
With a long history of commitment to home ownership, Australians have always been prepared to structure their finances around property. This showed up in a total dwelling stock to GDP ratio that persisted around a very high 150% from 1960 to 1990. In the late 1990s that shot up to 200% and then embarked on near ceaseless climb to 360% today.
There are many other guides to the extreme overvaluation of Australian property. The ratio of household debt (overwhelmingly mortgages) to disposable income is the highest in the world at 186%. Median price to income multiples are anything from 12x in Sydney, to 10x in Melbourne, down to still immensely unaffordable 6x in smaller capitals, up from 3-4x times in all over the long run for all. The extent of overvaluation is plain.
What makes the Australian property bubble unique is the degree to which it has warped the nation’s political economy. Once a diverse and vibrant resources and manufacturing economy, over the twenty years that the Australian housing bubble grew that shape changed completely. An huge proportion of the debt underpinning Australian property is borrowed from offshore, almost $1 trillion, mostly by its big four major banks. This perpetually inflated the local currency, as well as input costs like land prices, which dramatically diminished Australian competitiveness and drove tradable sectors like manufacturing offshore. From 14% of output in the 1970s, manufacturing hit 5% of output in 2016, the lowest in the OECD.
Moreover, the centrality of Australia property to the wealth of the national polity increasingly distorted policy and even elections. In the 2008 global financial crisis, the then Labor government bailed out the the big four banks with guarantees to their offshore loans, rewriting the entire rule book for Australia’s financial architecture in one panicked afternoon. Public subsidies poured into demand-side stimulus, as well as RMBS markets. Any notion that Australian property was a “market” evaporated. Australian property was, and remains, a kind of asset quango, a public/private partnership in support of the retirement plans of its pre-dominant Baby Boomer generation.
MacroBusiness cover all elements of Australian property daily.
These guarantees exist to this day and reached their peak distortion to the political economy in 2016 when the ruling Liberal/National Party Coalition government fought and won an election in the singular defense of “negative gearing”, the principal tax policy most responsible for investor’s favouring property over other asset classes.
Contemporary Australia does not just have a property bubble, it has morphed into Propertocracy in which the primacy of house prices determines who leads the country, what policies are chosen and which generations prosper.
One of the best stockbrokers I have ever known once said to me, in characteristically gruff fashion” “Mate, the market is always right. Even when it is wrong, it is always bloody right.” He was a great broker because he understood crowd psychology and the limited utility of numerical analysis. A great lesson in humility.
Houses and Holes noted today that the RBA looks as if it is trying to talk tough on interest rates. I assume that was before 11:30am when the ABS figures for housing finance appeared. JANUARY KEY POINTS VALUE OF DWELLING COMMITMENTS January 2011 compared with December 2010: The trend estimate for the total value of dwelling finance
The AFG monthly mortgage report is something I follow. AFG claim to represent between 10% to 20% of the mortgage market and release their raw data every month in a fairly consistent manner. They are a brokerage service so they are able to get their data out earlier than most. As they are not an actual
The Economist has published an excellent article entitled Bricks and Slaughter (h/t Financial Insights for the link). It is part of a series by the Economist exploring the lessons to be learned from the global housing bubble. Below are some key extracts; although I recommend that you read the article in full for yourself. A
As I have been commenting on recently the “edges” of the real estate market are showing sure signs of capitulation. I was going to begin my week with a bit of an inspection of first home buyer areas because I had heard some anecdotal evidence that housing stress is becoming very apparent. However I need not have concerned myself with
Australia’s state and local governments rely on a variety of regulatory devices to limit suburban growth. One measure that has been implemented in all of Australia’s major cities and some towns (many within the past decade) is the Urban Growth Boundary or UGB. A UGB is a form of large-scale zoning whereby the government effectively draws a ring around a
Sam Birmingham runs a top quality networking site for young professionals called WeBe, which provides up-to-date information on financial matters, work-related issues, lifestyle news and reviews, and current affairs and opinion pieces. WeBe also provides a platform where members can have their voices heard, express opinions and share ideas with other like-minded Young Professionals. With the last week’s Mortgage Choice data indicating
Regular readers of this blog will know that I am critical of Australia’s urban planning structure and land-use regulations. Through growth control policies such as exclusionary zoning and urban growth boundaries, Australia’s governments have effectively told the market where development can and cannot occur. In turn, they have restricted the level of contestability and competition in the land market and helped raise
Some readers might have seen it already, but the Economist has just released an article questioning the sustainability of Australia’s house price boom. Here are some key extracts (article available here): This week in The Economist we will publish our quarterly index of house prices around the world. Australia’s homes are the most overvalued in the index. The ratio of prices to
When the real estate market was in full swing they were best of friends. A new client would approach the bank for a loan, the bank would ring the valuers. They would barely leave the office to come up with a number, they didn’t need to see the place, it was only going to go up in value anyway.
In the wake of the 2011 Demographia International Housing Affordability Survey, which identified Australia as having the most unaffordable housing in the Anglosphere, it appears that pressure is building on the Australian Government to take corrective action. Over the past two weeks, concerns have been raised by three disparate groups: the Sacred Heart Mission, the Real Estate Institute of
The 7th Annual Demographia International Housing Affordability Survey has just been released and, once again, it has delivered a stern condemnation of housing policy in Australia. This year, the Demographia survey has been expanded to 325 markets in seven countries: Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom, and the United States. The
Sam Birmingham runs a top quality networking site for young professionals called WeBe, which provides up-to-date information on financial matters, work-related issues, lifestyle news and reviews, and current affairs and opinion pieces. WeBe also provides a platform where members can have their voices heard, express opinions and share ideas with other like-minded Young Professionals. Yesterday, Sam published the first in
In this week’s post, I’ve undertaken a detailed analysis of one of the key macro factors I believe will exert significant downward pressure on Australian asset values, in particular housing, over the next decade: the retirement of the Baby Boomer generation. But before I launch in, here’s an overview on what I have said previously about this issue on
Whilst I was on vacation escaping the bitter Melbourne cold, Morgan Stanley Chief Strategist, Gerard Minack, released an excellent research article on the Australian housing market, entitled Living in a Bubble. Mr Minack’s article received widespread coverage in the press (for example, see here and here), so it is likely that many Australian readers are aware of his analysis already. And fellow
Since launching The Unconventional Economist in May, I have written eight housing-related articles focusing on the key drivers and consequences of the Australian residential property bubble. Before moving on to other topics, I thought it would be useful to provide a re-cap of the key themes raised in my earlier posts and offer some practical policy solutions aimed at: making
