Are Aussie House Prices in a Bubble?

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Today is all about housing. We’re going to take a big step back from global issues and focus on the biggest local of issue of all: whether Aussie house prices are in a bubble or not. So sit back, buckle up, and get ready the case against property.

First off, house prices are still rising in Australia, but for the second month in a row sales are falling. Here in Melbourne, the average house price is now $510,000 according to the RP Data Index. Melbourne prices are up 15% since January. Granted, that’s not quite as good as the stock market this year. The All Ords is up nearly 30% year to date. But it’s not bad for houses is it?

Nationally, Aussie house prices are up 10% for the year. That’s a good year, even by bubble standards. The only somewhat alarming news yesterday is that thanks to the retreat of first home buyers and the chance of higher interest rates, sales have fallen for the second month in a row.

We’ll get back to the insane level of Aussie house prices in a moment. But about those interest rates. The Reserve Bank, as you know, meets today to decide whether to hike Aussie rates again. If the bank did hike the overnight cash rate to 3.75% it would do so in the face of pretty weak growth everywhere else.

Would it be bold? Would it be prudent? Or does it even matter?

Our guess is that central bankers here are pretty much making it up as they go along and hoping for the best. They will announce their decision with wise central banker words that sound a lot like this: “Blah blah blah blah. Blah blah blah! Blah blah….inflation expectations are muted. Blah. Thank you. Blah blah.”

And while we’re on the subject of doublespeak designed to obfuscate the truth, check out the graph below. Unless we’re statistically illiterate, it appears to suggest that the number of households compared to dwellings has actually grown in Australia in the last twenty years.

Gasp! Wouldn’t this mean there is a housing surplus and NOT a housing shortage (as is repeated ad nauseam by real estate industry spruikers?)

Ratio of Dwellings to Households

RBA Deputy Governor Ric Battelino explains in the report linked to above. “A significant proportion of dwelling investment,” Battelino writes, “appears to have gone into holiday homes or second homes. Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin.”

Emphasis added here is ours. “As a result, the ratio of the number of dwellings to the number of households has been rising over time; as at 2006, there were 8 per cent more dwellings in Australia than there were households. Presumably, most of this surplus reflects holiday houses and second houses.”

Well how about that?!

Obviously the definition of two terms here is key, dwellings and households. If a dwelling is a caravan or shed out back where you nip away for a drink on the holidays to escape the in-laws, then the data don’t suggest there are too many unoccupied houses in Australia. After all, we know some people who spend 30% of their waking hours sitting on a bar stool. But you wouldn’t call that a dwelling, would you?

The ABS defines a dwelling in the following way, “In general terms, a dwelling is a structure which is intended to have people live in it, and which is habitable on Census Night. Some examples of dwellings are houses, motels, flats, caravans, prisons, tents, humpies and houseboats.”

Okay then. Having learned that a hupmie is a kind of lean-to in the bush, this definition appears to suggest that not every dwelling is a brand new suburban McMansion. Some places you can live in, others you can pass out in (the Gatwick Hotel on Fitzroy Street…or the drunk tank at the local lock-up, for example). It would be fair to say that not all dwellings are houses.

But we must still define the term “household.” Is that a family unit? Or is it an idea of suburban nuclear family wellness?

Luckily, the Australian Bureau of Statistics is good enough to define this for us. It writes that an Australian household is, “One or more persons, at least one of whom is at least 15 years of age, usually resident in the same private dwelling.”

Now that we know what dwellings and households are, it’s fair to ask if there is a housing shortage in Australia. So we’ll ask: is there a housing shortage in Australia? Our answer is pretty simple: no.

There are plenty of places for people to live in Australia. But many of them are apparently not for sale, or in places people would prefer to live (and you know these days it’s all about what you deserve, not what is realistic). According to Battelino, much of the dwelling investment is on second homes or improvements to existing homes. It doesn’t go to produce new homes.

Blah blah blah.

The persistent claim that underlying demand for housing suggests a housing shortage continues to be pure garbage. People buy houses when they have access to credit and can support the mortgage payments with rising incomes. Interest rates are coming off multi-generational lows in Australia. They are headed up globally. As the price of money rises, wouldn’t you expect demand for it to fall, and “underlying” demand for housing finance to fall too?

And what about household incomes? If household income includes the rather generous definition given by the ABS, then you could argue that Australian house prices might not be as high, relative to household incomes, as the more often quoted house-price-to-median-wage ratio. And after all, most households have two wage earners these days, which might lower the ratio even more.

Since our financial newsletter business does not depend on advertising dollars from the real estate industry or banks for survival, we feel compelled (and empowered!) to point out a simple fact: Aussie house prices are built on a bubble of borrowed money. Prices will fall when the money runs out and the national delirium over rising property values recedes.

The facts show that the level of debt in Australia has been steadily rising faster than incomes for ten years. Most of this borrowed money went to buy houses because houses were going up in price. Hurry! Get on the ladder now! You don’t want to miss out! You idiot!

But this whole household financial model – using debt to bid up asset values – is no different in principle than businesses or investors gearing up to speculate on stock prices. Once the easy money – the money borrowed by Aussie banks globally to fuel local house prices through new lending – goes away, so do the house price gains. Underlying demand vanishes as credit gets more expensive and home prices decouple from reality (and incomes).

In case you hadn’t noticed, the easy money IS going away. That is, the global boom in assets from loose central bank lending practices is blowing up. Right now, it’s succeeded in inflating new bubbles. But when it blows up the second time around, it’s going to take a lot of assets and markets with it. China…some commodity prices…and Australian house prices.

According to the ABS (emphasis added is ours), “Between September 1990 and September 2008, the ratio of total household debt to assets held by households rose from 9% to 19%. In other words, debt grew twice as fast as the total value of assets held by households. The sharp increase in the debt to asset ratio from December 2007 to September 2008 was due to a decline in the value of household assets.”

But because prices have been rising faster than incomes, the increased debt ratio is actually delivering Aussies less ownership of their new homes. “Among the different types of debt, housing debt as a proportion of housing assets rose from 11% to 29%, which means overall, households have come to own a relatively smaller proportion of their houses.”

This is why households in Australia will eventually join the global trend and deleverage. They’ll reduce debts to match slower income growth. And if you’re going to argue that a mining investment boom leads to GDP growth in Australia that’s counter to the global trend, you still have to prove that GDP growth translates into higher income growth. In the meantime, have a look at the chart below.

Household Debt to Household Assets Ratio, Australia

Household Debt to Household Assets Ratio, Australia

Source: Australian Bureau of Statistics

The ABS reports that, “Over the past decade, household debt grew much faster than income. The ratio of household debt to annual disposable household income peaked at 160% in December 2007 and March 2008. The ratio decreased over the last three quarters, reaching 153% in December 2008. Housing debt as a proportion of disposable income followed a similar pattern, and made up 87% of all debt in December 2008.”

A bubble by any other name would still look like a bubble. You can talk about Australian preferences for large houses. Or their willingness to take on higher debt levels and reduce saving because of rising stock prices. Or the “underlying” demand for houses.

But all those are variables in the supply and demand dynamic. And the thing about variables is that they vary. When the cost of credit changes, financial behaviour changes too. Part of the process is rational and part is psychological. Deleveraging is as much about fear as it is about prudence.

The end result, however, is that all over the world asset prices supported by debt are falling. Why would Australian housing be any different?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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103 Comments on "Are Aussie House Prices in a Bubble?"

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Joe
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Yes. Yes. And very much Yes. Always told from a young age that (like any market based purely on supply and demand) that when the average man on the average wage cannot afford the average house, then a correction is due. That principle has changed in recent times to reflect the average family. Since the average family cannot afford the average house, a correction is highly likely. The latest trend bucking price inflation is just making it an absolute certainty. On another point. I am glad I managed to finally (with some delays in the setup) got my mortgage locked… Read more »
GB
Guest

i’m curious about the RBA rate rises. The RBA have focused on CPI and adjusted rates based on it but recent comments by Glenn Stevens about how prices are too high and shelter should be possible for all citizens might mean a change of tack. The RBA may now focus on asset price inflation instead of CPI. So if assets rise then rates rise…

Joe
Guest
GB, Same as in the UK with the BOE. The RBA would need a request from Treasury to change its’ remit. That would probably be published, but, you never know, may not. I do agree. Between 2000-2003 in the UK house prices doubled. 100% spread compound over 3 years works out at about 28%. So the biggest asset class in the country was running at 28% and it had no impact on CPI and therefore rate setting. The BOE was denied the very tool it needed to prevent the bubble. It seemed the government liked the bubble (until it popped… Read more »
Sid
Guest

Great read Dan,

I appreciate all your points. I will look to follow your future articles on this topic as the day of reckoning is fast approaching.

If it is ok, I would like to share some of my articles on this topic with your readers located at:

http://www.scribd.com/sidfalcon

Cheers
Sid

Ross
Guest
Young people that hope to eventually buy decent and affordable housing should participate in, and promote among their friends, the practice of boarding and communal living in larger households. Getting urban consolidation among McMansions and having singles avoid the renting of two bedroom apartments and terraces is about the only direct action available to them that will burst the bubble and provide an economic reward. Fighting back like this challenges the oldies political hegemony that is gouging them. The empty nest houses are already there as reflected above and the service economy’s impending struggles will provide the impetus, older single… Read more »
GB
Guest

Joe,
Below is the CPI from the RBA website – why are they raising rates when CPI is falling? I guess its headline inflation not core that falling but still, the only thing going up at the moment is house prices and food

Sep 5.0
Dec 3.7
Mar 2.5
Jun 1.5
Sep 1.3

Norfolk Enchants
Guest

Like it.
For anyone interested, this paper by someone called Dirk gives a good rundown of how mainstream, neoclassical economic models used by governments allowed these debt-fueled asset bubbles to be created, and subsequently failed to see the looming crisis:
http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

Paul
Guest
I like to look at the housing boom from the little person’s perspective – the little person that thinks they’ll get rich because (gigantic) home loans include the guarantee of automatic, and constant, increases in asset prices. I think that people (the mob) are drunk – and totally consumed – with the illusion that they’ll make lots of money because housing prices ‘always rise’. Someone on the weekend told me, ‘Housing prices don’t fall. If you buy now you’ll begin making money on your investment immediately’. This person, as you can imagine, was a mouth-breathing Neanderthal. He told me –… Read more »
Mark
Guest

There is one question that the spruikers cannot answer:

How come when we are faced with a supposed massive supply shortfall, with near record low interest rates, with yields on property investments going up at the same time we are told about record low vacancy rates and with strong property price increases, the sale of new houses is declining?

Keep plugging away Dan.

dan
Guest

OK…all agreed….Aussie property market is overvalued.
due to a geographical advantage to the china bull, not completely brainless lending (US Style) and serious Govt. intervention has managed to keep the bubble inflated – and inflating.
So anyone with John Paulson sized balls who wants to bet against this?
How do you do it? Short Banks? Homebuilders? Developers? are there RMBS to short in Aust?
Cheers

IK
Guest

Very interesting that he is now focusing on Real-Estate. Since he mentioned in his talk in Perth that they didn’t focus their interest rates on the housing market since there was no accurate way to measure the growth……
So does this mean that he is speculating on real-estate being overinflated now?

yo
Guest

You are absolutely right that house prices are too high. But I cannot see the trigger that will cause the turnaround – there are no signs of signifant job losses – the banks have tightened a little, but it’s still pretty easy to take on a ridiculous mortgage – the fear factor is rampant, get in or miss out – so what can possibly cause a turnaround??

Simon
Guest

“but for the second month in a row sales are falling”..

Just interest to know where this data was found. I have been trying to find information about sales volumes in queensland, but haven’t have much success.

jimbo james
Guest
Paul, That is one of the most accurate and observant posts I’ve seen anywhere. You mentioned Enzo Raimondo and the article with table showing rental vacancy rates within varying ranges of the Melbourne CBD. The upshot was a rate of about 1.2% (no change from 12 months prior). Not 6 weeks ago however he had the same table printed showing a vacancy rate 12 months ago of roughly 1.2%, but his 2009 data showed an increase to 2.4%! This was accompanied by the same article telling people why there was never a better time to invest. Since the rhetoric clearly… Read more »
prozak
Guest

Dan,

few ways to do it.

you could also

short AUD.
short aussie gov bonds.

Dan
Guest

Short your investment property and get something that’s more likely to keep rising.

Tom Sugar
Guest
This web site has been calling for a crash in house prices for a long time now. We are still waiting…… What this web site doesn’t seem to realise is the government has allowed foreigners easy access to our property market. They have been keeping the prices inflated. Most people limit themselves to investing in either shares or property (should I say sheep?). If there was a big drop in Aussie house prices, its safe to say the Aussie sharemarket would take a huge beating of at least the same size. So to the average sheep you may as well… Read more »
Justin
Guest

Does nobody here read, I posted this just yesterday;

The Australian government gave a formal green light on Monday to a proposal to invest up to $8 billion in additional public funds to support the country’s residential mortgage-backed bond market.

The government IS the market. If you short RMBS you could lose more than your shirt.

Greg Atkinson
Guest

Justin yes I saw your post and the story in the media but what’s new? The Government is spending $43 billion on a broadband network that will be dated by the time it is ready, building school halls where they are not needed and handing out dollars for pink batts. It’s raining money! :)

GB
Guest

Tom Sugar,
how can anyone pick a date when the government keeps sticking their finger in???

Lachlan Scanlan
Guest

You made me laugh Greg. I know of a property investor who just had bats put in all their houses. I know the tennants in one of the houses and the house itself very well. Its almost worth bulldozing (and in a small country town). You just gotta laugh…lifes too short. What the heck, my kids can work it off.

Don
Guest

Failing large spikes in interest rates – in my opinion the other factor which will precipitate a fall in housing prices is rising unemployment. For whatever reason Australia has been spared a significant rise in the jobless rate and as a result people can continue to service their mortgages. Also let’s face it – you are not going to take a huge devaluation on your property unless you are desperate ie out of work and out of money.

GB
Guest
Don that unemployment may come soon. The government keeps talking about this massive resource boom we are experiencing that will sustain Australia for years BUT stockpile levels of aluminium, copper, nickel, lead and zinc are at all time highs and growing rapidly. That confirms that nobody is buying resources at boom levels. In 2005 the stockpiles basically didn’t exist because we were actually in a boom Go to kitco.com and click base metals, down the left hand side select charts under warehouse stocks. You can see that China finished buying metals in the middle of this year and now copper… Read more »
Joe
Guest

The tipping point is the moment that the market borrowing interest rate beats the annual percentage increase in property prices + rental yields. Why own a property that goes up at 7%p.a. and gives 3%p.a in rent when it costs 11%p.a. to service it? At that point people sell up and pirces go down, those who didn’t are in a worse position, so they sell and the whole thing spirals down.

yo
Guest

Joe – I think Don is right – it will take unemployment. High interest rates won’t do it, because after a decade of double digit growth in property, it will take years of low or no growth for investors to believe it is anything other than a temporary blip. There is an unshakable faith in property as a sound investment even when the spreadsheet doesn’t add up.

Davo
Guest
Expecting a deadline on when property prices will crash is a bit much to expect from a free newsletter, aside from the fact nobody has the answer. Property is a market, like shares etc. You can’t profit if you don’t participate. Having the advantage of DR’s advice served to us every day makes us all a little bit wiser about things, and if we are participating in markets to make some bucks, chances are we’ll get a “heads up” before the mob, to exit our investment strategy. Question to Dan Denning and Shae at MM – Have you sold your… Read more »
Davo
Guest
How is anybody supposed to know what’s really happening with house prices, when the median house prices realised can vary so greatly from suburb to suburb and from month to month. Realestate.com.au has a new suburb page, providing month by month median house price sales by suburb in Australia. My suburb in Nov 2008 was $750,000, rose to $975,000 in Feb 2009, dropped to $575,250 in August 2009 and in October 2009 was $787,000. So in 1 year, we’ve had a 30% rise in 3 months, followed by a 40% crash in the next 6 months and then a 37%… Read more »
Richo
Guest

Yes unemployment forces peoples hands, and hurts rents as well as property demand plus boosts property supply.
When might we see a big rise in unemployment? Probably after US, Japan, Europe and China start to experience it.

Ned S
Guest
” … all over the world asset prices supported by debt are falling …” Are they? I could have sworn stocks all over the world and gold and Asian property prices (including those in Oz) were going up??? Course if DR said This is just a bit of irrationality in between US subprime and Alt-A resets with world governments being too fiscally prudent to keep the printing presses going to avoid deflation in future, then the argument might be based in a hope for some rationality (even though that hope would seem to be a bit forlorn?) But either way,… Read more »
Don
Guest
Although not a closed system, I would consider Cairns (where I live)to be a bit of a “canary in the coalmine” with regards to housing. It is a reasonably large city with the unemployment rate hovering at 14% and so the pressure of rising interest rates along with the decrease in the first home owners grant should make things interesting. Of course people from interstate tend to juice the market a bit but eventually that has to give way to reality (no pun intended). So far there has not been a collapse as such but the prices are certainly feeling… Read more »
Firebug
Guest
The house prices will have to fall, either nominally or through no growth in a high inflation or hyper inflation environment. Remember no assets in this world appreciates without correction. Longer the boom harder the pain when the eventual correction does come. I think the interest rate in Australia will spike up to double digit when the US $ finally tanks, perhaps in two or three years’ time. The global credit market will lend to our banks at very high rate or won’t lend to us at all. If the banks cannot secure credits then new loan will dry up.… Read more »
Ned S
Guest

Ditto for Russia as I’ve said before Don – House prices are holding. Despite being maybe 8 times the average wage and with most people not getting anything like the average wage and with banks not lending – But their inflation (that they confess to) is 9.4% pa (low by their standards) and the CBR has just dropped interest rates to 9% pa to support growth – Funny old world eh?

Ned S
Guest

One of the problems that DRA has (just maybe?) is that while DRUS only has to answer to a bunch of Yanks who sit at home on their bottoms sure in the knowledge that America always has been and always will be the centre of the universe, a fair number of Aussies own passports, have had a look overseas, and allow for the possibility that medium to long term it just might not be so.

Ned S
Guest
America is getting up my nose bigtime – Just like those banks what they reckon are too big to be let go, America seems to be too big to be let go? Unlike the likes of Iceland and Ireland and Spain and Greece and Dubai and even the UK – Or China and even Japan if it should come to it! Just don’t seem healthy does it? Maybe someone should bring in a rule that no one nation can use financial tricks to get anymore percent of global GDP than 2.5 times its share based on it’s bit of the… Read more »
Jim
Guest
Im no economist and dont invest in anything. I own a property (thanks to a mortgage). Id like to know where is the right place to invest my money (considering selling property via auction). I initially believed Prof Steve Keen regarding properties to fall. But our Govt has a policy (my guess) to keep the housing shortage as is – since its the great Australian dream to own a home. But Govt dont want u to be free from debt, so need to keep the balance as we are in today. Hope this makes sense – or im speaking nonsense… Read more »
Don
Guest
Jim, you have pretty well summed up what everyone would like to know so I will give you my 50 cents. Firstly I would like to point out that I am no gun investor at all, I have done ok for myself and have no complaints but of course could have done much better. I didn’t lose anything in the GFC however I also missed the boat with the rally but don’t feel too fussed about it. I like coming to DR as it offers a very interesting viewpoint and they are more than happy to admit that they could… Read more »
Bertie
Guest

Yes! Don’t invest in housing you nongs! Subscribe to Diggers and Drillers and invest in stocks! Jeeeez, it aint that hard. If all else fails get yer facts from the Warnumbool Standard Awlright!

John Mazzarollo
Guest

Oh the agony! So much expertise in one place. So many doomsayers, property crash gurus and Steve keen acolytes. What a load of tosh.
OK experts of the property bubble, show me the money. Show me a graph from a reputable source that shows an Aussie property crash in say…..lets be helpful, the last 50 years. I don’t mean a dip or correction, I mean crash.

Firebug
Guest

Hi John Mazzarollo,

I don’t know whether looking into historical data is necessarily going to give you a good idea on what will happen in the future.

One wouldn’t have predicted the recent strong property prices rise based on historical data as the average house price over wage ratio is at historical high.

I don’t know whether property prices will crash or not. But it should fall, either norminally or through no growth in a high inflation environment.

Watchful eye
Guest
My confusion comes from our stock market having a direct correlation with the US market. Why does a fall or rise in the US market have any real bearing on what goes on in our market place? Correct me if i am wrong but our markets should be fuelled by and monitored based on our scenario, to argue that we have a heavy reliance on the US is absurd as we haven’t even sneezed while they ended up in ICU with nuemonia. Shouldn’t our stock market be heavily tied in with Chins and there scenario given they are also playing… Read more »
Watchful eye
Guest

i realise the spelling is dreadful in my last post, i am having keayboard issues……………………

Ned S
Guest
The US is about 24% of world GDP, so if America is happy the world is happy. That’s my simple minded take on it anyway. It isn’t at all healthy of course. Because when the US stuffs up its finances the whole world gets damaged. And the US has a long track record of stuffing up its finances. But then it wouldn’t be healthy for China to be 23% of world GDP either. Or any country. Big is powerful. And they do say that absolute power corrupts absolutely. Nothing special about America in that regard – King Neb, Rome, the… Read more »
Dan
Guest
I am no expert either, but I can say that the thing about stock markets is they are really a cash exchange, and as such cash is fluid and money flows in and out of Australia in massive amounts overnight (not necessarily as direct fund transfers, but on the internal balance books of multinational companies, which adjust their exposure across global markets each day). This is reflected in the stock market. Things like debt, for example, can mean many things – “foreign investment” often really means a loan by a foreign owned company to itself (sometimes via what is essentially… Read more »
Callum
Guest
John Mazzarollo, Your onanistic comment suggests to me that you are a moron. Do you drive your car by looking in the rear-view mirror? Have a look at the lunacy in the Australian property market and tell me if it’s precedented. After you do that, look at US property price graphs – I’m sure you’ll argue that ‘Australia is different’. You appear to have a very simplistic view of the world. Let me enlighten you – we are not traveling backwards through time so history doesn’t necessarily inform us all that well. By the way, the people that contribute to… Read more »
Dan
Guest

Never thought I’d hear the term onanism used on an economics site.

Bargeass
Guest

All but the most intellectually challenged can see the Aussie property market is an overpriced bubble just waiting for a trigger to burst it.
The only difference is some acknowledge the truth while others are in denial for a variety of self interest reasons.
Either way the correction will occur.

Ned S
Guest
You’re one up on me Dan – I had to look it up! Oz House Prices (the basics): 1. They are high (VERY high even!) 2. Returns aren’t great – As low as 3.5% net before tax maybe? 3. Although a negatively geared investor does his sums differently I gather – Look into it by all means if you wish – I never warmed to it greatly – Which just might explain why I’m NOT rich??? 4. Investment in them is government backed – Please don’t argue! – Oz Houses crash = Oz Banks crash = Oz economy destroyed =… Read more »
Ned S
Guest

Hello Bargeass – Ya could be right. Or ya could be wrong. Time will tell. As for me, I’m just backing the boring old inflationist cant.

Choc
Guest

Nearly everyday, there is something in the media about house prices going up/steady/falling; vested interests, banks, brokers, builders, developers, r/e agents are all saying “now is the time to buy or invest”; govt is throwing billions of $$$’s into the building industry; mum & dad investors are talking investment properties, how much more their property is worth over the neighbourhood BBQ. Me thinks it can only mean the property bubble is about to burst. 2010 will be a very interesting year.

Tom Tanning
Guest

Look at South West Sydney for when house prices will fall. The fringe will suffer more than the core. Shops will close.

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