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?)
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.
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?
for The Daily Reckoning Australia