The authors of these blogs and websites who advocate the property bubble is about to burst see themselves as guerrilla cells working to detonate Australians' warped obsession with property, which they see as fuelled by low-rent property spruikers and a hopelessly conflicted media empire that makes money out of selling property advertising.
Somewhat undermining their argument, it is the media that periodically causes a spasm of alarm about potential property price falls by reporting the results of international surveys suggesting Australia is home to the most overvalued housing in the world.
The Economist magazine recently published yet another of its surveys estimating Australian houses are ''overvalued'' by 56 per cent – the highest in the world – on a historical ratio of rents to house prices. (The so-called Economist Intelligence Unit manages to routinely overlook the different tax treatment of investment housing in Australia, which encourages landlords to chase capital gains and treat rental returns as secondary.)
Less sophisticated bubblers simply compare the rise in house prices over the past few decades to the rise in wages to make the ''overvalued'' claim, pointing out that the former vastly outperforms the latter.
But this overlooks the historic boost to household borrowing capacity that occurred in the 1990s with the halving of nominal interest rates. This, in effect, doubled the amount households were able to borrow against a certain income. The relaxation of lending standards by banks in response to financial deregulation also increased the amount banks were willing to lend against that income. These two factors are largely responsible for the increase in household debt between the mid-1990s and 2000s.
Sophisticated bubblers acknowledge this, but are convinced that debt levels are unsustainable. Some shock will happen, they say, such as high unemployment that will lead to forced sales and falling prices. The bubble, by definition, must pop.
You see, house prices only fall when people are forced to sell their homes. Otherwise, households choose to simply remain in their home and wait things out. Property investors are loath to realise their capital loss.
A true collapse in house prices would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls.
With low joblessness in Australia and the big surge in national income created by the mining boom, it is hard to see the trigger for such an event.
That does not mean, however, that housing in Australia is not expensive compared to other countries. Economists such as HSBC's Paul Bloxham have pointed out that there may be good reasons for Australian houses being expensive. Compared to the rest of the world, we have high quality housing stock, with a high proportion of solidly constructed houses on big blocks. Most of the population is concentrated in a few capital cities with often marvellous water views. The dire state of public transport in big cities such as Sydney only increases the premium on properties located close to the CBD.
The Reserve Bank has also sought to dispel fears of a bursting property bubble by pointing out that the rise in debt levels has been concentrated in the hands of those who can most afford it. In a Bulletin article last week, RBA staff analysed data from the Melbourne Institute's household, income and labour dynamics in Australia survey to show how by the end of the noughties, 73 per cent of the value of home loans were in the hands of the top 40 per cent of households by income, up from 69 per cent at the turn of the century. The article also found that about half of households are ahead of schedule on their loan repayments, giving them something of a buffer should they lose their income temporarily.
Finally, those predicting big house price falls should also recall the recent experience during the global financial crisis when policy makers, confronted by an external shock capable of puncturing house prices, acted quickly to cushion the economy with interest rate rises and fiscal stimulus.
The Reserve Bank governor, Glenn Stevens, was asked recently whether the prospect of house prices falling kept him awake at night. ''I worry about a lot of things at night,'' the governor confided before admitting that falling house prices were not among them.
Because here is the surprising thing: house prices, in Sydney at least, have been falling relative to incomes for some years. The great house price deflation is already happening, just very slowly and in an exceedingly calm manner. That's the slowly deflating hiss of an over pumped air mattress you can hear, not a bubble bursting.
Yep! We don’t have a large reliance on our 2ndary industries as they have been sold off in the 70’s & 80’s so we are more reliant upon primary industries like mining & agriculture for our export revenues and our large services sector to keep our economy going. The carbon tax will help close whatever manufacturing we have got left as there is no industry reforms to require more efficient products or outcomes.
The US has been hit hard especially the car industry & heavy manufacturing 2 ventures we don’t really have anymore.So if our main economic driver is not reliant upon external factors, then jobs are not at as much risk as those economies relying upon exports & our own property sector will continue to remain reasonably stable.
Well said Scott!
WOW! Great read ALF1
Scott,
I am not sure I understand your point. You are saying that 'we are more reliant upon primary industries like mining & agriculture for our export revenues' and yet 'our main economic driver is not reliant upon external factors'.
In a downturn commodity price fall fast and sharp, I would think that an economy that rely on mining and agriculture exports is particularly exposed to external factor, in the case of Australia particularly to a slow down of China, Japan and India.
We export primary products more so than secondary. Certain countries like the USA may have a downturn in the Car Industry (Secondary) but there will always be other countries that will still manufacture cars and need our steel and iron (Primary).
But what about the downturn in China (where a lot of our primary industry exports go), and our European debt exposure? Wont that have an effect on jobs and interest rates?
Okapied wrote:But what about the downturn in China (where a lot of our primary industry exports go), and our European debt exposure? Wont that have an effect on jobs and interest rates?I don’t think China is in a ‘downturn’ as such. Yes the economy shows signs of slowing slightly but is still growing at a healthy rate. The recent 5 year plan, and I’m happy to be corrected, suggests China is shifting from production to increased consumption. This is due to the inevitable movement away from socialism to capitalism and the emergence of a middle class.
Yes, Australia’s economy is becoming more and more reliant on commodities and so when there is a small correction in the market or downwards pressure on GDP economists get spooked. Moving forward, India has a significant shift on the near horizon that will see our economy benefit. There is discussion recently we are not being proactive enough to secure a trade partnership with India unlike the United States and Canada who have been on the front foot. The ‘she’ll be right’ attitude won’t cut it in this environment.
I think unemployment will drop and interest rates will rise. It’s inevitable as the benefits of this coming investment in infrastructure comes into fruition. Always happy to be corrected.
Jack
Even if China slows down, we have India coming right up behind them on a slower, steadier and some would argue, far bigger climb with a bigger impact on our economy.
emptyvessel wrote:Even if China slows down, we have India coming right up behind them on a slower, steadier and some would argue, far bigger climb with a bigger impact on our economy.Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions
http://globaleconomicanalysis.blogspot.com/2011/08/michael-pettis-long-term-outlook-for.htmlIf some of you ppl (pro property) actually take the time to research the interconnectedness of all the markets you might sing a different tune.
There’s this illusion that somehow China and India will somehow save AU’s bacon needs some serious rethinking. The reality couldn’t be more different.
Jack
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