Room for debate: Is there an Australian housing bubble?
We are returning to moderate housing price growth, but no bubble: Terry Ryder
Talk is cheap because supply exceeds demand.
The cheapest talk comes from economists speaking about real estate, because supply (endless) is hugely in excess of demand (zero). There’s also a low price on the articles of most journalists about property because the demand is for a David Jones product but most of the supply is coming from Gone Bonkers.
So, after two years of price decline or stagnation in our major cities, at the first sign of price recovery they’re out there talking up a bubble.
Yes siree, if you crave a bit of media limelight the shortest route is to contact a lazy journalist and give them a sound byte with the word “bubble” in it.
Data from the various research sources indicates we’ve had three or four months in which the average result across the state and territory capital cities has been a rise in median prices.
I’m not sure how reliable the data is, because organisations like RP Data are so desperate to be first with the news that they’ve been calling the monthly price movement on the last day of the month, something that’s difficult to do credibly. Indeed, this week RP Data declared the October price movement 10 days before the end of the month. Is the need for publicity really that desperate?
Nevertheless, the trend evident in the figures from various research sources is one of big-city prices now starting to trend north, slowly.
Further to that, a number of forecasters are predicting rising prices in the near future. BIS Shrapnel is tipping growth in all eight state and territory capitals in the next three years, with the strongest to be in
National Australia Bank published its survey of Australian property professionals, most of whom are expecting moderate growth in the next 12 months.
So we appear to have a return to price growth, though small, with the prospect of more moderate rises.
But there’s no middle ground with media. It’s either boom or bust. Now it seems even the smallest rise in house prices instantly has the label “bubble” slapped on it. Alternatively, a cut in interest rates gives rise to fears of a bubble.
David Uren, who writes about economics for The Australian, recently tried to link fears of a house price boom in
Bubble talk has been around for the past five years. It started when a metropolitan newspaper journalist misquoted RBA governor Glenn Stevens and the mistake was repeated as fact by media outlets around the country. Economists and journalists have been promoting bubble talk ever since, although Stevens never said the words reported. It wasn’t merely a beat-up – it was a lie.
I’m still waiting for someone who subscribes to the bubble theory to actually define it. So far, nobody has. The term implies that something has been over-inflated and will burst.
Despite all those dire predictions about a collapse in our home prices since 2007, mostly from publicity-seekers based overseas, the forecast implosion hasn’t happened.
So why are we talking about a bubble now, when capital city prices have barely budged after two years of mediocrity? Because we’re beset with writers and commentators who are shallow, lazy and like the sound of their own voices.
Terry Ryder is the founder of hotspotting.com.au and is a regular Property Observer columnist. He can be followed on Twitter.
Australian residential property market currently experiencing a bubble: Philip Soos
Recently, Australian property analyst Terry Ryder, in an article on Property Observer, voiced complaints about housing bubble advocates. His issue is “waiting for someone who subscribes to the bubble theory to actually define it. So far, nobody has. The term implies that something has been over-inflated and will burst.” Of course, Steve Keen has already done so in his voluminous and critical work reaching back for over a decade.
If Ryder has difficulty in finding someone who has constructed an accurate definition of an asset bubble, the work of the late US post-Keynesian economist Hyman Minsky is recommended reading. Minsky developed a theory called the ‘financial instability hypothesis’, theorising that financial markets are not very efficient and continually misallocate substantial amounts of credit into asset markets, creating pyramid schemes or bubbles (Minsky called them Ponzi schemes, named after the fraudster Charles Ponzi).[1]
He defined three types of finance: hedge, speculative and Ponzi. Hedge finance: income flows from an asset are sufficient to pay down both principal and interest on the debt used to finance the asset purchase, and asset prices are based upon fundamental or intrinsic value. Speculative finance: income flows cover only interest repayments, not loan principal, requiring debt to be continually rolled over from the current time period to the next. Businesses or individuals may experience financial stress, but it is not widespread and fundamentals valuations are kept largely in check. Ponzi finance: income flows cover neither principal nor interest repayments. This leaves asset owners completely reliant upon escalating capital values in order to realize substantial capital gains at sale to meet the cost of principal and interest. Prices are completely delinked from fundamental valuations at this stage, resulting in an asset bubble.
Simply put, if gross rental income pays down neither interest nor principal repayments of mortgage debt on aggregate (including other property-related costs) and is sustained over a number of years, a housing bubble exists by this definition. Even better, there is plenty of evidence to show that the residential property market is currently experiencing said bubble. The following figure shows a long-term housing price index for Australia, adjusted for inflation and quality.
Figure 1: Australian Median Capital Cities Housing Price Index 1880-2011, 1880=100[2]Click to enlarge
The 1996-2010 period is easily the largest boom on record. This meteoric surge in housing prices, however, is not proof in itself of a bubble; more evidence is needed. Data from the Australian Tax Office shows that, on aggregate, residential property investors have been running substantial net income losses since 2000-01. The same would hold true concerning owner-occupiers and imputed rental incomes.
Figure 2: Residential Property Investor Net Rental Income 1993-94 – 2009-10[3]
The reason for these sustained net income losses is the combination of general running costs with interest and principal repayments, as shown in the next figure.
Figure 3: Deductions and Repayments as % of Gross Rental Income 1993-94 – 2009-10[4]
In 2009-10, the negatively geared cohort, who comprise 63% of the residential property investor market, are precariously positioned under a staggering amount of mortgage debt. The following figure shows a breakdown by income tax bracket.
Figure 4: Deductions and Repayments as % of Gross Rental Income 2009-10[5]
The reason why costs outweigh gross income is because Australians have burdened themselves with the largest household debt increase in history to engage in an orgy of residential property speculation.
Figure 5: Household Debt as % of Nominal GDP 1861-2011[6]
In conclusion, Minsky’s financial instability hypothesis helps to integrate the occurrences of why housing prices and the proportion of household debt to the economy (GDP) have boomed while net income losses are sustained. That Australia’s residential property market has resembled Ponzi finance for the last 10 years is nothing short of astonishing (longer if counting 2010-11 and 2011-12 as there is a substantial lag in making tax data available). The market would have collapsed during the global financial crisis in 2008 were it not for a fresh first-home owner’s boost (FHOB) re-inflating housing prices to a new, higher peak.
Although Ryder claims that bubble advocates are “publicity-seekers” and “shallow, lazy and like the sound of their own voices”, outbursts of ludicrous pettifoggery should not deter the presentation of sound evidence.
References
[1]. Minsky, Hyman P. (1992). “The Financial Instability Hypothesis,” Working Paper No. 74, Levy Economics Institute of Bard College, New York.; Minsky, Hyman P. (2008). Stabilizing An Unstable Economy, 2nd Edition. United States: McGraw-Hill.
[2]. Stapledon, Nigel D. (2007). “Long Term Housing Prices in Australia and Some Economic Perspectives,” PhD Thesis, University of New South Wales.
[3]. ATO Taxation Statistics 2001-02 through to 2009-10.
[4]. ATO Taxation Statistics 2001-02 through to 2009-10.
[5]. ATO (2012; personal communication).
[6]. RBA (2012; personal communication).Philip Soos is a researcher at the School of International and Political Studies at Deakin University.
