Bubble denier in Comical Ali mode
By Gavin R. Putland
Thus spake Shane Oliver, Chief Economist at AMP Capital, in the opening “key point” of his newsletter of November 25:
Australian housing is not in a bubble but it is very overvalued, and combined with high debt levels leaves Australian households vulnerable should anything significantly threaten house prices.
Which is a bit like saying that you don't have a drinking problem but go to bed half pickled every night, and wake up every morning with a hangover that leaves you vulnerable should anything force you to face reality.
Dr Oliver prefers the view that prices “can be justified by a severe undersupply.” One would think that such an undersupply would affect prices and rents alike. But as Oliver himself notes, “the ratio of house prices to rents is 58% above its long term average,” this figure being “at the top end of OECD countries.”
“But other signs for the presence of a bubble are absent,” he insists. For example, “There is no sense anymore that buyers are rushing in for fear of missing out. Weekend auction clearance rates have slumped.” That's because the burst is in progress, Doc.
“Non-performing housing loans are less than 1% of the total...” So what? You don't need defaults to cause a crash (although they help). You only need prospective buyers to stop believing the claim on which present prices depend, namely that prices will keep rising. When prices slump, defaults follow either directly (due to negative equity) or indirectly (via a credit crunch and the ensuing job losses).
“And finally,” says Oliver, “Australia does suffer from a shortage of housing. In contrast to the US which saw a huge supply surge during its period of strong price gains into 2006...” Never mind that American spruikers, into 2006, were pontificating about a shortage of housing, as their Australian counterparts are now.
“The undersupply is reflected in continuing low vacancy rates...” Never mind that official vacancy rates don't include empty dwellings that aren't offered for rent but are held for capital gains. These are likely to become officially vacant when hopes of capital gains are dashed.
As signs to watch for, Oliver lists “a surge in supply, much higher levels of interest rates and anything that sharply pushed up unemployment.”
On unemployment, Oliver should have noticed by now that in the USA and most other countries affected by the GFC, the rise in unemployment came after, not before, the housing crash. On interest rates, note that the RBA usually stomps on housing bubbles after they've already popped. On supply, there is little reason to expect a surge in construction; but look at the surge in auction listings.*
The last aspect surprised me almost as much as it surprised the spruikers. In a normal bubble-burst, buyers go on strike first, and sellers only belatedly lower their price expectations, so that sales fall first and prices later. What seems to be happening this time is that some owners, mindful of what happened in so many other countries, are pre-emptively selling out for whatever they can get. But in so doing, they have arrested the price rise and dampened expectations of further rises. This must eventually produce a response from buyers, whereupon the usual crash sequence will resume.
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* I post these words without the benefit of reading the auction clearance rates for Dec.4, but knowing that the CEO of the Real Estate Institute of Victoria wrote on Nov.21: “This is the first weekend of the busiest four week period ever in the Melbourne residential auction market.”
