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Thursday, March 17, 2011:

Australia's housing bubble: The warnings

Gavin R. Putland compiles a short list.

2003, May 29:

This survey will conclude that the latest housing boom has inflated bubbles in several countries, notably America, Australia, Britain, Ireland, the Netherlands and Spain. Within the next year or so those bubbles are likely to burst, leading to falls in average real house prices of 15–20% in America and 30% or more elsewhere over the next few years, in line with average price declines during past housing-market busts. This time, however, with inflation so low, house prices will fall more sharply in money terms than they did in the past.

— Pam Woodall, “House of cards”, The Economist.

2003, September 7:

The spring season of home auctions has started early and fast, but buyers are still paying above reserves... The implication is that sellers are bailing out while they're ahead, but buyers haven't yet got the message... that homes are overvalued because rental yields are less than interest rates while debt-servicing costs as a fraction of income are approaching an all-time record.

— Gavin R. Putland,
“Coping when housing bubble bursts” (editor's title),
Sunday Telegraph (letters).

2003, September 8:

Reform of bankruptcy laws must be in place in time for the coming residential property crash, which will leave investors with negative equity and insufficient cash flow to service their loans.

— Gavin R. Putland, quoted in the Daily Telegraph, p.18.

2003, September 16:

The short- to medium-term challenges then are in these areas: the drought, the housing bubble — I use that word advisedly and not for quotation outside of this room...

— Ken Henry (Treasury Secretary),
Address to a Canberra business seminar.

2003, September 20:

Treasury boss Ken Henry has let the ‘B’ word slip: the housing market is in a bubble — meaning that investors have forgotten rental yields and are relying on the circular argument that prices will keep rising. A bubble cannot correct itself in an orderly manner, because if prices stabilise, the justification for those prices is removed... Real estate turnover now exceeds 25 per cent of GDP. In the past, any value over 19 per cent has portended a crash and recession.

— Gavin R. Putland (citing stats by Bryan Kavanagh),
Weekend Australian (letters).

2008, April:

The first figure shows the percent increase in house prices during the period 1997 to 2007 that is not accounted for by the fundamental drivers of house prices. The countries that experienced the largest unexplained increases in house prices were Ireland, the Netherlands, and the United Kingdom — by the end of the decade, house prices in these countries were about 30 percent higher than justified by fundamentals. A group of other countries, including France, Australia, and Spain, have house price gaps of about 20 percent.

— IMF, World Economic Outlook, Box 3.1.

2008, November 26:

RORY ROBERTSON: I think some people here probably came today to hear about why house prices are going to fall 40 percent, so that's what you're most famous for at this stage. So what I was going to do, in the spirit of competition or whatever (Steve's a betting man; he sold his house), so what I would say is if — I think it was 40 percent on average across Australia, is that what it was?

STEVE KEEN: Yeah, but over a ten- to fifteen-year period mate, so...

ROBERTSON: So, all right, it's a long term thing.

KEEN: But over the long term I'm willing to stick to it.


ROBERTSON: I'm still only going to give Steve five years to get his 40 percent.

— “Vital Issues Seminar”, Canberra
(Keen walked less than 18 months later).

2010, June 15:

The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or... 7.5. Australia is having one now. You are at near 7.5 times family income... which suggests you are twice the size that you should be.

Jeremy Grantham (GMO).

2010, July 8:

House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009. More concerning, however, is our analysis of “fair value” in housing, which is based on comparing the current ratio of house prices to rents with its long-term average. By this measure Australian property is the most overvalued of any of the 20 countries we track.

— “Froth and stagnation”, The Economist.

2010, August 17:

Australian residential housing is very expensive on standard valuation measures. House prices appear around 50% above fair value in terms of house prices to GDP per capita. In terms of value of the housing stock relative to household disposable income, the housing stock appears around 35% above fair value (a trend line based on data until 2000). With respect to house prices to gross rental yield, prices appear to be around 40% above fair value. House prices started to move above fair value around 2000 on all three value metrics.

... The best-fit lines suggest that Australian house prices are around 40% more expensive than the average for the UK, Canada, New Zealand and Ireland, adjusting for city-size. If the US is included, the overvaluation is around 85%.

... Tax Office data confirm that residential investment is a poor investment: total rent has not covered total costs since FY2000 (again, the date the bubble started to inflate). In short, this is an investment that depends on capital gain for its payback. With net income not even covering interest charges, this is a classic Hyman Minsky Ponzi scheme. Ponzi owns the house, and he's betting that house prices keep rising.

... Buying a bubble is an extremely bad investment. I expect that the real returns on residential investment will be negative over the next decade.

— Gerard Minack (Morgan Stanley),
Living in a Bubble”.

2010, October 1:

During the interest-rate trough of 1992 to 1994, when official interest rates (both real and nominal) were in a range that would now be regarded as normal, the scaled home-price index was almost stable. This “almost stable” value of the index may therefore be taken as an estimate of the “normal” value. The index is now about 47% above the “almost stable” level; that is, it will fall about 32% if it returns to that level.

So, using round figures on the conservative side, we estimate that Australian housing is about 45% overvalued, in which case the scaled home-price index must fall about 30% to return to normal. This assessment, if correct, does not mean that prices must fall 30% in nominal terms or even real terms; it means they must fall 30% relative to per-capita GDP.

— Gavin R. Putland (Land Values Research Group),
40 years of housing bubbles and recessions”.

2010, October 6:

If rental yields are very low, investors are buying properties without really thinking about the rental yield... Buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble.

— Luci Ellis (Head of Financial Stability, RBA),
Answer at CPA Australia conference, Brisbane.

2010, November 11:

One possible explanation for the seemingly anomalous peaking of prices is that after so many bubble-bursts in so many countries, property owners have decided to get out while the getting is good... But whatever the explanation, prospective buyers who observe the peaking or “flat-lining” of prices will conclude that this is not the time to buy. I would expect that realization to show up as a renewed slump in lending, for both owner-occupation and investment, in the near future. Then I would expect the usual sequence — a slump in sales followed by a slump in prices — to reassert itself with a vengeance.

— Gavin R. Putland (Land Values Research Group),
Price indices say housing has peaked”.

Can governments prevent or arrest a fall in prices and stabilize the future growth of prices? Yes — by cutting taxes on current income or expenditure (to increase borrowers' immediate capacity to service loans), and replacing the revenue by taxing capital gains with no grandfathering (to reduce selling pressure without affecting borrowers' immediate capacity to service loans, reduce speculative tendencies by making capital gains less attractive relative to current income, and fund investment in infrastructure that contributes to the said capital gains). For example, the Commonwealth could abolish the GST or eliminate income tax for low-income earners, and tax all capital gains at the top marginal rate. Or the States could abolish payroll tax (which reduces loan-servicing capacity) and stamp duty (which is partly shifted onto sellers through lower prices), and introduce a vendor stamp duty on capital gains.

Unless some such reform is introduced, first home buyers should go on strike.

[Further references added on May 6, 2011.]

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