Aussie Officials and The Aussie Housing Bubble (“not”)

I say “not”, because it would, in fact, be political, social and economic suicide for Government employed (or endorsed) officials to say that “there is a housing bubble”, even if they believe there is….

…So the moral here is: just because you don’t hear our officials saying things like “Hmm, yes…it does look bubbly, doesn’t it?”, does not mean there is not one.

Now, that is not to say that I am trying to argue from absence – that would be a logical fallacy, and I try to avoid those wherever possible. But what I AM commenting on is the common flip side attitude that goes something like this: “If there was a bubble, the government (etc) would: 1) tell us, and 2) fix it”.

Well on (1), consider my above comments; and on (2) don’t assume that a government can “fix” an economic problem, especially one the size of ruptured speculative bubbles being experienced around the world, and soon to come to our shores. No, governments can DELAY economic “pain”, and maybe create a slightly softened “landing” for some who fall (which is generally everyone in some way, when a large bubble bursts)…but make no mistake: the government can only do so much – and that is generally very little. In truth, government intervention generally delays but INCREASES the size of a bubble, giving the appearance of “escape”, but actually inflating the problem further for an even greater explosion/implosion (depending on how you look at it) later on.

Kind of just kicking the can down the road, to come across at a later date….and to find that the can has grown bigger teeth for the next “kick” attempt….ouch.

But, with all that “you won’t hear it” type of notion, the following comments from the Australian Treasury are interesting, rather subtlety acknowledging the existence of an Australian Housing Bubble, back not making a big song and dance about it (and it certainly wasn’t and isn’t really talked about much in the mainstream media, so must Average Joe’s won’t have heard anything).

The article is from the Australian Newspaper, and can be found here.

Below is an excerpt from the article, followed by the relevant (and I say, telling) chart of housing prices compared to other member countries of the OECD (Organisation for Economic Co-operation and Development):

A SENIOR Treasury official has sounded the alarm over Australia’s property market.

He has warned that the prospect of a sudden and dramatic drop in prices is “the elephant in the room” and should not be ignored by the federal government.

While the government and Reserve Bank insist Australia does not have a housing bubble – as some economists and the International Monetary Fund suggest [my edit: and many overseas economists, some Australian economists and Australian academics, and many internet economics “bloggers”!] – it remains such a worrying concept that Treasury has privately sought reassurance from its analysts that prices are not artificially high and that Australia does not face the kind of house price collapse that has hit Britain and the US.

Documents obtained by The Weekend Australian under Freedom of Information laws show the Treasury officials preparing the so-called Red Book of briefs for the incoming government were as divided as private sector economists about the strength of the property market.

Phil Garton, the manager of Treasury’s Macro Financial Linkages Unit, sent colleagues a draft paper on the rise in household debt, prospects for further growth in the debt-to-income ratio and the potential implications of slower household debt growth.

His email prompted an exchange with Steve Morling, currently the general manager of the Domestic Economy Division, who argued the paper should “make a bit more about the risks”.

“The elephant in the room is house prices or more specifically the risk of a precipitous drop in them, perhaps from an external shock or perhaps from their own internal dynamics when affordability constraints or capacity debt levels see prices and expectations of house prices start to move in the opposite direction,” Mr Morling wrote on June 15.

“(I) know there are very supportive fundamentals, but prices rose by 50-60 per cent in three to four years in the early part of this decade, with largely unchanged fundamentals, so they can have a life of their own.

“And given what’s happened elsewhere I’m far less sanguine about this – and the interplay with debt – than in the past.”

Mr Garton agreed that there would be risks if the fundamentals of low interest rates, unemployment, and financial deregulation “reversed significantly”. But he maintained the price growth in the early 2000s was based on a “lagged response” to improvements in the fundamentals, and questioned how Australia could have maintained a bubble for more than six years.

Mr Morling said other bubbles had lasted that long, and the fundamentals were often used to justify price rises – including in Britain where a debate over lack of supply drove property prices higher “before the British property bubble burst”.

Note: don’t take that “interplay with debt” comment lightly at all…more on that later…

But them’s some interest and frank comments, eh?

And there is another comment from Luci Ellis, the head of the Reserve Bank of Australia’s (RBA’s) Financial Stability Department, cited here:

“The people pointing to supply-side factors [my edit: just about anyone from anywhere in the mainstream government, market or media] really believed at the time that if only these supply restrictions didn’t exist, prices would not have risen quickly. This is just rubbish, and we said so”

…but that was a private email, sourced by someone (sorry can’t remember who! and can’t be bothered to find it just yet!), which was sourced by another Freedom of Information claim on the RBA…again, not intended for the public domain, but it has “forced” (been coerced by FOI law) into the Public Domain.

Actually, if I remember correctly, Luci Ellis said that the connection of prices withe “cheap [low interest rate] debt” had a stronger correlation with house prices, than did supply-side factors. FYI: in case you were not aware, in the conventional economics world, “debt” most strongly relates to a “demand-side” factor, in that it affects the ability of someone/thing to “demand” in an economic sense…more on that later, too….

But now for that chart supplied with the Australian newspaper article:

Note, the “index” adjusts for all sorts of unique country factors, such that it roughly represents the Australian housing story against other nations (many of whom have suffered and are still suffering from housing-induced recessions, bordering on depressions…)

Ouch…that’s some impressive “performance”.

And here’s another chart which I sourced from one of my favourite economic bloggers, Leith van Onselen, from The Unconventional Economist – the data is also sourced from government and mainstream sources, but just not really talked about much:

This is a particularly interesting chart. Why? It showed all the important, indexed (ie. adjusted for all the “special factors”) fundamentals that are normally talked about as affecting house prices.

But notice how, even though they are indexed, and the even increase with time (the indexes consider time factors, such as inflation), the house price absolutely outstrips them…something else is going on…but what!

As I (and many others) have said in a previous article on this website, I strongly believe the answer is, at the end of the day, simple: debt…access to plentiful, overly cheap debt. Such plentiful, cheap (low interest rate) debt has been used by many to speculate (ie. “invest” –> gamble) on the price of houses, and even the common mum and dad have been able to access huge amounts of too-cheap debt to either “play the game” as well, or unknowingly concede to being sucked into the “scheme” to just buy a house. But we’ve done it by simply loading up on debt; consider the following charts:

Australia and USA House Prices Indices

(Remember “index” means that the prices are “real” in the sense that they are adjusted for relative factors, such as time-dependent inflation, etc, etc; allows for direct comparison to a fairly high confidence).

And here is some more international comparison:

Australia, USA and Japan House Prices Price Indices

And here’s a chart showing Aussie and US housing prices (again indexed) from 1890 to 2008:

Wow! What on earth happened in the late 1990s?!?!?!

Housing price fundamentals? Did the West suddenly get heaps, heaps richer? Did populations explode beyond all control? Did half the houses in each country burn down all at once? Or was it something else?

Now, after seeing how prices have risen see how our levels of debt have risen!

Debt Level Comparisons

Notice how the trends – house price and debt levels – have roughly followed one another?

Wait, let’s visit the “fundamentals” chart again, from earlier in the post…

That House Price Fundamentals Chart Again...

And here’s another chart, because charts are cool…

Another Chart

Ah, by George, I think we might have found what extra ingredient was needed to massively pull the Aussie house prices up, up and away (!!) from their fundamentals! Debt! And heaps of it! Woohoo! A massive debt binge for all…and now we are all drunk, and the world is waking up….and hangovers really hurt. (It also implies that a lot of our prosperity of recent times is just “borrowed”, and we are not necessarily nearly as wealthy as we seem to be…)

So, in terms of classical economic-speak (supply and demand), debt has increased relative demand…but that’s not what you hear from mainstream economic thought…instead, you hear that since prices have gone up (reflecting increased relative demand) relative supply must have reduced, and caused the price increase (ie. there is a “shortage”).

(FYI: I discuss this impact debt-based relative demand further in another post).

But not so: all that was required is for more money to be thrown into the mix (is this case, mostly just extra debt); a “housing shortage” is simply not required. Have a look at the following chart (based on government data – ABS and RBA):

That is, it’s only been very recently there might have actually been a housing shortage…and that assumes we didn’t actually have a housing oversupply to being with, which, it seems, we most probably did! (eg. 1996-2006 saw the Australian population grow by 13%, and the number of dwellings grow by 17% – no shortage there! Heaps more info here).

And we can also see that Mortgage Debt is, far and away, the most dominant debt force in the Australian economy, and has grown out of sight when compared to everything else…

Mortgages Dominate the Australian Debt Scene...

And here is a breakdown of the “Total”:

Components of Australian Debt

So “everyone” got involved, and now indebtedness – and a dependence on increasing indebtedness to “keep it all working” – characterises the Aussie housing market (and, I argue, the entire Australian and global economy – as it has (and still does) characterise so many housing markets around the world now).

An acquaintance also did up the following chart for me, which really goes a long way, in my honest opinion, to telling the debt-house price love story of the past few decades (from here):

Essentially, the blue line represents Housing Finance ($, most of which is debt, especially in the last decade) since June 1986 to early 2010, and the red line represents the House Price (Index), over the same period of time.

They really do following each other very closely, don’t you think? Almost as if they are linked! Does seem to be the case, given that the other “fundamentals” we explored from an earlier chart don’t seem to have kept pace with prices the way that housing finance/debt certainly has. I believe this is a strong case.

…And, just for kicks, let’s see how indebtedness has been involved the Australian economy over the last, say 130 years:

Be aware that those two early peaks – at about 1890 and 1930 – where the debt to GDP (Gross Domestic Product) ratios are relatively high, are where economic depressions occurred; you will probably know the 1930’s depression as the “Great Depression”. It’s interesting to note that the 1890’s depression actually affected Australia much more than the Great Depression; and it’s also interesting that the 1890’s depression was caused by excessive debt-based speculation (ie. gambling) on property prices…

What’s a bit “scary” – if you’re that way inclined – is how much higher the debt-levels are NOW – even compared to the Great Depression (which was caused by excessive debt-based speculation on share markets, among other things debt-related) – AND the more severe 1890’s depression…..hmmmmm…..

Well, I have written thoroughly, and this post must come to an end.

But hopefully you have another/alternative perspective on how Aussie house prices have gotten to where they are…AND what happens to economies (and house prices) when debt levels get excessively high, and it all just becomes “too much” for the system to cope with anymore.

…and why it might be fair to get a little “concerned” about the state of affairs, when the Australian house-price/mortgage-debt) trends of the last 2 or so decades seem to look eerily like the “upward/increasing” and “topping/flattening” part of the now famous Rodrigue Bubble Psychology Chart (as discussed here, here and here – previous articles of mine on this site):




2 Responses to Aussie Officials and The Aussie Housing Bubble (“not”)

  1. Simon says:

    Nice post. But, I think that there are two factors keeping the current prices where they are, and until those factors disappear we won’t have a crash. (1) the presence of foreign investment, which is keeping prices high as well as reducing the number of available dwellings to buy. (2) that dwellings vs population chart. The long term trend of dwelling increases is actually downwards, and from all predictions, population increases are going up. Until that situation is reversed, the drop won’t start happening.

    The crucial difference in te US was an oversupply of housing and incredibly stupid banks and borrowers who borrowed far beyond their means. When people couldn’t afford it any longer, they just walk away and either rent or buy somewhere cheaper. The bank the sells the property for x amount less then before, and this is multiplied millions of times over, prices crash in part because people can’t afford them and in part because they have better options. Here we don’t have that issue (yet!) because we (a) don’t have an oversupply of housing and (b) people in large part can still affor their mortgages. Now…. If China crashes then we are in trouble. But not now.

    Secondly, you can’t compare Japan either, because since the late 80’s they’ve basically been in a deflationary spiral, which affects everything including house prices. Couple that with the fact that a lot of people there are savers, not spenders, and they are quite happy to rent, and it’s a totally different mindset.

    Having said all that, I don’t doubt prices will fall here. The charts show all too clearly that they have risen far too much. But I don’t think it’s necessarily due to debt. I think an economy crash due to China will be the cause of a housing crash, taking out foreign investment and keeping buyers low, not a housing crash causing an economic crash like the US experienced.

  2. Matt says:

    Simon – “Here we don’t have that issue (yet!) because … people in large part can still afford their mortgages.” – in my view, this is one of the major faults in people’s reasoning.

    Now you probably think I mean that people can’t afford their mortgages, but that’s actually not what I mean. I agree that people in the large part can still afford their mortgages, however I don’t think affording the mortgage is the major issue. This is because I don’t think homeowners are the issue.

    A housing market without speculators is incredibly stable. People will reduce just about any expense and make just about any effort to keep paying their mortgage and keep their family home. With low unemployment and reasonable rates, I don’t think homeowners are about to get foreclosed. Thus I don’t think the homeowners will (unless things change) substantially contribute to any price reductions. Most people then conclude that we can’t see any substantial price reductions. I disagree.

    Speculators are a different breed. Property speculators are bleeding money each month on the expectation of value gains. In the 80s, around 15% of properties were sold to ‘investors’. In June 2010 it was 51%. What we’ve seen is a massive shift from the typical ‘homeowner’ mortgage, to the ‘speculator’ mortgage. This has been the increased demand that has fueled prices to skyrocket.

    Now that property has become such a speculator’s market, I believe we should expect it to behave just like any other speculator’s market. Speculators don’t generally like to buy when a market is trending neutral and they sell off as soon as it starts trending down. Speculators buy into somethign that is ‘trending up’. Smart ones realise that the trend will eventually end and jump off when it appears to reach the top. Naive ones think that it will go forever and become the big losers of this game.

    I assert that the property market is full of speculators and not investors because the fundamentals have left the property market years and year ago. Consider a reasonably average property with a yield of say 4.5%. If you completely owned this property, you would only have to pay rates, tax, insurance and maintenance on this property. From your 4.5% yield, after tax and other expenses you will probably be pulling just around the inflation mark. Let me reiterate that – the price of property is so high now that if you owned a home with no mortgage and rented it out 52 weeks a year you would get nothing in return, you’d merely be treading water. Your only chance for profit is speculative – that tomorrow the price will go higher. If you have a mortgage on the property and see no capital gains you will inevitably be making a loss.

    My overall point is – we do not need high unemployment or huge rates to cause a massive decrease (although these things would certainly exacerbate the affects and bring about a price reduction much faster). I think we simply need the trend to see a turning point, and the speculators that have flooded the property market will do the rest.

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