EC Australia’s Bubble Trouble

Thank God It’s the “Lucky Country”, and Good Thing it’s not a Bubble …

We have previously written about the many extant housing bubbles in the world, which are a result of the incessant monetary pumping by central banks (see: “A Tale of Two Bubbles” for details). Recently Australia’s big banks published a study in which they strenuously deny that one of the biggest housing bubbles the world has ever seen is actually a bubble. This is no surprise, because when – not if – this bubble implodes, Australia’s financial system will be in major trouble and the “big four” Australian banks are going to have a front-row seat. As “The Australian” reports, the “banks are dispelling housing bubble fears”. Not surprisingly, their arguments sound eerily similar to those of the NRA in the US shortly before the demise of the significantly less enormous US housing bubble.

“Amid fears that record low rates are laying the ground for problems, the Australian Bankers’ Association will today release a ­report arguing there is “insufficient evidence” of a speculative bubble, adding that the banks have not added to the price surge by relaxing lending standards.

After assessing the past 25 years, the paper, “Key truths on housing in Australia”, finds that the biggest driver of prices is mortgage rates falling below 5 per cent, and plays down the impact of foreign buyers. It also backs a Reserve Bank study this week that shows the highest debt loads are held by wealthy, less risky borrowers.

But the ABA does concede that houses are expensive relative to rents and “current rates of return may be economically viable only if expectations of further price gains are fulfilled”.

Also, prices have become more expensive relative to purchasing capacity and buyers should view “with a critical eye” claims that the structural housing shortage is massively driving the market.The major banks have repeatedly dismissed a bubble in their most lucrative asset class, and the ABA says it is important to “get the facts on the table” and not just focus on the recent bull market, particularly in Sydney.

“House prices in Australia are currently in a period of strong growth. (But) there is insufficient evidence to conclude that house prices are unsustainably overvalued or that Australia is currently experiencing a speculative ‘bubble’,” the report says.

[…]

Since the market stirred to life in mid-2012, Sydney is up 35 per cent — far outpacing the 23 per cent increase in the patchy broader market, including capital cities like Perth that have begun going backwards, according to CoreLogic RP Data.”

Anecdotal proof that there is “insufficient evidence of a bubble” in Australia’s housing market: this shack on Edith Street in Sidney sold for $980,000 in May of 2014. The cottage has been uninhabited for 20 years. The walls that have not disintegrated are covered in graffiti and the house is littered with rubbish. The backyard features the remnants of an outdoor toilet, with rubbish strewn about amid patches of weed, which are the only vegetation. Size of the property: 278 sqm. (~2,992 sqft.)

Photo credit: Attila Szivasi

Let’s take a look at some of that “insufficient bubble evidence”, shall we? We will start with a piece of anecdotal evidence. Below is a picture of a shack that was sold in Sidney for $980,000 in May of 2014 – when prices were actually not yet quite as elevated as they are today:

We have a picture of the inside of this magnificent palace as well:

It’s amazing what a million dollars gets you in Sidney …

 Photo credit: Attila Szivasi

Here is a chart showing the development of median house prices in Sidney and Melbourne since 1996:

Sidney and Melbourne house price data (via a recent CLSA report) – click to enlarge.

Of course, house prices as such are not really telling us much. For instance, in hyper-inflationary economies like those of Argentina and Iran, property prices are rising at a much faster pace. However, Australia’s CPI inflation rate has oscillated between 1.2% and 5% over the past decade, so the increase in house prices has far exceeded the official decline in the purchasing power of the RBA’s fiat confetti. In fact, between 2001 and 2011, Sydney land prices rose 512 per cent faster than inflation while the city’s population grew only by 16 percent. Moreover, wage growth in Australia is in a steep downtrend, making the growing lack of affordability stand out like a sore thumb: