Today a several themes of this website have found themselves entwined. More evidence has emerged of yet another house price bubble and it has happened in one of the teams playing at the Rugby World Cup. So it is time for one of my occasional visits to here.
I come from a land down under
Where beer does flow and men chunder
Can’t you hear, can’t you hear the thunder
You better run, you better take cover.
What the Men At Work need to take cover from is what is looking like a bubbilicious property market especially in another familiar feature of these times in its capital city of Sydney, or as I have just made a mistake its perceived capital city. There the market looks red-hot almost as if we are singing along with Midnight Oil.
How do we sleep while our beds are burning?
No doubt others are mulling this lyric from the same song.
The time has come
To say fair’s fair
To pay the rent
To pay our share
The Australian Bureau of Statistics has released its property price indices this morning so let’s get straight to it.
The price index for residential properties for the weighted average of the eight capital cities rose 4.7% in the June quarter 2015.
They mean state capitals here and that looks a fair pace and I think even faster than that of Sweden. If we look into the detail we see that there are both pronounced hotspots and cold spots.
The capital city residential property price indexes rose in Sydney (+8.9%), Melbourne (+4.2%), Brisbane (+0.9%), Adelaide (+0.5%) and Canberra (+0.8%), was flat in Hobart (0.0%) and fell in Perth (-0.9%) and Darwin (-0.8%).
So we get the idea that Sydney is surging and Perth in particular falling. As Perth is the capital city of Western Australia where so much of the resources and commodity producing industry is located if there is a surprise here it is that it has not fallen faster. After all 2015 has been a hard year for that industry.
For some more perspective let us move to an annual comparison.
The index rose 9.8% through the year to the June quarter 2015.
So again all rather Swedish and the breakdown is shown below.
Annually, residential property prices rose in Sydney (+18.9%), Melbourne (+7.8%), Brisbane (+2.9%), Canberra (+2.8%), Adelaide (+2.7%) and Hobart (+1.5%) and fell in Darwin (-1.8%) and Perth (-1.2%).
If you want to know what this means in terms of actual prices then the numbers are below.
The mean price of residential dwellings rose $26,200 to $604,700 and the number of residential dwellings rose by 38,400 to 9,528,300 in the June quarter 2015.
The next part has a dubious element as you are using marginal prices for some of the stock to value the whole stock but here it is.
The total value of residential dwellings in Australia was $5,761,607.2m at the end of June quarter 2015, rising $271,939.1m over the quarter.
What is official policy?
Last week the Reserve Bank of Australia (RBA) released its latest Minutes which told us this.
They also noted that conditions in the housing market overall had remained strong and that housing price inflation nationally had risen since the beginning of the year……In particular, the strength in housing price inflation had been concentrated in Sydney and Melbourne, mainly for detached houses
There was an implicit rather than an explicit acknowledgement of the RBA’s role in this.
Members noted that very low interest rates would continue to support growth in dwelling investment and household consumption.
Also it was keen to start a campaign to shift the blame elsewhere.
The Bank was continuing to work with other regulators to assess and contain risks that may arise from the housing market.
The RBA has been cutting its official interest-rate since late 2011 when it was 4.75% and it has cut twice already in 2015 leaving it at 2%. The ten-year bond yield has fallen from 5.6% in early 2011 to 2.76% now and we know from our observations elsewhere what that will have done to the price of mortgage lending.
Actually the Sydney Morning Herald has helped us out today.
The most competitive rate offered by small lenders Credit Union SA and Community First Credit Union-owned Easy Street had fallen by more than 1 percentage point in the last year, with both offering loans at 3.99 per cent, while online bank ING Direct was also offering rates of 3.99 per cent, Mozo said.
It is wealth gains
The RBA has also engaged in the usual central banking practice of claiming the house price gains as a wealth increase or effect. If we move on again from the dubious system of using a marginal price for an average value we see that it has published a paper telling us this.
The preferred estimate suggests that a 1 per cent increase in housing wealth is associated with a one-half per cent increase in new vehicle registrations.
So these clever central bankers have pumped up house prices and the economy gains. How clever! To be fair it thinks that the effect is less than half that for other areas but again we are left with the impression that house price gains add to wealth and there appears to be no mention of inflation.
Oh I hope that they did not buy Volkswagens with their new found “wealth”. Or even worse Volkswagen shares.
Some Deeper Perspective
Another RBA paper has looked at longer-term trends.
In real terms, housing price inflation during the 1980s was relatively low, at 1.4 per cent per annum compared with 4.5 per cent during the period from 1990 to the mid 2000s, and 2.5 per cent over the past decade.
So the present gains are on top of past ones.
Who is driving this?
I asked the question on Twitter and received the following replies.
@econhedge it’s all China. they are snapping up 20-23% of new supply in NSW and Victoria
@fundamentalmac Yes the Chinese
The Daily Reckoning put an interesting perspective on it.
Not only is Sydney priced OK for China’s rich, it has a thing that’s pretty rare in the big cities of China these days: blue sky.
From a Chinese perspective house prices in Sydney may not have changed much as you see some 5.45 Yuan were needed a year ago to buy an Aussie Dollar whereas now we can rearrange those two numbers to 4.54. Those who read my update covering the Auckland property market in New Zealand on the 10 th of this month may be experiencing some deja vu here.
There is much to consider in the combination of a cooling economy and a housing market exhibiting bubbles. It can lead to media confusion with the Sydney Morning Herald telling us these two things today.
Sydney property prices faltering…………Prices in Sydney grew at 8.9 per cent in the quarter, to give 18.9 per cent over the year.
Up truly is the new down or something like that. Time for some Kylie.
I’m spinning around
Move out of my way
We are in fact seeing three factors combine. Firstly the boom and more recently bust in the Australian commodity and resource sector where the boom went national but the bust is so far regional. Secondly the easy monetary policy of the RBA. Thirdly the desire of the Chinese to purchase property in what they consider to be a safe-haven be that a political,economic or environmental one. In a way they are all combined as we see the Aussie Dollar fall.
Meanwhile we are promised that the modern cure-all will fix this as macroprudential policies are applied. That will only convince those with little or no knowledge of economic history. Meanwhile for the Australian economy the house price bubbles in Sydney and Melbourne are summed up for us by INXS.
Makes you wonder how the other half live
The devil inside
The devil inside