Australia faces its own house price bubble demons

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 Numbers

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.

Comment

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

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10 thoughts on “Australia faces its own house price bubble demons

  1. even Oz is like us , thaey may have vast deserts inland but good farm land is in short supply and they build on it like us .

    the equation is the same as yesterdays post , Shaun . Land is short supply and no one is making anymore like the Dutch did

    more people + less land = higher house prices aided and abetted by lax money policy

    Solution ? Aye, yeah cannae change the law of physics, captain!

    Aukland next door is having a good run to get to Tokyo prices ,

    It will all end in tears , mark my words

    Forbin

    PS: what can you do ? well there a place on the sofa here and some fresh popcorn . sit down and watch the show…..

    • Water is in short supply – especially inland. Water is the scarce resource. But Australia has a small population and food self sufficiency –

      house prices co-relate to the locations with employment.

      As to the central banker speak that rising house prices are under control -> I’d play Icehouse’s Don’t Believe Anymore

    • Forbin, I am ready to call your bluff! You call it, when this house of cards starts to topple then lets all meetup for a popcorn session. I prefer butterkist flavour.

      Paul

    • Currently, it’s more about cheap money Forbin, as Shaun pointed out Oz has experienced falling rates for 4 years now over which time they have more than halved.

      The land argument is a long term structural issue that currently applies little upwards pressure – look what happened in the UK when the %0 mortgage deals began to be pulled in 2007.

  2. http://dfat.gov.au/about-us/publications/trade-investment/australias-trade-in-goods-and-services/Pages/australias-trade-in-goods-and-services-2013-14.aspx#exports

    Iron Ore and Coal were worth USD$114mn in 2013/14 about 33% of the toal USD$331 mn exports

    http://www.tradingeconomics.com/australia/gdp
    GDP USD$1.56 tn

    http://www.indexmundi.com/commodities/?commodity=coal-australian&months=60

    coal now about USD$58 per tonne as opposed to circa USD$90 in 2013.A lot of that may have been forward sold at better prices.Someone better informed may know.

    http://www.indexmundi.com/commodities/?commodity=iron-ore&months=60

    Iron ore down from USD$120 to circa USD $120

    • Hi Dutch and thanks for the links.

      Coal prices in Europe were in the news earlier today.

      “Ioan Smith ‏@moved_average 12h12 hours ago
      *COAL DROPS BELOW $50 FOR FIRST TIME IN EUROPE AS GLUT PERSISTS
      Embedded image permalink

      It is a little bit dramatic as that contract only began in 2012 but even so it shows a change in the market. Also if you are looking at commodities then the fall and fall of Glencore gives plenty of food for thought

      “#FTSE 100 top fallers: Glencore (-10.63%), Johnson Matthey (-8.09%), Antofagasta (-7.25%)”

      For iron Ore I think you meant to say it has fallen to circa US $60.

      • I did Shaun Thank you.Also worth noting that I got my millions and billions mixed up in the first stat.One of those days.

        Easily done,I should be in govt or rigging Libor

  3. Hi Notayesmanseconomics,

    I very much enjoyed your post and analysis. I especially enjoyed the musical interludes – good stuff – and very appropriate. Down here, our beds are burning and it is not going to end well at all.

    Some points of interest that you may have missed:
    – Our new PM is seeking tax cuts for the highest income earners. It is almost one of the first orders of business and I don’t believe that it is a good look;
    – Businesses are clamouring to reduce penalty rates for employees who work Sundays;
    – There have been some startling revelations that overseas students are apparently being forced to work very long hours for apparently very low wages (both of which are illegal practices) in a franchise chain owned by the second richest gentleman in the country;
    – The government is hell bent on closing down the remaining local car manufacturing businesses putting something like 250k people out of work in 2017;
    – APRA – the banking regulator – now requires Investment loans to have a 20% deposit and the banks now charge an additional 1% interest rate on investment loans – which will be netting them a tidy profit and driving rents up; and
    – I believe that there has been some sort of recent arrangement with the Japanese government to allow the Japanese savings access to our markets here.

    Whilst the locals appear to be blaming the Chinese, their dirty little secret is that they are secretly hoping deep down to make stacks of mad cash on the property market at the expense of someone else – which usually happens to be their children and fellow countrymen. Oh my, this is so not going to end well because what can’t be sustained eventually won’t be sustained – but the government is chucking everything they have at it. It is fascinating to watch.

    I live a very austere life and avoid debt like the plague. Unfortunately, few seem to want to take that safer option.

    Cheers. Chris

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