Australian housing overvalued

[MaggieMcT]

What happened in Ireland:

Cheap credit available on very easy terms for a prolonged period of time (EU membership = German banks seeking margin lending money to Irish market) combined with genuine economic growth (due to liberalisation of economy + educated workforce + EU membership + proximity to US + cheap corporation tax= attracts inward investment etc) leads to property price growth.

Property price growth + media reporting + easy cheap credit = increased interest in property investment = more property price growth.

Increased activity in property market = large bank profits + big stamp duty bonanza for government.

Banks start to compete more for market share = lower lending standards to individual borrowers and developers (greater than 100% mortgage common - i.e. mortgage plus personal loan for stamp duty etc, insane lending to developers - I had clients who borrowed 100% of the land costs + 100% of the development costs + about 20% extra based on pre-sales).

Government increases spending to match new larger income based on temporary stamp duty bonanza.

Government becomes concerned about property market but cannot adjust interest rates which are controlled by EU Central Bank, and set to suit large stagnant German and French economies = very low interest rates. Is also addicted to stamp duty income so stamp duty reform becomes political football - one party wants to reform it to discourage property speculation, but this is not popular so drops the idea very quickly.

Bank regulation in Ireland is poor because banks and big 5 accounting firms pay higher salaries than the regulator. Banks are also very effective lobbyists. Combination of poor bank regulation and low interest rates = very cheap, easily available credit and some dodgy dealings.

At this stage many years of rising property prices conflict with the reported opinions of many economists who have been warning of bubble for years - the ordinary person is more convinced by what they have seen happening around them. Irrational behaviour becomes more irrational. Developers engage in sharp practice to feed the hype (pre-selling to friends at lower price so that they can claim 'X development already gone up Euro 15,000 in first week!!' etc etc). People buy at prices they cannot afford because they are convinced prices will always go up. and they are afraid to miss out. Developers grow in confidence - they are making a fortune and some grow in the belief that this is due to their hard work and good decision making, rather than extraordinary economic circumstances = they put their money back on the roulette wheel = more property deals, higher prices, more hype.

Sub-prime crisis hits in the states. Banks are suddenly afraid and credit is frozen. The easy cheap credit available is suddenly cut off. Irish bank that has engaged in dodgiest lending practices to developers (Anglo) caught with its pants down. Other major banks also grossly over-exposed. Banks lie to govt about extent of the problem = Irish govt guarantees the debts of Irish banks - i.e. the tax payer must now pay all the unsecured bond holders of Irish banks.

Credit is completely withdrawn from the market - nothing available at any price as banks retrench. Construction comes to a screeching halt. Massive lay-offs result. Govt cuts spending everywhere = more job losses throughout the economy. Govt cuts benefits increases taxes across the board. Economy hit again as consumer spending drops through the floor. More job losses.

Property prices collapse. No-one knows what anything is worth because there is no market but min 60% drop in property prices country wide.

Large proportion of the population now has negative equity (in some cases 60% negative equity), either major salary cut (40% in many cases) or no job. Cannot sell their home.

If you are Irish chances are at least one member of your family has now lost everything - family home, savings, all assets, and job. In some cases multiple family members. Younger people emigrate in large numbers (mostly to the UK, US, Canada and Australia) - well worn paths for the Irish.

A cautionary tale ...

 

[Redom]

What happened in Ireland:

Cheap credit available on very easy terms for a prolonged period of time (EU membership = German banks seeking margin lending money to Irish market) combined with genuine economic growth (due to liberalisation of economy + educated workforce + EU membership + proximity to US + cheap corporation tax= attracts inward investment etc) leads to property price growth.

Property price growth + media reporting + easy cheap credit = increased interest in property investment = more property price growth.

Increased activity in property market = large bank profits + big stamp duty bonanza for government.

Banks start to compete more for market share = lower lending standards to individual borrowers and developers (greater than 100% mortgage common - i.e. mortgage plus personal loan for stamp duty etc, insane lending to developers - I had clients who borrowed 100% of the land costs + 100% of the development costs + about 20% extra based on pre-sales).

Government increases spending to match new larger income based on temporary stamp duty bonanza.

Government becomes concerned about property market but cannot adjust interest rates which are controlled by EU Central Bank, and set to suit large stagnant German and French economies = very low interest rates. Is also addicted to stamp duty income so stamp duty reform becomes political football - one party wants to reform it to discourage property speculation, but this is not popular so drops the idea very quickly.

Bank regulation in Ireland is poor because banks and big 5 accounting firms pay higher salaries than the regulator. Banks are also very effective lobbyists. Combination of poor bank regulation and low interest rates = very cheap, easily available credit and some dodgy dealings.

At this stage many years of rising property prices conflict with the reported opinions of many economists who have been warning of bubble for years - the ordinary person is more convinced by what they have seen happening around them. Irrational behaviour becomes more irrational. Developers engage in sharp practice to feed the hype (pre-selling to friends at lower price so that they can claim 'X development already gone up Euro 15,000 in first week!!' etc etc). People buy at prices they cannot afford because they are convinced prices will always go up. and they are afraid to miss out. Developers grow in confidence - they are making a fortune and some grow in the belief that this is due to their hard work and good decision making, rather than extraordinary economic circumstances = they put their money back on the roulette wheel = more property deals, higher prices, more hype.

Sub-prime crisis hits in the states. Banks are suddenly afraid and credit is frozen. The easy cheap credit available is suddenly cut off. Irish bank that has engaged in dodgiest lending practices to developers (Anglo) caught with its pants down. Other major banks also grossly over-exposed. Banks lie to govt about extent of the problem = Irish govt guarantees the debts of Irish banks - i.e. the tax payer must now pay all the unsecured bond holders of Irish banks.

Credit is completely withdrawn from the market - nothing available at any price as banks retrench. Construction comes to a screeching halt. Massive lay-offs result. Govt cuts spending everywhere = more job losses throughout the economy. Govt cuts benefits increases taxes across the board. Economy hit again as consumer spending drops through the floor. More job losses.

Property prices collapse. No-one knows what anything is worth because there is no market but min 60% drop in property prices country wide.

Large proportion of the population now has negative equity (in some cases 60% negative equity), either major salary cut (40% in many cases) or no job. Cannot sell their home.

If you are Irish chances are at least one member of your family has now lost everything - family home, savings, all assets, and job. In some cases multiple family members. Younger people emigrate in large numbers (mostly to the UK, US, Canada and Australia) - well worn paths for the Irish.

A cautionary tale ...

Thanks for sharing - definitely a cautionary tale. Tragic too, the impact on peoples lives would be extraordinary.

I'm not sure how domestic surveillance didnt pick up some of the warning signs and act to prevent excessive buildup. That run of asset price expansion fuelled by credit is a pretty well told story and has been for decades and decades (debt cycles).

Smells like domestic oversight failure and poor surveillance from international bodies too.

 

[Redom]

From my (limited) understanding, Ireland set itself up to attract global capital quite well.

While poor management and frameworks around that capital inflow came back to bite them, perhaps its a way to get out of the mess quickly too.

I hear there anticipated to grow at 7-8% in coming years - much much quicker than the rest of Europe. Albeit from a low base, but a strong recovery seems to be taking place there. Hopefully it'll equate to jobs, income and wealth growth too.

 

[MaggieMcT]

Thanks for sharing - definitely a cautionary tale. Tragic too, the impact on peoples lives would be extraordinary.

I'm not sure how domestic surveillance didnt pick up some of the warning signs and act to prevent excessive buildup. That run of asset price expansion fuelled by credit is a pretty well told story and has been for decades and decades (debt cycles).

Smells like domestic oversight failure and poor surveillance from international bodies too.

I agree completely that it was oversight failure. Ireland could not adjust interest rates because these are set for the EU as a whole and so the rate is driven by the larger economies. Our politicians were also weak. Adjustments to the stamp duty regime could have slowed the market considerably, but it was not a popular move so although they knew they make changes, the political will just wasn't there.

I can see this sort of thing becoming a problem across most advanced economies however. With the dumbing down of media coverage and the willingness of many politicians to lie and engage in hyperbole, the ordinary person is used to being told what they want to hear. I think it is increasingly difficult for politicians to govern responsibly.

 

[Deltaberry]

As John Howard said the other day, politicians these days have too much slogans, and too little vision.

But hey the last time someone tried to do any meaningful economic reform - aka Workchoices - they were crucified. You get what you vote for.

 

[Redom]

Carbon pricing is another good example - big change, political nightmare.

Change is hard to sell. Tendency for people to cry victims to any notion of change, quelling any opportunity to have meaningful reform before even entertaining real thoughts of pushing it through.

I'm not so sure visionary works - its idealistic and generally leads to political walls (unless theres a leader that can take the country with them).

 

[Deltaberry]

Carbon change is a big vision, but it was sold on a simplistic slogan. Greatest moral dilemma of our time? I wonder how long Rudd practised that in front of a mirror.

 

[BayView]

Carbon pricing is another good example - big change, political nightmare.

Change is hard to sell. Tendency for people to cry victims to any notion of change, quelling any opportunity to have meaningful reform before even entertaining real thoughts of pushing it through.

I'm not so sure visionary works - its idealistic and generally leads to political walls (unless theres a leader that can take the country with them).

The hard sell was to convince people it wasn't going to hurt their hip-pocket...

And despite that; it still got through.

And now it's gone....for a while.

How's the temperature going?

 

[Marty McDonald]

All this bubble talk got me looking for a basic graph that outlined house price growth as compared to CPI in Sydney. I couldn't find it just a whole bunch of D & Gers so I jumped on the ABS and did my own. Attached.

You can see there is not too much of an uptick in real prices in Sydney between 2003 and 2014... So no bubble unless of course you think it has been a bubble the whole time. I used 2003 as the starting point because this was when the ABS changed their methodology for house prices and the latest series starts then. This was also a peak in the market so is a good reference point IMO and BTW it is not because it supports an argument either way.

 

[Redom]

All this bubble talk got me looking for a basic graph that outlined house price growth as compared to CPI in Sydney. I couldn't find it just a whole bunch of D & Gers so I jumped on the ABS and did my own. Attached.

You can see there is not too much of an uptick in real prices in Sydney between 2003 and 2014... So no bubble unless of course you think it has been a bubble the whole time. I used 2003 as the starting point because this was when the ABS changed their methodology for house prices and the latest series starts then. This was also a peak in the market so is a good reference point IMO and BTW it is not because it supports an argument either way.

Nice work Marty.

I think you can make compelling arguments either way - thanks for the chart/analysis!

 

[Redom]

I wonder how long Rudd practised that in front of a mirror.

Hahahahaha. Solid.

 

[hobo-jo]

You can see there is not too much of an uptick in real prices in Sydney between 2003 and 2014... So no bubble unless of course you think it has been a bubble the whole time. I used 2003 as the starting point because this was when the ABS changed their methodology for house prices and the latest series starts then. This was also a peak in the market so is a good reference point IMO and BTW it is not because it supports an argument either way.

You are basically measuring from the end of the rise that took prices to a "structurally" higher level relative to incomes, GDP, rent, etc. So yes it could be argued you've measured from an unfair point in time (even if that wasn't your intention).

Perhaps prices don't correct to a structurally lower level... but I'm waiting for the next recession and fall out from the mining boom to play out before I'd agree there is no structural bubble in Australian housing.

That aside, if Sydney is back at the same valuation relative to inflation that it was at the last peak in 2003... isn't that a sign the city may be at or near a cyclical peak (i.e. overvalued as per thread topic)?

From the 2003 peak Sydney corrected around 8% and that was with lower unemployment & higher wage growth... I think there's a good chance the next cyclical correction will be a larger fall and timing may coincide with the economic fall out from the end of the mining investment boom.

 

[BayView]

Perhaps prices don't correct to a structurally lower level... but I'm waiting for the next recession and fall out from the mining boom to play out before I'd agree there is no structural bubble in Australian housing.

That aside, if Sydney is back at the same valuation relative to inflation that it was at the last peak in 2003... isn't that a sign the city may be at or near a cyclical peak (i.e. overvalued as per thread topic)?

From the 2003 peak Sydney corrected around 8% and that was with lower unemployment & higher wage growth... I think there's a good chance the next cyclical correction will be a larger fall and timing may coincide with the economic fall out from the end of the mining investment boom.

I remember seeing a sign in a realestate agent's window one time...

It was a black and white photo of a really, really old man sitting on a park bench, resting his hands on top of his walking stick.

The caption underneath read something like;

"He's still waiting for the prices to drop before he buys."

Don't you think you are suffering from paralysis by analysis?

I can look back over my past purchases and say; "Sheet; I should have bought over there instead of here...woulda made more!"

And so on.

The key word there is; purchases.

 

[turk]

You are basically measuring from the end of the rise that took prices to a "structurally" higher level relative to incomes, GDP, rent, etc. So yes it could be argued you've measured from an unfair point in time (even if that wasn't your intention).

Perhaps prices don't correct to a structurally lower level... but I'm waiting for the next recession and fall out from the mining boom to play out before I'd agree there is no structural bubble in Australian housing.

That aside, if Sydney is back at the same valuation relative to inflation that it was at the last peak in 2003... isn't that a sign the city may be at or near a cyclical peak (i.e. overvalued as per thread topic)?

From the 2003 peak Sydney corrected around 8% and that was with lower unemployment & higher wage growth... I think there's a good chance the next cyclical correction will be a larger fall and timing may coincide with the economic fall out from the end of the mining investment boom.

Deja vu


Waiting For Godot

Waiting for Godot begins with two men on a barren road by a leafless tree. These men, Vladimir and Estragon, are often characterized as "tramps," and we soon see that the world of this play is operating on its own set of rules, its own system where nothing happens, nothing is certain, and there?s never anything to do. Vladimir and Estragon, we soon learn, are waiting for Godot, a man or perhaps a deity. The tramps can?t be sure if they?ve met Godot, if they?re waiting in the right place, if this is the right day, or even whether Godot is going to show up at all. While they wait, Vladimir and Estragon fill their time with a series of mundane activities (like taking a boot on and off) and trivial conversations (turnips, carrots) interspersed with more serious reflection (dead voices, suicide, the Bible).

The tramps are soon interrupted by the arrival of Lucky, a man/servant/pet with a rope tied around his neck, and Pozzo, his master, holding the other end of the long rope. The four men proceed to do together what Vladimir and Estragon did earlier by themselves: namely, nothing.

(The members of the audience, meanwhile, scratch their heads and look around to see if everyone else gets what?s going on. At least, we guess that they do. We sure did the first time around.)

Lucky and Pozzo then leave so that Vladimir and Estragon can go back to doing nothing by themselves. Vladimir suggests that this is not the first time he?s met with Lucky and Pozzo, which is surprising, since they acted like strangers upon arrival. Then again, Estragon can?t even remember a conversation ten lines after it happens, so we?re not going to depend on memory in this play. So the nothing is interrupted by the arrival of the Boy, who reports to Vladimir that Godot isn?t coming today, but will be there tomorrow. Yippee! Except not, since Vladimir?s comments suggest the Boy has said this before.

Estragon and Vladimir talk about suicide some more and then resolve to leave the stage, since it?s nightfall and they no longer have to wait for Godot. Of course, having resolved to leave, neither man moves, and the curtain closes on Act I.

The curtain opens for Act II which you will soon see is remarkably like Act I. The men still sit around waiting for Godot and try to fill the idle hours in the meantime. Lucky and Pozzo show up, only this time Lucky has gone mute and Pozzo is blind. They putz around the stage for a while, and Pozzo declares that, having lost his eyes, he now has no sense of time. Lucky declares nothing, because he?s mute.

Vladimir gets rather poetic in the meantime, wondering if maybe he?s sleeping, agreeing with Pozzo?s claim that life is fleeting, and concluding that habit is the great deadener of life. Pozzo and Lucky leave again, just in time for the Boy to show up right on cue and tell Vladimir that Godot isn?t coming today, but will be there tomorrow. Vladimir and Estragon contemplate suicide, but have no rope (they have in mind to hang themselves from the barren tree, since it?s the only prop around that could lend itself to such an endeavor). The men resolve to leave, since it?s nightfall and they no longer have to wait for Godot, but neither man moves and the curtain falls.

The play ends, but we think everyone knows what happens next. And after that. And after that. Et cetera.


To scarey for words

 

[hobo-jo]

"He's still waiting for the prices to drop before he buys."

Don't you think you are suffering from paralysis by analysis?

Will buy again in Adelaide before I think the next cyclical upswing will start. IMO I've still got a year or two. Sold out at the last cyclical peak.

Both Sydney and Perth saw 5-6 year periods of nominal price stagnation before next leg up. Expecting similar in Adelaide and it's been around 4.5 years so far.