USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia

[Shadow]

Hi all.

This is a copy of my latest blog entry from the Australian Property Forum.

I think it should interest most people here.

I believe it demonstrates quite clearly that Australia does not have a property bubble.

Cheers, Shadow.

USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia.

Property bears often claim that Australia has a housing bubble, and they compare Australia to other countries that are known to have had housing bubbles that did burst. Such countries include the USA, Ireland, UK, Spain and Japan. Each of these countries had a confirmed housing bubble. Those housing bubbles were confirmed because they burst, and that is the only way to confirm a bubble. Bubbles can only be confirmed beyond doubt in hindsight, after they burst (because they burst).

However, there are indicators that may be used to identify the absence or presence of a potential bubble. We have enough experience of housing bubbles that burst in other countries to be able to examine the characteristics common to most confirmed housing bubbles.

The housing bubbles in USA, Ireland, UK, Spain and Japan had something in common. They were all characterised by a sharp rise in the house price to income ratio as the bubble inflated, followed almost immediately by a sharp fall in this ratio as the bubble collapsed after prices peaked.

The charts below illustrate this phenomenon quite clearly.

We can use this pattern (the sharp rise in the price/income ratio as the bubble inflates, followed immediately by a sharp fall as the bubble collapses) to determine whether Australia is likely to have a housing bubble at the present time. In Australia, the house price to income ratio did rise sharply until it reached a peak in 2003. At this point one would normally expect the ratio to collapse, if this was indeed a bubble. Instead, the house price to income ratio has remained close to that 2003 level for almost a decade. Now in December 2011, the ratio is still where it was in 2003. This is not normal bubble behaviour. Bubbles (not just housing bubbles, but all asset bubbles) are normally characterised by a sharp rise followed almost immediately by a sharp fall after prices peak. A house price to income ratio that doesn't fall shortly after a peak might be a good indicator for the absence of a property bubble.

Therefore, either Australia does not have a housing bubble, or we have a new type of bubble - a special/different form of property bubble never experienced before. I suspect the former explanation is the more likely. Either way, it is obvious from the charts that Australian property does not necessarily follow the path set by the other countries that the housing bears like to compare us to. Their claims that Australia has a property bubble just like USA/Ireland/UK/Spain/Japan, and that Australian property must crash just like those countries, are clearly unfounded, because we have not experienced house price changes that mirror anything like the changes in those other countries. The present house price to income ratio in Australia has held close to 2003 levels for almost a decade and there is no reason why that ratio needs to suddenly collapse. The current ratio appears to be sustainable.

 

[Intrinsic_Value]

yeah sure not a crash.
but not necessarily a good mechanism to make money either on a medium term basis.

 

[Deltaberry]

A blog on a property website...?

 

[devo76]

Feels like an extended period of lackluster to average property growth to me.
Sure not the best conditions to make money but
#good for survival of current property holders.
#Good for wages and rents to catch up.
#Good for new players to enter the market.
#Good for people wanting to extend beyond property investing but need reason.
#good for the chances of another boom in prices at the end be it 5/10/15 years.

 

[.toe]

Property bears often claim that Australia has a housing bubble, and they compare Australia to other countries that are known to have had housing bubbles that did burst. Such countries include the USA, Ireland, UK, Spain and Japan. Each of these countries had a confirmed housing bubble. Those housing bubbles were confirmed because they burst, and that is the only way to confirm a bubble.

I agree that the only way to confirm a housing bubble is when it bursts. However the corollary of that statement is this, so long as price to income ratios remain high there is no way to confirm no housing bubble.

You can't have your cake & eat it to, and you can't analyse charts and ignore fundamentals. Other countries were shakier than Australia to begin with, at that time. We are not out of the woods yet. If we were meant to have housing prices this high, we would've grown average income by more.

 

[Shadow]

I agree that the only way to confirm a housing bubble is when it bursts. However the corollary of that statement is this, so long as price to income ratios remain high there is no way to confirm no housing bubble.

You can't have your cake & eat it to, and you can't analyse charts and ignore fundamentals. Other countries were shakier than Australia to begin with, at that time. We are not out of the woods yet. If we were meant to have housing prices this high, we would've grown average income by more.

To me, the fact that our price/income ratio has remained close to current levels for almost a decade suggests that current levels may be sustainable.

In every other country that had a housing bubble, the ratio fell sharply immediately after the peak.

Can you give me an example of any housing bubble where the house price to income ratio peaked, then plateaued for almost a decade, and only then crashed?

Or are you saying Australia has a unique type of housing bubble - one never experienced anywhere else before?

 

[Shadow]

A blog on a property website...?

Lots of forums allow users to create their own blog - it's not uncommon.

Edit... just checked, and you can do it on Somersoft too - see here... http://www.somersoft.com/forums/blog.php?do=bloglist

 

[Aaron_C]

I'm not sure how Ireland's price chart works...if the Ireland economy is in deep sh**t now, people are losing their jobs, getting paid less etc. If prices of houses are also falling, how is the ratio falling so dramatically? Shouldn't it be less drastic due to the numerator and denominator both falling?

 

[turk]

A blog on a property website...?

Try Somersoft for a property website that allows blogs

 

[Intrinsic_Value]

Feels like an extended period of lackluster to average property growth to me.
Sure not the best conditions to make money but
#good for survival of current property holders.
#Good for wages and rents to catch up.
#Good for new players to enter the market.
#Good for people wanting to extend beyond property investing but need reason.
#good for the chances of another boom in prices at the end be it 5/10/15 years.

you pretty well hit the nail on the head with this post, well done. I like your time frame for another 'boom' (not being sarcastic), but it implies that a boom will come when its ready, in the mean time, those in the market should be able to survive.
Those that dont have any exposure to the market can enter on reasonable conditions (there is a different risk spectrum between someone with no exposure, and someone up to their eyeballs in debt and property. If someone has no property exposure at all, and property doesnt crash, they could very well further price themselves out of the market in years to come, especially for good suburbs)

Overall good post in my opinion

 

[DanielS]

I often read the comments on SMH every time there's an article about housing prices, where 95% of the posters seem like rabid Steve Keen followers (a non rabid one may settle with 5-10% figure, but the rabid ones truly want a 40% drop).

What I don't get is, why do some people aggregate the whole nation's property and expect the price correction everywhere equally. Even when there is housing crash, shouldn't one be safe if your properties are fundamentally sound? Or at least won't get affected as much.

I have absolutely no evidence, no data, etc, just anecdotal stories. For example, Seattle was largely immune until this year (I was told), but prices in Bellevue and Redmond (where Microsoft is) was still as high as ever. Same with some parts of London and LA (or so I've been told, when I told my friends, "It should be cheaper for you now to buy an apartment!").

 

[silverx]

it looks like bubble appearing in 2003, we should have had the correction during the gfc and i think we were lucky to avoid that big crash. however those other countries are not that lucky unfortunately.

i am not sure how long we can keep this up though

 

[.toe]

To me, the fact that our price/income ratio has remained close to current levels for almost a decade suggests that current levels may be sustainable.

I guess it's possible but I can't really say

In every other country that had a housing bubble, the ratio fell sharply immediately after the peak.

Of the recent bubbles yes, but there have been many others


Can you give me an example of any housing bubble where the house price to income ratio peaked, then plateaued for almost a decade, and only then crashed?

Ask me again in five years haha
But seriously I can't offer that example, but then as many people are fond of pointing out, Australia's case is different.

Or are you saying Australia has a unique type of housing bubble - one never experienced anywhere else before?

I'm actually saying I think they're all unique. Randomness in the markets is the one thing you can count on. The market is undecided on the issue. There may be some data somewhere that will convince the market one way or another. Yet I don't think a half dozen past bubble charts is strong enough evidence, against the likely degree of randomness involved.

 

[hobo-jo]

Why are there different starting years for the charts? It's great what you can do with a change to the start in the index

In regards to your comments about the immediate decline, are you able to point to another bubble which has had as much government intervention as our housing market?

Shadow's Spain/Aus chart with different starting year.

 

[Shadow]

In regards to your comments about the immediate decline, are you able to point to another bubble which has had as much government intervention as our housing market

Yes - the UK, US, Ireland, Japan and Spain housing markets had massive stimulus, including cash rates falling to zero, or very close to zero. In that respect, they had more monetary stimulus than Australia. In the UK, there were even mortgages that tracked 'cash rate minus x%' - they dropped so low that they went negative - i.e. the lenders paid interest to the borrowers! All property bubble markets had huge government and central bank intervention. Home buyer grants are also a feature of UK, US and Irish housing markets (not sure about Japan and Spain).

Australian property did not have much fiscal or monetary stimulus between 2003 and 2008. In fact, interest rates rose continually during this period. Yet our house price to income ratio held fairly steady, around 2003 levels for that half decade. And then, during the following years, despite a huge global financial crisis, the ratio still remained close to 2003 levels. It seems to be quite a sustainable ratio.

Regardless of which time series you use for Spain, they experienced a sharp rise in the house price to income ratio as the bubble inflated, followed almost immediately by a sharp fall in this ratio as the bubble collapsed after prices peaked. This seems to be a characteristic common to all housing bubbles, and notably absent in Australia.

 

[hobo-jo]

I'm sure I could argue and nitpick and likewise you could return for pages on end, but meh...

Priced in real money there was no 10 year plateau:

http://www.bullionbaron.com/2011/09/australian-houses-vs-gold-silver.html

The crash has been in full force for half a decade and counting

 

[Shadow]

I'm sure I could argue and nitpick and likewise you could return for pages on end, but meh...

Priced in real money there was no 10 year plateau:

http://www.bullionbaron.com/2011/09/australian-houses-vs-gold-silver.html

The crash has been in full force for half a decade and counting

Gold and silver aren't real money. Money is a medium of exchange. Very few places will accept gold or silver as a medium of exchange. Try buying your groceries from Coles using gold.

Regardless, the relevant 'plateau' here is the house price to income ratio, which in Australia has remained close to current levels for almost a decade. This is in marked contrast to the price/income behaviour of all other property bubbles.

Also, nobody actually buys houses using gold so it seems pointless to chart house prices against gold prices. You might as well chart house prices against the price of iPads, baked beans, or concert tickets. What relevance does it have to the average person?

However, I must say am glad to see your blog has ceased its mindless focus on 'trolls' and suchlike that you were getting heavily involved in a few months ago... I thought maybe you were losing it there for a while...

 

[contrary]

there is very little actual analysis in this thread. What is the mechanism of action? The transmission mechanism.

To me it hinges around unemployment. Obviously there has been no significant correction in prices here because unemployment has remained low. People will not sell at a singificant loss unless stressed and losing your job which you thought was secure for your mortgage and not being able to find another job for 6 months can do that.

Will the unemployment rate be low in the next 10 years. There is no hard data either way for that which I can see. On one side is the commodities boom. On the other side is the fact that there has been no recession here for 20 years. And then there are the unknowns.

 

[silverx]

i think that's pretty spot on. We had massive increase leading up to 2003 had we had massive unemployment the buble would have burst instead of plateauing for a decade

Actually from the graph itself it sort of show it started to fall during gfc and I think ir cuts and government intervention prevent it falling further

 

[hobo-jo]

Gold and silver aren't real money. Money is a medium of exchange. Very few places will accept gold or silver as a medium of exchange. Try buying your groceries from Coles using gold.

Sure they are. In fact some Perth Mint coins are legal tender in Australia so you could use them at Coles... but you'd be an idiot to do so (face value $1, commodity value $30).

However, I must say am glad to see your blog has ceased its mindless focus on 'trolls' and suchlike that you were getting heavily involved in a few months ago... I thought maybe you were losing it there for a while...

Your work is actually quite good (regardless of whether I agree with everything you post), you should start a blog on a proper platforum like wordpress or blogger. That said I can understand you want to keep drawing hits to your Australian Property Forum honeypot.