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When will the 'inevitable' Australian property crash begin? When does 'The Bubble' actually pop?
Topic Started: 14 Jul 2014, 11:31 AM (12,137 Views)
Ex BP Golly
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Shadow
16 Jul 2014, 11:53 AM
Possible, but unlikely.

If anything we will continue to move in the direction of less regulation, lower structural interest rates, more competition, foreign lenders, Coles now issuing loans etc.
What you see as a block to further regulation, I see as a cause for it.

Interesting.
Shadow
16 Jul 2014, 10:07 AM
Sometime after a bubble develops.

Based on recent pops in other countries, that would be after a protracted period of growth in price/income ratios, plus a construction boom that leads to a large glut of unsold homes.
As to your first precondition 'price/ income ratios' and looking at the period of growth leading to America popping, would you say Australia has experienced a period of protracted growth?:
Posted Image


Edited by Ex BP Golly, 16 Jul 2014, 12:13 PM.
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Sydneyite
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Ex BP Golly
16 Jul 2014, 12:05 PM
As to your first precondition 'price/ income ratios' and looking at the period of growth leading to America popping, would you say Australia has experienced a period of protracted growth?:
Re your price incomce chart, remember the US population is far more distributed than ours. If you looked at that ratio say for the top 10 populated US cities only, I'd bet it would look very similiar to ours. Likewise if you plotted regional Australia only, we would look more like them on your chart.

Also the income distrubution in the US us far different to Australia - we do not have ~40% of our workforce living $5/hour - our minimum is 3-4 times theirs. The "average" figure used on those charts is simplistic and does not account for differences in the income distribution, which are significant. So I think wage multiples are useful maybe for looking at changes over time in one country/region, but pretty useless for comparing between countries.

These are the reasons that the comparison on that chart is not apples-apples.
Edited by Sydneyite, 16 Jul 2014, 12:53 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Wisebear
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Shadow
16 Jul 2014, 11:45 AM
I don't think anyone is saying prices couldn't revert if the financial conditions prevalent in the past returned.
Shadow, this is a big step for you. I’m sure that you used to believe that property had entered a new paradigm and that the structural changes to the property market were some sort of a one off, magical realignment. Anyway, you’ve certainly made some progress now that you accept that a return sound financial regulation would crash the property market.

Can you please provide some context though? Say we had a 10% cash rate and mortgage restrictions of 3x income, how big do you think the crash would be?
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Ex BP Golly
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Sydneyite
16 Jul 2014, 12:52 PM
Re your price incomce chart, remember the US population is far more distributed than ours. If you looked at that ratio say for the top 10 populated US cities only, I'd bet it would look very similiar to ours. Likewise if you plotted regional Australia only, we would look more like them on your chart.

Also the income distrubution in the US us far different to Australia - we do not have ~40% of our workforce living $5/hour - our minimum is 3-4 times theirs. The "average" figure used on those charts is simplistic and does not account for differences in the income distribution, which are significant. So I think wage multiples are useful maybe for looking at changes over time in one country/region, but pretty useless for comparing between countries.

These are the reasons that the comparison on that chart is not apples-apples.
There is a cool interactive chart here for checking income to price ratios in America (third option) with 10 city and 20 city index and individual cities.

It seems to be consistent across the board and in line with the chart above.

http://www.economist.com/blogs/graphicdetail/2014/02/us-house-prices

Well worth a play!

As Im regional and remote at the moment and dependant upon a (not so smart) phone, maybe someone would be kind enough to post it up for me.
Edited by Ex BP Golly, 16 Jul 2014, 01:36 PM.
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Ex BP Golly
16 Jul 2014, 12:05 PM
What you see as a block to further regulation, I see as a cause for it.

Interesting.

As to your first precondition 'price/ income ratios' and looking at the period of growth leading to America popping, would you say Australia has experienced a period of protracted growth?:
Posted Image

Based on this chart, one would have been encouraged to sell Australian Property and pile into US property in 2005-2006.

Not a very useful chart.
(S – I) + (T - G) + (M - X) = 0
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Ex BP Golly
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Ex BP Golly
16 Jul 2014, 01:24 PM
There is a cool interactive chart here for checking income to price ratios in America (third option) with 10 city and 20 city index and individual cities.

It seems to be consistent across the board and in line with the chart above.

http://www.economist.com/blogs/graphicdetail/2014/02/us-house-prices

Well worth a play!

As Im regional and remote at the moment and dependant upon a (not so smart) phone, maybe someone would be kind enough to post it up for me.
Show me a chart you have found useful. :wak:

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Shadow
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Ex BP Golly
16 Jul 2014, 12:05 PM
As to your first precondition 'price/ income ratios' and looking at the period of growth leading to America popping, would you say Australia has experienced a period of protracted growth?
It did in the late 90s and early 2000s as a result of financial deregulation, but that process ended more than a decade ago, and since then prices have simply tracked income growth. So current price/income ratios in Australia have been sustained for over a decade. The current ratio appears to be sustainable.

In all other countries that had a housing crash, the crash happened immediately after the sharp rise in price/income ratios and construction boom. That's because price/income ratios in those countries grew to levels that could not be sustained.

There have been no cases ever in the history of popped bubbles where a bubble suddenly popped after relatively stable price/income ratios had been sustained for a decade.
Wisebear
16 Jul 2014, 01:17 PM
I’m sure that you used to believe that property had entered a new paradigm and that the structural changes to the property market were some sort of a one off, magical realignment.
Incorrect. I have always said the run up in price/income ratios during the late 90s and early 2000s was a result of financial deregulation. If that financial deregulation is reversed, then house prices would fall back to earlier price/income ratios. But in my opinion the likelihood of financial deregulation being reversed any time soon is pretty remote. If anything, there is likely to be further deregulation, lower structural interest rates, increased competition from foreign lenders and supermarkets etc.

Quote:
 
Can you please provide some context though? Say we had a 10% cash rate and mortgage restrictions of 3x income, how big do you think the crash would be?
If mortgages were restricted to 3x income then we could see price/income ratios fall back to 3x household income instead of the current 4x to 5x household income.

Which aspects of financial deregulation do you believe will be reversed, and when?
Edited by Shadow, 16 Jul 2014, 02:09 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Veritas
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Shadow
16 Jul 2014, 02:02 PM
It did in the late 90s and early 2000s as a result of financial deregulation, but that process ended more than a decade ago, and since then prices have simply tracked income growth. So current price/income ratios in Australia have been sustained for over a decade. The current ratio appears to be sustainable.

In all other countries that had a housing crash, the crash happened immediately after the sharp rise in price/income ratios and construction boom. That's because price/income ratios in those countries grew to levels that could not be sustained.

There have been no cases ever in the history of popped bubbles where a bubble suddenly popped after relatively stable price/income ratios had been sustained for a decade.
Sustained by:

1. Extremely favourable economic fundamentals that are now deteriorating.
2. Massive fiscal Stimulus in Australia
3. The Largest fiscal stimulus package in world history in China
4. Massive monetary stimulus through rate cuts.

So as long we have all those ducks in a row at the next whiff of trouble we should be absolutely fine. :re:
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Sydneyite
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Shadow
16 Jul 2014, 02:02 PM
If mortgages were restricted to 3x income then we could see price/income ratios fall back to 3x household income instead of the current 4x to 5x household income.
Actually I'm not convinced even this would happen. Most banks lend pretty much a max of 3 times houshold (gross) income anyway currently. For higher income earners they can usually get a bit more (their living expenses are a lower proportion of their income after all), but for average earners, ~3 x is pretty typical.

The reason prices are 4-5 times is because the vasy majority of dwelling purchases are repeat buyers who also bring equity to the table to add to their 3 x times income in borrowing capacity. I don't think this picture would change much if a 3 x lending ratio became a regulatory requirement.

By the way, I think such a lending ratio restriction would be a dumb policy. If I can show that have the capacity to pay back the loan and the bank is happy with that then we are all concenting adults and I should be able borrow what I want / need, and they should be able to lend me what I want / need.

Regulation should focus on ensuring the risk assesment, credit worthiness assesments etc are done adequately so that banks don't take on excessive risk, as well as capital adequacy requirements and so on to ensure liquidity is available to cover statistically possible defaults across the banks loan book etc etc.
Edited by Sydneyite, 16 Jul 2014, 02:25 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Shadow
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Evil Mouzealot Specufestor

Veritas
16 Jul 2014, 02:10 PM
Sustained by:

1. Extremely favourable economic fundamentals that are now deteriorating.
2. Massive fiscal Stimulus in Australia
3. The Largest fiscal stimulus package in world history in China
4. Massive monetary stimulus through rate cuts.

So as long we have all those ducks in a row at the next whiff of trouble we should be absolutely fine. :re:
You've been reading too much Macrobusiness.

1. Unemployment is pretty steady and residential construction is taking over from the mining boom. Apart from the mining boom slowing, everything else is actually going OK.

2. The USA also had massive stimulus, but it didn't prevent house prices there crashing because they had an actual housing bubble. Also Australia government debt is very low by global standards. Plenty of scope for more stimulus there if needed.

3. Until their next one.

4. Rates can be cut further if needed, although increased banking competition will probably do the RBA's job for them here.
Sydneyite
16 Jul 2014, 02:23 PM
Actually I'm not convinced even this would happen. Most banks lend pretty much a max of 3 times houshold (gross) income anyway currently. For higher income earners they can usually get a bit more (their living expenses are a lower proportion of their income after all), but for average earners, ~3 x is pretty typical.
I think you're right, but I was assuming Wisebear meant restricting to 3x single income - i.e. pre-financial deregulation style of not considering the wife's income etc.
Edited by Shadow, 16 Jul 2014, 02:36 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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