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Christopher Joye turns bear - Australian housing bubble is now here; House prices have inflated at a 9.5% annualised pace (triple wages growth)
Topic Started: 19 Jul 2014, 01:12 PM (21,411 Views)
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Quote:
 
http://www.afr.com/f/free/blogs/christopher_joye/stretched_housing_valuations_mean_4rJJJmv1Sl2cMYHpYUFWeO

Stretched housing valuations mean bubble is here

With Australian home values in absolute terms and compared to incomes now at, or near, multi-decade peaks, there is a case that we have an emerging bubble. While Stevens has been reluctant to mention the “b-word”, the RBA’s latest research lends weight to the notion valuations are getting stretched.

In a new paper the RBA presents two main estimates of valuations: one based on house price growth rates since 1955 and another using capital gains over the last decade. Both are used as proxies for future gains.

The RBA’s 1955 number, equivalent to annual future price appreciation of about 5 per cent in nominal terms, appears to have been cherry-picked to engineer the politically palatable result that Australian home values were exactly fully priced in April 2014.

The RBA knows we don’t have reliable housing data before 1980 and has often argued the unusually strong gains over the last 30 years were boosted by the big one-off decline in interest rates after inflation stabilised in the mid-1990s. The average variable mortgage rate between 1980 and 1993 was 13.2 per cent, but has averaged 7.6 per cent since. The message is prospective capital returns are likely to be much skinnier than during the 1980s, 1990s and early 2000s.

So when the RBA deploys its alternative assumption – which is the more modest annual house price growth rate since 2004 of about 4 per cent in nominal terms – its model finds that Australian homes are 19 per cent overvalued. This just happens to be the same result you get if you compare the house price-to-income ratio to its average since 1993.

Other credible benchmarks on which to base future house price appreciation – including household income growth, the returns consumers think they will get and the rate at which rents rise – similarly imply that housing is overvalued by between 20 per cent and 30 per cent.

One of my preferred anchors for capital gains is household income growth per capita. Here the RBA paper echoes an observation I have posited before: that housing has historically been a “superior good”.

This means families have been prepared to spend a growing share of their earnings on buying properties even as prices climbed. But this process cannot continue indefinitely and may have run its course.

So what is a “bubble”? Simply put, it’s where prices materially exceed fair value. Speculative mania and/or rapid credit growth are only portents, not conditions, precedent to a bubble existing.

RBA officials claim they are not worried about a bubble because credit growth is low. This is muddle-headed for two reasons: first, housing credit growth is outpacing incomes, which is the key criterion; second, credit growth is only meaningful in respect of the light it sheds on changes in the level of household leverage and the probability of borrowers defaulting.

Low leverage combined with strong credit growth is a sign of dangerous conditions ahead. But RBA data shows that historically and internationally lofty leverage has already arrived: Australia’s 150 per cent household debt-to-income ratio is approaching its pre-financial crisis apogee. All we need now is an interest rate, income or unemployment rate shock to crush house prices and send leverage into uncharted territory.

And contrary to RBA rhetoric, house prices are hardly “cooling”. In the first seven months of 2014, prices have inflated at a 9.5 per cent annualised pace (triple wages growth).

Melbourne values are appreciating more rapidly than Sydney, with both realising strong double-digit gains this year. Many pundits were fooled by the winter seasonal slowdown, which has been reversed. With banks promoting the cheapest mortgage rates ever, I suspect Australia’s nascent housing bubble will get bigger.

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Edited by CrossPost, 19 Jul 2014, 01:13 PM.
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ThePauk
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Mmmm, the bull king turns around. I wonder how long it will take for other thinkers to do the same? Shads? Where is your rebuttal?
Edited by ThePauk, 19 Jul 2014, 02:16 PM.
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All Part Of The Cycle
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It's all part of the cycle. We are in the house prices accelerating at 3 times income part of the cycle now. No bubble to see here.
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Shadow
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Quote:
 
there is a case that we have an emerging bubble

I suspect Australia’s nascent housing bubble will get bigger
Emerging / nascent...

adjective: nascent
just coming into existence and beginning to display signs of future potential


Yes, a bubble may be beginning to come into existence, and if it does, then the question is... for how many years might this potential bubble inflate before it eventually pops?

Most bubbles that popped in other countries ran for quite a few years - i.e. house prices rose faster than income growth for about ten years in Ireland, USA, and Spain in the immediate run-up to their crashes.

House prices in Australia have only been rising faster than incomes for the past 18 months, but so far this is just catchup to the previous two years when house prices fell while incomes kept rising. In fact our house price to income ratio today is still close to the level it was at in 2003, over a decade ago.

If house prices here do keep rising faster than incomes for several more years then potentially we might have something to pop. This is what Chris is talking about when he mentions a 'nascent' bubble.
Edited by Shadow, 19 Jul 2014, 03:59 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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Chris
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Shadow
19 Jul 2014, 03:52 PM
Emerging / nascent...

adjective: nascent
just coming into existence and beginning to display signs of future potential


Yes, a bubble may be beginning to come into existence, and if it does, then the question is... for how many years might this potential bubble inflate before it eventually pops?

Most bubbles that popped in other countries ran for quite a few years - i.e. house prices rose faster than income growth for about ten years in Ireland, USA, and Spain in the immediate run-up to their crashes.

House prices in Australia have only been rising faster than incomes for the past 18 months, but so far this is just catchup to the previous two years when house prices fell while incomes kept rising. In fact our house price to income ratio today is still close to the level it was at in 2003, over a decade ago.

If house prices here do keep rising faster than incomes for several more years then potentially we might have something to pop. This is what Chris is talking about when he mentions a 'nascent' bubble.
And maybe you are nascent on the idea a bubble even exists?!

Wow, the universe is a magical place.

You keep saying " income to prove ratios haven't changed since 2003" and you are yet to provide any credible evidence to support the same. Just because you keep saying it and showing unsubstantiated graphs and images to support it doesn't make it true.

And even if it was, all you are proving is that housing has been unaffordable for a decade or more. I would love to hear just one convincing arguemrnt from you Shadow either way.
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ThePauk
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Shadow
19 Jul 2014, 03:52 PM
Emerging / nascent...

adjective: nascent
just coming into existence and beginning to display signs of future potential


Yes, a bubble may be beginning to come into existence, and if it does, then the question is... for how many years might this potential bubble inflate before it eventually pops?

Most bubbles that popped in other countries ran for quite a few years - i.e. house prices rose faster than income growth for about ten years in Ireland, USA, and Spain in the immediate run-up to their crashes.

House prices in Australia have only been rising faster than incomes for the past 18 months, but so far this is just catchup to the previous two years when house prices fell while incomes kept rising. In fact our house price to income ratio today is still close to the level it was at in 2003, over a decade ago.

If house prices here do keep rising faster than incomes for several more years then potentially we might have something to pop. This is what Chris is talking about when he mentions a 'nascent' bubble.
I read it as the CJ is saying the bubble is here now...

CHRISTOPHER JOYE
Stretched housing valuations mean bubble is here
PUBLISHED: 13 HOURS 45 MINUTES AGO | UPDATE: 8 HOURS 13 MINUTES AGO
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Shadow
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ThePauk
19 Jul 2014, 06:13 PM
I read it as the CJ is saying the bubble is here now...

Stretched housing valuations mean bubble is here
Writers don't get to choose their own titles. The papers have editors who come with headlines that they think will get the most hits. The content of the article is the writers own words but the title is just something vaguely based on the article but created by someone else. An article titled 'Potential Bubble May Be Emerging' is not as attention grabbing as 'Bubble Here Now'. More clicks = more revenue.


Chris
19 Jul 2014, 04:34 PM
You keep saying " income to prove ratios haven't changed since 2003" and you are yet to provide any credible evidence to support the same

And even if it was, all you are proving is that housing has been unaffordable for a decade or more. I would love to hear just one convincing arguemrnt from you Shadow either way.
Go here... http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

Click on 'Prices against average income' and then add Australia to the chart. It will look like this...

Posted Image

Our price/income ratio today is roughly where it was a decade ago.

Chris
19 Jul 2014, 04:34 PM
housing has been unaffordable for a decade or more
If housing has been unaffordable for a decade then how come so many people have been able to buy homes over the past decade?

Roughly half a million homes are bought every year, and mortgage default rates are very low, so it seems plenty of people are able to afford these 'unaffordable' homes.

Just because you can't afford to buy a home doesn't mean nobody else can.
Here's another recent price/income ratio chart published by permabear Callum Pickering on Business Spectator last week...

http://www.businessspectator.com.au/article/2014/7/15/property/great-australian-housing-rip

Posted Image
Attached to this post:
Attachments: Aus_Price_Income_Ratio.jpg (47.78 KB)
Edited by Shadow, 19 Jul 2014, 06:45 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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Ex BP Golly
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Gawd, CJ joining the Catherine Cashmore brigade!

Shame with only have Shadow left to give him a good pantsing :lol :lol :lol
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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Veritas
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Ex BP Golly
19 Jul 2014, 06:45 PM
Gawd, CJ joining the Catherine Cashmore brigade!

Shame with only have Shadow left to give him a good pantsing :lol :lol :lol
And he doesn't usually work Saturdays.

Must have to do overtime with this article coming out.
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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miw
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Personally, I disagree with CJ's definition of a bubble:

Quote:
 
So what is a “bubble”? Simply put, it’s where prices materially exceed fair value. Speculative mania and/or rapid credit growth are only portents, not conditions, precedent to a bubble existing.


In normal usage, a bubble is where prices of an asset exceeds fair value by a hell of a lot - not just a material amount. In most of the famous bubbles we are talking about multiples in the 10s or even 100s. I'd be prepared to accept a multiple of 1.75 for property since it is normally such a non-volatile and illiquid asset. CJ's claim that speculative mania being just a portent and not a condition for a bubble existing would disagree with every other definition of a bubble that I have ever heard. I do agree that credit growth is not a requirement. There have been bubbles little credit or no credit at all being involved.

However, if you do accept CJ's incorrect definition, and read what he actually wrote (i.e. that there may be a 'nascent bubble') then I'd say that he could be correct for some markets in oz. Of course, by his definition, there is a "nascent bubble" in most markets every 10 years or so, so it's not exactly earth-shattering news.

Putting aside high-end luxury property aside, there is only one indicator of "fair value". What are people prepared to pay for the right to use the property per week or per year? Wake me up when nett rental yields drop below 1.5% in capital cities.

CJ just jumped the shark because people have stopped listening to him and it offends his vanity.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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