The National Housing Bubble That Isn’t

I found this story Central banks’ QE fuels ‘insanity trading’, says US Investment expert Ed Yardeni fascinating.

Ed Yardeni, a former US Federal Reserve economist, believes that quantitative easing in markets around the world has been a possible catalyst for deflation. His argument is that quantitative easing is increasing supply faster than demand. He has been scolded by some of his peers for suggesting it, but I think he has at least half a point.

Let me tell you it’s wrong to take a broad-brush stroke on the housing market when all the evidence suggests there is no national housing bubble currently in existence.

I am not so sure that interest rate cuts on their own directly result in deflation. However, I do believe there is a positive causal relationship between increasing levels of debt relative to incomes, and deflation. If you increase debt compared to incomes, that means your disposable income will be less as consumers focus on paying the debt back. It’s very much like the vicious cycle of payday loans that ABC’s Four Corners ran last night.

That program covered the story of a number of poor individuals taking out loans to pay bills, and the debt is then repaid back on their payday. The problem is the pay down of the loan leaves them with little disposable income and so they have to take out another payday loan to get by. All the while they pay ‘rip-off’ interest rates to their lenders.

On the global scale, central bankers think the best way to get global growth going is by offering cheaper debt. But it seems central bankers are ignoring or failing to grasp that one of the primary reasons we have slower economic growth is because the world had too much debt in the first place and we are now setting aside increasing levels of our disposable income in an attempt to pay it back. 

Deflation, if it were to truly grip the global economy, would likely be bad for existing property investors in the long run as it would mean rents would likely be flat or fall, incomes would fall and eventually, so would property prices, especially if prices were boosted by low interest rates and a national housing bubble was going on.

Speaking of which, I’ve noticed increasing media chatter about a national housing bubble that we apparently have, here and now! Let me tell you it’s wrong to take a broad-brush stroke on the housing market when all the evidence suggests there is no national housing bubble currently in existence. Sure, you could make the claim that Sydney property is overvalued and in bubble territory. Perhaps you could make the claim that parts of Melbourne are also experiencing a strong run up in prices as well.

However, please try telling residents of Adelaide that they are in the midst of a property bubble when prices have been almost stagnant for the past 12 months. Prices haven’t done much better in Brisbane, Hobart or Canberra for that matter. Or the Gold Coast and Sunshine Coast which have recently bottomed out after a housing price crash.

Are they currently in a bubble as well? Are they really experiencing a “run-up in housing prices fuelled by demand, speculation and the belief that recent history is an infallible forecast of the future.”?? Clearly not.

There are also literally hundreds of other smaller townships and residences dotted around the country which have not experienced capital growth in a very long time and are running at discounts to incomes. These localities are influenced by local factors. No matter how cheap mortgages are, prices in these localities will still rise and fall, largely as a result of the fortunes of their local economies.

So no, the evidence of a current national housing bubble is very weak indeed. And for those people that don’t believe our asking prices charts, here is a table from the Australian Bureau of Statistics that very much shows the same thing. Note the one and ten-year annualised results for most cities appear rather benign.

 

So to those who have claimed there is a national housing bubble in this country, by all means make a point about excessive debt and the banks increasing their grip on our economy and indeed, the global economy. I believe in this notion too. But let’s not make a broad public statement on the current national housing market when it is simply not based on facts. Such claims reek of sensationalism and attention seeking and fundamentally take away from some other solids points that deserve to be addressed and resolved by our leaders.

But that does not rule out that we won’t get a housing bubble in future. Our forecasting modelling does suggest that the current low rates and low Australian dollar will be increasingly stimulatory to at least the Melbourne and Brisbane markets on top of the already booming Sydney market. 

The above table covers our forecasts for this year made back in September. For the record, given the interest rate cut we have had and the fall in the Australian dollar, we now believe our ‘Scenario Two’ forecasts are increasingly in play over the base case ‘Scenario One’ forecasts. And on those numbers, Melbourne and Brisbane house prices could take off, particularly later in the year. 

In recent weeks, the RBA has made it clear that monetary policy will not be dictated by what is happening in Sydney. However, if we were to throw Melbourne and Brisbane into a housing boom, that could very well change. The three largest cities all in a boom would create significant concerns for the RBA and in my opinion would certainly stop the easing cycle. Indeed, the RBA would likely raise rates to stop the excessive property speculation unless APRA finally took some real action. 

In Sydney itself, I recognise the market is trading in overvalued territory. Our chart below is clear on this point. If our forecasts are right for this year, the market will move to a point which would suggest it is 40% overvalued. That would be the second highest point we will have reached since the 1980s.

 

 

 

 

 

 

 

 

 

 

 

On the flip side, I would like to point out that there are some very logical reasons for this which are not in any way associated with cheap mortgages.  Sydney has, for example, strong population growth. The city expanded by an estimated 90,000 people last year. With this population increase the city has still been under building even while building approvals have picked up. NSW has a strong state economy and the future is looking good on infrastructure spending, presuming the ‘poles and wires’ sell-off goes through state parliament. Sydney unemployment is lower than the national average.

So there are quite a few positive things happening in the city that help explain the large premiums being paid for housing. Sydney is very much like a bluechip listed company trading at a high price-earnings multiple.

That said, eventually the good news will be well and truly priced in and that could be in the near term, particularly if our forecasts for this year come into play.