SMH March 23, 2011: House prices! Now that I have your attention, here’s a pop quiz: in which Shakespeare play does the phrase “bubble bubble, toil and trouble” feature? If you guessed Macbeth, you’d be wrong. The actual phrase chanted by the three witches around their cauldron of “liver of blaspheming Jew” and “finger of birth-strangled babe” is in fact “double double toil and trouble”. The witches are literally brewing “double trouble” for the impressionable Macbeth. Sometimes we see bubbles where there are none.
In Australia, concerns about a house price bubble have spawned reams of prose on countless blogs and websites warning of impending doom. Associate Professor Steve Keen of the University of Western Sydney is the de facto leader of bubblephobia, attracting a loyal and passionate following to his Debtwatch blog.
The authors of these blogs and websites see themselves as guerilla cells working to detonate Australians’ warped obsession with property, which they see as fuelled by low-rent property spruikers and a hopelessly conflicted media empire that makes money out of selling property advertising.
Somewhat undermining their argument, it is the media that periodically causes a spasm of alarm about potential property price falls by reporting the results of international surveys suggesting Australia is home to the most overvalued housing in the world.
The Economist magazine recently published yet another of its surveys estimating Australian houses are “overvalued” by 56 per cent – the highest in the world – on a historical ratio of rents to house prices. (The so-called Economist Intelligence Unit manages to routinely overlook the different tax treatment of investment housing in Australia, which encourages landlords to chase capital gains and treat rental returns as secondary.)
Less sophisticated bubblers simply compare the rise in house prices over the past few decades to the rise in wages to make the “overvalued” claim, pointing out that the former vastly outperforms the latter.
But this overlooks the historic boost to household borrowing capacity that occurred in the 1990s with the halving of nominal interest rates. This, in effect, doubled the amount households were able to borrow against a certain income. The relaxation of lending standards by banks in response to financial deregulation also increased the amount banks were willing to lend against that income. These two factors are largely responsible for the increase in household debt between the mid-1990s and 2000s.
Sophisticated bubblers such as Keen acknowledge this, but are convinced that debt levels are unsustainable. Some shock will happen, they say, such as high unemployment that will lead to forced sales and falling prices. The bubble, by definition, must pop.
You see, house prices only fall when people are forced to sell their homes. Otherwise, households choose to simply remain in their home and wait things out. Property investors are loath to realise their capital loss.
A true collapse in house prices would indeed require some large external shock – a doubling of unemployment or interest rates – to trigger the wave of forced home sales that it would take to provoke house price falls.
With low joblessness in Australia and the big surge in national income created by the mining boom, it is hard to see the trigger for such an event.
That does not mean, however, that housing in Australia is not expensive compared to other countries. Economists such as HSBC’s Paul Bloxham have pointed out that there may be good reasons for Australian houses being expensive. Compared to the rest of the world, we have high quality housing stock, with a high proportion of solidly constructed houses on big blocks. Most of the population is concentrated in a few capital cities with often marvellous water views. The dire state of public transport in big cities such as Sydney only increases the premium on properties located close to the CBD.
The Reserve Bank has also sought to dispel fears of a bursting property bubble by pointing out that the rise in debt levels has been concentrated in the hands of those who can most afford it. In a Bulletin article last week, RBA staff analysed data from the Melbourne Institute’s household, income and labour dynamics in Australia survey to show how by the end of the noughties, 73 per cent of the value of home loans were in the hands of the top 40 per cent of households by income, up from 69 per cent at the turn of the century. The article also found that about half of households are ahead of schedule on their loan repayments, giving them something of a buffer should they lose their income temporarily.
Finally, those predicting big house price falls should also recall the recent experience during the global financial crisis when policy makers, confronted by an external shock capable of puncturing house prices, acted quickly to cushion the economy with interest rate rises and fiscal stimulus.
The Reserve Bank governor, Glenn Stevens, was asked recently whether the prospect of house prices falling kept him awake at night. “I worry about a lot of things at night,” the governor confided before admitting that falling house prices were not among them.
Because here is the surprising thing. House prices, in Sydney at least, have been falling relative to incomes for some years. The great house price deflation is already happening, just very slowly and in an exceedingly calm manner.
Another enthusiastic blogger – Christopher Joye, the managing director of the real estate funds manager Rismark International – says Sydney house prices have risen by a compound annual rate of just 2.1 per cent since 2003. Hardly a housing bear. Even Joye expects house price rises to lag income growth for the next 18 months, helping to improve affordability.
That’s the slowly deflating hiss of an overpumped air mattress you can hear, not a bubble bursting.
Ross Gittins is on leave.