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Australian Property Bubble
Australia’s double trouble: The housing bubble and mining boom
Philip Soos, Paul D. Egan and Lindsay David
Australia has contracted a severe real estate bubble, which threatens to burst and throw our economy into disarray, yet attempts to warn Australians about this are censored by our mainstream media, say economists Philip Soos, Paul D. Egan and Lindsay David.
The most important lesson to draw from recent international experience is that a run-up in housing prices and debt need not be dangerous for the macroeconomy, was probably inevitable, and might even be desirable. As emphasised by the BIS Committee on the Global Financial System’s Working Group report, the expansion in household borrowing has in many cases reflected better pricing of risk and credit scoring, implying that credit is being allocated more efficiently than in the past.
OVER THE LAST DECADE, Australians have debated the causes of the rapid housing price inflation and perceived lack of affordability.
In the domestic mainstream media – apart from Steve Keen – this debate has been a very one-sided affair. With no invitation by the mainstream media to the contrarians for their views and research, you can bet that the housing lobby will continue to fool Australians into believing that one of the world’s least densely populated countries has a chronic housing and land shortage.
As a result, the mainstream media is deciding for you whether Australia is experiencing a debt-fuelled real estate bubble. Those attempting to warn about the housing bubble have been effectively censored, with the media refusing to provide coverage to the only two books detailing the economic problems the end of the housing bubble and mining boom will cause.
Lindsay David published his book in April of this year, called Australia: Boom to Bust, yet no journalist or reporter in the domestic media will review it. The only coverage has been a solitary article in the St George and Sutherland Shire Leader. Nonetheless, on Amazon Australia, over the last 90 days, it has been the best-selling economics book authored by an Australian.
Paul D. Egan and Philip Soos published their book in June called Bubble Economics: Australian Land Speculation 1830-2013, freely available online, but likewise ignored. Crispin Hull, an independent journalist, has provided coverage, but only because he used to be the editor of The Canberra Times.
When any economist or analyst from the RBA, Treasury, banks, private research firms or real estate institutes comment about the housing market, no matter how outlandish, it is provided wide coverage in the media. When the only two books on the housing bubble are published – a combined 1,000+ pages of the most in-depth research on real estate, banking and mining available – the media are curiously absent.
The existence of a bubble requires both the public and elites to deceive themselves into believing the commonplace delusion that housing prices are rational. Commentators and investors are adversely affected by a range of cognitive, emotional, social and cultural biases, reinforcing the belief that high prices are the consequence of a supply-demand imbalance caused by ‘structural factors’ such as housing/land shortages, and low interest rates.
Since 1996, prices have outpaced inflation, incomes, rents and GDP, making it difficult for potential first home buyers to enter the market and realise the ‘Australian dream’. It should be obvious to any impartial observer that Australia’s housing market is gripped by yet another bubble, despite the protestations of government, industry and the economics profession in general. The rich historical record is ignored outright, even though it plainly demonstrates a repeating pattern of asset bubbles over the last 180 years.
Speculative frenzies in the land market prior to the 1840s and 1890s depressions, and in the stock and land markets before the onset of the 1930s depression, have almost gone unnoticed. These bubbles occurred long before government took a more interventionist role in the economy post-WW2. In recent decades, economists also failed to recognise the recessions of the mid-1970s and early 1990s were intimately linked with rampant speculation in the commercial and residential property markets.
Like those throughout history, the modern speculator confuses price with value — adopting strategies predicated on capital gain rather than income flows.
A host of metrics indicate an immense housing bubble: rapid price inflation of 123 per cent in real terms between 1996 and 2010, a doubling of total land values relative to GDP in the same period, compression of gross and net housing yields to a historical low of 3.9 and 1.9 per cent nationwide in 2013, and the failure of rental income to cover expenses, principal and interest for investment properties since 2001.
A net price to earnings ratio of 53 indicates investors are price-insensitive and willing to pay massive premiums for residential assets, despite the paltry rental income. Depending on the measure of housing valuation used, real housing prices could fall between 30 to 50 per cent across the capital cities, devastating the economy and rendering Australia’s financial sector insolvent.
Using concerns about housing affordability as a pretext, a host of government policies have been implemented to keep inflated prices aloft, including first home owners grants and boosts, negative gearing, capital gains and land value tax concessions and exemptions, and liberalisation of self-managed superannuation funds and foreign investment. These policies clearly indicate our political and economic leaders have been managing a bubble, not an economy.
Australia’s woes are compounded by the forthcoming end to the largest mining boom since the mid-19th century gold rushes, reliant on China’s own massive real estate bubble. The record terms of trade helped to boost income growth during the 2000s, but if it reverts back to its long-run average, income growth and employment will be adversely affected.
Between January and November of 2013, in just eleven months, 6.4 billion square metres of real estate was being constructed in China. Of that, 4.7 billion square metres was for residential space. China was constructing 3.45 square meters of residential floor-space for every Chinese man, woman and child with an estimated year-on-year growth rate of 13.5 per cent. That means consuming a lot of Australian iron ore.
This would leave China, the world’s most populous country, with more apartments than people sometime between 2021 and 2027. Even if the Chinese data is either overstated or understated, there is simply no common sense to the belief that China will continue to propel its residential construction sector at such a senseless rate. But Australian policy-makers have faith they will because our mining industry depends on it.
With China aiming for 70 per cent of its population to be urbanised by 2035, it is likely there is enough housing stock and infrastructure (plus a few million extra apartments) already built to house the hopeful influx of new migrants to the city — two decades ahead of schedule. They are generally from poor farmland regions of China and expected to pay 15 to 45 times their new urbanised annual income for home ownership. The Chinese real estate bubble will end badly.
Two of the Big Four banks in Australia probably only survived the GFC via an extended and secret Fed liquidity injection, while the remainder of the stressed banking sector continued operation only through mergers, acquisitions and favourable treatment — RMBS purchases, expanded deposit and wholesale funding guarantees, and short-selling bans to protect share prices.
The government dares not mention this inconvenient fact; it would badly shake public confidence in the illusory strength of the illiquid, over-leveraged, under-capitalised, highly concentrated, foreign-funds addicted and heavily over-compensated banking sector. The Big Four banks have manipulated the internal risk-weighted asset methodology to fortuitously determine an average capital buffer of only 1.5 per cent is necessary to withstand future residential portfolio defaults.
To put the situation into perspective, Lehman Brothers had assets on its balance sheet equivalent to 5 per cent of U.S. GDP. Each of the Big Four’s balance sheets shows asset holdings equivalent of 42 to 48 per cent of Australian GDP. Two of the Big Four today hold less cash but more assets than Lehman Brothers did fifteen months prior to its collapse. The banks will experience financial difficulty if they are unable to lend more to new homeowners and investors than they did the prior year.
The ‘going for growth’ business model will inevitably break down. Lending less to the household sector will significantly inhibit its ability to pay more for a dwelling than a new homebuyer was previously able to. The result will be a decline in property/land prices which, in return, will reduce the profitability of the banking system, leading to a ‘house of cards’ moment.
The ‘too big to fail’ banks know they are immune from insolvency, continuing high-risk practices that sustain abnormally inflated profits.
To prevent a future catastrophic 1890s-style banking collapse, a taxpayer-funded Committed Liquidity Facility is planned, alongside a bail-in framework permitting the theft of depositor funds and capital controls.
Rather than making Australia’s economy more competitive and efficient, neoliberal ‘reform’ has undermined future prospects by encouraging the rapid growth of the FIRE sector, generating the largest credit boom and land market bubble in its history.
The dire consequence has been the rise in the unconsolidated household debt to GDP ratio from 46 to a record 111 per cent between 1993 and 2010 — lifting residential land prices far beyond economic fundamentals.
As history and recent international events have plainly demonstrated, the experts are generally oblivious to asset bubbles, let alone the damaging impacts of a collapse on the economy and broader society. Australia’s economics profession has a perfect 100% failure rate in identifying stock and land market bubbles and predicting the ensuing chaos; the path of least resistance demands wilful ignorance or dismissal of inconvenient facts.
But, as the mainstream media tells us: ‘this time is different’.
If history is a reliable guide, a mountain of phantom wealth will be destroyed during a major bust, triggering a severe downturn in the economy and increasing unemployment. Australia has not experienced a recession since the early 1990s, breeding a sense of complacency. The end of the largest housing bubble and mining boom on record suggests Australia may not be the ‘lucky country’ for much longer.
The two books on Australia’s housing bubble and mining downturn referred to in this piece are Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos; and Australia: Boom to Bust: The Great Australian Credit and Property Bubble, by Lindsay David. Read also: The Government run Australian property market Ponzi scheme, by managing editor David Donovan.
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