Sydney Property Bubble

If it’s a bubble, houses won’t unaffordable for long
THE AUSTRALIAN JUNE 13, 2015 12:00AM

Alan Kohler

Business Spectator editor in chief
Melbourne
Charts 1 and 2Charts 1 and 2 Source: TheAustralian < PrevNext >

The trouble with the Great Bubble Debate is that the words “unaffordable” and “bubble” are being used interchangeably.

They are connected, of course, but are not synonyms. One implies permanence; the other is temporary by definition. Those who believe we have a housing affordability crisis will be hoping it’s a bubble, because that would mean the problem won’t last long.

Is it a bubble?

Well, you can prove anything with statistics. The ratio of Sydney to national home prices prove it is not a bubble:

Sydney, it can be seen from the first graph (below), is just part of the way through catching up with the rest of the country after a long period of underperformance.

Meanwhile, the national house price-to-income ratio has not moved materially in 10 years, although the Sydney ratio is definitely starting to get out of line (currently about 5.5 times) from the national average of 4.1 times.

Then there are graphs that prove it is a bubble. Take chart two — the national house price to income ratio — back to 1990. It looks extraordinarily stretched.

And the third chart proves it is a bubble driven by investor demand provoked, in turn, by negative gearing and foreign money.

But all that aside, the Treasury Secretary says it is “unequivocally” a bubble in Sydney, and the governor of the Reserve Bank says some of what’s happening is crazy, so it must be a crazy bubble. The “Yes” team has won the debate; the “No” team is slumped in defeat.

So it follows houses shouldn’t be unaffordable for long.

When bubbles burst the people who borrowed too much against the inflated asset tend to go broke, which is their own silly fault and no great loss.

The problem is that lenders also get into trouble, as in 2008 in America when houses there became suddenly much more affordable quite quickly. Recession ensued.

Will that happen here when the bubble bursts, if it is a bubble?

Hard to tell, but the banks and bank regulators don’t seem to think so, although they would say that, wouldn’t they?

As for the timing of the bubble bursting, I remember a number of people, including John Spalvins, warning in 1986 that the share market was a bubble heading for trouble.

They turned out to be right … 18 months later in October 1987, that is, at which point the All Ordinaries index had doubled from when the bubble warnings started up. Bubbles and booms usually last longer than you think, or as JM Keynes put: “Markets can remain irrational longer than you can remain solvent.”

In that context, and with the ­inherent uncertainty of knowing whether a boom has crossed over into a bubble, the comments of Treasury Secretary John Fraser and RBA governor Glenn Stevens can be seen as jawboning — trying to talk the heat out of the market.

But unlike with money and ­foreign exchange markets, there is no instant gratification with such things in real estate: we won’t know for a while whether they ­succeeded.

It’s worth noting that a housing boom was actually the RBA’s plan in 2011 when it began cutting the cash rate from the peak of 4.75 per cent to 2 per cent — it just worked a bit too well and got away from them.

The intention was to rebalance the economy away from the ­mining sector through housing construction and the wealth effect of a rise in house prices.

As Stevens acknowledged this week, “There isn’t much cause from research … to expect a direct impact on business investment (of lower interest rates).”

Nor were the rate cuts going to drive an increase in consumer spending. Stevens added: “Their debt burden, while being well ­serviced and with low arrears rates, is already high.”

So it had to be housing. And don’t forget that when the first rate cut was announced, in November 2011, the fourth chart (above) was published in the Statement on Monetary Policy.

That was a real concern for the macro economy given the importance of real estate values to consumer sentiment and domestic final demand. Here in chart five (also above) is what that looks like now, four years on.

So, great success all round.

Unhappily, the economy has continued to trend downwards, as Stevens bemoaned this week, so while the plan worked, it didn’t work. Meanwhile, cutting interest rates by more than half has created a housing affordability crisis, ­according to many credible, if somewhat emotional, witnesses.

In a way this has been a separate debate to the bubble one, tinged as it is with emotional social welfare issues. In my view, and as I have written a number of times, it is much clearer that housing has become too expensive for the ­national good — socially and economically.

That’s a different question to whether house prices are a bubble.

Australia’s cost base is too high, which is largely a function of dwelling costs — prices and therefore rent.

The simplest solution to this problem would be that it is indeed a bubble that will soon burst, bringing prices down again.

If that doesn’t happen, then a strategy is needed to increase supply or reduce demand. Cancelling the tax deductibility of interest would do it, but that seems ­unlikely, and there are already earnest efforts to crack down on foreign investment in existing houses, which don’t seem too ­effective just yet.

You could also limit demand by cutting back on immigration, but that seems even less likely than ending negative gearing.

So all roads lead to creating more housing supply, something pet shop galahs are squawking about, along with Joe Hockey. That’s all about infrastructure and planning, and instead of talking about it in press conferences, the government must talk about it in a national summit on housing ­supply.

As the Senate economics references committee recommended in its report in May on housing ­affordability: (there should be) “a national long-term affordability housing plan that recognises ­affordable housing, including ­affordable rental housing, as a mainstream and national policy objective and places affordable housing at the forefront of government policy across Australia.”

Unless, of course, it’s a bubble, in which case it won’t long before houses become more affordable all on their own.

‘Red tape driving prices’
THE AUSTRALIAN JUNE 13, 2015 12:00AM

Turi Condon

Property Editor
Sydney
The country’s biggest apartment developer, billionaire Harry Triguboff, says the cost of building home units in Sydney could fall by as much as 30 per cent if red tape were removed.

As the housing bubble debate reignited this week, Mr Triguboff argued that the easing of delays and regulation in the planning system would substantially boost ­affordability. “Ultimately, this would mean more production and the prices would drop,” he told The Weekend Australian.

Mr Triguboff — who built his first block of eight red-brick units in Sydney’s inner Tempe in 1963 — has unique access to the market pulse, retaining some apartments from each project to personally own about 2500 rental units.

The first sign of the market turning would be when rents begin falling, he said. “We will know it (if there is an oversupply of apartments), rents will drop.”

Rents for Meriton’s apartments were still rising “slightly”, Mr Triguboff said, citing a rate of about 5 per cent a year. Rental rates at his Gold Coast project were rising at a faster rate than for some of his Sydney units, he noted.

One of his new Sydney blocks was renting for an average of about $700 a week, however, Mr Triguboff said he raised or dropped rents on a week-by-week basis to meet the market.

While Reserve Bank governor Glenn Stevens this week described parts of Sydney’s property market as “crazy” and Treasury secretary John Fraser last week called a bubble in Sydney and parts of Melbourne, Mr Triguboff said Sydney’s housing prices were in line with those of other inter­national cities.

Mr Triguboff’s Meriton Group, which builds more than 2500 units a year in Sydney and southeast Queensland, sells about 70 per cent to offshore Chinese buyers or Australians with Chinese heritage.

He said he had not seen any sign of Chinese interest abating despite the federal government announcement in February of new fees for foreign buyers, and Joe Hockey’s crackdown on housing acquisitions that are in contravention of foreign investment regulations.

Sydney’s apartment prices rose 8.8 per cent in the year to the end of May, while house prices surged 16.4 per cent, according to ­researcher CoreLogic RP Data.

Mr Triguboff said Sydney was the worst city for red tape-induced cost and delays. “If the councils co-operated, we could save 30 per cent of the cost (of construction),” he said.

Single Sydney first-home buyers must earn more than $150,000

Misa Han
700 words
11 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

A single Sydney buyer will need to get a job as a senior executive, IT manager or psychiatrist to afford an average first home.

An analysis by The Australian Financial Review, using a methodology from the University of NSW, showed a first-home buyer on their own would need to earn about $152,000 a year to afford an average house or unit in Sydney, $115,000 in Melbourne and $111,000 in Canberra.

First-home buyers in other cities had better luck with housing affordability. A single first-home buyer would need to earn $103,000 in Perth, $93,000 in Brisbane and $81,000 in Adelaide.

The findings came after Treasurer Joe Hockey said on Tuesday first-home buyers should "get a good job that pays good money". On Wednesday, he refused to apologise for his comment.

A first-home buyer on their own in Sydney would need to get a job as a chief executive ($144,000), IT manager ($157,000) or psychiatrist ($176,000) to afford mortgage payments.

The salary data was based on the national average in the latest Australian Bureau of Statistics figures and did not reflect the fact that professionals in capital cities may have higher incomes, such as a senior lawyer working for a top-tier law firms in Sydney.

Logically, affordability was better for couples buying a house together - but only in certain job categories. Two accountants ($74,000) or two PR managers ($75,000) could nearly afford a mortgage in Sydney. But it was out of reach for two preschool teachers earning $56,000 each and two nurses earning $63,000 each.

In Melbourne, a solo first-home buyer would be able to afford a mortgage if he or she was a sales manager ($112,000) or a supply and distribution manager ($114,000), but not a police officer ($98,000) or a vet ($61,000).

The salary required to make mortgage payments was based on the median dwelling price of each capital city in May from CoreLogic RP Data. It assumed first-home buyers would put down 10 per cent as a deposit, and 30 per cent of their before-tax salary would go towards mortgage payments over 30 years, at ANZ's standard variable rate of 5.38 per cent, the lowest of the four banks.

HSBC chief economist Paul Bloxham said house prices had been rising faster than incomes, and policymakers needed to focus on the supply side of housing to address affordability issues.

"Policymakers need to remain focused on the supply side. Land release and improving our urban infrastructure are important parts of this debate. House price is high relative to income because we have attractive cities, but we need to be able to match it with [a] strong supply of housing."

Professor Bill Randolph from the University of NSW said a typical home-buyer might go for lower priced dwelling, such as a two-bedroom unit. But the figures showed Gen Y home-buyers on a typical salary of $60,000 would be at a disadvantage, he said.

He said housing affordability was particularly an issue for the single.

"Not everyone is in a neat couple, there are a lot of single people out there. So if you're a single Gen Y, then you're doubly disadvantaged."

He said state governments had incentives for first-home buyers, but it was not enough to offset the high cost of a mortgage.

RateCity's financial commentator Peter Arnold said affordability measures now assumed first-home buyers were buying with a partner, with both earning. "If you look back at the social domestic structure ... it was more common to be a single-income household, whereas now all the affordability calculations seem to be done off the back of a dual-income household.

"Two people on an average salary are well and good, but once they have children, either you've got to start working or you've got to have childcare." He said it was important to take an interest rate "buffer" into account in case it rose.

WITH JACOB GREBER,

ROBERT HARLEY

Blowing bubbles: the tricky task of tackling Sydney’s property market

June 15, 2015

AUTHOR : Amy Auster
Deputy Director at Australian Centre for Financial Studies

The debate over Sydney’s property price bubble (Yes there is! No there isn’t!) sits smack bang in the middle of one of the most fascinating economic questions of our time: how risky is sudden asset price inflation?

And if the risk is judged to be high, what if anything are policymakers to do about it?

In the 24/7 world of US and European bond markets, traders’ Bloomberg screens have bleated dire warnings since bond yields went negative last year for the first time in modern economic history. In China, speculators watch equity markets in Shanghai and Shenzhen that have risen more than 150% in the past 12 months. And in Australia, Australian_property_bubble is its own Wikipedia page.

As my former boss Saul Eslake pointed out last week in the Sydney Morning Herald, to use the term bubble in relation to asset prices is “emotionally laden”. It has no definition in the academic literature, other than a generalised notion of a sudden and upward acceleration in asset price movements that poses the risk of a violent crash.

Alan Greenspan’s famous term “irrational exuberance,” was another expression of emotion. Bubbles – the endgame of a bull market – are not as well defined as a bear market, which generally refers to a 20% or more fall in equity prices, or an economic recession, which is two consecutive quarters of negative GDP growth.

What is a bubble and other tricky definitions

One of the big challenges in defining a bubble is in establishing its start. Sydney property prices are a case in point. In 2014, the ABS residential property price index for Sydney indicated a 14.7% rise for the year. That’s strong growth, and was at least double the rate of growth seen in other capital cities. But extend the starting point back five years, and Sydney’s property prices have increased by 39%, roughly on par with Canberra (36%) and Melbourne (35%). Go back 10 years, and Sydney’s property price growth of 57% is significantly less than the national weighted average of (85%) and less than half that of Darwin (168%) and Perth (133%), or even Melbourne (113%).

So are Sydney property prices in bubble territory, or are they just catching up after a period of flat-to-negative growth in the early 2000s? What of other factors such as the underlying dynamics of supply and demand, housing density, urban planning and land value?

When policymakers are staring in the face a potential bubble, their real concern is the underlying drivers of that sudden, rapid surge. Is the bubble a symptom of systemic risk?

Growth in credit and foreign investors

In Sydney’s case, two potential systemic risks merit scrutiny. The first is the very rapid growth in credit being used for property investment; that is, the expansion of leverage. The second is increasing foreign investment that is reportedly flowing into the Sydney property market, purportedly from China.

These are, however, two very different risk stories. Of the two, leverage is far more pernicious. Excessive household leverage in particular walks down a well-worn path toward financial instability - as the global financial crisis amply reminded us - where it can take years for families to repair their balance sheets after a hit. “Buyer beware” is a theoretically correct construct, but not a particularly practical one should a government have to face down armies of homeowners sinking under negative equity.

Rising capital inflows hold much less risk, particularly in an Australian context. A sufficient magnitude of outflows would dampen market prices, potentially cause the Australian dollar to weaken somewhat and ultimately require some current account adjustment. One could argue that this outcome may be an upside risk for growth, not a downside one.

Reserve Bank of Australia governor Glenn Stevens’ comments last week in Brisbane make it clear that his focus is square on the risk of leverage. He notes pointedly that Australian households already have a high debt burden taken on in the years leading up to the 2008 financial crisis; the point of the speech was a plea was for government to shoulder the burden by getting on with a boost in useful (non-mining) infrastructure investment while cheap finance is so plentiful.

Macroprudential actions

Should Stevens’ concerns on household indebtedness move from words to action, the policy response would be to temper leverage. The most targeted and effective approach is to make borrowing more expensive through more stringent customer debt-to-income tests.

The RBA and Australian Prudential Regulation Authority (APRA) could also reduce the allowable maximum loan-to-valuation ratios (LVRs) thereby requiring higher deposits – following the example of the Reserve Bank of New Zealand – or, in a nod to recommendations in the Financial Services Inquiry, increase the Big Four banks’ risk weights on capital held against mortgage loans.

These types of measures are often called “macroprudential”– that is, regulations applied to maintain financial system stability by directly addressing perceived underlying risks. Macroprudential regulation is a term that has come back into vogue in the post-GFC world. In reality, the concepts are not new.

As Luci Ellis and Paul Woolley pointed out in an RBA paper back in 2012, a macroprudential policy stance is more a state of mind around monitoring and acting on systemic risks rather than a specific set of policy measures or tools.

Lower stamp duties, increase capital gains tax?

A second course of action would be for the federal or state government to shift market dynamics through tax incentives. Lowering stamp duties would reduce transactions costs, potentially freeing up more supply in the existing housing stock. So could shifting the pension asset test to increase the incentive to downsize from the family home once it is no longer needed. Introducing greater capital gains tax on properties sold within a short period or reducing the benefits of negative gearing would go a long way toward discouraging investor-driven acquisitions, while imposing new levies on purchases by non-residents could dampen capital inflows.

The problem with changing property-related tax policies for residents is twofold; not everyone will be happy, and the need for gradual introduction to allow for adjustment means impacts may be slow. An additional issue with trying to limit property purchases by non-residents through tax is that its target is a great unknown.

Hong Kong’s failure to deflate

As will be discussed in depth in a paper released by the Australian Centre for Financial Studies and Finsia this week, there continues to be a remarkable lack of comprehensive and reliable data on both the source and ultimate destination of foreign investment into Australia, and particularly into the residential and commercial property market. With such thin evidence as to both the total size and the source of these anecdotal flows, policymakers are shooting in the dark.

Beyond this, it cannot be guaranteed that raising borrowing costs and shifting tax incentives would deflate a perceived property bubble. Hong Kong and Singapore have both tried it, and arguably failed. In 2010, Hong Kong moved to simultaneously require a significant increase in deposits for investment properties while also adopting additional stamp duties on investment properties, with higher penalties for non-resident investors. Singapore followed suit in 2013.

The impact on Hong Kong has been negligible. Despite concerns of market disruption in 2010, property prices continued to climb and hit an all-time high last year. Singapore did see its property prices flatten in 2013, then fall by 4% in 2014.

However, there has also been a significant decline in the volume of both existing and new home sales according to the Urban Redevelopment Authority, suggesting that these measures may not have had the desired impact of increasing housing affordability or supply. And although prices have not increased, they remain high relative to Singapore household income.

Crazy indeed.

http://theconversation.com/blowing-bubbl...rket-42988

Frankly i dont think GG nor these "no it's not a bubble" faction dont know its a bubble. Difference is they dont think its going to burst soon. IMHO most people can see a bubble, but irrational exuberance and policy inactions, and sometimes macro interest rate moves like now in Australia and US post dot com means nobody can predict with certainty when a bubble will burst. Jeff Vink, buffet and more predicted dot com bubble burst 3-4 years in advance and julian Robertson famously been bearish but gave up 4 months before the bust.

Irrational exuberance was used by Greenspan in dec 1996, 8 months before AFC, 52 months before dot com bust

Leverage and foreign investors are different yet highly correlated. They are correlated by rising prices. With more leverage, prices go higher and foreigners come in, with foreigners coming in more locals leverage up

The problem with these commentators is that they look at numbers and statistics and DD/SS but forget what drives these number in a bubble: psychology

Asset price rise is not always bad. It is a symptom of economic growth. But it cannot be the other way round nor in a worse case, cause economic competitive loss

Singapore is successful in deflating property prices after 7/7.5/8/whatever rounds of tightening. It dropped 4% in 2014 and probably >4% this year and affordability hasn't improve? Author obviously doesn't live here. That said, until asset prices revert to normalised trajectory, people wishing for reversal of policy in next 12 months should move to HK to continue their dreams instead.

HK on the other hand is half hearted in policy and chinese flood of money. Thats why it failed and australia should learn from the difference. Like i said i wouldn't want to be a HKer living in HK.

I will not be draw into the debate of the definition of a bubble.

I am merely watching the drama as there are simply too much at stake for all interested parties.

I just want to add that Australia is simply too big a continent. There are simply too many dynamics at work here.

I am glad that I have an opportunity to learn. Just like the latest China stock market experience.

Attempting to draw conclusions to me is futile as modern economics simply has too many dimensions - u solve one problem only for another problem to crop up.

GG

(15-06-2015, 11:09 AM)specuvestor Wrote: Frankly i dont think GG nor these "no it's not a bubble" faction dont know its a bubble. Difference is they dont think its going to burst soon. IMHO most people can see a bubble, but irrational exuberance and policy inactions, and sometimes macro interest rate moves like now in Australia and US post dot com means nobody can predict with certainty when a bubble will burst. Jeff Vink, buffet and more predicted dot com bubble burst 3-4 years in advance and julian Robertson famously been bearish but gave up 4 months before the bust.

Irrational exuberance was used by Greenspan in dec 1996, 8 months before AFC, 52 months before dot com bust

Leverage and foreign investors are different yet highly correlated. They are correlated by rising prices. With more leverage, prices go higher and foreigners come in, with foreigners coming in more locals leverage up

The problem with these commentators is that they look at numbers and statistics and DD/SS but forget what drives these number in a bubble: psychology

Asset price rise is not always bad. It is a symptom of economic growth. But it cannot be the other way round nor in a worse case, cause economic competitive loss

Singapore is successful in deflating property prices after 7/7.5/8/whatever rounds of tightening. It dropped 4% in 2014 and probably >4% this year and affordability hasn't improve? Author obviously doesn't live here. That said, until asset prices revert to normalised trajectory, people wishing for reversal of policy in next 12 months should move to HK to continue their dreams instead.

HK on the other hand is half hearted in policy and chinese flood of money. Thats why it failed and australia should learn from the difference. Like i said i wouldn't want to be a HKer living in HK.

Nobody can adequately define a bubble which academics are trying to do. It's barking up the wrong tree and trying to be "scientific" about it. But you know immodesty when you see one. Both does something to your adrenalin

IMHO like i said before property bubbles is relatively easier to see. If u buy a property not for rental income and above inflation long term capital appreciation, but for flip next year for double digit gains, it is a bubble. Question is whether u can resist the green eyed monster or follow the Joneses, or sit tight and wait. The biggest variable is WHEN which no one is smarter. Inevitable news will selectively write about those who made it but when they write about those that didnt it would be too late

PS till today i dont understand how your assertion of the size of Aussie continent is that different from US or China

As far as I m concern, Australia is too big. Sydney / Melbourne may be expensive but there is an alternative to live away from this major cities.

If it remains unaffordable, then there is always a choice to live in "cabin style" housing estates (I just learn over the weekend).

Otherwise, one can move interstates. If that is still unaffordable, then can go live in bushes but of course amenities and support is not as good as in capital cities.

Hence, it is a continent on its own. There are plenty of choices. That is from my understanding and probably what I meant.

(15-06-2015, 11:31 AM)specuvestor Wrote: Nobody can adequately define a bubble which academics are trying to do. It's barking up the wrong tree and trying to be "scientific" about it. But you know immodesty when you see one. Both does something to your adrenalin

IMHO like i said before property bubbles is relatively easier to see. If u buy a property not for rental income and above inflation long term capital appreciation, but for flip next year for double digit gains, it is a bubble. Question is whether u can resist the green eyed monster or follow the Joneses, or sit tight and wait. The biggest variable is WHEN which no one is smarter. Inevitable news will selectively write about those who made it but when they write about those that didnt it would be too late

PS till today i dont understand how your assertion of the size of Aussie continent is that different from US or China

Err okay so why doesn't that size/ alternative living theory applies to US or China? Why aren't they immune to bubble burst?

If anything if you look at the population dispersion, Australia population is much more concentrated in that few locations vs say china or US ie they have much more alternatives

I oso dunno... I m an equity person. I just go for big picture and listen and read what many says then execute an investment strategy that is acceptable to my risk appetite.

So far Australia has been a lucky country and property cycle have not been interrupted since early 90s.

Even FCL (my main core prop stock) also think that Aussie prop cycle is a long one with stable margins unlike many land scarce Asian country and is a good diversification from the usual highly cyclical prop mkts that we are familiar with.

Even high end Simon Cheong is still systematically perserving with AVJ - a freebie that he gotten from former MPH that was subsequently renamed SC Global and delisted eventually.

I m a dumb. I hope I can be a dumber so that I can get some consistent returns riding on the astute professional management rather than my shallow lay man views. GG's view is worth nothing. Professional mgt views are more important as they draw huge salaries to take risks to generate good returns for their shareholders.

(15-06-2015, 05:06 PM)specuvestor Wrote: Err okay so why doesn't that size/ alternative living theory applies to US or China? Why aren't they immune to bubble burst?

If anything if you look at the population dispersion, Australia population is much more concentrated in that few locations vs say china or US ie they have much more alternatives