Welcome to Finance and Fury, 

Are we in a property bubble?

There is no question that the Australian property market has become significantly overpriced – but is it a bubble and due for a significant downturn? – For this – only talking about capital cities – most of the land isn’t in a bubble

First – A property bubble is a form of “economic bubble normally characterised by a rapid increase in market prices of real property until they reach unsustainable levels relative to incomes and rents” – then like most bubbles – prices at some point decline

  1. History – Australian house prices rose in correlation relative to average wage-earning – up until 1996
    1. June 2014 – IMF reported that house prices in several developed countries are “well above the historical averages” and that Australia had the third-highest house price-to-income ratio in the world. 
    2. 2016 – OECD – reported that Australia’s housing boom could end in ‘dramatic and destabilising’ real estate hard landing
    3. In past 12 months – Sydney and Melbourne have experienced price declines of up to 10% with potential of a further 10-20% loss in the near future – But the upturn in Australia’s markets over October 2019 has been remarkable, with the rebound in prices considerably stronger than many expected (Melbourne’s strongest property price recovery ever and Sydney’s in decades)
      1. Driven by the combination of lower interest rates, easier access to credit
    4. Initial declines were largely triggered by the significant tightening of lending standards (removal of HEM benchmark) and the revealed mortgage fraud aka subprime ‘liar loans’ and widespread irresponsible lending practices

What has created our bubble? A number of factors –

  1. The Australian property market saw an average real price increase of around 0.5% per annum from 1890 to 1990, approximately matching CPI – 100 years
    1. From 1990s – prices have risen faster resulting in an elevated price to income ratio – all capital cities strong increases in property prices – Sydney and Melbourne been the largest – rising 105% and 93.5% respectively since 2009
    2. Coincide with record low wage growth, record low interest rates and record household debt equal to 130% of GDP – clearly shows unsustainable growth in property – driven by ever higher debt levels fuelled by the RBA – cutting rates beginning in 2011
  2. Today – property prices 7 to 10 times equivalent of average full time earnings – up from three in the 1990-90s

Demand side –

  1. Greater availability of credit due to financial deregulation and lower rates
    1. Debt growth averaged 15% per annum compounding (1998–2009). During the same period national economic growth was less than 3% with debt stripped out – low interest rates since 2008 allowed for the increasing borrowing capacity fuelling growth
      1. The influence of interest rates and banking policy on property prices is evident –
      2. Coupled with financial deregulation – led to greater availability of credit and a variety of financial products and options
      3. RBA has maintained a low cash interest rate policy – reduced the cost of financing property purchase
        1. Easy availability of interest-only loans has made investment borrowing more profitable – increasing incentive
      4. Allowed for expansion of bigger properties and became easier and cheaper to borrow more money – bidding war backed from unowned assets
        1. Now that rates are 3% – $600k loan is $2,530 pm – at 6% is almost $3,600pm – or $12k p.a. more
        2. At 6% would be cashflow equivalent of $425k borrowing – or about a 30% drop since 2008
      5. Between 1998 and 2008 inflation was about 36% and property prices increased by more than 300% on average in all capital cities except Sydney (up 180%) – Continued this trend – with property growth matching credit growth but no longer inflation or wage growth like it did before 1990
    2. Interest rates – Major increase in property price comes back to lending capacity
      1. 50s to 70s – 5% or so- Very consistent in the gold standard, Brenton woods era – pounds
      2. 70s – 80s – went to 7, 8, 9, 10%, then in the late 80s – early 90s 10 -17%, by 92 – within 2 years dropped back to 10% – then went to about 7%, by 2000s – range of 7 – 9% (dropped to 5% in 2009) – Back to 7% after – but since
      3. Last 8 years been dropping – Now looking at rates below 3%
  2. High population growth, concentration and overseas investment/property purchases – Population size and growth – Great place to live – High levels of immigration -makes up over 60% of our population growth – One of the Highest growth in the world – Behind Saudi and NZ
    1. 1901 at Federation – population of 4 million – Population now – over 25m – Growth of – 6 ¼ times in 100 years
      1. America – 77m to 326m – growth of around 4 times
    2. Why has our population grown by so much? – Lots of factors – We are living longer – 100 years ago the median age was 22 years and 4% of the population was aged 65 or over – Today – 37 years, and 14% of the population were aged 65 and over – but due to lowering birth rates – most comes from immigration
    3. Immigration/Overseas purchases – When it comes down to it – the housing price increase is a story of private household debt –
      1. 2008 foreign investment rule changes for temporary visa holders Stats show that there has been a large increase in foreign investors in the past decade – especially China (where you have a 99 year ‘lease’ while Commonwealth Nations (UK, Australia, etc.) is 9999 years – Additional demand has helped to inflate prices
      2. In December 2008, the federal government introduced legislation relaxing rules for foreign buyers of Australian property. According to FIRB (Foreign Investment Review Board) data released in August 2009, foreign investment in Australian real estate had increased by more than 30% year to date. One agent said that “overseas investors buy them to land bank, not to rent them out. The houses just sit vacant because they are after capital growth
      3. Kevin 07 really found his future employment – 2014 – October became the first President of the Asia SocietyPolicy Institute in New York City – He has also actively contributed to the World Economic Forum’s Global Agenda Council on China. Rudd is also a member of the Berggruen Institute’s 21st Century Council. On 21 October 2016, he was awarded an honorary professorship at Peking University.
      4. Also – Temporary people living here – RBA stated “rapid growth in overseas visitors such as students may have boosted demand for rental housing” – Almost all of which occurs in major cities due to proximity to Universities
  3. Supply Side – limited government release of new land (reducing supply) – government restrictions on the use of land
    1. Local Government – Very constricted land supply and extremely onerous planning approval processes
      1. Beginning in the introduction by local councils of upfront infrastructure levies in the early 2000s
    2. State Government – Unusually high stamp duties – under the Constitution have control of environmental and land use issues
      1. 1980s – started progressively implementing more rigid planning laws that regulated the use of land
      2. 1990s – further concentration and increase on restricting greenfield development in favour of “urban densification”, or infill development – Land rationing through banning development in all but designated areas = extreme land price inflation
      3. There is good evidence to suggest that the price of a new unit of housing is the ultimate anchor of all housing in an area, so when planning laws that implemented land rationing severely drove up the cost of new homes, all other homes followed suit
    3. Federal – Legislation for the entities which determine lending, etc – GST, APRA, ASIC – financial framework


More reflective of the price increase though is the Population distribution and access to housing supply

  1. On the Supply-side – Mix between where people can buy and want to live
    1. Urbanisation – The nature of Australian property supply is very centralised
      1. Sydney 4.6m, melb 4.2m, bris 2.2m, Perth 1.9m, Adelaide 1.2m – drops off
      2. GC 600k, Canberra – 367k, Newcastle – 308k
      3. 65% of population live in 5 cities
      4. America – big 5 – NY, LA, Chicago, Houston, Phoenix – 19.3m – 6% of total pop
    2. But major contributor – Today – 85%-90% of Australians live in urban areas, 70+% in the cities
    3. 100 years ago less than 40% of Australia’s population lived in our capital cities


  1. Outcome – 1994 to 2018
    1. Brisbane – Median house price $126k to $524k. Borrowed $101k at 9%, today $419k at 5%
      1. Annual repayments $13k to $31k – 20% to 31% of median incomes in servicing
    2. Based on trend – median house price would be half of prices today if inflation target credit regime didn’t take place
    3. Even with lower rates, we spend way more on servicing a mortgage
  2. Flow on effects – diversion/misallocation of resources – excessive lending to the residential housing sector at the expense of businesses – lead to “a banking system which allocated capital away from the most productive areas of the economy — business — is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end, bad for us
  3. Research conducted in overseas markets confirms that “in areas with high housing appreciation, banks increase the amount of mortgage lending and decrease the amount of commercial lending as a fraction of their total assets. This allocation results in firms receiving reduced loan amounts, paying higher interest rates, and reducing investment.
  4. With the misallocation of resources adds to the chance of property downturn – incomes, employment and ability to afford property is the determining factor long term as to “will the prices remain”
    1. Mortgage and rent stress – Increased housing prices and therefore increased borrowings can lead to difficulty in meeting housing payments. According to Ratings agency Standard & Poor’s (S&P), “Arrears for sub-prime loans backing RMBS [residential mortgage-backed securities] jumped 126 basis points to 11.45 per cent”


Summary –

  1. Consumer side –
    1. One of the most highly urbanised population
    2. Large areas of rural and remote Australia can not secure loans from banks against land in those areas.
  2. Government side –
    1. Very constricted land supply and extremely onerous planning approval processes – Unusually high stamp duties


The answer is yes – we are in a bubble – prices can continue to go up – but affordability is the key –

Unless wages keep going up or negative rates come in – property may struggle to continue to grow in prices

Thanks for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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