One Of These Things Is A Lot Like The Other – “Australian prices matched other countries’ bubbles until 2008. But while the real estate process elsewhere has since been deflating, Australian prices marched higher after a brief respite. The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case for a housing/land shortage.”

.

Australian fundamentals, or lack of them. Enough to make a Canadian homesick.

“It’s different from the US. The Australians have a very strong economy. China is buying our coal and iron ore like crazy! That’s not going to stop any time soon.”

The Australian economy today
What the bulls will tell you:
“The Australian economy is a true success story compared to those of other developed countries. It almost completely escaped the “Great Recession” and with its GDP slightly dipping for only one quarter in late 2008, its unemployment stands today at an enviable 5.1%. Real estate is booming. Until recently, the Reserve Bank of Australia was raising rates to fight inflation and “economic overheating.”
Reality:
The reality is starkly different: Australia has a very vulnerable economy where upcoming bad news has not been “priced in” at all. The country suffers from an epic real estate bubble that greatly exceeds those of US, Ireland, and Spain. The average Australian consumer is completely tapped out. Take out a “consumer credit” punchbowl and reduce the Chinese voracious appetite for iron ore and coal, and the Australian economy will collapse like a house of cards.

Australian Real Estate Bubble
What the bulls will tell you:
“We hear bubble warnings all the time today as many people see bubbles everywhere where a price has appreciated. You can hear about “commodity bubbles”, “treasury bonds bubbles”, “new dot.com bubbles”, etc. Australian housing is built on solid fundamentals due to economic and population growth. There is not enough land in large cities to build houses to meet ever-increasing demand.”
Reality:
It’s always instructive to take a look at historical trends and plot a “mean-reversion” graph before concluding that something is significantly overpriced.
Optimist’s claims are not supported by any other data such as high GDP growth rate, rising rates, or increasing construction costs.
What’s truly remarkable is that the Australian economy had sub-par GDP growth rate (under 2% vs. USA over 3%) for the last 30 years, while real estate prices significantly outpaced those in the USA. The fact that the Australian real estate bubble is probably 30 years old is missed by many observers who plot data from the year 2000.
Australian prices matched some of the other country’s bubbles until 2008. But while the real estate process elsewhere has been deflating, the Australian prices marched higher after a brief respite.
The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case that Australia is experiencing a housing/land shortage. The rising income and rising construction costs were (at best) only minor contributing factors to the price rise.


What may “pop” the bubble
The Australian real estate bubble has run longer and deeper than recent property bubbles in the USA, Ireland, and Spain. Heavily indebted Australian consumers, just like those in America, have a large portion of personal wealth tied-up in real estate. The price correction has not yet run its course (the mortgage defaults hover around 2%). When it does, it will certainly plunge the Australian economy into a severe recession.


– from ‘An Epic Australian Bust’, Igor Novgorodtsev, Seeking Alpha, 27 Feb 2012 [hat-tip Farmer]

16 responses to “One Of These Things Is A Lot Like The Other – “Australian prices matched other countries’ bubbles until 2008. But while the real estate process elsewhere has since been deflating, Australian prices marched higher after a brief respite. The sharp deviation of rents from rapidly growing house prices completely refutes the bullish case for a housing/land shortage.”

  1. Nah Australia’s problem is supply supply supply.

    And demand. Mostly demand, actually.

    • “There is not enough land in large cities to build houses to meet ever-increasing demand.”

      !!!

      • CanuckDownUnder

        The housing shortage numbers compiled by the National Housing Supply Council and quoted throughout the Australian press counted the homeless, couch surfers, backpackers, and trailer park residents as those in need of housing and unable to get it under current supply conditions.

      • Not enough land.

        Scarce resources are scarce. Is that what “demand exceeds supply” means? If so, add it to the list of meaningless platitudes we have all come to hate.

  2. LOL

    We got a lovely bubble over here in Australia. Like ive been telling our friendly bulls over at RE Talks. Nowhere is different. Prices pumped up by too much cheap credit.

    Had some fun in the Telus Garden thread.

    [url=http://nfbpsh.blogspot.com.au/2012/02/perth-apartment-fire-sale-starts.html]Not Fooled by Property Spruikers Hype[/url]

    It was pointed out to me that everybody wants to move to Vancouver.

    In another thread we were told that billionaires love Vancouver. Great i replied name some.

    To the above story about receivers being appointed to a condo development in Perth, it was retorted – who would want to live in Perth? Obviously it must be a nasty backwater to some.

    Well Gina Reinhart – worlds 2nd richest woman lives in perth. 20bn
    Andrew Forest 6.9bn lives in Perth.
    Lots of millionaires live in Perth, and WA is booming in mining, oil and gas.

    Real work, real wealth, real money. Even if China drops back imports there are plenty of long term contracts

    If anything, with increasing per capita income in WA, higher prices could have been justified. Obviously they went way over the top.

    Personally I think residential where i lived has dropped around 20%. As I bought and built my house starting in the mid 90’s and its paid off, it doesnt worry me.

  3. That is one sick graph.

    • That is exactly my thoughts, AG. We seem to think we have it bad in Canada but can easily forget the insanity is so much worse in other places.

      How can any sane person look at a chart like the one posted here today and not think there was trouble brewing?? And yet the house pumpers in Australia continue to insist prices will rise further and there is lots of potential yet.

      There is a certain point in time where I too lose sympathy for buyers who make poor investment decisions. I mean, you do not even need a good education to appreciate how badly out of whack the market is after scanning some of the raw data.

      But when well educated people behave like fools and refuse to see the danger you almost start rooting for the herd to turn hard and run them down. Some of those greedy idiots deserve to lose their shirts.

      The way things are going, plenty of them will. Australia is in a very bad predicament. The article makes that clear. They have hitched their star to the fate of China and are experiencing one of the worlds worst property bubbles at exactly the point in time that China’s own bubble is deflating.

      Coal consumption in China is falling by the way. So is steel production. Ouch.

      • Better yet, the Spruikers are all screaming “it’s bottoming!” right now because it flat lined month to month. Blech.

        Yes, China is a Chimera. 2012 will be Interesting Times.

    • I don’t think Vancouver’s market is any less insane. We look very much like that Australia chart, if not worse here in Vancouver.

      Also, from January 24, 2012:
      http://www.vancouversun.com/news/Vancouver+displaces+Sydney+second+most+expensive+housing+market+well+known+survey/6038069/story.html

      e.g., “Vancouver displaced Sydney as the least-affordable housing market after Hong Kong among large English-speaking cities, as home prices rose faster than incomes, a study of 325 metropolitan areas worldwide showed”

      • Well I would agree Basement. Vancouver is literally in a league of its own and it is insane all right. But it is only one city. The chart above refers to a whole country if I am not mistaken, not just Sydney. When I see a national Canadian chart that even comes close to the Australian one I will know we have officially hit bottom.

  4. The house price chart especially is quite revealing, it shows something that I believe can be described as a “soft landing” – thats painful to say for a sceptic like myself.

    It looks like the AUS market previously peaked in 88-89 under what even then looked like bubble conditions, incomes only grew temporarily and cost didn’t justify the increase in prices. Yet it looks like the market only corrected about 20% and flat lined for what looks like a decade. Thats quite remarkable.

    I don’t know a thing about the economic conditions existing in AUS during that time, but its interesting to see that market behaviour on that chart in particular since it provides us other important valuation metrics.

    Any idea on what happened in the late 80’s? What economic conditions ensued in 90’s?

  5. Hildergarde Hammhocker

    I am not sure what reading people access who post here but China’s coal needs are increasing at a dramatic rate. With a population increase each year in excess of the total population of France, with more and more people leaving the agricultural land for the urban cities there is more and more demand from the newly and growing affluent in China for more goods and services, demand for products manufactured from raw materials may ebb and flow but will continue to grow. ( Hey I’m a poet huh!) For over the last decade on Canadian economic websites in particular they have been predicting Australia will decline. It has only gone from strength to strength and on trend figures should surpass the economy of Canada within 5 years. With a population only 65% of Canada’s that not bad. I don’t think there are any short term bubbles to burst. With stimulus now starting to be thrust in to increasing manufacturing and a federal recognition of this importance the Australian economy should continue to amaze

  6. Harriet Hammhocker

    Credit Suisse report says Australians enjoy the highest median wealth levels in the world . This is secured by real assetts, not hairy , fairy unreal investments.

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