Tuesday, April 21, 2009

The Australian housing bubble: the view from the OECD

Here on the Brown Couch we love charts and graphs. So here are a couple more, this time generated from data from the OECD that measure movements in house prices in OECD member-states. (I don't believe these data have been reported by the Australian media – you saw them here first at the Brown Couch!)

We'll be looking in particular at Australia, the United States and the United Kingdom. The latter two countries – the US especially – are often reported here as having experienced a house price bubble (which is now collapsing). Have Australian house price movements been so very different?

The OECD data are interesting because they several things all at once. First, they give us two ways of thinking about the level of house prices, by comparing house prices with rents (Figure 1: house prices to rents ratios), and house prices with incomes (Figure 2: house prices to incomes ratios).

Second, they show how much these ratios vary, in any given year, from the long-term average ratio for each country – that is, the average ratio of prices to rents, and prices to incomes, over a 35-year period. In other words, the data show whether prices are out of whack from their long-term relation to rents and incomes.

Third, they adjust the long-term average ratio for each country to a base of 100, so we can compare movements in the ratios in the different countries.

Hopefully all this will become clearer when we look at the graphs:



(Figure 1: House prices to rents ratios, Australia, US, UK. Source: OECD Economic Outlook No 84 and Economic Outlook Interim Report March 2009. Click on the image for a better view)


So what does this tell us? It tells us that from around the turn of the century, house prices in the United States, home of the sub-prime bubble, moved out of whack from their long-term relation to rents by about 30 per cent, but lately the relation has moved back close to the long-term average. In the UK and Australia, house prices moved even more out of whack: in each country, they got out of whack by up to 80 per cent. Last year in the UK, the relation started sharply coming back into line, but there's still a way to go. In Australia, house prices are still out of whack from their long-term relation to rents by 70 per cent.

(Now, one might object that what this shows is not that Australian house prices are too high, but that rents have been, and remain, too low. Hardly – rents have kept up with inflation, and lately have increased more than that. Figure 2 also shows that the trouble is on the house price side of the ratio.)

On to figure 2:



(Figure 2: House prices to incomes ratios, Australia, US, UK. Source: OECD Economic Outlook no 84 and Economic Outlook Interim Report March 2009. Click on the image for a better view)

Similar story here: US house prices significantly moved out of whack from their long-term relation to incomes, but this movement seems modest when compared to the movements in the UK and in Australia. And again, the US's and UK's respective house price to income ratios are moving back towards their respective long-term averages, while Australia's has yet to move back.

(Anticipating another objection: don't these graphs also show that house prices getting out of whack has been an international phenomenon, so no single decision or policy by national governments can be blamed for the problem? That's true, but it does not get Peter Costello off the hook. While the world caught the bug for gambling on house prices, in Australia Peter Costello was, as we have previously described him, like the tout at the door to the casino, offering punters free chips (ie tax breaks) if they borrowed up big and played.)

We're used to talking about a US or UK housing bubble; we should call Australia's recent history of house price movements a bubble too. And we should welcome their return to something more like their long-term relation to rents and incomes, after being so far out of whack.

9 comments:

  1. This is the best piece of analysis I have seen anywhere. It is obvious that the extended first homeowners grant is a significant contributer to this bubble continuing.

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  2. Chris, I agree, but I think your analysis understates how far out of whack our prices have become. The reason is that the 35 year period over which the long term average has been calculated contains the bubble, and looking at more long term data shows that the bubble has been inflating for pretty much that entire 35 year period. See for example here: http://bubblepedia.net.au/tiki-browse_image.php?galleryId=1&sort_mode=created_desc&desp=0&offset=0&imageId=315

    This chart : http://bubblepedia.net.au/tiki-browse_image.php?galleryId=1&sort_mode=created_desc&desp=42&offset=0&imageId=96 from the RBA who bizarrely keep arguing "it's different here" (which is also a hallmark of any bubble) clearly shows that prices have been rising in relation to rents since the late 1980s.

    It's not absolutely certain, but is seems likely that we should be excluding the period after about 1985 in any calculation of long term rent yield or price to income ratio. Stapledon's data show that before that prices were relatively stable in relation to other consumer prices. If so, then prices have far further to fall than just 40%.

    all the best

    dan, of bubblepedia.net.au

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  3. Thanks for stopping by Dan. There was no getting around the 35-year average, which is built into the OECD data. But I'm happy to go with it - it's an average over a much longer period than that used in any similar exercises I've seen, such as the RBA's.

    Thanks also for the work you do at bubblepedia.net.au - it's a must-read. Other Brown Couch readers, please go go and have a look - there's a permanent link in the sidebar.

    cheers

    Chris M

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  4. I'm not savy with, and couldn't be bothered with OECD and ABS and RBA data, but a laymans view could be: it's not the cost of materials and labour that is exhorbitant, high when in short supply, yes, but not a stratospheric rip-off like land. Land artificially valued by banks to keep you enslaved, encouraged by the governments , who TAX the banks on their obscene profits, and use the inflated value of the land for rates and property tax calculations, . . .

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  5. Great Article and i agree whole heartedly. We have just sold our property and are planning on renting for the next year or two as i just cant believe prices like this can hold up. Nearly the entire global real estate continues to drop and yet all government and media tell us is...Nooo we are different. Ian Macfarlene's latest coments about the posibility of a bubble are a bit late. Sell now before its to late!!(but dont put it into the stock market sucker rally).
    Thanks
    David Hart

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  6. This is one of the enlightening discussion i've ever seen bye of Steve Keen. http://www.debtdeflation.com/blogs/2009/11/14/michael-hudson-talk-green-new-deal-discussion/
    I advice all the watch it. It explains the dynamics that led to this bubble, particularly the one with Michael Hudson and why most economist did not foresee the market crash.

    We the people have become suckers to the corrupt govt and greedy bankers who have brain washed us to believe that owning a house at any cost must be everyones life dream even if we must take and then slave for the rest of our lives for the banks persuing a stupid dream only to realise that that the whole concept is nothing more than a golden handcuff and a clever trick. Who says there is no more slavery in todays world. This is economic slavery we willingly enter after being brain washed.
    Industry, good and services should be financed by debt and homes from savings as per traditional wisdom. But even now as of 2009 RBA report the lending on a/c of house mortgage has increased by 8% over p year and to business 0%.
    When will they learn that business are the real wealth creators not houses. That discipline can only come when the banks are nationalised.

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  7. Excellent info.

    I struggle to find friends and family who understand due to ignorance or short term memory loss.

    My wife and I have rented for 2 years and we are now selling our investment property as of this weekend because we feel reality has caught up.

    It's been a great ride but lets be serious.

    If house prices continue upward our 2 and a half year old baby girl will need to earn several million dollars a year in order to buy the same appartment we bought for $74 000 in 2001.

    Nice to read from people who get it.

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  8. The UK market is similar to the AUS market in terms of housing shortages which is claimed will keep prices rising here. It did not work for the UK, though recent reports indicate they are on the rise there again too after a 20% or so correction. The reality here seems to be a deliberate policy by both sides of government to escalate the migrant intake in order to prolong the bubble - How long can this last? It failed in the UK and can only be sustained in AUS whilst commodity demand stays high.

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  9. Thank you for posting such a useful, impressive and a wicked article./Wow.. looking good!

    Houses in Australia

    ReplyDelete

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