Dec 15, 2009

Housing prices: the bubble just gets bigger

The housing bubble continues to inflate in earnest, as the last major weekend of the auction season delivered a spate of booming prices. Can it continue?

Adam Schwab — Business director and commentator

Adam Schwab

Business director and commentator

The housing bubble continues to inflate in earnest, as the last major weekend of the auction season delivered a spate of booming prices. Almost $1 billion worth of residential property changed hands on Saturday in Melbourne alone. While property bulls continue to blame a shortage of supply for the price rises, some of the recent increases belay any sort of "supply based" explanation. The Sunday Age reported yesterday that a one-bedroom property in Malvern East sold for $374,000 yesterday. It sold for $221,000 one year earlier, and the vendors spent $30,000 improving the property. In one year, the price effectively rose by 50%. Another Melbourne bayside property was reported as selling for $600,000 -- an increase of 27% in 18 months. The usual property spruikers buoyed by the results and were as usual, liberally quoted by grateful media outlets. Real Estate Institute of Victoria boss Enzo Raimondo told the Financial Review that "demand for residential property is proving to be very strong … this demand is being driven by a couple of factors -- a healthy economy, high confidence levels and a population that is growing by 1700 per week." Fellow bull, property adviser Monique Wakelin was equally ebullient, telling The Age that:
If a global stockmarket crash and worldwide credit market freeze only dents Melbourne property prices by 3.8 per cent, as it did in 2008-09, it's hard to think of any other scenario which would break house prices … Continued 25-basis point rate rises in 2010 may restrain over-exuberant price growth, but they won't kill the market.
BIS Shrapnel, which masquerades as an expert property research house, continued the theme with its chief economist, Frank Gelber, telling the Sunday Age:
Every time the market wanted to break out, something stopped it … interest rate rises, the financial crisis -- prices started to rise and then they were stopped again …
Now there's nothing to stop it. The trouble with keeping a lid on a pressure cooker is that when it comes out it comes out really strongly.

What property bulls appear to forget (apart from ignoring the inconvenient truth that supply problems are actually not backed by data is that even after the recent rises, interest rates remain at historically low levels. Rismark boss Chris Joye produced this fascinating graph for his Business Spectator blog last week indicating the link between interest rates, house prices and median incomes.


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5 thoughts on “Housing prices: the bubble just gets bigger

  1. Scott

    The good thing about being a bear is you can be wrong for so many years but when the business cycle turns (which it does every so often) you can say “I told you so!”

  2. abarker

    @Scott – Totally agree. This harping about the house price crash is getting old. Steve Keen has been proven wrong, yet he then somehow changed the ‘terms’ of his deal with Rory Robertson to extend all the way until around 2025 – house prices will collapse sometime between now and then? Wow…

    A simple example: It is going to rain. I can guarantee you that this weather is incorrect and there is something wrong. The creek near my house has run dry, so all that water has gone into the atmosphere and I can assure you what goes up will come down, so it is going to rain.

    Never mind the fact it’s summer, I can sit here and tell everyone it is going to rain.

    Then, when it does (next year in July), I can sit back and say I told you it would rain!

    The thing is by that stage, nobody remembers who you are or even cares, they have gotten on with their life.

  3. bakerboy

    Yes, where’s Steve Keen? The collapse must be imminent! Steve must feel like a mug after he sold his own property a while back, predicting a crash. Now, he wouldn’t be able to afford to buy it back – duh! In real estate the agents say it’s ‘location, location, location’. It’s also ‘demand’, demand’, demand’. Simple really.

  4. Kevin Herbert

    Adam: you got it right about BIS Shrapnel:

    ‘ BIS Shrapnel, which masquerades as an expert property research house….’

    Much of their property data in recet years has been woefully innaccurate, and developer oriented.

    Nice piece though…the real estate sector in this country is woefully under supplied with decent data.

    In NSW, the Real Estate Institute isn’t quoted anymore in mainstream media since it was revealed that their rental property data was pure bunkum….not even close to market reality.

  5. Micky

    Adam, glad you mentioned the difference between using average income versus median income when determining housing affordability (household price to household income ratio). The recognized ratio is median house price to median household income. As you mentioned, average income is greatly skewed by the small number of people earning massive incomes (company directors, dare I say property developers, etc.). I am not surprised that Rismark boss Chris Joye bases his results on average income; At $95,000 it grossly exceeds the $72,000 median income which is a much better indicator of household income. Melbourne, with median household prices around $530,000 and a median income of around $72,000 gives a ratio of 7.4. Joye’s chart is quite misleading. He should at least have a footnote saying “Based on average household incomes”. I would suggest that Chris Joye is being even more sneaky. I reckon he is comparing median dwelling price to average household income. i.e. comparing a median to an average. Another deception is that dwelling price takes into account unit prices as well which means that median dwelling price is considerably lower than the median house price.

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