Does the RBA’s head of Financial Stability Luci Ellis read Crikey? It seems Ellis has performed a neat backfield in recent months in relation to her views on house prices and whether Australian residential property prices have formed a bubble.

In May this year, Ellis told the Financial Review Residential Property Conference that:

Every cycle starts with something real, something fundamental. Recent data suggest that we do not have a credit-fuelled speculative boom on our hands.

Ellis also noted that:

Even if household balance sheets were to become overstretched to some extent, historical experience suggests that this, on its own, is unlikely to pose significant risk to Australia’s financial system …

Compared with other kinds of credit, lending to households to finance the purchase of housing is relatively low risk. International banking regulations recognise this by applying lower risk weights to home mortgages than to small business loans, for example.

As this column noted at the time — Ellis’ views ignored the fact that the main reason for rampaging house prices rising wasn’t necessarily income growth (although that played a small role), but rather, the incredible accumulation of debt by Australian households. Australia now has a great proportion of household debt to GDP than the United States and a mortgage debt-GDP ratio of 90% (up from 30% in the late 1990s).

It appears though that Ellis may have changed her views on whether Australian housing is in the midst of a speculative boom telling CPA Australia conference in Brisbane this week that:

If rental yields are very low, investors are buying properties without really thinking abut the rental yield … buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble.

At the moment, returns on Australian property are virtually non-existent. That is, an investor is not able to generate real earnings a residential property investment (they can, however, hope that for a capital gain, or more aptly, a bigger fool pays even more for an already over-priced asset, or some negative gearing tax benefits). Based on the median property price across Australia (about $460,000) and the median rental amount ($360 per week), the gross yield on property is about 4%. However, gross yields are completely irrelevant — on a net basis, taking into account council rates, management fees, repairs, body corporate fees and depreciation (yes, properties do fall down) the median yield would probably be about 1%.

Ellis wasn’t the only person warning of housing risks. Land Value Research group researcher Bryan Kavanagh told the Financial Review earlier this week that real estate turnover had leapt to 25% of gross domestic product — indicative of a bubble. Kavanagh warned that he “cannot give a date for the Australian bubble to burst — this depends on spontaneous motivation, “animal spirits” — but it is clearly looking us in the face”. Kavanagh stated that since 1999, Australians had spent $2.76 trillion on real estate and that landowners were facing the “imminent prospect of a once-in-a-century price collapse”.

Peter Fray

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