housing bubble

As far as conspiracy theories, it’s not exactly a grassy knoll, but the Fairfax mastheads treatment of the residential property boom is convenient. The importance of Fairfax’s Domain property business isn’t surprising — it was responsible for around a sixth of the entire company’s operating earnings — but the calibre of reporting is a far cry from the days of Rags Henderson or Graham Perkin.

The value of the Domain business is even more pronounced when you look at relative growth rates: Domain’s digital operating earnings grew by 49.6% in the first half of the 2014 financial year, compared with 2.3% for the entire Fairfax business. Much of that revenue comes from real estate agents, who happily spend their clients’ money advertising their properties online in the likes of Realestate.com.au and Domain.

But while the Domain website is the key revenue generator, Fairfax still invests in its offline Domain lift-outs, which appear in The Sydney Morning Herald, The Age and Friday’s Australian Financial Review. Aside from the weekly gossip column on Saturday (focusing on C-grade celebrities as well as lawyers and bankers selling their properties), The Sunday Age features a weekly summary/editorial of the performance of the housing market — and the summary tends to be overwhelmingly positive.

Currently written by Chris Tolhurst, the wrap reports the weekly “clearance rate” — that is, the proportion of auctions that result in a sale. Tolhurst rarely bothers to remind readers that the clearance rate is determined by real estate agents providing information — and they tend to be less enthusiastic about reporting “passed in” results, which means the clearance rate is inevitably inflated (and reassessed downwards during the week). Crikey reported on this way back in 2010, but not much has changed since then.

Tolhurst’s bias extends past quoting dubious statistics, though — during Easter, with nary an auction in sight, he noted: 

“An increasing number of buyers are paying prices well above what experts consider to be fair value … this isn’t necessarily a bad thing, certainly not for sellers or for anyone keen to see sustained price growth in house prices.

“A vendors’ market is good for all property owners and the broader economy. But more competitive market conditions are also pinpointing the frustration of buyers who miss out when properties sell for far more than their advertised estimate.”

On one hand, Tolhurst observes that house prices are well above their “fair value”, but he then says such a trend is actually a good thing for the broader economy.

A study of the United State, Ireland and Japan economic collapses tells quite a different story. High property prices create a significant misallocation of resources to small (highly unproductive) pockets of the economy. It’s no coincidence that most economic slumps are preceded by asset bubbles (be it company or property bubbles).

Australian house prices have been rising for 16 years, partly due to higher incomes and population growth, but also due to a sustained increase in the amount of money Australian banks lend to property purchasers. Australian house prices have considerably outpaced inflation in recent years (traditionally, house price growth would mirror the general level of prices) — this is indicated in academic Philip Soos’ research below. Australia’s mortgage debt as a percentage of GDP is around 90% — higher than the level it was in the US in 2006 …

Is this a good thing? Perhaps, if you own leveraged investment properties. But for everyone else (including those who own their own homes), higher property prices are almost certainly likely to lead to lower living standards. If you own your own home, a higher property price simply means higher stamp duty and rates (eventually, you’d need to purchase a replacement anyway). A higher property price may make you feel richer, but you can’t eat your veranda, or take a holiday in your backyard.

All rising property prices achieve is a wealth transfer from those who don’t own properties to those who own investment properties. It creates no additional economic output and diverts investment away from productive areas of the economy. Instead of creating additional productive capacity, our banks lend money to property speculators, which leads to a higher price for existing assets.

Like any boondoggle, there are a privileged few who benefit from this misallocation of resources. The property industry — including real agents, of course, as well as banks, insurers and hangers-on like lawyers and accountants — benefits. As do newspapers, which reap millions of dollars in revenue from perpetuating the boom.

Peter Fray

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