Property bubble: let’s get the facts straight, please

The misreporting of Australia’s residential property market continues unabated, while the body in charge of Australia’s money supply continues to deny the existence of a debt-fuelled housing bubble.

Someone at the Sunday Age must not have been concentrating last weekend when they wrote the headline, “Foreign Property Fear Exaggerated”. The sub-editor may not have read Ruth Williams’ article too closely, which referred to the substantial effect that foreign buyers appear to be having on the Australian housing market:

“To try to find out whether the [foreign ownership laws were] being breached, the [Foreign Investment Review] board did a sweep in March that examined 58 overseas buyers of properties in sought-after [Melbourne] suburbs including South Yarra, Toorak and Brighton. The sweep found that at least half were Australian citizens or permanent residents. Some already had board approval to buy their properties, and several said they had bought new properties as investments, which is allowed under the law.”

While 58 properties is an absurdly small sample size, the figures vastly contradict the headline. If the “sweep” was a truly representative sample, that means that almost half of the properties acquired were done so by temporary residents or foreign companies. This is a truly astonishing figure and provides some explanation for the continued appreciation in residential property prices while mortgage finances has dropped for eight of the past nine months.

While ABS figures recently noted that residential property had rocketed by 20% in the year to March, the head of the Reserve Bank’s Financial Stability Department told a conference last week that “recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one”.

Dr Luci Ellis’ speech to the AFR’s Residential Property Conference started well enough, showing a graph indicating that in the past decade, residential property prices have, in real terms, risen by 220%. That property has risen at double the rate of other goods and services over 14 years would appear to some to be indicative of a bubble — alas, not to our central bankers.

Ellis was also correct in noting that certain demand side factors (low interest rates, low unemployment and the absurd first home owner’s grant), coupled with supply issues (caused by increased population growth and slower dwelling construction) have been partially responsible for the price run up. However, the RBA continues to ignore the elephant sitting in the arm-chair across the room, denying the existence of excess credit as playing a role in recent boom. Ellis claimed:

“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.”

Ellis is correct in a sense — historically, housing lending has been less risky than business lending. However, that is only true until a point — if banks are continuing to lend to fund property purchases that are far removed from intrinsic values, the risk of lending to fund residential property increases substantially.

The RBA stability head then produced a graph that  indicated that mortgage debt in Australia has tripled from 10% of assets to 30% now. Given the substantial appreciation in price in recent years, this would actually understate the impact of leverage on housing prices.

A better illustration of the impact of debt on house prices is the graph below produced by Steve Keen, which shows mortgage debt compared with national income (in the form of GDP). The increase is especially alarming, rising from less than 40% in 2000 to almost 90% today.

House prices, even adjusting for inflation, have more than doubled in the past 14 years, meanwhile, personal mortgage debt has rocketed. While factors including low interest rates and unemployment have been partially the cause of the massive house price appreciation in recent years, it is somewhat concerning that the institution that determines the cost of credit in Australia is denying the impact of the incredible increase in debt as the major cause of Australia’s property bubble.