For those interested in the Australian residential property market, a long history makes for fascinating reading. Australians are fortunate because much data on real estate and financial markets is publicly available, going into depth not seen in other countries. Careful scrutiny can yield useful ratios that go back over a century and offer context for where the market is now.
Comparing housing prices to inflation is one of the more common indicators in property market analysis. If the trend is fairly even over time, then there is no indication that people are favouring housing relative to other goods and services.
On the other hand, if there is a wide divergence between housing prices and inflation, this tells us that people are considering housing to be relatively more important. Interestingly, every rise in real prices has led to a downturn, with the one exception of 1961-1964.
Another popular method of determining property valuation is comparing housing prices to rents. In a fairly efficient market, the costs of buying and renting should closely match each other, though due to factors such as taxes, risks and interest rates, it is unlikely that costs will equal. Since the post-World War II boom, the ratio has unevenly decreased. Upswings in the ratio suggest the presence of a bubble: the mid-’70s, early ’80s, late ’80s and today.
As with inflation and rents, housing prices have also outstripped incomes. Unfortunately, the ABS does not provide a long-term median household disposable income (HDI) series, so the denominator is derived by dividing aggregate real gross household income by the number of occupied households on an annual basis. This results in an unusually high HDI as averages are typically greater than medians, and is further amplified as the HDI is stacked with artefacts like superannuation which cannot be drawn upon to finance debt repayments. While the outcome is a rather low ratio, it keeps in line with that developed in Stapledon’s 2012 housing paper and shows a substantial increase from 1996 onwards. A more realistic median measure would result in a higher ratio.
It is easy to see the major cause of the Great Depression: a deflating land bubble, centred in the commercial property market. Every major rise in the ratio has resulted in a downturn, correlating with, and arguably causing, the economic recessions of the mid-’70s, early ’80s and early ’90s. The ratio has doubled from the trough in 1996 through to the peak in 2010. The substantial rise in the ratio during the late 1970s was likely due to an anomaly in splicing multiple land value series together, though part of the rise is justifiable because of a residential bubble.
The primary determinant of the boom and bust cycle in the land market is availability of credit/debt used to speculate on rising capital values of real estate. While data on private debt goes back to 1861, aggregate land values only begin in 1910. Debt peaked in 1893, driving a colossal commercial land bubble that burst, causing the worst depression in Australia’s recorded history. This also occurred in the 1920s, with the same result. It took until the 1970s for the debt cycle to assert itself once again, with one boom and bust after another. Debt reached the highest peak on record in 2008, driving the largest land boom on record.
Unsurprisingly, the cause for the massive rise in housing prices and land values, along with net rental income losses, is the colossal increase in household debt, primarily composed of mortgage debt. It has more than quadrupled since 1988, rapidly accelerating during the ’90s and 2000s. The ratio peaked in 2010, as did housing prices, which is clearly no coincidence.
While land booms have been a continual feature of the Australian economy, what separates this cycle is the relative size of the boom in both land values and private debt.
It is often claimed that “this time is different”. It certainly is, but not for the reasons usually given: Australia has not experienced a land boom, or bubble, of this magnitude in its history.
Philip Soos is a master’s research student at the School of Humanities and Social Sciences, Deakin University. The full chart pack on the history of Australian property values is available free at MacroBusiness
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