Puzzle Finance Blog

Bursting the bubble myth

INVESTING in property is a no-brainer at the moment. Prices have bottomed, auction clearance rates are on fire, especially in Sydney, and you can get a fixed rate mortgage for 4.8 per cent with 100 per cent gearing, 70 per cent in your super fund.

And the experts are now saying there'll be another housing bubble. What could be better?

There's no sign of a housing bubble yet: values are only just back to where they were three years ago. Will there be one next year or the year after? Who knows? But one sure way to make it happen is to sternly warn about one.

By way of confirmation, a lot of the coverage of Tuesday's Reserve Bank minutes plucked out the comment that: "Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances."

Yes, well, you'd be mad not to move some of your DIY super money from bank shares into geared residential property.

The bank share index is up 54 per cent in the past 12 months while the median house price is up 7 per cent over the same period.

If there's a bubble it's in high-yielding shares, especially banks; it's time to take the profits and put them to work in the next bubble.

The main problem with houses in Australia is that we never build enough of them, and the main problem with the Australian economy is not housing -- it's that it's begun a transition from resource investment-led growth to . . . well, hopefully something else.

In the US between 2002 and 2007 low interest rates led to a boom in both house prices and house building. They ended up with a glut of houses and prices collapsed: you could famously buy a house for the price of a second-hand car.

In Australia over the same period there was a house price boom and that's it -- no glut. In fact there has been a consistent shortage of housing in this country right through the boom and bust of at least 100,000 per annum. As a result, prices didn't fall much and have started rising earlier than in the US.

Why is there a persistent shortage of housing in Australia when it's the third least densely populated nation on earth? (Mongolia and Western Sahara are less dense).

Good question. The reasons are complicated and probably boil down to a lack of spending on infrastructure by state governments and planning restrictions by local councils.

Why are people in outer suburbs, especially western Sydney, so grumpy that during the election campaign politicians are thick on the ground, wearing holes in the carpets of motels there? Because they can't get around because the roads are clogged and schools, hospitals and shops are miles away.

So Australia has a housing supply-side problem that means the definition of a price bubble is distorted. Bubbles only occur when supply exceeds demand. Just because a price rises a lot, that doesn't mean it's a bubble if there's a shortage.

So what about the issue that, according to the minutes, the RBA board spent most of its time talking about this month?

For example: "Members noted that, based on a profile for projects derived from the bank's liaison and public statements by mining companies, the staff assessment was that mining investment was likely to decline noticeably over the next few years from its recent very high levels." That's Australia's real problem.

In 2001, when China entered the World Trade Organisation, gross fixed capital formation, or investment, broadly defined, represented 18 per cent of our GDP. Ten years later it was 28 per cent, having contributed about 1.5 percentage points to the average annual GDP growth of 3.1 per cent since 2001.

Since the GFC the proportion of our economic growth contributed by investment has been even greater -- 1.4 percentage points out of 2.7 per cent.

Australia's great investment phase is now over, and capital expenditure on non-dwelling construction and plant and equipment is falling. Half of our GDP growth of the past 12 years is in the process of disappearing.

As the Reserve Bank minutes noted, housing construction has "increased moderately", but household consumption has been "below average". Wages growth has eased and as a result of the declining terms of trade, national income has fallen.

So GDP growth is below trend and its main prop is being pulled away.

We just have to hope that stable government -- if that's what we get with all the blokes in charge -- improves consumer and business sentiment, and that the dollar falls some more so that investment in manufacturing, agriculture and tourism increases.

Low interest rates aren't getting much traction because they're feeding into house prices, not house building, and borrowers are not using the lower rates to cut their repayments so they can spend more.

Apart from that, the new government has to find a way to persuade super funds -- both SMSF and public offer -- to invest in building things rather betting on rising asset prices, and since asset prices are indeed rising, that won't be easy.

Treasurer Joe Hockey has been talking about infrastructure bonds where the commonwealth guarantees some of the risk. Good idea. Get on with it.


Alan Kohler is editor in chief of Business Spectator. For more commentary visit www.businessspectator.com.au

Posted by Alan Kohler - The Australian on 19th September, 2013 | Comments | Trackbacks

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