The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."
Thursday, March 11, 2010
Is there a Melbourne housing bubble?
Extreme myths and misconceptions pervade almost every discussion one engages in: debt servicing is incredibly poor (despite Australia’s high mortgage rates, it is actually exceptionally good by global standards based on our very low default rates); affordability is at all time lows (it is, in fact, around where it has been on average over the last 20-30 years using a range of different measures); prices are seven or eight times incomes (average home prices are actually 4.6 times average disposable household incomes using the largest sales database in Australia and the ABS’s December 2009 National Accounts data); prices have skyrocketed over the last five years (growth in national home values has, in fact, been almost exactly on par with per capita incomes and significantly less than system-wide income); and prices are purely determined by ‘demand-side’ factors, such as credit growth and interest rates (a mistake made by some high-profile economists during the GFC, who now presumably recognise that the supply-side has a role to play).
I end up spending an inordinate amount of time busting housing myths on behalf of journalists, commentators, analysts, economists and policymakers (a classic example is this interview with Peter Switzer on Sky Business). One of the few exceptions to this intellectual lacuna is the RBA. All I can say is, Thank God for Australia’s Central Bank (at least most of the time). On the right day, the RBA’s executives are experts at the myth-busting business. Phil Lowe offered up some outstanding commentary yesterday. And in this housing domain, the RBA’s efforts are led by a world-class group of professionals, including, amongst others, Dr Anthony Richards, Luci Ellis, Paul Bloxham and the little-known young ’en, Natasha Cassidy.
The latest falsehood doing the rounds is about the Melbourne house price boom. Readers down south would be familiar with the story, with headlines screaming out at them that a gigantic ‘bubble’ is about to burst. But as with all things related to housing, the facts do not fit comfortably with the fiction (I am quoted in the AFR about this today). And the 'bubble' moniker is almost exclusively reserved for those who are talking out of their behinds when it comes to housing.
Between December 2003 and December 2009 the compound annual growth rate of disposable household incomes across all Australian areas was 5.7 per cent based on the ABS National Accounts data (unfortunately the ABS does not provide timely quarterly data for individual cities, so we will have to make do with the national estimates). Now it is important to note here that the ‘system-wide’ growth rate was a higher 7.9 per cent per annum. Our lower 5.7 per cent estimate takes the system-wide growth and deflates by the total number of households for an equivalent per capita measure.
So what have Melbourne house prices done? Unsurprisingly, the compound annual growth rate of Melbourne dwelling prices over the same period has been 6.8 per cent based on RP Data-Rismark’s Hedonic Index. In short, Melbourne dwelling prices have grown at a similar, albeit higher rate, than national incomes over the last six years. It is an open empirical question as to whether the difference between the two estimates is accounted for by Melbourne’s household income growth, which we cannot easily measure.
Support for this latter thesis is provided by a more like-for-like comparison between overall Australian dwelling prices in capital cities and national disposable household income growth. We have to start this analysis in December 2004 since this is the inception date of RP Data-Rismark’s Hedonic Index. Over the period end 2004 to end 2009 home values in Australia’s capital cities rose by 6.1 per cent per annum. While system-wide disposable incomes grew by a much stronger 7.9 per cent per annum, if we deflate by the number of households we get an annual growth rate of exactly 6.0 per cent. That is, national home prices have tracked 1:1 with per capita incomes.
While the media is caught up in the hyperbole surrounding the 2009 capital growth rates, they forget that Melbourne dwelling prices only rose by 2.6 per cent per annum over the three year period 2004, 2005 and 2006. And then Melbourne prices actually fell by nearly 2 per cent in 2008. So four of the last six years have seen exceptionally weak growth. But, of course, that does not make for a stunning story. The reason the average growth rate between end 2003 and end 2009 is a higher 6.8 per cent is because of the two anomalies: ie, the smart capital gains registered in 2007 and 2009.
Over the medium term one might reasonably expect Melbourne dwelling prices to rise broadly in line with purchasing power. Of course, on a year-by-year basis the outcomes can vary around this trend: some periods will see little growth while others will appear comparatively spectacular.
The sensibility of Melbourne housing valuations is reflected in the median price data. If we take the median (or middle) price from all home sales transacted in Melbourne in the three months to end January 2010, we arrive at a median city-wide dwelling value of $455,000. The national median dwelling value in capital cities is $449,000. That is, almost identical to the Melbourne median. Indeed, median dwelling prices are actually more expensive in Sydney ($494,500), Perth ($472,500) and Canberra ($489,250).