License article

Housing bubble is real – it’s just not due to pop

Australia’s madly over-priced housing market seems to be holding up, despite various economists’ analyses that dwellings in Australia are 30per cent to 40per cent over-priced.

The analyses are basically right –  from a historic perspective, dwellings are about 40 per cent over-priced, or even higher. But the conclusion drawn from that – expect house prices to collapse any time soon – is a long bow. There are too many forces holding prices up.

Philip Soos, of Deakin University, has done a terrific set of charts indexing housing and land values and pitting them against an array ofother figures, especially income and debt.

Everything goes berserk after about the late 1990s. Since then, we have gone heavily into debt to buy houses that cost more than ever – especially the land component.

Soos concludes – rather grimly for property owners – that on seven measures, houses prices would have to fall by between 37per cent and 57per cent to revert to the late 1990s ‘‘trough’’.

The measures are mainly house prices against inflation, income and rents.


The analysis is first rate. Housing prices are well above long-term historic trends.

Moreover, as Soos points out, the mountain of private debt, mostly incurred in housing, is a much greater threat than the molehill that is public-sector debt. The latter is well under control and historically extremely low. 

But does  this mean  we have a housing bubble that will burst because of unsustainable debt and cause housing prices to tumble back to some historic average – a fall of perhaps 40 per cent?

There are lots of forces that militate against that. Bear in mind  the market for some things has gone to a new plateau and stayed there whereas the market for other things has fallen into a rift valley and stayed there.

Art plateaued. Blue Poles cost a trifling $1.3 million in 1973. It is worth a hundred times that 40 years later. French Impressionists went tothe stratosphere and show no sign of returning to some historic average.

The market in secondhand electronics and whitegoods has collapsed. The new ones are containered out of China at half the price of two years ago. People used to ‘‘trade in’’ their fridges, cameras and TVs and people bought the trade-ins. The concept now is laughable.

What militates against a collapse (or return to historic levels) in the housing market?

Immigration for a start. You can rely on governments to continue to import more and more people, even if it is against the long-term national interest. This keeps demand up.

Incidentally, one of Soos’ charts knocks on the head all of the self-serving whingeing by the Housing Industry Association and others that Australia is not building enough houses to keep up and that tracts of land should be opened up and unrestrained development should be allowed. The figures show fairly convincingly that dwelling construction has kept pace with population increases.

The tax system is next. Capital gains tax, stamp duty and negative gearing conspire to restrict supply, and thereby hold prices up.

Capital gains tax is perhaps of much more significance than the more popularly discussed stamp duty and negative gearing, by the way.

The structure of the capital gains tax makes people hold on to housing  they might otherwise sell (and thereby increase the supply and put a brake on prices). A lot of investor housing stock bought before, say, 2002 sits with a large capital gains tax liability ready to mature on sale.  So much so that to sell and reinvest in shares or an annuity, for example, would be madness.

The return after paying capital gains tax would be less than the return on rent alone on the investment houses.

Stamp duty makes empty nesters and others reluctant to sell and buy smaller dwellings. Again this reduces supply and puts pressure on prices.

True, eventually baby boomers will die or become  incapable of running big houses and there may be a glut in this part of the market. My guess, though, is that it will be met by cutting the big houses up or redeveloping to smaller dwellings.

Negative gearing and easy lending (at least before the global financial crisis) combined to push house prices higher – often out of reach of young first home buyers.

Nearly 40 per cent of dwellings are  owned by investors, compared with just over 10 per cent in the 1980s. Governments say they will not abolish it. Worse, do-it-yourself superannuation funds are poised to enter the market and they can probably avoid capital gains tax.

Third is infrastructure. Rather than looking at present dwelling costs (six times annual income) as ahistoric high, one might well look at pre-1980s prices as the aberration.

Before 1980, governments borrowed money to build the suburban infrastructure and did not pass the cost on to home buyers. Not so these days. Development charges are wound into the cost and will remain there. And governments  show no sign of borrowing to provide suburban infrastructure.

Fourth, the cost of green tape and red tape, which mainly affect land prices, will not go away. These are now part of the cost of a dwelling.

Last, the housing market is less susceptible to correction than the share market. People can sell small parcels of shares and take modest losses. They do so and this increases supply immediately and drives down the price.

But with housing, you have to sell all or nothing and people are very reluctant to sell for such a large loss in one go, so they tend to hang on,  keeping the housing market higher than it should be.

The housing market has been remarkably resilient to predictions of bursting bubbles.

But what of the morality of all this? Baby boomers buying their first homes in the late 1960s and 1970s got cheap land serviced by the taxpayer and often were not condemned to the fringes of cities. They could service loans equivalent to one or two years’ income with 10per cent or 15 per cent of their income. Saving for a deposit was a realistic proposition.

Young people today are facing loans equivalent to five or six years’ income, deposits beyond reach without parental help, and loan servicing costing 40 per cent of their income. They also face heavy marginal tax rates on their incomes and interest as they save for their deposits, while  investing boomers wipe out their tax liabilities with negative gearing.

It is simply  unfair – and I am one of the benefiting boomers. It is also socially corrosive, as we know that home ownership helps cohesion.

But since when has unfairness prompted governments into action? You can rely on them to do nothing. Indeed, many housing investors are. And that’s why the housing bubble is not likely to burst any time soon.