Jan31
I’m giving two talks at Swinburne University of Technology on Thursday February 4th. The information below is reproduced from the flyer for the event developed by regular blog contributor Matt Mitchell, who has arranged the talks:
12.00pm – 2.00pm: DebtWatch : Observations and reflections on the educative role of modern media
- Dr Keen will discuss his experience using his Debtwatchblog on which he posts regular articles for discussion and the role of this media in both educating the public and stimulating debate among economists, students and lay people around economic theory and practice.
- Target Audience: Educators using online resources and those interested in emerging media.
2.30pm – 3.30pm: Have we dodged the iceberg?
- Dr Keen will describe the causes of the Global Financial Crisis, and the role of debt in that crisis, as well as proposing some courses of action to deal with the effects of this crisis.
- Target audience: staff in the Economics and related discipline areas.
Matt would be delighted to have other blog members attend, and the event is open to the general public. So please make it along if you can. The venue for both talks is LA101 at the Lilydale Campus of Swinburne University of Technology.
For further details, please contact:
- Matt Mitchell: 9215 7140, mmitchell@swin.edu.au; or
- Debbi Weaver: 9215 7204, dweaver@swin.edu.au
I hope to see some of you there. Closer to the date I hope to publish a retrospective on the development of the blog. Some feedback from members about the blog experience–which I can use in the talk–would be appreciated.
Re images Philip–no this is a plug in that only allows one image. If anyone can find a plug in that allows comments to be fancier and allows multiple images and doesn’t stuff up like the last one I tried, I’d like the hear from you!
Mish talking about the imminent bust of the Aussie housing bubble
http://www.marketoracle.co.uk/Article16958.html
The great Jim Chanos says ‘bubbles are best identified by credit excesses, not valuations’. Now how do we define a credit excess?
H4A,
Thankyou for your reply.
To answer to your question – I can not find anyone who is not conflicted and supports the notion house prices are ok.
I also can not find anyone who is not conflicted and supports the notion house prices are a bubble.
I can’t talk about everyone on your list. But Prof Keen is conflicted. He sold his unit, and has a very public bet which MSM sometimes unfairly uses to undermine his credibility. He has a vested interest to see house prices fall.
You are conflicted. You are making one of the biggest financial decisions of your life (short housing). You have a vested interest to see house prices fall.
I’m conflicted. I own a house & have a mortgage and hope you are wrong. I have a vested interest NOT to see house prices fall.
Everyone has a stake in this game because everyone needs a roof over their head, and commentators have their credibility on the line. To think otherwise is a mistake. So lets leave “spruiking” and “conflict” out of the debate.
I’m sure you can agree, the best thing to do is analyse the facts. The facts to me are
- Aust housing is very expensive (as measured by income)
- Land (englobo) is very cheap
- Builders and developers have made poor return on capital (measured over 10-15 years). Stockland share price in 1993? $3.60. Today $3.88.
- Building costs have rising and perhaps this has been driven by credit. Perhaps driven by skills shortage. Perhaps both.
The elephant in the room for the housing bears is the fact the suppliers of the product are not making adequate returns. Unlike most countries, this is because they are being squeezed by very high (unaffordable) end prices, and rising government charges to cover long run infrastructure costs.
Like I said – this does not mean prices will not fall. But if they do, supply will stop. And while the population keeps growing something will have to give. 9 time out of ten, it ususally means prices rise again.
homes4aussies @ #53,
That was an excellent article by Mish. Even though I don’t agree with Austrian economics, I find that I agree with his analysis.
I’ve updated the Stapledon index with the most current ABS house price index data (Dec 2009). Attached is the image.
This graph shows the Year-on-Year percentage growth of the population and private dwellings in Australia from 1890 (population) and 1901 (private dwellings) onwards.
From 1956 to 2005, the YoY growth of private dwellings was greater than that of population. If supply and demand was the economic mechanism setting property prices, then property prices should’ve been steadily decreasing since 1956!
Phillip @ 44
Thanks for the chart. Very interesting.
However I fear you are comparing apples with oranges. To deliver a house you need to
- Buy the land
- Services the land
- Build the improvement.
You seem to be comparing house price increases with only the the third point (correct me if I’m wrong).
Much of the cost inflation has occured in “servicing the land” Prior to the 1980′s, this cost was borne by Government. Now these charges have been passed onto the developer, and passed onto the consumer.
Overtime, this makes existing serviced land more valuable.
To think about it another way, your chart implies developer margins should be +50% today. The accounts of the public companies suggests otherwise.
Phillip @57,
You are assuming household formation should remain constant over 50 years. Personally, I find it difficult to accept that assumption.
bb @ #58,
Stapledon’s real construction price index looks at construction costs, not the costs of purchasing the land. It has been noted elsewhere that rising construction costs is one factor in pushing up property prices. Yet this graph would contradict this.
Have you examined the accounts of US developers and compared them with the AU developers? If you can post them here, the figures could be interesting.
Phillip @ 60
Thankyou for your reply.
Yes, construction costs are ONE factor, but not the only factor. At the end of the day, it is the total cost of production (including required return on capital for risk).
I have analysed US builders. The best example is Lennar. You have to dig through the filings to get the numbers.
Check out Item 6 page 14 for a good five year history during the bubble.
http://phx.corporate-ir.net/phoenix.zhtml?c=65842&p=irol-SECText&TEXT=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPXRlbmsmaXBhZ2U9Mzk0ODQzNyZhdHRhY2g9T04mc1hCUkw9MQ%3d%3d&bcsi_scan_6912F53A33CD47C2=sCSBLBow5p0+/gMgLFU2dS4AAAA3PXwJ&bcsi_scan_filename=phoenix.zhtml
From 2001-2005, Lennar’s building margins expanded from 11% to 17% (more than 50% increase). This is a massive return for a pure builder which has very limited capital requirements as evidenced by their 26% ROE.
By way of contrast, AV Jennning building division average margin is less than 3% (they made a $8.3m loss last year). Check out note 6, page 44.
http://phx.corporate-ir.net/phoenix.zhtml?c=65842&p=irol-SECText&TEXT=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvZmlsaW5nLnhtbD9yZXBvPXRlbmsmaXBhZ2U9Mzk0ODQzNyZhdHRhY2g9T04mc1hCUkw9MQ%3d%3d&bcsi_scan_6912F53A33CD47C2=sCSBLBow5p0+/gMgLFU2dS4AAAA3PXwJ&bcsi_scan_filename=phoenix.zhtml
Apologies – AV Jenning link here
http://www.avjennings.com.au/getdoc/38c69d3f-a1ed-440a-a80f-68458f1f9bcd/AVJenningsAnnualReport2009.aspx
bb,
Nice point on everyone having a vested interest, it is natural to think that you are beyond the very human influence of vested interest and your arguments are objective. It is harder to filter out you own influences from the argument, especially an argument which is essentially ambigous in evidence because of the general approach of analysis which tends to be one dimensional and applying a mutual exclusive rule to counter arguments.
I want to disagree to some extent on one of your points but it also leads to some further understanding.
- Land (englobo) is very cheap
Without knowing what englobo means, I would say that it is the available land is cheap. Try buying land in the already well developed areas where there is no more undeveloped land. This is part of the reason houses become much more expensive. In an area which is well populated and starts to become approved for higher density through transformation of housing blocks to units, the price of the remaining houses tends to be very strong. 2 houses could easily turn into a block of say 12 or more units. This is the particular nature of Australian real estate, the land that remains free of development is mostly cheap because of the location. The locations which are desirable, mainly due to access to well paid work are already well developed. This is a pretty mature RE market, the fresh developments are at the periferies. The price pressure comes from the fact that there are a few concentrated sources of income in this country and transport isn’t exactly getting any faster. Evidence of this can be seen in the increase in values of homes when the transportation to employment centres becomes more viable either via new public transport routes or new freeways.
The point – the price pressure is from the increasing population density. If income sources were more dispersed than RE market would be very different. Therefore one of the key drivers of RE market is employment, which interestingly as Steve points out is correlated to credit. However I would argue the cause/effect is contentious and certainly not one sided.
TITINT,
Good post. However I don’t think we are in diasgreement. You are just looking at the issue from a difference angle.
What you are alluding to is generally called “highest & best use” is real estate jargon. This dynamic comes about (as you correctly pointed out) due to lack of, or improving infrastructure, plus changes in social behaviour (Balmain & McMahons Point was once blue collar and crime ridden suburbs of Sydney. Now they are populated by professionals).
Since the 1980′s, infrastructure was undervalued since it was delivered to the consumer essentially for free by Governments (along with associated goverment deficits). Since 1980, the system has gradually become “user pays”, and goverment deficits have reduced.
Therefore exiting (old) infrastructure become more valuable, as maginal stock has become more expensive. This encourages professional to pay up to live in Balmain & McMahons Point, and consequently gentrify the area.
In short, rising house prices has essentially monetised the governments subsidies prior to 1980′s to the baby boomers. It will not be repeated.
PS. Englobal land is generally land without services (sewage, power, roads, gutters etc). Think of it as an un-even paddock full of trees and rocks.
bb
Your response regarding conflicts of interest is cute and the type of response one might give when focusing strictly on attempting to win a debate – or at least scramble to get a couple of points back – but it really has no substance and really is weak in a real world context.
Of course we all are conflicted. But you miss the most important conflict in my view. We live in a society and we’ve been dealing with the consequences of “The Greatest Bubble in History”, and soon we’ll be dealing with the consequences of that bubble busting. I hate seeing people hurt by this bubble – and that is my greatest conflict – but I also am concerned for the many people (including friends) that will be hurt by it’s bust.
That is not to suggest that I have absolutely no financial conflict myself. But your views are one of somebody who is more interested in investing and financial returns. I am more interested in society and other issues which I consider more important.
You raised financial conflicts for Steve and I. I don’t wish to speak for Steve – though having read his comments for the last couple of years I would think his thinking is similar to mine here – nonetheless, this is what I think.
My family is very financially secure renting – very. We are extremely fortunate to be in the position that we are – we know it, we respect it, and we give back as much as we can (in time, and financially – on the latter, most of us in developed countries can always give more, and finding that balance for us is a constant tussle.) We seriously have no financial issues at all by renting, and we are well on our way to providing the financial platform to give our kids the best start in life and a secure retirement for us.
There have been times through this bubble that the propaganda has affected me – I’d be lying if I didn’t say there were times when I thought “I want to own the family home, where we raise our kids” – but then I realise that I am falling into the trap that so many Aussies have of making the whole family make sacrifices for something that the parents actually want (and the kids are the ones paying the highest price with long term day care, etc). A house is material – and what kids most need is the love of their parents – whether you choose to make a home in a house that you rent or one that you pay off from a bank, that makes little difference to your kids.
In my view you are blinded by your concentration on money and your own relative position financially in society.
That sort of stuff does not interest me, and you are wrong about your conflict of interest theory.
And all of the other things cancel out – the ego issue – from bears to bulls.
So this issue is one of relativity, and the guys that cheerlead the housing market and provide the spin that it is not a bubble – well they have relatively massive conflicts.
And seriously, trying to argue otherwise is nonsensical. No wonder you wanted to move the debate on.
The problem then with your argument becomes one of affordability. Let’s remember that Rudd sent all of his new MPs to a homeless shelter in their first week in the job.
He knows what is coming – a growing political storm over the cost of rents and its affect on homelessness (if he were a magician and able to keep the bubble going). And as I said above, the problem is at the affordable end – the higher you go up the renting chain, the higher the vacancy rate and the more bargaining power. Dan at Bubblepedia was telling me that he was looking at renting places in Sydney on a gross rental yield of 1% !!!
The Government will come under more pressure to do more about housing, including providing social housing and ensuring that it does flow through to easing rents in the private sector. There are a lot of votes here, too. And older Australians – when they are more reflective of legacy and what is being left behind – they too are concerned for the situation. With mature professional people getting actively engaged in politics and helping vulnerable and young Aussies to understand how they are getting shafted, this pressure will only grow.
But the greatest problem with your arguments, in my view, is that they are based on “fundamentals”. And my firm belief is that house prices have not been moving according to fundamentals – they’ve been moving according to emotion which is essentially the definition of a bubble (when positive emotion, ie. irrational exuberance).
That reminds me – I love the graphics on CNBC – I especially like the graphics on the NASDAQ where they show 12 month performance – pretty impressive; blow the graph out to 3 years performance – not too good, but not disastrous; and then blow it out to 10 years – who fell off that cliff!
I don’t think I need to find any relevant quotes for you, but you know that there were plenty of spruikers back then quoting lots of “fundamentals” for why the companies making up the NASDAQ were great buys with buyers thinking they can’t lose.
Affecting emotion is the only tool available to people wanting to continue our house price bubble – from spruikers to Government.
But emotions are fickle, and that strategy is just about out of effectiveness.
And finally, you might also find Mish’s article above of interest.
Thanks for the chat.
bb,
If that’s the definition of englobal land than I think was right and I don’t see how it is a relevant factor in the debate.
Infrastructure value must be ultimately linked to proximity to income centres and apart from the essential services the most important is transportation to those income centres. Individuals exchange their time for money, so there is some direct value one could estimate for an individual with respect to travel time to work.
I’ll try and do an example. Let’s say you earn the average wage guesstimated at $52K for convenience after tax. That’s $1000 per week which is $25 p/h. Increase travel time by 1hr each way, difference between Balmain and Blacktown (let’s say roughly) that’s $50 per day. Over say 30 years that’s 250*50*30 which is 375K already. The point is I think the pressure comes from these high density areas, this pressure disperses externally and this also gives a nice intuitive link between RE market and employment.
Just some thoughts, I’ve got to run for now.
Aussie4Homes,
While we may disagree, I like your perspective and I too enjoy the debate.
I know I probably can not convince you we do not have a bubble, but you made a number of assumptions about me which were incorrect.
Whether you like it or note, buying or renting a house is a big financial decision. Getting this wrong will affect your financial well being.
Like most bears, you have made the mistake of assuming you have avoided a financial liability by renting. You have not. Instead of a liability with a bank, you have one to all future known and unknown landlords. The question is, in financial terms, which liability is bigger? In social terms, which decision makes more sense for any given lifestyle?
On the second point, remember, so long as you meet your financial obligations, a bank will not remove you from your home. The same can not be said for a landlord.
I hope we have both made the right decision (somehow).
bb
I also appreciate your perspective especially as shown in your last post.
We’ve both made some wrong assumptions on the other – in many ways it’s natural with the medium in which we are chatting.
I actually think that I probably will buy a home eventually – it is our plan at this stage. But I would never buy with so much buoyancy in the market and house prices across the board at such unaffordable levels.
The point I was trying to make is that I am not conflicted in the way you suggested because I am not sitting here waiting for a price correction to occur. I think it will. And if it does, we’ll probably buy. If I’m wrong – as unlikely as that seems to me – I will happily continue renting. And if I have to shift for some reason, I’ll do that. Plenty of people who have purchased homes have to move also for a lot of reasons.
(In fact, the propaganda thrown at kids of buying something, anything that they can afford, to join the property ladder actually infers a lot of shifting.)
And I think we have both already made the right decisions because we are very comfortable with them. And that is the most important thing.
Take care
Another ‘surprise’ fall:
http://www.smh.com.au/business/retail-sales-in-surprise-fall-20100204-nepc.html
Sorry to bang on about Soros again. I wrote a post yesterday, where I quote from his recent book, but when I clicked submit my connection was dead.
I don’t have the quote handy now, but someway after the middle of the book, he suddenly declares that his theory of reflexivity is important and he wants to push it more, only that one person on his own can only do so much and he wants others to get engaged. He then declares that is why he wrote the book.
Why he didn’t leave his email address for us to contact him I do not know. I would strongly recommend trying to apply some of the feedback concepts (especially Steve’s insight into the ‘reflexivity’ of pricing and the underlying feedback loops in leveraged asset speculation) presented here to George Soros’s case scenarios and testing by analogy.
After all that I’ve had a moment of inspiration and will attempt to put together a multi agent model of the RE market. I’ve always wanted to build one and thanks to the debates I’ve had enough ideas to play around with. I’ll try to show how you can incorporate most of the things which people have strong views about into one model. If I manage to do this and it’s something that works it will be thanks to the open debate on this site, so either way thank you Steve.
bb,
Perhaps you are missing the point. Household formation (or what I think you are trying to say is the average occupancy rate) has been slowly but steadily falling since 1901. Clearly property prices aren’t a correlated or causal factor with the AOR.
Continuing this current trend, Australia will have a AOR of 1 by 2060!
Given that the only factor with which property prices are correlated with is housing credit (mortgage debt), I find it difficult to believe that developer margins are the real cause. From 1987 to 1995, Australian property prices decreased by 9.5% and then increased 136% from 1996 to 2009. It is doubtful that something drastically occurred to the economics of the construction industry or developer firms to result in this.
The only way to verify this is to graph both a national aggregate of developer margins and the property price index to see if there is a correlation (even then it doesn’t imply causation).
Phillip,
Just because average occupancy rate have declined in the past, does not mean it will keep declining to 1.0 by 2060.
I don’t think your point discredits the notion that there is a rational explaination for smaller households.
The fact is, household formation has changed. Less kids, the aged living longer (sometimes alone), higher divorce rates have all contributed.
Therefore, just because supply has been growing faster than population, does not mean prices should have been falling since 1950 (which was your assertion).
re: building costs. You are trying to fit an econometric model to explain causality. I don’t think your will succeed here since there are too many short term factors which affect prices and costs. The correlations probably need to be done on 5 or ten year rests (ie: 10-20 observations over 100 years). As you probably know, cnaging rests can give a very different correlation.
However, I don’t think this is neccesary to prove or disprove my point. The fact is, “if there is a housing bubble today, why are developers, builders and land traders losing money?”
Phillip – one more point.
whe you use poperty prices, are you using the ANS series? Average or Mdeian.
To get close to any correltion, you would need to compare building costs to the price of new homes (not all homes).
I think, therefore, you are comparing apples with oranges, and therefore you will not get a correlation.
Again – look at the developers today. If they cant make money, how can prices reflect a bubble?
bb
If you have pay tv, watch Property Ladder tonight (the +2 channel). A couple bought for 58,500 pounds, thought they could do the project for 15,000 and sell for 110,000. SB reckons it will cost 50,000 – there goes their profit.
Do you suggest it wasn’t a bubble there because they won’t make any money?
Maybe, just maybe, they paid too much for the property to begin with.
I’d suggest that when the bubble pops, developers will be forced to write off a large chunk of the value of their assets, their land banks.
It happens in every other business, and it will happen in this case. Then, after a few years once the value of the land is valued more rationally, developers will make money again from developing.
homes4aussies @ #75,
Yes, that is likely the case.