Jeremy Grantham pricked, if not the housing bubble itself, then at least the bubble that property market spruikers live in, with the quip that:
“Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.” (Housing market a ‘time bomb’, says investment legend: The Australian June 16, 2010)
How true that is. Before Japan’s bubble burst in 1990, we heard that Japan was different: the “Rising Sun” was eclipsing the USA and house prices reflected this growing wealth (and—didn’t you know? —there was a land shortage in Tokyo!). Before the USA’s bubble burst, there were land shortages in all the States with price bubbles—especially California. There were probably even Tulip shortages in Amsterdam, four centuries ago.
Those other bubbles duly burst, despite their “unique” characteristics, under the weight of the same force: too much debt was taken on by speculators seduced by the groupthink that house prices always rise. When the rise in house prices made the entry costs for new players prohibitive, debt stopped growing and house prices collapsed.
This is the other thing that all housing bubbles (and share price bubbles, for that matter) have in common: they are all driven by borrowed money, and they can only be sustained so long as rate of growth of debt outpaces incomes. Once that stops, the engine of unearned income that enticed speculators in breaks down—since the only way that we can all appear rich without working is if we spend borrowed money.
Of course, we all know that spending borrowed money is a surefire route to ultimate poverty. The great tragedy of an asset bubble however, is that it’s someone else’s increase in debt that makes us appear wealthier when your house sells for more than you paid for it. In effect, the housing market “launders” the debt money, making it appear real.
Any doubt that borrowed money is what has driven house prices into the stratosphere in Australia is dispelled by the data: despite all the hooey about Australian lenders being more responsible than those in the USA, mortgage debt in Australia rose three times faster since 1990. Having started with a mortgage debt to GDP ratio that was just 40% of America’s, we now have a higher ratio than the USA—and ours is still increasing while theirs is clearly falling.
Notice however that our ratio was lower than the USA’s—and was falling too—before the government brought in the First Home Vendors Boost. As it has always done, that government intervention in the market set off a price bubble—the government in this sense is as responsible for the house price bubble as the banks are.
The government pulls this trick because it makes it look good for a while: the bubble pulls in yet more private sector borrowing, and the spending makes the economy boom. But when the grant ends and the borrowing slows down, things don’t look so rosy.
That’s one way to describe the housing market right now. The boost caused the number of buyers to explode last year, and now the number is fizzing: there were just 46,000 home loans taken out by owner occupiers in April, a cool 25% down on the same month in 2009. Actual demand (and that’s people with cash in their hands to buy now, not the hypothetical future demand concepts touted by the property spruikers) is therefore falling below actual supply.
As the stock of unsold houses mounts up, it is only a matter of time before the bubble bursts.