Debunking bubble economies - Australia pt1

I have already started to mention how crazy things have been in Australia for the past several years a couple of months ago on a post title It's Not Gonna Happen Here.

So let's start from where I left it: the housing bubble, propelled by a massive credit bubble (as it is the case in almost all the globe, except in US — it already bust! — and in Germany — would they be smarter than the rest of the Earth inhabitants?):

09 March 2010:

RP Data-Rismark, in their monthly review of property price trends, published an updated estimate of “price to income” ratios, drawn from their own analysis of property sales (said to cover 100 per cent of all property transactions in Australia) as well as Australian Bureau of Statistics data on household incomes.

Rismark estimated that average Australian home price across all metro and non-metro regions (and covering all property types) was 4.6 times average Australian disposable household incomes as of the December 2009 quarter. This is slightly higher than Australia’s average home price-to-income ratio, since March 2003, of 4.4 times.

Rismark updated its methodology to include both an “average”, or “mean” and a “median” price-to-income ratio for Australian homes across all regions and property types.

The ratio of median prices to average incomes is slightly lower at 4.3 times (and up from a ratio of 4.1 times in September).

In the December quarter, the average Australian home price was $428,000 using RP Data-Rismark data. The median home price was a little lower at $400,000.

Rismark estimates that at the height of the financial crisis in 2008 and 2009 the average home price-to-income ratio in Australia fell to a low of 3.9 as dwelling prices declined while household incomes remained generally stable.

Thus the 11 per cent growth in dwelling prices since the start of 2009 has seen the ratio of prices to incomes restored to around its recent average of 4.4 times.

Babak over at Trader's Narrative mentions a price to income ratio of 7.5, but he doesn't give out the source. This would mean that it's even more expensive than the UK.

While I'm not sure whether it's 7.5 or 4.6, the following report should make things clearer as to how come there can be such discrepancy between the two figures — this was January 25, 2010:

Media commentators frequently reference “house-price-to-income ratios” produced by overseas groups to gauge whether Australia’s housing market is over- or under-valued. 

These measures typically suffer from a range of shortcomings, including the fact that they ignore non-capital city regions (around 40 per cent of homes are located outside of the capitals), often only examine wages as opposed to “household incomes”, and frequently restrict their analysis to detached houses when one quarter of all homes are semis, terraces, and apartments.

To better examine these issues, Rismark International (”Rismark”) has developed a new housing affordability index that compares Australian dwelling prices across all metroand non-metro regions (including all property types) with the RBA’s definition of national “disposable household incomes” over time.

The property sales data in this new index derive from Australia’s most comprehensive residential property database (sourced exclusively from RP Data Ltd), which captures 100 per cent of all transactions consummated across the country. 

The quarterly Rismark National Dwelling Price-to-Income Index, which is released for the first time today with accompanying data, shows that Australian house prices
have not risen relative to disposable household incomes since late 2003. 

As Australian home values rose robustly by circa 11 per cent in 2009, Rismark’s National Dwelling Price-to-Income Index has risen from its low of 3.7x in December 2008 to 4.1x as at the third quarter of 2009 (which is the date of latest ABS National Accounts data).
Over the last six years, Rismark’s National Dwelling Price-to-Income Index has remained broadly static after solid growth during the early 2000s. In December 2003 Australian dwelling prices were 4.2x disposable incomes, which is effectively where they remain today. 

Christopher Joye, Managing Director of Rismark International, commented, “The fact that there has been no discernible increase in Australian house prices relative to disposable incomes since the end of the last boom in 2003 is one important explanation for the exceptionally resilient performance of Australia’s housing market during the GFC.” 

“In contrast to claims that Australian house prices are 7-8x incomes, Rismark’s National Dwelling Price-to-Income Index implies that the true ratio across all regions and all property types is around half this estimate.” 

“This suggests that Australian housing is not as expensive as is commonly believed. It also reconciles with RBA analysis highlighting Australia’s internationally low mortgage default and mortgage stress rates” Mr Joye said.

So? Notice that new metric is needed! What applies elsewhere doesn’t apply to Australia. Just like PER doesn’t mean anything during the new era, the new economics of the Internet Bubble.

Here's another guy stating that we need new metrics for the Australian houses — May 28, 2010:

An Australian property analyst said the price-to-income ratio analysis was “fundamentally flawed” as a measure of housing affordability. 

"International comparisons of house price to income ratios have been widely used to suggest that Australian house prices are significantly overvalued," ANZ's head of property Paul Braddick said in a research note. 

"These analyses … explicitly ignore a key component of the housing affordability equation – interest rates," Mr Braddick said. 

Housing affordability was underpinned by debt servicing levels, of which interest rates were a key driver. 

Mr Braddick said housing affordability and the sustainability of current house price levels were "extremely complex issues". 

"Drawing conclusions from simplistic aggregate metrics such as house price to income ratios is very unwise," he said.

This is the first part in this series about Australia. I've gathered documents about 2-3 weeks ago, but haven't had a chance to write in a structured manner. More to come.