Australian hosuing bubble

What is a 'Housing Bubble'

A housing bubble is a run-up in housing prices fueled by demand, speculation and
exuberance. Housing bubbles usually start with an increase in demand, in the face of
limited supply, which takes a relatively long period of time to replenish and
increase. Speculators enter the market, further driving demand. At some point,
demand decreases or stagnates at the same time supply increases, resulting in a
sharp drop in prices -- and the bubble bursts.

https://www.investopedia.com/terms/h/housing_bubble.asp#ixzz5BchSJToq

BREAKING DOWN 'Housing Bubble'

A financial bubble refers to a situation where there is a relatively high level of trading
activity on a particular asset class at price levels that are significantly higher than
their intrinsic values. In other words, a bubble occurs when certain investments are
bid up to prices that are far too high to be sustainable in the long run.

Traditionally, housing markets are not as prone to bubbles as other financial markets
due to large transaction and carrying costs associated with owning a house.
However, a combination of very low interest rates and a loosening of
credit underwriting standards can bring borrowers into the market, fueling demand. A
rise in interest rates and a tightening of credit standards can lessen demand, causing
the housing bubble to burst.

The housing bubble

explained
JENNIFER DUKE JUN 6, 2015 domain

The housing market talk has gone from boom to bubble,

with homeowners and buyers concerned by soaring
house prices and growing investor numbers. Is Australia
in a bubble?
What is a bubble?
A housing bubble is a period of above-average levels of
house price growth that is followed by a drop in prices,
back to or lower than the point where the
growth started. The drop in house prices begins at the
point where the bubble “pops”.
For instance, in a market where prices are $300,000,
a rapid and unexpected rise to $600,000, would need to
be followed by a return to $300,000 prices or below to
constitute a bubble. This concept is called the Wilson
Curve, modelled by Domain Group’s Andrew
Wilson. This may take some time to occur and the drop
is called the “correction phase”.
For a bubble to form, something outside the norm must
push prices upwards and then change, creating the
drop. If no fall eventuates, it can be argued the growth is
a result of “fundamentals”.
So it’s difficult to know if a bubble exists – until it pops.
Have we seen housing bubbles
before?
Bubbles form in many different ways and no bubble is
the same. Most Australians will be familiar with the
early-2000 mining-town housing bubbles that burnt
investors – many of which are still recording substantial
price declines in 2015.
In these towns, property investment surged, largely as a
result of high-return promises and miners paying high
rent prices. The influx of investor cash and sudden
demand caused prices to surge. When mines shut, or
wound back, investors exited the market en masse and
sold the properties. The bubble popped.
In 2006, Port Hedland’s median house price was
$465,000. It reached $1.2 million in 2012 and has
slumped ever since – now at $780,000 and declining.
Gladstone, Karratha, Moranbah and Blackwater have
also experienced similar drops – from 30 to 50 per cent
since their peaks.
Small local areas with single-driver economies are more
exposed to bubble-style volatility. However, that’s not to
say that large cities are not affected by bubbles.
In the US, property prices increased by more than 70
per cent, with much of the growth in 2001 to 2006.
Prices subsequently plummeted, at one point dropping
18 per cent in six months. The cause of the house price
collapse was complex, however most fingers are
pointed to the expansion of “subprime” lending, whereby
lenders provided mortgages to riskier clientele. When
interest rates jumped from record lows, foreclosures
increased and house prices plummeted.
Why is it potentially bad?
The problems with a bubble are twofold. There are
issues during the house-price growth period, including
lack of affordability and a sudden change in the towns
themselves. Mining towns saw local businesses and
families leave, either as a result of unaffordable rent or
to make their fortune by selling up. Some of these towns
never recover.
Not only does a correction crash the housing market, cut
personal wealth and affect retirement plans, but it can
also be destabilising for the economy. The popping of
the US housing bubble is seen as one of the major
reasons the entire country headed into a recession.
It can cause job losses, particularly in countries such as
Australia, where housing construction and related roles
are strong employers and market drivers. Individuals
affected will find themselves often unable to retire,
unable to provide a roof over their heads and struggling
to pay bills.
With so much money dedicated to the housing market,
particularly in countries where the bank will still come
after mortgage holders to repay the debt on a now
worthless asset, the outcome can correlate with
bankruptcy, eviction and even social unrest.
How worried should we be?
Smaller towns are volatile, yet capital cities are the
sources of most property bubble speculation. Despite
this, there is no consensus on whether Sydney and
Melbourne are in a bubble.
To date, Sydney and Melbourne have not seen a fall
back to their previous troughs and continue to surprise
with strong price growth. While deceleration and price
decreases have been recorded, in the past few
decades these markets have not fallen in a manner that
could be described as a bubble-popping.
For those in cities with multiple drivers, the chances of
an imminent collapse are not as prominent. However,
there are some features seen in Sydney and Melbourne
that could be taken as signs of a bubble, including
record-high levels of investor activity and house price
rises.
Indicators of a housing bubble:
• Strong credit growth (more people taking on more
debt)
• Lending standards are loose
• Historically low interest rates
• High levels of speculation (more investors in the
market)
• Sharp rise in house prices
Ensuring the property market does not overheat is in the
interest of the regulators, including the Reserve Bank of
Australia.
Tight lending requirements and a close eye on the debt
levels and investment habits of Australians is critical.
Despite this, broad reform may affect other capital cities,
such as Perth, that are not recording signs of growth.
This year, the Australian Prudential Regulation Authority
(APRA) exerted pressure, with some banks already
taking action to wind back speculative purchasers and
raise their standards. This is expected to continue even
if the jury is out on whether we’re in a bubble.

Australian housing crash is a

possibility that should worry
us all
By business reporter Michael Janda
Updated 18 Jan 2018, 5:13pm
Thu 18 Jan 2018, 5:13pm

PHOTO: There has been a rise in the number of properties listed for sale over the
past year. (AAP: Lukas Coch)
RELATED STORY: Home loans rebound as prices cool
RELATED STORY: Apartment boom continues as development approvals jump
RELATED STORY: Australian housing set for 'sustained weakness'
The start of the year prompts a flurry of forecasts, most of
which turn out to be hopelessly wrong.
Couple buys first home in outback Queensland

In pursuit of an affordable option for their first home, a young couple packs up and
moves 1,000 kilometres to Blackall where they found a four-bedroom house for
$185,000.

The problem with economic forecasting is that there are so many

variables, not least of which is the unpredictable nature of human
behaviour.
Orthodox economists typically assume a rational individual, which is
one of the reasons why predictions from their models are usually
next to useless.
We know from psychology, and from our own life experience, that
people can be greedy, fearful, impulsive and otherwise captive to
emotional reactions.
We also know that humans tend to exhibit herd behaviour — during
a boom they suffer extreme FOMO (fear of missing out) and when
there's a bust almost everyone rushes for the exits at once.
No-one wants to be the last wildebeest in the herd,
finding itself singled out and surrounded by lions.
If you want a recent example of how speculative, mass insanity can
take hold, you need look no further than the meteoric rise of a
range of cryptocurrencies last year (and fall this year), some of
which were literally jokes and many of which are scams.
If you want a less insane, but no less intense, example of
speculative groupthink, you need only look in your own backyard,
literally.
"House prices will only ever go up" is a phrase surely heard by
every Australian many times during their life. Even when prices
have fallen, the refrain simply changes to, "house prices always go
up in the long term".
It's been true for the best part of three decades — in fact there are
a lot of working-age people who don't remember the last time
Australian property seriously wobbled in the wake of the late 1980s
crash, 17 per cent mortgage rates and the early 1990s recession.
But, as they say in financial disclaimers, "past performance is no
indication of future performance", in fact, it is often a warning sign of
future underperformance.
We asked if you were worried about a housing crash in Australia. Read the
discussion in the comments.

One of three factors needed for a crash …

maybe
This leads back to the danger of making predictions.
While academic economist Steve Keen has been much pilloried for
his constant predictions of house price doom and gloom over the
past decade, current forecasts assuring everyone that a crash is
impossible or highly unlikely seem equally dogmatic.
What bitcoin says about us

Bitcoin is a formula almost guaranteed to end in tears, but still speculators pile in to
the bubble, writes Ian Verrender.

The common refrain we hear from this group is that you need
forced sales to trigger a housing crash and there are only three
factors that could cause this: a dramatic rise in interest rates, a
falling population or a steep rise in unemployment.
For one thing, this analysis ignores the fact that housing prices are
determined by the latest transaction.
There will always be some forced sellers — moving cities, bigger
families, personal financial difficulties, divorces and deceased
estates — and if the current buyers aren't willing or able to pay as
much, say because lending restrictions limit what people can
borrow, then prices can fall heavily even though few properties are
changing hands.
There will also obviously be people who bought their property at a
much lower price and are still willing to sell into a market where
prices are down 10 or 20 per cent because a) they're still making a
big profit, and b) they're worried prices may fall further.
Media player: "Space" to play, "M" to mute, "left" and "right" to seek.
VIDEO: Quantitative easing and surging property prices explained using a coconut
(ABC News)

It also ignores new developments — most developers have finance

to fund their project and will need to sell their finished units/houses
to pay their debts, even if they have to slash prices to do so.
But this severe price correction isn't really a full-on housing crash,
with its consequent economic fallout, unless the falling prices affect
tens, or perhaps hundreds, of thousands of sellers who end up
booking losses (including banks in repossession).
To get this you probably do need one of the above factors (rising
rates, rising unemployment or a falling population) to turn a steep
house price fall into a housing crash with mass forced and panic
selling.
Range of plausible risks
However, the analysts who insist that none of these things are on
the horizon are ignoring a range of plausible risks.
One is that a global inflation revival and overseas rate rises
essentially force the hand of the Reserve Bank into lifting rates, or
at least force the retail banks into raising mortgage rates as
offshore funding costs rise.
Central bank bubble trouble

Central banks pumped asset bubbles to revive the global economy, now they are
desperately trying to deflate them.
However, with the Australian dollar back near 80 US cents and
global inflation still very moderate, this doesn't seem like a short-
term threat over the next year or two.
The much bigger risk is around employment.
It sounds ludicrous to suggest this given the 300,000-plus full-time
jobs added over the past year, but even that very strong job
creation has left unemployment at 5.4 per cent, which is far from
low.
And the reality is that a large contributor to job creation over the
past five years has been the record residential building boom.
As building approvals rose more than 40 per cent from around
155,000 in calendar year 2012 to about 220,000 in financial year
2016-17, employment in building and construction services jumped
almost 30 per cent to 1.07 million people.
Number of construction workers (excludes heavy
engineering)
200
300
400
500
600
700
800
900
1,000
2013
2014
2015
2016
2017

Building construction (000s)Construction services (000s)Total (000s)

Construction services is mainly made up of tradies, such as plumbers, electricians,
painters, etc
Source: ABS Get the data Embed

EMBED: Construction workers in Australia

This figure excludes engineering (i.e. resources and infrastructure)

but does include those who work on commercial construction,
which is now undergoing something of a boom itself in some cities.
Keen Kosciuszko walk

Steve Keen is famous for his walk up Mt Kosciusko after losing a bet on house
prices with fellow economist Rory Robertson.

With more than 240,000 more people now employed in construction

than at the start of the residential building boom, there is a lot of
scope for a dramatic rise in unemployment should falling home
prices cause further residential development to stall.
If building activity and employment fell back to
2012 levels, those 240,000 surplus workers would
increase the number of unemployed by about a
third.
Assuming the labour force remained the same size, that would
quickly push the unemployment rate to 7.2 per cent.
Wider fallout from construction job losses
That's exactly the kind of jobless rate that would start causing
widespread defaults on mortgages, potentially turning a home price
fall and development downturn into a property crash.
And these figures don't include potential job losses in the other
sectors reliant on the property market, such as real estate services
and banking.
Housing outlook for 2018
Australia's once booming east coast markets started weakening in the second half of
2017, and most analysts tip more of the same.

They also don't include the inevitable job losses in retail, hospitality
and other services sectors as the growing number of unemployed
dramatically cut their household spending.
A saving grace for Australia is that many of these workers are
temporary residents from overseas who may return home if they
lose their job and can't find another.
Yet this is no saviour for the property market, retail or services, all
of which have relied on very strong population growth for sales.
Does this all seem unrealistically gloomy?
Maybe it is, but it's exactly what happened in Ireland, Spain and, to
a lesser extent, the US during the financial crisis.
We now have recent case studies highlighting how the collapse of
an over-inflated property market can lead directly to a severe
economic recession — in fact, research has shown a real estate
collapse and associated financial crisis tend to lead to most of the
worst recessions.
To be certain this will happen in Australia is misguided, but to be
certain it won't is folly.