Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 193

History repeats on housing, but how long will this last?

In 2011, the Reserve Bank of Australia set out to create a policy-induced housing construction boom to fill the hole being left by the collapse of the 2003-2011 mining construction boom. It cut interest rates 12 times between November 2011 and August 2016 to levels never before seen in Australia, to lift house prices and lower borrowing costs to encourage development.

House prices are important for Australian investors for several reasons. The local economy and stock market are heavily reliant on the local banks remaining solvent and lending. Our big banks make up one third of the local stock market value and they pay one half of all dividends.

The vulnerability of banks

The problem with the banks has four main elements:

  1. they are extremely highly leveraged (at around 20:1, for every $1 of debt there is 5 cents of equity capital)
  2. they are highly exposed to the local housing and housing construction industries
  3. they are heavily reliant for funding on fickle foreign markets, as Australia’s conduits for foreign debt, and
  4. mortgage interest rates are extraordinarily low and rising rates will put pressure on highly geared borrowers.

The pattern of mining booms switching to housing construction and lending booms that collapse in bank bad debt crashes and economic recessions is not new. The 1870s-80s mining boom (which gave birth to BHP, Rio and many others) turned into the 1880s housing construction and lending boom which collapsed in the bank bad debt crash in the early 1890s, triggering a deep economic depression. The 1960s mining boom turned into the early 1970s housing construction and lending boom which collapsed in the property finance crash in 1973-1974, triggering the deep 1974-1976 recession. The early 1980s ‘mini-resources boom’ expanded into the mid-1980s ‘entrepreneurial boom’ which after the 1987 crash turned into the late 1980s construction and lending boom which collapsed in the bank bad debt crisis in the ’recession we had to have’ in 1990-1991.

Problems looming in apartments but not houses

In each of these cycles, Melbourne saw the worst of the excesses in construction and lending and suffered worst in the crashes, in terms of price falls, vacancies, bad debts, business failures and unemployment. In the current cycle Melbourne is once again leading the charge (along with Brisbane), while the excesses are less severe in Sydney and other cities.

The main problem is not in the broader suburban housing market but in high-rise construction. As in all previous cycles, the current over-construction will result in high vacancy rates, boarded up building sites, properties lying empty for years, falling rents, falling prices, bankrupt developers and bankrupt over-extended buyers. As in past cycles the problem for the banks will mainly be property developers, not just the highly-leveraged buyers.

This has happened several times before and it will happen again. The risk for investors is that the collapse in the high-rise market will probably also infect the broader economy and the broader housing market as well.

Our broad housing market has not suffered big crashes as it has in most other countries. Our high rates of immigration and population growth and extreme concentration of population in a few large diversified cities ensure broad house prices have tended to rise rapidly for a few years every decade or so, and then go sideways in real terms for several years.

There are regular price falls of 10% to 15% or so but no major broad-based collapses like in the US and many other countries. We easily forget that as recently as the seven years from 2004 to 2011, there was no real growth in house prices following a surge from 1996 to 2004. We have had five periods since 1900 when real house prices have not risen for a decade or more.

While the Melbourne and Brisbane high-rise markets are probably heading for another sizable collapse similar to past boom-bust cycles, the most likely outlook for the broad housing market is for modest price falls in housing and then many years of no real growth, rather than a sudden major crash.

 

Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

8 Comments
mc
March 11, 2017

Units are best not thought of as "air", but as a tiny parcels of land. If a 100 sqm area of land has one dwelling on it, then that dwelling has 100 sqm of land. If it has ten dwellings stacked on top of each other on it, then each dwelling has 10 sqm of land. When land in a location has a very high value, it is justified to put lots of dwellings on it.

This said, any exceptionally valuable location has the danger of becoming less exceptional. Ordinary locations rarely become exceptionally devalued. Unit prices collapse relatively often compared to non-units because the land under them tends to have been ascribed a much higher value than than surrounding areas.

Sam
March 10, 2017

It's not necessarily about supply and demand, a lot of demand is driven by property spruikers, property investment businesses such as mezzanine debt structures (investment schemes) and of course banking credit via mortgages. And alot of SMSF funds are investing in these!

Irish were spruiking population growth as well and their housing values are still down about 40% from the peak. Its mostly credit driven. @niremas, twitter.

Anyways, amazing article and historical perspective, thanks for this info.

Sam
March 10, 2017

Thanks for the chart guys. I've posted this on my twitter feed, Oz we'll have one hell of a bust when this is over and will present amazing buying opportunities! @niremas, twitter.

ashley
March 10, 2017

Just confirming my story was mainly about free standing housing ie where most of the value is in land. I would never, and have never bought air ie units. That is where the main problem is, and where most of the losses will be in this cycle. Its all a question of supply and demand. The supply of air space far exceeds demand so prices will fall when stupid bankers wake up and stop lending.
cheers
ashley

Billy
March 09, 2017

The situation we are in with historically high debts puts us closer to 1929-1930 instead of any other time.

Fergus Hardingham
March 09, 2017

RE: "While the Melbourne and Brisbane high-rise markets are probably heading for another sizable collapse similar to past boom-bust cycles, the most likely outlook for the broad housing market is for modest price falls in housing and then many years of no real growth, rather than a sudden major crash."

PRE- GFC home owners in the US (and other countries) did not also believe that their property markets would decline as they did.

How can anyone be so sure that Australia (which is building everywhere - including in regional centres houses and apartments at the bottom of the rate cycle) will not suffer the same fate.

Suggest that caution is warranted.

Andrew
March 09, 2017

Would love to see this chart with a non log axis - suspect this will show the dramatic increase since the 1990s

Warren Bird
March 09, 2017

But the whole point of using log axes is to show that something recent that seems dramatic actually isn't. It shows every episode in percentage change terms, which is the valid comparison.

Any cumulative time series will look as if the most recent period was the most 'dramatic' if you don't use a log scale.

I'm totally with Ashley on his use of log charts.

 

Leave a Comment:

     

RELATED ARTICLES

Noel's share winners and loser plus budget reality check

Australia’s residential property boom

Will the house price boom be a boon for Australian banks?

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reason to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies will benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated investors' can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.