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Can US house price falls happen here?

We have all been reading and listening to the debate about Australian property prices and whether they are going to crash. It’s hard to ignore when august journals like The Sydney Morning Herald report,

“The Australian real estate market is in the grip of the biggest housing bubble in the nation's history and Melbourne will be at the epicentre of an historic ‘bloodbath’ when it bursts, according to two housing economists.”

More level heads suggest that for prices to crash either interest rates need to jump dramatically, or unemployment-inducing economic conditions need to transpire.

Hoping for a bargain

Perhaps because I love a bargain and I am an optimist (a value-investing optimist hopes for lower prices), I have until now been broadly in agreement with those expecting a correction of some magnitude. I was in Malaysia in the 1990’s when the skyline was filled with cranes and I was in New York and Florida in 2007. In both cases, overbuilding was followed by a collapse.

Today, I am not sure whether we are due for a significant correction, despite the construction boom in Brisbane, Melbourne and Sydney.

The reason for my more sanguine view is the result of some simple calculations, using ABS data, into the demand and supply picture for Australian property. The weakness in my thesis is that I am looking at aggregate data rather than city-specific, but aggregate data was all that was needed for some to predict housing price collapses elsewhere in the world.

Factors affecting house prices

Employment, inflation expectations, interest rates, debt-to-income ratios, house-prices-to-income, financial stress measures and the like all influence short-term property prices, but basic demand and supply seem to be the most important influences over the medium term. And given very few people buy property to ‘flip’ over the short term, it is the medium term we should focus on.

There is merit in looking at household formation as a proxy for demand and construction as our indicator of supply. With the exception of the circa 80% falls in property prices in mining towns in Australia, the most notable real estate price collapse that occurred recently was in the US.

Figure 1 illustrates one of the conditions that preceded the collapse: a sharp jump in the level of construction. According to the US Census Bureau, in the years prior to the GFC, the number of dwellings under construction had risen from 993,000 annually in 2000 to 1.1 million in 2003, 1.2 million in 2004, 1.4 million in 2005 and 1.2 million in 2006.

Figure 1. US private housing construction, 1980-2015

Source: US Census Bureau

Meanwhile, according to the US Census Bureau’s Current Population Report entitled Projections of the Number of Households and Families in the United States: 1995 to 2010, household formation was increasing at about a million per year. In other words, the US was oversupplying dwellings for seven years, and by 2007, possibly a million excess dwellings needed to be soaked up.

Houses were simply being built faster than they could be occupied. In 2012, Warren Buffett observed as much when he said, “In normal times, we need about one million or more homes to keep up with household formation.”

And we know what happened next.

In Australia today, dwellings are being constructed at a rate faster than they can be occupied by newly-formed households.

According to the Australian Bureau of Statistics (ABS) March 2015 report Household and Family Projections, Australia, 2011 to 2036, “The number of households in Australia is projected to increase from 8.4 million in 2011 to between 12.6 and 12.7 million in 2036.”

In other words, household formation is increasing at about 1.6% annually and in 2017 that equates to about 150,000 new dwellings required.

The ABS also reports dwelling units commenced and the construction industry is currently building about 56,000 dwellings per quarter. That’s 228,000 per year, a lot more than seem to be needed.  More importantly, this has been growing since 2011 when 35,000 dwellings were being constructed per quarter, which was about the same number as the number of new households being formed. It roughly balanced.

So if we assume an average of 47,000 dwellings were constructed per quarter in the years 2012 to the first quarter of 2016, and we add the 18,000 or 19,000 monthly approvals occurring now and project this number for eight months until the end of 2016, we arrive at a supply of 923,000 dwellings. During this period, the number of dwellings required, as estimated by household formation, is 716,249. That suggests an oversupply of about 200,000 dwellings.

At the current rate of household formation, that oversupply could be soaked up in about 18 months, provided construction of new dwellings ceased completely. But of course construction will continue and the oversupply will take longer to be absorbed.

It looks like Australia has a greater oversupply problem than the US did in 2007. The estimated 18 months is more than the 12 months oversupply the US had and after their property market collapse, it took five years before property prices began recovering.

What about sub-prime in the US?

But before we jump to the conclusion that we are due for a crash, keep in mind that our banks have not been extending $700,000 subprime mortgages to Mexican strawberry pickers earning $14,000 per year.

It’s reasonable to expect property prices will not rise by much in the next few years and it is certainly possible they could fall. But the falls experienced elsewhere in the world seem unlikely, which means my hopes of a bargain in the next few years may be just that: hope.

However, I am reminded of the inflationary effect on global asset prices from quantitative easing. Cheap and plentiful money injected into the financial system triggered the purchase of assets by institutions migrating away from the safety of cash into (apparently) higher-yielding assets. But the easy money is over, particularly in the US, where the Fed ceased its third quantitative easing programme in October 2014. Since then the amount of money in the system – the US balance sheet – having reached about $US4 trillion (up from $800 billion in 2008), has stopped rising.

Unsurprisingly, the world economy is now slowing. If quantitative easing was responsible for inflating asset prices, the end of QE must surely have the opposite effect. And sure enough, it has.

Since 2014, commodity prices have collapsed. Oil has fallen from $115 per barrel to $40 per barrel and commodities from wheat and corn to copper and cattle have collapsed. Other assets aren’t doing too well either, with the US, UK and Australian stock markets about where they were in 2014.

So why are property prices persistently high? One factor is that they aren’t traded on an exchange. They’re a clunky asset and re-pricing is less efficient as they can take weeks or months to sell and even longer to settle.

And there’s a generation of students, and twenty-something-year-old, low-to-middle income earners with multi-million dollar mortgages over property investment portfolios that don’t even know what an interest rate is. They aren’t strawberry pickers on $14,000 but what will they do if and when rates rise?

Don’t worry about rushing into residential property

One thing I’m confident about: the probability of a bargain is higher than the probability of prices running away. There’s no need to rush and it may pay to have some cash around rather than a lot of debt.


Roger Montgomery is the Founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘’. This article is for general educational purposes and does not consider the specific needs of any individual.


November 05, 2016

Forget supply and demand. It is all about debt. When we all wake up to what has been done by the financial whiz ducks worldwide, there will be tears.

When I lived in Greece, Italy and Spain over the last 3 decades, they too thought this time it was different and the Germans, the Brits, the Russians, the Chinese etc would never stop buying their property too. We know how that has ended with further deterioration in their living standards each year!

Sadly, policy makers are useless everywhere and we are allowing them to continue this farce where speculators make more money than those using their labour and entrepreneurship.

I'm cashed up and waiting. Have been waiting since 1998.... may be waiting for a long time but until it makes sense, I will not take part in this ponzi scam. you shouldn't either

Scott Hochgesang
June 14, 2016

A few points to throw into the debate

1) Thousands of units will not be built in Brisbane as developers cancel projects and wait for the next boom. I suspect this is happening in Melbourne too but have not see the facts to definitively make the statement. Even happening in Sydney as Greenland looks for a new builder partner to build their first premier project in the CBD.

Just remember that the 200,000 Melb/Brisb/Syd units coming in the next 24 months are based on CoreLogic "approvals" data. They have not gone out and counted up even the number of sites where demolition has begun or support pillars are going in.

2) Labor's housing plans, and big new taxes, could throw a spanner in any forecasts. It is my belief that a major change in housing tax polices (Neg Gearing, CGT) will cause a roller coaster effect. A run up in prices before the switch over to get the lifetime benefit of exiting policies. And then a plunge immediately after with the benefits removed (with no phase in).

3) Our currency rate will play a role here. The AUD is currently trading at 74 US cents. Say it falls to 70 US cents. A $500K new unit in Brisbane now costs a foreign buyer $350K USD. But now imagine we get the 1-2 rate cuts, our economy slows further, AUD possibly falls to 60 US cents. That Brisbane unit now costs the foreign buyer only $300K, a $50K USD discount.

There are so many adjustment factors we have to deal with any over supply. Yes it could happen, but in all likelyhood, its duration will be short as construction quickly falls off and constricts supply.

I have been advising my clients to buy now with a market of uncertainty creating short term opportunities, especially with the amount of potential buyers sitting on the sideline for an election result.

Scott, Crave Property

May 17, 2016

So why is the govt telling us that house prices are high because there's not enough supply?

May 09, 2016

Prices down, lower stamp duty on purchase. Seems like a good thing, Let's have a crash.

Andrew Wright
April 29, 2016

Commentary has concentrated on the supply side (which is sensible). I wonder, though, if there is a 'pent up' demand for property at the right price developing in Australia? There is a lot of anecdotal evidence to suggest that there is and that household formation might just speed up if property prices drop substantially. Think about all your Gen Y's still living at the parental home and so on, trying to get into the market. I also can't help noting the pent up demand for Australian citizenship. No, if we ever had a serious over supply or housing bust, all the Australian Government would have to do is open that 'tap' slightly to increase the flow of moneyed migrants. That's not an arrogant white Australian speaking either. I'm a migrant to this country myself and I know how long the queue was when I applied for Australian residency.

April 20, 2016

This is the best article I have ever read about the Australian property. I have been trading the stocks and the financial derivatives for around 4 years and I am interested in property pricing as well.. I do keep track of global financial market. I do have some chinese mates, they work as a real estate agent and that have told me that Chinese investors tends to pay the full amount for the houses or the units.. they some how manage to get the money from overseas. I do not know if that is even the legitimate money..
I do some time wonder what Aussie gov is doing when those money are coming inside the country. Also there is property spruikers who always tends to brain wash the people.. I think most of the people that works in the real estate Business is the Chinese people.. like wise the Indian people in the IT. Also the billion population of china imagine only 0.01% of the Chinese population is coming to Australia. Where the house price will go??

Isn't it the time for Government to think about the actual Australian citizen and think about the potential Australian citizen rather than bringing some migrant from overseas giving them permanent residency.. just for the sake of generating revenue for the government. I think those who are coming to Australia on investment visa, they can buy the government bonds which pays more than the bank interest and after maturity they get their money back.. how is the job created when someone can invest on bonds and that is counted towards the criteria for the permamant residency?

Is it fare for first home buyers or the young Australians who wish to buy the house or units in the future?

April 11, 2016

Dear Roger, a follow up to my previous post. Are there similarities between what is happening in the oil market and housing? In particular, the slight excess of supply c/w demand that caused the collapse in oil prices. What would be the likely impact on rents if supply exceeded demand by 5%?

Unlike oil, where lower prices may stimulate increasing demand for the product, lower rents would cause a downturn in residential construction, reduce the demand for workers and their accommodation requirements.

April 08, 2016

In the event the property bubble bursts a major issue would be the rapid rise in unemployment. Manufacturing would not take up the slack and the banks, who would be struggling with non-performing loans, would be unlikely to lend to business. Governments would have to adopt the Japanese solution and commit huge sums to infrastructure, much of which could be poorly spent because spending decisions would be largely political rather than based on ROI. Most of the unemployed would have to look for lower paid jobs in service industries and struggle to repay their loans. When a person does not have an income, even low interest rates cannot be serviced.

joe blow
April 07, 2016

the housing bubble is being driven by globalists largely wanting to leave their own crime ridden nations, which became crime ridden after the rich elites plundered them as the recent mossack fonseca leaks are revealing. essentially australia has been very cut throat with its own citizens recently in allowing developers to build so much and to then feed demand by allowing foreigners to buy up regardless of where the money is coming from and regardless of our own laws, infact many mansions have been proven to be bought illegally by chinese investors for example. with all this in mind, i cant see a property bubble bursting any time soon as our laws now fascilitate perfectly a growing devloper sector and growing rents too. i forsee a growing property market for many years to come perhaps another ten years or even more and then there will be one of the all mightiest property crashes in human history because it is completely untennable. incomes in australia have simply not kept up with property price growth, the middle class is only suriviving off its equity and getting further in debt, and jobs arent being created fast enough if at all. it all adds up to an almighty crash the longer we draw it out. it is pure maths pure econometrics and unescapable consequence of mass greed.

Wendy Cook
March 30, 2016

I would presume the take-home from this is that, the markets already have priced in the uncertainty described, so an investor is best-served by sticking to his or her personal, globally diversified portfolio. Right?

SMSF Trustee
March 30, 2016

If you want to know the truth about the vacant dwellings on Census night, read what the ABS has to say, here:

Main story - most of them are holiday houses! They are not about to be dumped as excess supply. And I doubt the Chinese who want a house in another country are going to sell their little piece of global security just because prices pull back a bit.

Roger Montgomery
March 30, 2016

As I mentioned they are not part of the 'free float' pool of stock and should be excluded. They aren't available for sale to newly-formed households. They therefore have nothing to do with supply.

March 29, 2016

What about the 900000 residences empty on census night in 2011 or the study that 17% of apartments in the dock lands area of Melbourne used no water so must be vacant.

The comments above about under supply are nonsense there is a number of people parking money in vacant housing or holiday housing so when prices start to fall the question really is how many of these people will run for the exits.

Australia has a lack of housing at an affordable price not a supply deficit once the debt credit growth per annum levels out or turns negative watch out this Ponzi scheme will be revealed just like Bernie Madoff when original investors started demanding to withdraw their funds.

Roger Montgomery
March 30, 2016

Thanks Alex, owned-but-vacant properties are like stock in a company held by founders and not considered 'free float' and should be excluded.

March 26, 2016

hey Roger here are the numbers I'm looking at.

1) changes in dwelling unit
2015 dwelling unit = 9.61mm, 2011 dwelling unit = 9.04mm, so net increase since 2011 was 578.6k units
data from here:

2) household formation
2015 number of household ~9.1mm; 2011 number of household = 8.4mm, so household formation since 2011 is 652k
data from here$File/31010_sep%202015.pdf

3) comparing dwelling unit changes vs household formation, we actually would have supply deficit of ~74k.

I have not factored in units approved but not completed, but I think the big difference so far is we need to take demolitions into account

Brad Matthews
March 28, 2016

Michael, you are correct that demolitions and intentional vacancies need to be taken into account. Roger's suggestion that housing demand and supply was in balance in 2011 doesn't reflect these factors and therefore ignores the possibility that there was an extended period of under supply, which needed to be rectified by a period of higher than average building. In September 2015 the Reserve Bank published an article in its Bulletin suggesting that underlying housing demand could be as high as 195,000 per annum. If this is correct, then the previous period of under supply has been significant. Low vacancy rates across most capital cities would also support the view that there had been a prolonged period of under supply.

March 29, 2016

thanks Brad, could you point me to the vacancy data you're looking at? I've had trouble finding them.

I think we agree on the "under supply" argument, so the key question is if demand is of fickle or temporary nature. For example, the data I linked to (these are all projections by the way) seem to assume less people per household. I dont know what that would be the case, but it could be a Chinese student studies in Australia, her parents buys a condo for her, so thats a one person household that might turn out to be temporary (as the student moves back). Or maybe someone made fast money in mining and bought a home for himself but is about to lose his job... I'm looking for data/anecdotal evidence on nature of demand the past few years. any help would be appreciated. thanks

Roger Montgomery
March 30, 2016

one suspects we will see shortly...

Brad Matthews
March 29, 2016

Hi Michael - please see article titled "Long-run Trends in Housing Price Growth" on RBA website at

Doug C
March 25, 2016

I read a comment some months ago that house price inflation was due in part to a change in increased demand. New “households” were formerly largely the result of marriages, whereas there is now a significant purchase of properties (houses & flats) by singles who have left home, have good incomes but are not yet married. So, where previously 2 people together bought 1 house, now 2 single persons buys 1 house each, increasing the demand and increasing the prices.
Do the quoted ABS figures include this single-occupier phenomenon in the Household and Family Projections or just the new family formations via marriages ?

joe blow
April 07, 2016

i live in one of sydneys newly formed chinese communities, and previously lived in another major sydney suburb which is also now completely chinese and asianised. all these sburbs are developing thousands upon thousands of new apartments, demolishing houses and building in back streets, major roads and back lanes. new apartments are going up all around and my rent has doubled since i first moved into this area. demand is being created by new migrants. i see them daily, i meet them as friends , most look at me as they cant speak english at all, every shop in this area every employee is chinese or asian. im unemployed and there are hundreds of businesses around here but i cant get a job in any of them as im not asian. now here is the big scoop on this area .... it is traditionally a ratty low class suburb where units cost no more than $450,000 and as cheap as $220,000 only 8 years ago, a decent house with massive backyard cost around $350,000 ... now houses sell for $1.6 mill and a small new 2br unit starts at $600,000. the only buyers are asian. mostly chinese around here and let me tell you this area once never saw a bmw or mercedes. like i said it is one of sydneys lowest class suburbs. these days i see porsches aston martins driven by teenagers daily. most cant speak a word of english . they arrive with cash and start buying property. i talk to the developers too as im a financier usually so ive talked shop with the chinese builders , some of them have arrived in australia and a few years later bought entire shopping centres.... CASH. and then got rid of mcdonalds and every other non asian business inside the shopping centre. my old deli is long gone i cant evne buy ham around here . every shop is chinese or asian. and that is what is happening in sydney and why house prices are going nuts.

Jerome Lander
March 24, 2016

If you already own a property which you live in there are two pertinent facts that are worth considering that are often missed in this debate about whether property will go up or down:
(1) Property is expensive - there are other investments which should provide a better risk adjusted return - whether property value goes up or down. In other words you could and should do much better by buying something else.
(2) Your other dollars are better spent diversifying away from property from an overall portfolio perspective, as this will create a better (risk adjusted return for your overall) portfolio. Buying a prospectively higher returning investment that is not related to property is hence a much more sensible idea than buying another property or property related asset (such as an Australian banking stock) as an investment.

Roger Montgomery
March 30, 2016

You're right Jerome, the higher the price you pay, the lower your return. And don't forget that while falling property prices might be harmful to existing owners (sellers), they will be beneficial to those who are yet to own (buyers).

SMSF Trustee
March 24, 2016

Tyson, the answer is none. If a property is not legitimately available for rent you can't claim any expenses, so something just 'left empty'is not eligible.

March 24, 2016

How many properties are built and left empty to maximise tax deductibility (neg gearing gone mad)? Unless neg gearing is addressed, surely supply exceeding demand will continue.

March 25, 2016

Crazy rent expectations will accomplish the same thing. Empty house to negative gear. And if someone is silly enough to pay, bonus.

Negative gearing/CGT concessions have basically ruined Australia.

Roger Montgomery
March 30, 2016

Good point Tyson. If an investor is not trying to rent the property out for income, can they be described as an investor? One suspects that they are merely speculators.

Mario Surjan
March 24, 2016

One question was "So why are property prices persistently high?" my take is ridiculously high development costs, antiquated taxes and duties imposed on developments and bureaucracy ( at both local Govt. and State planning levels).

Roger Montgomery
March 30, 2016

And don't forget the uninhibited speculation of the crowd Mario. Houses, like any other commodity, can and do sell at below production costs.

Mark Hayden
March 24, 2016

Thanks Roger that is an excellent article. Your analysis and forecasting of supply and demand appears sound. I address land and the improvements (buildings) as separate asset sectors or sub-sectors - land appreciates and buildings depreciate. An interesting consideration is the true underlying value of land - the relative value of land. I agree that asset price inflation may be significantly distorting this value.
House prices also need, I believe, to be related to GDP with a caveat of allowing for inter-generational wealth transfers.

Roger Montgomery
March 30, 2016

Thanks Mark. That buildings depreciate is one of the reasons I prefer industrial developments (lots of land with a cheap shed on top) to CBD commercial ( little land with a very big building component).


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