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In 10 Charts, The Case For An Epic Australian Housing Bubble

Cliff edge: Shutterstock

Australia faces a massive housing bubble – much larger than any in its history going back to 1880 – and residents don’t seem to know it.

Societe Generale’s Albert Edwards earlier this month described Australia as a “leveraged time bomb waiting to blow”, with a massive credit bubble on top of a commodity boom on top of a colossal housing bubble.

The existence of a housing bubble is confirmed by every metric in the book – housing prices to inflation, gross yields, price-to-income ratio, land values, housing stock to GDP.

Here are 10 signs you should be aware of:

Housing prices have more than doubled since 1996

Comparing housing prices to inflation is one of the more common indicators in property market analysis. It took 40 years between 1950 and 1990 for prices to double in real and quality-adjusted terms, and has risen by 123 per cent within a 15 year period from 1996 to the apparent peak in 2010.

Melbourne property boomed the most of all capital cities

Melbourne’s residential property market boomed the most out of all capital cities, a whopping 180 per cent from 1996 to 2010, though surprisingly, Sydney posted the least gain.

Rental yields are low

Gross rental yields fell to their lowest point in 2007, a sure indicator of a bubble as housing prices escalated far above comparable rents.

P/E ratio peaked in 2007

Put another way, the inverted gross yield (P/E ratio) reached its highest point in 2007, a clear sign of overvaluation.

Reserve Bank indices agree that housing prices far outstrip fundamental metrics

Analysis from the central bank (RBA) has confirmed housing prices are far above the usual fundamental metrics: rents, constructions costs and household incomes.

Household debt levels peaked at the same time as real housing prices

Australian households have taken out tremendous sums of debt to speculate upon housing prices. The ratio reached a record high of 98 per cent in 2010, the same year real housing prices also peaked.

Residential property investors are reporting huge losses

As housing prices boomed, the running expenses and interest repayments have overwhelmed rental incomes, leading to substantial income losses on the part of investors. On aggregate, speculators have been dependent upon realising capital gains to make a profit since 2001.

Property prices are high because land values are high

The housing bubble is really a land bubble, with the ratio doubling from the trough in 1996 through to the peak in 2010, reaching a record high of 304 per cent.

Land values are driving up residential housing stock

As aggregate land values have risen against GDP, so has the value of the residential housing stock. It is the land component, rather than dwelling, that has reached stratospheric heights.

Property sale prices vs GDP peaked in 2008

Another indicator of a bubble is the Kavanagh-Putland Index, measuring the value of aggregate property sales to GDP on an annual basis. It peaked in 2008 and has fallen significantly.

Philip Soos is a research Masters candidate at the School of Management and Marketing, Faculty of Business and Law at Deakin University, and is a researcher at the Land Values Research Group, Melbourne.

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