tag:blogger.com,1999:blog-20232384710069752132024-03-14T14:11:05.467+11:00Popping BubbleBlog about The Great Australian Housing Bubble. We use trustworthy and reliable data to uncover common misunderstandings about housing markets. We focus on the housing related topics: house price growth, housing supply and demand (shortage/oversupply), credit size and availabilityravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-2023238471006975213.post-12118253497902462372017-04-24T16:16:00.001+10:002017-04-25T16:04:40.381+10:00I rest my caseThis is my final post on this blog prior to the bubble burst (before this becomes obvious). The Great Australian Housing Bubble is currently going through a bursting stage. Initially all bursts are slow and unnoticeable. Credit squeeze started and with price stagnation and fall it's only to get worse.<br />
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My prediction for next few years are:<br />
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- average price fall in Australia: 50%-70% from the peak to the bottom (initial fall is going to be slow)<br />
- in some areas (some parts of Sydney, Melbourne, Gold Coast, and some regional areas) prices will fall in excess of 75%<br />
- unemployment will hit 20% (maybe not fake ABS rate)<br />
- all four big banks will be bailed out, some small will be let down<br />
- Australia will record sizable population decline<br />
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in meanwhile, enjoy some entertainment on my other blog<br />
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https://nobubblehere.wordpress.com/ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com0tag:blogger.com,1999:blog-2023238471006975213.post-13034098380324853482017-01-23T08:18:00.003+11:002017-02-03T07:19:44.240+11:00Measure of Housing Affordability <div style="text-align: justify;">
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Median home price is used as a measure of cost of homes by almost everyone trying to quantify housing affordability. Sometimes this price is compared to a median income, sometimes to the past median price or a median price in another country. In all of cases it's the median price that almost always is used and compared. The argument is that median price is a good metric because it makes sure than half of homes are priced less than median. It's clear that median is much better than some other values like mean price but is median as good measure as it appears? Some of the questions that rarely gets asked (and answered) in home affordability studies are: how affordable are non-median homes? How affordable homes are for people who are not median income earners? Is price distribution fixed over time and in various places around the world so it can be used for comparison?</div>
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Half of population makes less than median income and half of homes are priced below median but these studies don't show how much below. They don't give clear picture how affordable homes are for people who make 2/3 or half of median income. They don't show how many homes are priced 2/3 or half of median. These studies also don't show what kind of homes are priced at median, 2/3 of median or half of it; are those houses or units, how far from city centers and employment hubs, how large they are (3bdrs or studios, ...). It is somehow assumed that distribution of income roughly follows distribution of house prices making ratio same for all income earners and that income distribution hasn't changed over time making affordability for all income earners changing same as median . It is also assumed that cost of living is proportional to income so that someone making 2/3 of median can use the same percentage of income for mortgage repayments and deposit saving. These studies assume that affordability is equal issue for all income earners and all types of buyers (first buyers, upgraders, downgraders ...). It is also assumed that house price distribution is the same in cities, states and countries across the globe. These studies also ignore the fact that most of people who make above median are middle aged people who already own at least a portion of their home purchased some time ago when prices were different. These people may comprise large part of buyers but income multiple is not relevant as a measure of affordability since large number of these buyers have large equity to start from. All of these assumptions seem to question adequacy of median price in affordability studies.</div>
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To try to understand this a bit more, first, we'll take a closer look into house price distribution. Home value data is not so easily available so we'll use freely available sales data for Sydney over the last year to estimate house price distribution. Based on numbers of sales per region (higher turnover in cheaper areas) and number of sales per housing type (more unit sales) we think that actual price distribution is noticeably worse in the sense that lower priced home sales are high disproportionately to their share of total housing. Also median home price is likely to be higher than median sale price due to higher market activity in lower price range. Almost half of all sales in Sydney in past year were unit sales while they represent just over a quarter of housing stock. This makes sale price distribution not perfect representation of actual home price distribution but we have to start somewhere. Real distribution is likely to be much worse in sense that there will be less lower priced homes than the sale statistics shows.</div>
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<span style="color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">Sales data for Sydney over a period of one year 2016 is used (Oct 2015 to Oct 2016). Only genuine full ownership (no fractional ownership) and non-combined sales for only residential housing units: houses, apartments, some restricted ownership units are included (over 55 yo units included, others like serviced apartments, student accommodation units, etc. are excluded); mortgagee and estate sales are included given full ownership was exchanged in one transaction; no land sales are included; off plan and 'home and land' packages are included. Sales price distribution for three subdivisions are calculated: Inner Sydney, Urban Sydney area and Metro Sydney - see note 1</span>. </div>
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<tr><td class="tr-caption" style="font-size: 12.8px;">Figure 1 - Sydney Home Sale Price Distribution 2016 (all homes)</td></tr>
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Figure 1 shows sales price distribution in Sydney. Median sale price for Inner Sydney is over a million ($1.08m) while mean is almost $1.5m. Urban area has median around $855k and mean over $1.15m while Sydney Metro has median of $820k and mean at almost $1.1m. Mean is always significantly higher than median which indicates that distribution is significantly skewed to the right meaning that there are fewer homes much lower than median and more homes priced much over median.</div>
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<b>Sydney </b><b>Inner </b></div>
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There are almost no homes (less than 2%) in Inner Sydney are priced under half of already high median ($550k ), those few are all small units (mostly studios). Less than 10% of all homes are priced under 2/3 of median ($700k) mostly 1 bdr units and studios. There are no houses of any size in Inner Sydney priced under 2/3 of median home price ($700k) and only few under 3/4 of median ($810k). Less than 8% of homes under median ($1060k) are houses. Median house price in Inner Sydney is just under $2m ($1.96m). Median home sale price ($1.06m) can buy an average 3bdr unit in an ordinary suburb or small older 2bdr terrace in some of the least desirable inner suburbs.</div>
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<b>Sydney </b><b>Urban </b></div>
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Situation is only marginally better in Sydney Urban area. Less than 2.5% of all homes is priced under half median ($425k) mostly studios and 1bdr units. There are around only 10% of all homes priced under 2/3 of median ($570k) - mostly 1bdr units. Only 2.5% of all homes are houses priced below 2/3 of median ($570k) - all houses under 2/3 of median are located more than 30km from city centre. Only handful of 'for demolition' houses are priced below half median ($425k). Just over 10% of all homes priced under median ($855k) are houses (mostly in areas 30km from CBD). Median house price in Urban Sydney is $1.25m. Median home price ($855k) can buy 2 bdr unit in suburbs ~ 5km from the city, 3 bdr unit in suburbs ~10km from city or a cheap house in less desirable suburbs more than 30km from the city.</div>
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<b>Sydney </b><b>Metro </b></div>
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In Metro Sydney, including the cheapest outer suburbs (over 50km from CBD), only around 3% of homes is priced under half of median ($410k) and only around 13% of hokes are priced under 2/3 of median ($550k). Affordability improvements only come in size and quality of housing in areas far from the city: compared to Urban and Inner areas where almost no houses were priced under 2/3 of median, large portion of homes between half median and 2/3 of median in outer areas are houses. These houses increase overall distribution of house prices but still manage to make make only 5% of all homes priced under 2/3 of median ($550k) houses - mostly in areas 50km from the city. Despite that, only 20% of homes below median ($820k) are houses. Median house price in all of Sydney is around $1.15m. Median price ($820k) can buy a older 2bdr unit in suburbs ~5km from CBD, new 2bdr or older 3bdr unit in suburbs 10km from CBD, an ordinary house in suburbs 30km from CBD or new house in outer suburbs (over 50km from CBD).</div>
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<span style="color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">It is also important to observe that these median priced sales in 2016 clearly do not represent average homes (by either size, location, age or construction quality). Homes sold for median sale price ($820k) in 2016 are smaller, further and of lower quality than average homes in Sydney. Distribution of homes clearly makes affordability situation much worse than it appears from simple median point of view. Vast majority of homes below median are priced very close to median. Homes that are significantly cheaper than median are not really satisfactory since they are often small (studios or 1bdr), old or too far from jobs. For large percentage of buyers, especially those who are looking into buying first home - young families below median income, these homes are usually not a solution for their "need for a shelter" and clearly there are not enough of these lower priced homes for large number of below median buyers</span>.</div>
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<tr><td class="tr-caption" style="font-size: 12.8px;">Figure 2 - Income and Home Sale Price Distribution</td></tr>
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Figure 2 shows home sale price distribution in Sydney and income distribution in Australia. Shape of income distribution in Australia is likely to be a good representation of income distribution in Sydney with the difference that median in Sydney is higher (because of higher wages for average earners). There is also to expect a higher percentage of households well below median because low wage earners are not paid more in Sydney (minimum wage is the same in whole of Australia). Income distribution is also skewed distribution but to a less degree. Sydney median income is estimated to be around $84k gross (this figure includes fictitious income like imputed rent and non-disposable income like superannuation). Simple ratio of median home sale price to median gross income equal to around 10.</div>
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The chart shows that the most homes (mode price) are priced close to median (3/4 of median), while most of income earners (mode income) earn between half and 2/3 of the median income. One third (32%) of all households make below 2/3 of median ($56k gross) income. At the same time only around 13% of all homes are priced below 2/3 of median home price (mostly smaller units). Some may argue that very low income earners are not part of housing market so comparison is not valid. Even if we assume that none under half median income would never take part in housing market (this is a poor assumption because many young families fall under this category due to low wages at the start of a career and inability of both partners to work full time while having small children) we there would be 20% of people who make between half and 2/3 of median income competing for only around 13% of all homes in Sydney metropolitan area that are priced below 2/3 of median. There are also large percentage of investors who the most active in this price range pushing prices up and making it even more competitive and harder for young families to buy. It is also important to notice that most of those cheaper homes are not suitable for majority of first home buyers due to small size and poor location. Age group that is likely to buy below median homes (young families under 35) have median income lower than overall median and around 20% lower than 35-55 age group.</div>
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Because there are very few homes priced under 2/3 of median that are adequate for young families, large number of these lower paid first home buyers are forced to buy homes that are more expensive than 10 times their income. In many instances this forces young families to pay 15-20 times of their income just to buy a cheapest satisfactory home e.g. 3bdr house or unit still far far from city but with option of tolerable commute time.</div>
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As mentioned before, two other points make this situation likely worse: real median home price is higher than median sale home price while real median income is lower than gross median income used in calculations. Also, lower income earners can afford to use much lower percentage of income for a mortgage repayments compared to median earners and don't have much equity to use as deposit. This makes homes prohibitively expensive and totally unaffordable for almost anyone making under 2/3 of median income. To illustrate this consider the case where a young family with two children that makes 2/3 of median gross income ($56k) would after saving 20% of income for almost a decade need over two thirds of their gross income just to repay loan on the cheapest 3bdr home 50km from city (priced $550k) leaving them with less than $400 per week for all other costs.</div>
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<span style="background-color: white; color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">Median multiple is clearly not very good measure of housing affordability for large segment of population that is most interested in buying a home. Another question is whether such metric is good to estimate change in affordability over time. To check this we'll compare home sale price distribution in 2011 and 2016</span>.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-uN28iGgdaiU/WHhJQe9ZXcI/AAAAAAAAAgI/V2FXa2lU1JckWDna_M8jpgugES3IEtj9QCLcB/s1600/Syd%2Bdist%2Byears.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="361" src="https://4.bp.blogspot.com/-uN28iGgdaiU/WHhJQe9ZXcI/AAAAAAAAAgI/V2FXa2lU1JckWDna_M8jpgugES3IEtj9QCLcB/s640/Syd%2Bdist%2Byears.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8px;">Figure 3 Sydney Home Sale Price Distribution 2011 and 2016</td></tr>
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<span style="background-color: white; color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">Figure 3 shown home sales price distribution for Sydney Metro area in 2011 and 2016. Median price increased by over 50% making median homes less affordable. What is more important is that price distribution got more skewed over the same period. To illustrate this we created Figure 4</span>.</div>
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<tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-yHHzOK6vxmY/WHhHwRAaNSI/AAAAAAAAAf4/Y8LPbpUUvoc4mfDP3nRTYj3UIAjbFak_gCEw/s1600/LowPriced2011-2016.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="344" src="https://1.bp.blogspot.com/-yHHzOK6vxmY/WHhHwRAaNSI/AAAAAAAAAf4/Y8LPbpUUvoc4mfDP3nRTYj3UIAjbFak_gCEw/s640/LowPriced2011-2016.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8px;">Figure 4. Low priced home distribution Sydney 2011 and 2016</td></tr>
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In 2011 almost 20% of homes were priced below 2/3 of already much lower median price ($580k). In 2016 percentage of homes under 2/3 of higher median fell to 13% of greatly higher median ($820k). Share of homes priced under one half of median halved from 6% to 3% over the same period. While median price increased 50% in just 5 years, prices of lower priced homes increased much more than prices of median priced homes. The lowest priced homes (priced around $200k in 2011) went up by 75% to $350k in 2016. This shows that affordability for below median earners deteriorated much more than the headline median price to median income figure would suggest. Using simple median price to median income is, in this sense, deceiving because it hides true extent of fall in affordability for large number of below average income earning first home buyers. Situation is much worse and it deteriorated much more than what median multiple numbers would indicate. Home affordability in Sydney situation reached level of crisis where large majority of young people without a home cannot even think of buying a home.</div>
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Median multiple (ratio of median income to median home price) is clearly not very good measure of affordability, it's not even good measure to estimate changes in affordability over time but is it good to compare affordability around the world? To check this we'll do house price distribution comparison between some other large world cities. Sales data is freely available for San Francisco, New York and London, but not for other Australian cities. These large and major cities with unaffordable housing are commonly used to compare affordability around the world and to detect housing bubbles.</div>
<span style="background-color: white; color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">To make comparison better these cities will also be divided in three areas: Inner, Urban and Metro. In some cases these areas will not directly correspond to Sydney areas but that will be noted. These areas are defined as described in notes 2 to 4</span>. </div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-HOBjZeQ0IdE/WH_aogNLmcI/AAAAAAAAAgc/L1Er7HNBtPIVoPn_Bp7w_cTfyyjgCavXwCLcB/s1600/Density.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="124" src="https://1.bp.blogspot.com/-HOBjZeQ0IdE/WH_aogNLmcI/AAAAAAAAAgc/L1Er7HNBtPIVoPn_Bp7w_cTfyyjgCavXwCLcB/s320/Density.png" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8px;">Table 1 - Population density people per km2 </td></tr>
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Table 1 shows density in different areas of these cities. It's obvious that price comparison is going to be favorable to Sydney and some degree SF because of their much lower density (higher availability of residential land). Inner Sydney area has almost the same density as all of NYC metro area that includes large areas in 14 counties across two states. Next few figures show home sale price distribution in these cities.<br />
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<tr><td style="text-align: center;"><a href="https://1.bp.blogspot.com/-E2ppzI3RuQs/WH_bjbszttI/AAAAAAAAAgw/jJBLHosuowMWCne4zi37xTFAamWXV5p_gCLcB/s1600/SF%2BDistribution.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="372" src="https://1.bp.blogspot.com/-E2ppzI3RuQs/WH_bjbszttI/AAAAAAAAAgw/jJBLHosuowMWCne4zi37xTFAamWXV5p_gCLcB/s640/SF%2BDistribution.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8px;">Figure 5 - SF Home Sale Price Distribution 2016<br />
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<span style="background-color: white; color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">Despite having similar median price ($1.22m) as Inner Sydney it's still possible to find 2bdr condo in some areas of SF for half median ($600k). Two third of median ($800k) can buy a 3bdr condo or a smaller house within city limits. SF metro area has lower median ($810k) and much larger proportion of homes priced much lower than median (21% priced less than 2/3 of median). It's possible to buy a house for half median in some less desirable areas that are just 5-10km from SF and other employment hubs in Silicon Valley. 2/3 of median ($600k) can still buy a large house in a not so bad suburb not very far from employment hubs.</span></div>
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<tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-5fdOYYyW4cE/WIApWAXTBjI/AAAAAAAAAhE/v2HK58590ewiBy7fE9rlsEqj-3rdI6SgACLcB/s1600/NYC%2BDistribution.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" height="362" src="https://4.bp.blogspot.com/-5fdOYYyW4cE/WIApWAXTBjI/AAAAAAAAAhE/v2HK58590ewiBy7fE9rlsEqj-3rdI6SgACLcB/s640/NYC%2BDistribution.png" width="640" /></a></td></tr>
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Figure 6 - NY Home Sale Price Distribution 2016</div>
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<span style="font-size: small;"><span style="background-color: white; color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">Manhattan median price is by far the highest ($1.65m) but despite being so desirable for buyers from around the world, third of all homes are priced below 2/3 of median and quarter below half of median. These below half median homes are mostly small units but it is still not so hard to find 2bd units on Manhattan for half the median ($825k) in many neighborhoods, while 2/3 of median buys even 3bd unit in some not so popular parts of Manhattan. Median price sharply falls by almost 67% to $650k when other boroughs of New York City are included. Despite this dramatic fall in median price almost 13% of homes are still priced under half of median ($325k) and over a quarter is priced under 2/3 of median ($435k). By adding metro areas under around 50km from Manhattan (mostly on New Jersey side) median price drops to $450k with significant portion of homes (mostly houses) priced under 2/3 of the median.</span> </span><span style="font-size: 12.8px;"> </span></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-UXDU4o6GGqw/WIAtq6MAqtI/AAAAAAAAAhQ/-byVa7XiP30HUEI125kHZo3pNpsf3lMugCLcB/s1600/London%2BDistribution.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="362" src="https://4.bp.blogspot.com/-UXDU4o6GGqw/WIAtq6MAqtI/AAAAAAAAAhQ/-byVa7XiP30HUEI125kHZo3pNpsf3lMugCLcB/s640/London%2BDistribution.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><div style="font-size: 12.8px;">
Figure 7 - London Home Sale Price Distribution 2016</div>
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Median sale price in inner London is around £530k with almost 20% priced less than half median and 7.5% under half of median (mostly small units). In Urban area (Grater London) median price is £435k with over 20% of homes under 2/3 of median and over 10% under half of median. London Metro median drops further under £400k with around 20% priced under 2/3 of median and 7% under 1/2 of median.</div>
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These least affordable cities in USA and UK do not only have lower median home price to median income ratio than Sydney but also much more favorable home price distribution where much larger percentage of homes is priced below 1/2 and 2/3 of median: Sydney Metro has only 3% under half median while SF Metro has 10%, Sydney Metro has only 13% under 2/3 of median while London Metro has over 21%. Situation is even more extreme for areas closer to city center: Sydney Urban area has only 2.5% under half and 10% under 2/3 while NY Urban area (NYC) despite being much smaller and having lower median has almost 10 times larger proportion of homes (20%) under half and 25% under 2/3 of median.</div>
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<span style="background-color: white; color: #3d596d; font-family: "merriweather" , "georgia" , "times new roman" , "times" , serif; font-size: 15px;">Figure 8 shows proportion of homes priced under half of median and two thirds of median in selected cities.</span> </div>
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<tr><td style="text-align: center;"><a href="https://4.bp.blogspot.com/-8DPL6gTsW0k/WIAzo-mKG_I/AAAAAAAAAhg/so2UCyzBAUQIhfan1PlLbLqotVVeWGTrgCLcB/s1600/LowPriced4cities.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="359" src="https://4.bp.blogspot.com/-8DPL6gTsW0k/WIAzo-mKG_I/AAAAAAAAAhg/so2UCyzBAUQIhfan1PlLbLqotVVeWGTrgCLcB/s640/LowPriced4cities.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8px;">Figure 8 - Distribution of under median priced homes in selected cities and areas</td></tr>
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Sydney performs extremely poor in lower priced home affordability in comparison with other expensive cities especially in areas closer to the city center. This means that home affordability for below median income earning first home buyers in Sydney is much much worse than what headline median 'price to median income' suggests. Affordability in Sydney for almost anyone making under median and has no equity or help is literally nonexistent. It would be interesting to see actual statistical distribution of home prices to real income ratio. It wouldn't be very surprising to find out that the ratio is well over 10 making all those mortgages highly risky and sub-prime. Even family with median income buying sub median home (e.g. 3/4 of median) would not be more than few paychecks far from default in case even third of income gets suddenly lost.</div>
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This analysis shows that median multiple is very poor tool not only to estimate home affordability (especially for first home buyers) or compare change in affordability over time, but also for comparing housing affordability between various cities around the world. Even more importantly this analysis shows that home affordability is non-existent for all first home buyers who make under median income and many who make even more than median.</div>
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<ul>
<li>N<span data-mce-style="font-size: small;">ote 1 - Sydney Subdivisions: Inner Sydney includes suburbs within ten kilometers from CBD including central, eastern, southern and inner western suburbs (post codes 2000-2050 and 2203-2204) and Lower North Shore (post codes 2060-2069, and 2088-2090). Inner Sydney as defined here has area of 190km2 and population of around 690k. Urban Sydney area includes most of Sydney: Inner Sydney, rest of Inner West and North Shore, Western Sydney, Norther Beaches, Northwest areas including Hills District, South Western suburbs, St George and Sutherland Shire. Area of Urban Sydney is around 2800km2 with population of almost 4 million. Metro Sydney area includes Urban Sydney area as well as Outer Western Suburbs, parts of Hawkesbury (areas around Richmond and Windsor) and Macarthur region (areas around Campbelltown) excluding Wollondilly. Area of Metro Sydney is over 4000 km2 and population of 4.5 million. Almost all suburbs in outer Sydney Metro area are more than 50km from CBD with one way commuting times well in excess of one hour.</span><span data-mce-style="font-size: small;">N</span></li>
<li>Note 2 - San Francisco subdivisions: Inner SF is defined here as SF city and county proper, Urban SF is defined as area of following counties: San Francisco, urban parts of Alameda, San Mateo, Santa Clara and small urban part of Contra Costa. Metro SF is defined as urban SF area plus city of Vallejo and some parts of Marin County (San Rafael and near surroundings). Metro SF as used here is smaller than comparable Sydney area and much smaller than commonly used San Francisco Bay Area (excludes non-urban parts of Alameda, San Mateo, Santa Clara, most of Solano and Marin counties and excludes Napa and Sonoma counties completely.</li>
<li>Note 3 - New York subdivisions:<span data-mce-style="font-size: small;"> Inner NY is defined here as Manhattan, Urban NY area is defined as NY City proper (5 boroughs - Manhattan, Bronx, Queens, Brooklyn, and Staten Island), Metro NY includes Urban area plus Nassau, Westchester, Rockland, Bergen, Hudson, Union, Essex, Passaic, and Middlesex counties in states of NY and NJ. It has to be noted that both Urban and Metro NY areas used here are much more relatively smaller than comparable areas in Sydney. Urban NY city area as defined here (NYC) has density of over 10k per km2 and makes only one third of population of typically used wide NYC metro area. Compared to Urban Sydney with density of 1500 per km2 and 90% of population of total metro area. NY metro area used here (with population of 16 million) is much smaller than commonly used New York–Newark–Bridgeport, NY, NJ, CT, PA area with population of 24 million. </span></li>
<li>Note 4 - London subdivisions:: Inner London is defined here as Inner London (as defined by London Government Act 1963) plus City of London. Urban London is defined here as Greater London (density 5.3k per km2) while Metro London is defined as London metropolitan area or sometimes called London commuter belt (including parts of Hertfordshire, Essex, Kent, Surrey, Berkshire and Buckinghamshire Counties) with population of over 14 million and density over 1500 per km2.</li>
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<span style="background-color: #f8f8f8; color: #666666; font-family: "lato" , sans-serif; font-size: 12px;">Content on this blog is licensed under a CC BY by theaussiebubble.wordpress.com/</span></div>
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ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com0tag:blogger.com,1999:blog-2023238471006975213.post-82477139752768447202016-01-14T10:39:00.004+11:002016-01-14T10:39:50.641+11:00Role of Market Supply During Housing Crash Many people ask me over and over whether stock on market, unemployment, or vacancy rates need to spike before house prices start falling. That thinking seems to be valid but only if someone assumes that supply side is what drives prices up during boom times. I already covered this issue before but I want to be more clear. <br />
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We can look into three indicators to get better understanding of this issue, stock on market (number of homes for sale), rental vacancy rates and number of sales. We'll also look what happened in USA because one of the main arguments for such claims are based on understanding that high foreclosure rate pushed US houses prices down. <br />
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Let's have a look in US house prices:<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://2.bp.blogspot.com/-qv3mXidOjug/VpawgTWkavI/AAAAAAAAAb0/bQ3D69OrgsI/s1600/USA%252BNational%252BHouse%252BPrices.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="372" src="http://2.bp.blogspot.com/-qv3mXidOjug/VpawgTWkavI/AAAAAAAAAb0/bQ3D69OrgsI/s640/USA%252BNational%252BHouse%252BPrices.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">US house price index</td></tr>
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Prices peaked in late 2005, by the end of 2007 were down 20% and by end of 2008 they reached -40%. In some bubbly areas magnitudes were larger (e.g. Phoenix AZ -40% by end of 2007, -75% by the end of 2008) but timing was very similar.<br />
<br />
The main question here is: why?<br />
Some people say unemployment rise:<br />
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<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-w6njSzkx0oU/Vpax_S-REvI/AAAAAAAAAcA/9KNqKV7mEzo/s1600/11082.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="444" src="http://3.bp.blogspot.com/-w6njSzkx0oU/Vpax_S-REvI/AAAAAAAAAcA/9KNqKV7mEzo/s640/11082.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">US unemployment</td></tr>
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They are wrong. Unemployment was at multi-decade lows at the end of 2007 at what time house prices already lost half of their total losses (20% on average 40% in some cities). Even by the end of 2008 unemployment was still relatively low (under 6%) while by that time house prices fell almost to the bottom.<br />
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Some people say subprime mortgage delinquency and foreclosures:<br />
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<a href="http://1.bp.blogspot.com/-rJ_rCgClkY8/Vpaz-wSP6CI/AAAAAAAAAcU/DQM5kP7ZKOc/s1600/image6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="434" src="http://1.bp.blogspot.com/-rJ_rCgClkY8/Vpaz-wSP6CI/AAAAAAAAAcU/DQM5kP7ZKOc/s640/image6.png" width="640" /></a></div>
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In late 2005 when house prices peaked mortgage delinquency and foreclosures were close to the record lows while By the end of 2007 the spiked to levels not much different to historic lows. By the end of 2008 reached levels 30% over 2002 levels. There is clear correlation between prices and foreclosures but not causation. It seems that foreclosures were behaving similar or slightly lagging in time behind prices. It's unlikely that foreclosures caused house price to fall since they were as often during boom 2002 when prices jumped 10% and 2007 when prices fell by 20%.<br />
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Let's see oversupply - new home construction:<br />
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<a href="http://1.bp.blogspot.com/-Y1jlSLRmC1E/Vpa8R67a3rI/AAAAAAAAAc4/14zNrhhiKPc/s1600/housing-2010-10-20-new-home-construction-sa-iacono.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="442" src="http://1.bp.blogspot.com/-Y1jlSLRmC1E/Vpa8R67a3rI/AAAAAAAAAc4/14zNrhhiKPc/s640/housing-2010-10-20-new-home-construction-sa-iacono.jpg" width="640" /></a></div>
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Construction was rising and it peaked in late 2005 at the same time as prices peaked. It fell fast afterwards and by end of 2007 was down 60%. Falling construction clearly didn't cause prices to fall during the bust. Maybe construction was so great during boom years with huge unsold inventories that later forced prices down. So, let's see if there was an oversupply of all homes - stock on market:<br />
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<a href="http://1.bp.blogspot.com/-Uj7N124DaMs/Vpa47pjPgjI/AAAAAAAAAcs/yfbUdHt9XFo/s1600/g16308084068145042364423817189335.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="340" src="http://1.bp.blogspot.com/-Uj7N124DaMs/Vpa47pjPgjI/AAAAAAAAAcs/yfbUdHt9XFo/s640/g16308084068145042364423817189335.gif" width="640" /></a></div>
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Number of homes for sale was rising with house prices during bubble period. It peaked in 2006 at the same time house prices peaked but than it fell with house prices. It is hard to argue that falling stock on market was driving price drops. Stock on market was above 'normal' and rising during 2000-2006 period when prices were going up. During house price collapse period 2007-2009 stock on market fell by more than 50% - clearly not driving prices down. If there was a large number of unsold new homes prior to bust they would have appear on market afterwards. The same is case with foreclosures. Despite all of this stock on market was falling with house prices.<br />
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Some people say that oversupply went into rental market:<br />
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<a href="http://1.bp.blogspot.com/-v4LsKQkwjso/Vpa25_hPk7I/AAAAAAAAAcg/j7Gm6wpIaXA/s1600/fredgraph.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="424" src="http://1.bp.blogspot.com/-v4LsKQkwjso/Vpa25_hPk7I/AAAAAAAAAcg/j7Gm6wpIaXA/s640/fredgraph.png" width="640" /></a></div>
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Rental vacancy rate peaked in early 2004 when prices were booming and reached a decade low at the end of 2007 when prices already lost 20%. It's hard to imply that oversupply of homes ended up on rental or that falling rental vacancies pushed prices down.<br />
<br />
So if it's not unemployment forcing people to sell, nor foreclosures, nor oversupply (new construction, rising vacancy rates or rising stock on market). It's clearly not increased supply so what is it?<br />
<br />
We should look into demand side. House price growth in years prior to 2006 was driven by price speculation, prices were rising because they were rising. Property investors were ready to pay more because they expected further growth and capital gains, occupiers were speculating that prices will be going up so it's better to jump in at any price or miss out forever. Demand was booming and it was supported by easy credit.<br />
<br />
Number of new sales:<br />
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<a href="http://3.bp.blogspot.com/-P1BbC5YY5as/VpbBSCaXdiI/AAAAAAAAAdU/Y4ioUUT1b2A/s1600/US-New-Home-Sales-8-12.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="490" src="http://3.bp.blogspot.com/-P1BbC5YY5as/VpbBSCaXdiI/AAAAAAAAAdU/Y4ioUUT1b2A/s640/US-New-Home-Sales-8-12.gif" width="640" /></a></div>
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Number of new home sales peaked in early 2005 before house prices peaked and fell quickly to levels not seen in decades. Demand for new homes collapsed prior do price falls. How about existing homes?<br />
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<a href="http://4.bp.blogspot.com/-pJwoKVsstpQ/VpbA9tU4jnI/AAAAAAAAAdM/KDl9Epec2rM/s1600/Housing-TotalActivityIndex-042313.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="438" src="http://4.bp.blogspot.com/-pJwoKVsstpQ/VpbA9tU4jnI/AAAAAAAAAdM/KDl9Epec2rM/s640/Housing-TotalActivityIndex-042313.jpg" width="640" /></a></div>
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Let see how it all aligns together:<br />
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<a href="http://1.bp.blogspot.com/-6GP--ij1M8o/VpbQItroo4I/AAAAAAAAAdk/5TVw2HmEUUs/s1600/a.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="416" src="http://1.bp.blogspot.com/-6GP--ij1M8o/VpbQItroo4I/AAAAAAAAAdk/5TVw2HmEUUs/s640/a.png" width="640" /></a></div>
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<br />
In late 2004 sales peaked while prices and number of homes for sale continued rising. Around 6 months later prices peaked while stock on market continued to rise. Prices started falling at slow rate. In late 2006 stock on market started falling while number of sales continued down - and prices started plummeting despite fall in supply. Falling demand (fall in number of sales) is the only indicator leading house price fall.<br />
<br />
<br />
12% vacancy rate in USA is not comparable to our vacancy rate because they count all rental homes that are vacant while dodgy sqm only counts those listed on one or two websites for more than 3 weeks continuously. In addition rental market in USA operates differently, largest share of rental homes is owned by businesses which makes normal vacancy rate high - over 7.5% (currently USA is experiencing rental crisis with rents skyrocketing while rental vacancy rate is over 7%) In 2006-2008 period vacancy rate was just slightly over at around 9.5% and it peaked at 11% well after house prices collapsed in 2009.<br />
<br />
Stock on market at the peak was significantly lower (0.5% of all homes) compared to current and historical numbers in Australia (~3% of all homes). Many of sellers in Australia are trying to get good price and they will not sell for less at the moment. But when demand collapses there is always enough supply (people who need or want to sell regardless of market conditions) to drive prices down on low volumes (US home prices collapsed in 2006-2009 period on record low volumes not seen since WWII). It only takes a few sellers willing or forced to accept anything to push prices into the ground.<br />
<br />
Sydney sale volumes peaked (current cycle) in mid 20014, Melbourne in mid 2015, nationally it is probably peaking around this time, ...<br />
<br />ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com1tag:blogger.com,1999:blog-2023238471006975213.post-14015382013281191482015-05-23T10:19:00.001+10:002015-05-23T10:20:01.363+10:00Australian Housing time has come ...<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Based on debt levels, economic conditions, mining bust and finally google trends data (see my previous <a href="http://popping-bubble.blogspot.com.au/2011/07/predictions-by-google-insight.html" target="_blank">post</a>) I predict that peak price will be reached within 6 months. It will be followed by, at the beginning, slow decline over 6-12 months and than accelerated collapse.</span><br />
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<tr><td class="tr-caption" style="text-align: center;">Google Trends - "housing bubble" in Australia</td></tr>
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ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com3tag:blogger.com,1999:blog-2023238471006975213.post-27734148825858343732013-11-02T12:56:00.002+11:002013-11-02T12:56:18.698+11:00"Bubble Truths" and "anxiety about overpriced housing is overblown"<div style="border: 0px; line-height: 17px; padding: 0px; vertical-align: baseline;">
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><a href="http://www.smh.com.au/data-point/home-truths-20131101-2wry7.html#ixzz2jRaQZ47i">An article</a> from the mainstream media brought interesting insight into a "bubble mind". In an interview, one of the famous Australian economists Stephen Koukoulas (with<span style="line-height: 19px;"> over more than 25 years of</span><span style="line-height: 19px;"> </span><span style="line-height: 19px;">professional experience</span><span style="line-height: 19px;"> as an economist in government, as Global Head of economic and market research, a Chief Economist for two major banks and as economic advisor to the Prime Minister</span>) asked simple question:</span></div>
<blockquote class="tr_bq">
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">''What would you prefer? House prices three times' average incomes with 13 per cent interest rates or house prices four or five times' average incomes with interest rates under 7 per cent?<br />''The bottom line is the repayments are roughly the same.''</span></blockquote>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">Economics used to be a science, not opinion field, so lets see how good scientist one of the Australian most famous economists</span><span style="line-height: 17px;"> really is.</span></span><br />
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">According to <a href="http://www.rba.gov.au/statistics/tables/xls/f05hist.xls?accessed=2013-11-02-12-53-25">RBA</a> 1982 was the last year when Standard Variable interest rate was 13% and ratio between an average house price and average income was 3. An average repayment after purchase was 33% of the income (25 year loan, 80% LVR, deposit equal to 60% of annual income).</span><span style="line-height: 17px;"> </span></span><br />
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">Today, ratio between </span><span style="line-height: 17px;">an average house price and average income is around 7 (according to </span><a href="http://www.rba.gov.au/publications/bulletin/2012/dec/pdf/bu-1212-2.pdf" style="line-height: 17px;">RBA</a><span style="line-height: 17px;">). Standard variable interest rate is 5.95%, repayment 45% of income (30 years loan, 90% LVR, deposit 70% of annual income).</span></span><br />
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">First year repayment today is 36% higher than what it was when home prices were 3 times income and IR 13%.</span></span><br />
<span style="border: 0px; line-height: 17px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="border: 0px; line-height: 17px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">But that is not the end of the story. Houses take decades to repay, so let see how repayments change over time.</span></span><br />
<span style="border: 0px; line-height: 17px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="border: 0px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">In year 2, repayment was equal to 29% for 1982 buyer (IR dropped to 12.5%, income grew by 9%), and 43.5% for today's buyer (assuming IR and income growth stay the same). </span></span></span><br />
<span style="border: 0px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;"><br /></span></span></span>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="border: 0px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="line-height: 17px;">In year 3, repayment dropped to 25% of income for 1982 buyer (IR dropped to 12%, income grew by 11%) and 41.5% of income for today's buyer </span></span><span style="line-height: 17px;">(assuming IR and income growth stay the same).</span></span><br />
<span style="line-height: 17px;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">In year 4, repayment dropped to 23% </span><span style="border: 0px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="line-height: 17px;">of income for 1982 buyer (IR dropped to 11.5%, income grew by 5%) and 40% of income for today's buyer </span></span><span style="line-height: 17px;">(assuming IR and income growth stay the same).</span></span><br />
<span style="line-height: 17px;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">In year 5, repayment dropped to 21% </span><span style="border: 0px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="line-height: 17px;">of income for 1982 buyer (IR increased to 12%, income grew by 7%) and 38.5% of income for today's buyer </span></span><span style="line-height: 17px;">(assuming IR and income growth stay the same).</span></span><br />
<span style="line-height: 17px;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">Total cost of house ownership (including deposit) in first 5 years was 190% of income for 1982 buyer and 280% for today's buyer. Despite significantly lower rates, higher LVR and longer loan term, houses today are 47% more expensive in first 5 years than they were in 1982.</span></span><br />
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;"><br /></span></span>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="line-height: 17px;">Over the life time of a mortgage (25 vs 30 years), today's potential buyer (with assumption that rates stay low) would pay more than twice in income terms for an average house than buyer from 1982. </span></span><br />
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<blockquote class="tr_bq">
<span style="border: 0px; line-height: 17px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Economist Stephen Koukoulas says the anxiety about overpriced housing is overblown because the burden of today's big home loans has been completely offset by the saving from low interest rates.</span></span></blockquote>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Completely offset?</span><br />
<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Don't worry and buy because "</span><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; line-height: 17px;">anxiety about overpriced housing is overblown"?!</span><br />
<span style="border: 0px; line-height: 17px; margin: 0px; padding: 0px; vertical-align: baseline;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><br /></span></span><br />
ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com2tag:blogger.com,1999:blog-2023238471006975213.post-74758570474205344822013-02-18T16:36:00.000+11:002013-02-18T16:36:33.755+11:00What caused Housing Bubbles in UK<br />
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UK has recorder one of the most volatile house prices in the West since WWII. Many economists use UK as a prime example how "land restrictions cause housing bubbles". But you they failed to provide evidence that UK home price volatility is caused by land restrictions and not something else. </div>
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They overlooked the fact that beside tough land restrictions UK has the least stable and the most speculative banking system in the West. Maybe that has something to do with price volatility. Lets explore: </div>
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If we look into history of UK banking you will find very interesting correlation between banking regulation changes and housing bubbles. </div>
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<a href="http://1.bp.blogspot.com/-PsXxbQ7lb_A/USG6luVHi2I/AAAAAAAAAXg/KhixAA_znzY/s1600/UK+house+price.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="280" src="http://1.bp.blogspot.com/-PsXxbQ7lb_A/USG6luVHi2I/AAAAAAAAAXg/KhixAA_znzY/s400/UK+house+price.JPG" width="400" /></a></div>
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Home prices in UK were relatively stable during 50s and 60s. Prices were slowly going up while government was slowly introducing "land development restrictions" in 1960s. This price growth could be attributed to land restriction regulation in addition to other causes (real income growth, etc.).</div>
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Suddenly, after decades of stability, house prices spiked in early 70s. Interestingly, that happened immediately after significant bank deregulation process: Competition and Credit Control in 1971 and big bank mergers in late 60s (during just two years in 1968, five big bank mergers occurred) . Competition and Credit Control relaxed bank reserve requirements, allowed deposit banks to participate on the market, removed interest rate collusion ... More interestingly, in 1970 (just before the bubble) new conservative government started relaxing many of the land development restrictions introduced by labour in decade before. Bubble burst and prices drop by 30% by mid late 70s. During this period of falling prices new labour government introduced new and tougher land restrictions but that didn't prevent house prices from falling.</div>
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Than, in late 70s, foreign exchange controls were lifted and 1979 Banking Act was passed. That coincided with the housing bubble that peaked in early 80s. This bubble was much smaller but real prices fell almost 20% after the burst. </div>
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New conservative government started reforms that included removal of some land restrictions laws and big banking reform. In mid 80s ‘Big Bang’ reforms were passed (1986). These reforms caused expansion of building societies and relaxation of lending standards. Deregulation turned building societies into real banks and enabled them to lend money freely. This was followed by big housing bubble of late 80s. </div>
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Finally, world wide deregulation and globalisation of late 90s happened just before great housing bubble of 2000s. Lending standards were dropped, bank funding became obscure and credit issue relaxed. UK banking sector tripled in less than a decade. Speculations became global, included insurances, big funds ... </div>
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This clearly shows that every UK housing bubbles since WWII occurred after a new bank regulation rules were passed (almost identical causation can be showed for USA, Australia ...). In some instances lend restrictions rules had been lifted before bubbles started inflation. These relaxations of land restrictions failed to prevent bubbles from happening. </div>
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In addition, the theory that land supply restrictions cause house price volatility is very hard to apply on UK cities where population significantly declined over the last 40 or 50 years (Manchester, Liverpool, Sheffield ...). These cities did not require much of a new land to meet new demand, still prices were more volatile there than in cities with fast growing population and end even more land restrictions like London.</div>
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<span style="font-size: x-small;">- Richard Davies, Peter Richardson, Vaiva Katinaite and Mark Manning of the Bank of England - Evolution of the UK banking system - 2010</span></div>
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<span style="font-size: x-small;">- Peter Scott - The Property Masters - Taylor & Francis - 2013</span></div>
ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com1tag:blogger.com,1999:blog-2023238471006975213.post-74193053107826521022012-11-19T17:26:00.000+11:002012-11-19T17:31:09.924+11:00Post-construction boom plan?<div style="text-align: justify;">
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There is a lot of talk recently about RBA's new great idea of replacing the mining boom with a construction boom. It is quite possible that could work, and we continue growth by shifting ex-mining investments into housing construction. This is not new idea. It was very "successfully" implemented in quite a few places around the world recently. Irish and US governments successfully replaced IT boom of late 90s with period of steady growth driven by construction boom. Chinese government partially did the same thing after their export boom ended. Historically, it seems it's quite easy to succeed with this plan.</div>
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<b>BUT, there is one much more important question that nobody seems to be asking </b><b>in Australia: even if the great idea of construction boom replacing mining succeeds, </b><b>what will replace construction boom at its end in three or five years? </b></div>
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<a href="http://beta.images.theglobeandmail.com/8a1/migration_catalog/article4061006.ece/ALTERNATES/w620/-IRELAND-EU-POLITICS-ECONOM.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="225" src="http://beta.images.theglobeandmail.com/8a1/migration_catalog/article4061006.ece/ALTERNATES/w620/-IRELAND-EU-POLITICS-ECONOM.jpg" width="400" /></a></div>
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If everything goes as planed, in just 5 years we will have million more homes - half of them empty (around half a million more new homes than new households), we will have around half a trillion more debt (half a trillion less invested in productive business and infrastructure) Maybe we can continue doing the same for 5 more years after. By than we should have million more empty homes and trillion more in debt.</div>
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BUT, what will happen after we take more debt and misallocate it into more empty houses? What is the great idea promises us after?</div>
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I'm scare even to think about this.</div>
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I hope our government's great ideas fails quickly. I hope for that not because I think we will be fine if it fails (we will not), but because I'm sure in 5 years we will be much better than if they succeed. For majority of Australians (especially our kids) going into few years long recession in 2013 is much better option than going into decade long deep depression in 2018.</div>
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I hope, we learned something from other's mistakes.</div>
<br />ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com2tag:blogger.com,1999:blog-2023238471006975213.post-32058435419102112972012-06-21T14:51:00.001+10:002012-06-21T15:36:00.758+10:00Census and Australian housing shortage/oversupply<div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Preliminary Census data is published a few days ago <a href="http://www.censusdata.abs.gov.au/census_services/getproduct/census/2011/quickstat/0">- census link</a>, and as I expected it just confirmed some of my projections. </span></div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal"><o:p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"> </span></o:p><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">First, couple of general (non housing) findings:</span></div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><ul style="margin-top: 0cm;" type="disc"><li class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Total population increased to 21.5m, while total number of dwelling increased to 9.1m.</span></li>
<li class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Population growth over the last 5 years was lower than projected (around 300k less – 60k less per year)</span></li>
<li class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Household size remained stable at 2.6</span></li>
<li class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">65+ is the fastest growing population group</span></li>
<li class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Median household income was $64k</span></li>
</ul><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Housing data is also interesting. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Ownership rate decreased from 68.1% to 67%. Outright ownership decreased from 34% to 32.1%. Percentage of mortgage owners and renters who spend more than 30% of income on housing increased as well. Income increased only 20% while house prices increased 33.3%, and median mortgage repayment 38% over the previous 5 years. Although income and repayment census data is not very reliable, this suggests that housing became less affordable.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Percentage of unoccupied dwellings increased from 10.4% to 10.7%. Total number of households increased by 616k; number of private dwellings increased by 720k. More than 100k dwellings that were built since 2006 are not occupied. One new dwelling was built for every 2.3 new residents while average household size stayed 2.6. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">All this suggests that there is no housing shortage in Australia. In fact, it suggests that oversupply of homes increased in 5 years. The oversupply increase since 2006 seems to be higher than what I predicted <a href="http://popping-bubble.blogspot.com.au/2011/02/australian-residential-housing-demand.html">here</a>. The likely reasons for this are wrong population growth estimates and my methodology that tends to underestimate oversupply. This means that current oversupply most likely exceeded one million homes. </span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Oversupply of homes is significantly up, price to income ratio is up, demography is getting worse, … It seems that there is nothing about real demand and supply that can drive house prices up (or support current prices). It is all down to speculative demand and credit availability. </span></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com2tag:blogger.com,1999:blog-2023238471006975213.post-5597376144795690582012-04-13T10:40:00.002+10:002012-04-13T14:41:42.539+10:00Why we are so different - according to RBA<div class="MsoNormal" style="margin: 0cm 0cm 0pt;">RBA head of financial stability, Luci Ellis, delivered few days ago a <a href="http://www.rba.gov.au/speeches/2012/sp-so-110412.html">speech</a> at Financial Markets Conference in Atlanta. Ms Ellis “explained” why the US housing market bubbled and then busted, and why the Australian housing market will not burst. She made several arguments why we are different. All of them wrong. I will concentrate here on two points:</div><blockquote class="tr_bq">The first is that housing supply is quite elastic here, at least in enough parts of the country to matter. The housing boom was a construction boom as well as a price boom. As a result, by 2006 there was already a substantial overhang of excess supply (Graph 1). The inherent stock-flow interaction in the housing market means that construction booms sow the seeds of their own destruction. Prices can undershoot formerly sustainable levels. </blockquote>US construction in 2000s was (in nominal terms) lower than in 1970s and 1980s. In relative terms (relative to population or total existing housing stock) construction rate at the peak in mid 2000s was by far lower than in all previous decades. <br />
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<a href="https://lh6.googleusercontent.com/-0Bunbm6u9X4/T4Z5BocVy8I/AAAAAAAAAWE/M-QrsKnRA-M/s800/US%2520construction%2520Luci.JPG" target="_blank"><img alt="Posted Image" height="217" src="https://lh6.googleusercontent.com/-0Bunbm6u9X4/T4Z5BocVy8I/AAAAAAAAAWE/M-QrsKnRA-M/s400/US%2520construction%2520Luci.JPG" width="400" /></a><br />
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This is what she calls US “construction boom”. During the same period we were building at the rate of almost 2%. <br />
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More interestingly, in states where developments were restricted construction “boom” was lower while bubble was bigger. Supply side restrictions just amplify house price growth but don’t stop prices from falling. Places with the most supply restrictions (Las Vegas, California …) recorded largest house price drops although none of supply restrictions was lifted in meanwhile. Places with no restrictions like Texas or Georgia recorded no price growth. <br />
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<blockquote class="tr_bq">This links to the third factor, which is that a range of tax and legal differences, as well as industry convention, created a system that discouraged amortisation. Interest-only loans, explicitly negative amortisation loans and cash-out refinancing, all meant that loan-to-valuation ratios that were high at origination, stayed high well into the life of the loan. American households are less likely to pay their mortgages down ahead of schedule than Australians (Graph 2). Trade-up buyers seem to have high loan-to-valuation ratios in the United States; that doesn't appear to be true in Australia. The result of all this is that the US housing stock is far more leveraged than that in Australia, even during the boom period (Graph 3). </blockquote><br />
While it's true that Australia does not provide tax benefits for PPOR mortgages it provides significant benefits for property investments. Americans have interest in not paying mortgages ahead of schedule, while Australians don’t. Even with this “advantage” Australians managed to increase LVR during housing boom while Americans decreased it. Australians were adding more debt and much faster (relative to home prices) than they are able to repay ahead of schedule. So, we are paying mortgage faster but or those mortgages grew so quickly that debt is skyrocketing.<br />
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<a href="http://www.rba.gov.au/speeches/2012/images/sp-so-110412-graph3-small.gif" target="_blank"><img alt="Posted Image" src="http://www.rba.gov.au/speeches/2012/images/sp-so-110412-graph3-small.gif" /></a><br />
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Australia has higher percentage of interest only loans which shows that less people in Australia are interested in owning house – these people only think about price speculation. Since boom started we increased out leverage by almost 50% while Americans decreased their leverage during boom years (by almost 10%). After house price fell US leverage jumped up to level almost 50% higher than pre-boom levels. When our bubble bursts leverage will jump to levels at least 150% higher than pre-boom period (probably 200% or even more). It’s already 50% up.<br />
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RBA is already left with very little credibility and this is just one more step toward losing all of it.ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com0tag:blogger.com,1999:blog-2023238471006975213.post-86118980923639196452012-02-08T17:22:00.001+11:002012-02-08T20:52:02.245+11:00Market Inventory vs Bubble BurstThere is strong belief among Australians that housing market will not crash because majority people will not be willing or forced to sell for reduced price. Although it is true that majority of people will not sell at low price, there is misconception how many forced or willing sellers is necessary to crash the market.<br />
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Let's see behaviour of market stock in Australia over the past 5 years or so:<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.macrobusiness.com.au/wp-content/uploads/2011/11/RPData_SOM.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="182" sda="true" src="http://www.macrobusiness.com.au/wp-content/uploads/2011/11/RPData_SOM.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart1 Stock on the market RPdata</td></tr>
</tbody></table> From the chart, we can see that number of homes for sale doubled since first housing troubles started in 2008. Stock slightly decreased during short boom in late 2009 - early 2010 but increased 50% since then. Similar data comes from SQM - Chart 2 <br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.macrobusiness.com.au/wp-content/uploads/2012/01/stockonmarketnational.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="243" sda="true" src="http://www.macrobusiness.com.au/wp-content/uploads/2012/01/stockonmarketnational.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart2 - Stock on the market SQM</td></tr>
</tbody></table> From observation of a recent events in USA, I noticed that significant rise in inventories is not needed for price to crash. If we take a look at US existing house inventories (Chart 3) we can clearly see that inventories didn't increased more than inventories in Australia. <br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.daily-bourse.fr/images/analyses/2010/03/26/0ABGR.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="255" sda="true" src="http://www.daily-bourse.fr/images/analyses/2010/03/26/0ABGR.gif" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Char3 - US existing home inventory</td></tr>
</tbody></table><br />
From the chart we can see that home inventories in USA at the peak were lower than current inventory in Australia. At the peak inventories were only about 4% of total housing stock, while that percentage already passes 4.5% in Australia. It is hard to say that 4% of the total stock is extreme number that caused 33% price crash in USA. We should also notice that stock on the market fell in late 2008 early 2009 when house prices dropped the most. This means there is something else that significantly affects house prices.<br />
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Lets take a look at sales:<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.marketoracle.co.uk/images/2011/Nov/us-homesales-29.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="255" sda="true" src="http://www.marketoracle.co.uk/images/2011/Nov/us-homesales-29.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart4 - US home sales</td></tr>
</tbody></table>It is clear that drop in sales, significantly affected housing market in USA. Lack of buyers seems to have much larger effect on price than rise in inventories. It is expected there will always be significant number of people forced or willing (for any reason) to sell, but it's hard to expect significant number of buyers (especially if credit freezes and/or unemployment hits). <br />
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Let's see whether this holds in Australia<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://www.macrobusiness.com.au/wp-content/uploads/2012/01/Number-of-Housing-Finance-Commitments.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="275" sda="true" src="http://www.macrobusiness.com.au/wp-content/uploads/2012/01/Number-of-Housing-Finance-Commitments.gif" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 5 - Australia home sales</td></tr>
</tbody></table> It is clear that house price fall in 2008/2009 was caused by significant fall in sales. House prices recovered driven by new buyers although stock on market remained elevated compared to pre 2007 levels. <br />
<br />
It looks like inventory levels at the moment are more than enough to enable market crash, it's up to buyers to set market direction. Recent drop in sales (since 2010) is larger than drop recorded in USA during the first two years of price contraction. If soon buyers do not return to the market in large numbers, we may expect price fall to accelerate. There is no need for mass panic sale for prices to fall significantly.ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com5tag:blogger.com,1999:blog-2023238471006975213.post-78109370338869627092011-12-18T22:37:00.000+11:002011-12-18T22:37:55.000+11:00What drives prices up?There is common understanding in Australia that FHBs are one of the most important house price drivers. Is this really true?<br />
<br />
Let's see what data shows:<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-OEaFrRCsyZY/Tu3Itfm3q5I/AAAAAAAAARo/KRLKOzBsDNI/s1600/Whodriveshouseprices.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="http://3.bp.blogspot.com/-OEaFrRCsyZY/Tu3Itfm3q5I/AAAAAAAAARo/KRLKOzBsDNI/s1600/Whodriveshouseprices.PNG" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Australia Property Investor/FHB market share vs. house prices</td></tr>
</tbody></table><div style="text-align: center;"><br />
</div>It is clear from the chart that there is a weak correlation between FHBs market share and house prices. For most of the time these two series were heading into opposite direction (correlation is slightly negative). On the other hand, property investors (PI) market share is very strongly correlated with house prices. This, of course, does not imply direct causation so we need more information. Just recently, US FED published report* that claims increase in property investors market share was the most important factor that created housing bubble in USA. Lower lending standards attracted large number of highly leveraged investors ready to take big mortgages with expectation of big and quick capital gains. They increased demand and drove prices up. FHBs and upgraders got squeezed and forced to pay ever increasing prices. Increasing prices attracted more investors and feedback started its own life independent of real demand or realistic future prospects. It's almost irrelevant what initiates the feedback loop; once started abundant and easy credit is only thing needed for growth.<br />
<br />
According to FED property investor market share in bubble states increased from less than 25% in 2000 to almost 45% in 2006. Similar rise is property investors was recorded in Australia as a whole. In some areas (SE Qld, inner capital cities, ...) significantly higher percentage of investors entered property market and drove house prices by increasing debt to extreme levels. It is hard to imagine this trend to continue for long because of huge debt already accumulated. Once prices stop growing, property investors begin to sell because quick capital gain expectations are gone while big repayment bills continue to arrive every month. Most of highly leveraged and negatively geared investors cannot afford to hold for long without quick capital gain expectations.<br />
<br />
Looks like same forces created housing bubbles in USA and Australia. Other minor factors made bubble extents and timings slightly different but core cause for rise and fall seem to be the same.<br />
<span style="font-size: x-small;"><br />
</span><br />
<span style="font-size: x-small;">* <a href="http://www.ny.frb.org/research/staff_reports/sr514.pdf">http://www.ny.frb.org/research/staff_reports/sr514.pdf</a></span>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com3tag:blogger.com,1999:blog-2023238471006975213.post-53557679604764567632011-11-02T14:19:00.000+11:002011-11-02T14:19:54.804+11:00Australian House Price Trend<div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;">There have been discussions that house prices cannot remain flat in “real” CPI adjusted terms because we are earn much more in “real” terms today that few decades ago. I agree that CPI adjusted prices should not be flat because CPI adjustment does not reflect standard of living improvements over time. House prices should follow more realistic measures of our improved wellbeing. </span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;">Chart 1 shows house prices in “real” (CPI adjusted) terms as well as growth of our real per capita GDP and per household GDP. These measures are one of few only with long historical series that could be used for price “trend” estimation.</span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><br />
</div> <table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://1.bp.blogspot.com/-BMAUQsbT61A/TrC0rs6ssMI/AAAAAAAAANQ/4ly9yGPJW1w/s1600/house+price+vs+real+gdp+per+capita-household.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="278" ida="true" src="http://1.bp.blogspot.com/-BMAUQsbT61A/TrC0rs6ssMI/AAAAAAAAANQ/4ly9yGPJW1w/s400/house+price+vs+real+gdp+per+capita-household.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 1 "Real" House Prices vs. "Real" per Capita and Household GDP</td></tr>
</tbody></table> <div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;">Real per capita GDP is good measure because real GDP by itself ignores the fact that more than twice as many people contribute to GDP today compared to 50 years ago. On the other hand, houses are asset needed and owned by households, not the individual persons. In addition, number of homes is closely following number of households. For these reasons, real GDP per households seems to be better measure of the increased ability of households to spend money on home.</span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;">From the chart you may see that “real” (CPI adjusted) house prices followed real GDP per household with only few smaller property bubble events in mid 70s and late 80s. Prices returned toward the real GDP per household trend soon after. Since late 90s, house prices significantly deviated from real GDP per household trend. This deviation is strong indication that we are currently experiencing big housing bubble that is not supported by fundamentals.</span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;">This chart could give us a feel how much our homes are overvalued - inflated beyond historical and fundamental trend and what level of correction we may expect in near to mid future. Correction may happen with slow deflation in real terms or quick crush. It could be even combination like it was in 1990s when prices fell quickly by 10% in “real” terms and than stagnated while real GDP per household increased. </span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;"><span style="font-size: x-small;">References: </span></span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;"><span style="font-size: x-small;">1. ABS Australian National Accounts</span></span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;"><span style="font-size: x-small;">2. ABS Australian Demographic Statistics</span></span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;"><span style="font-size: x-small;">3. Stapledon</span></span></strong></div><div class="MsoNormal" style="margin: 0cm 0cm 0pt;"><strong><span style="font-weight: normal;"><span style="font-size: x-small;">4. ABS House Price Indexes</span></span></strong></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com0tag:blogger.com,1999:blog-2023238471006975213.post-60663511504205608102011-08-13T10:38:00.000+10:002011-08-13T10:38:17.931+10:00Cost of Mortgage vs. Interest Rates<div>“New era of low interest rates” is often quoted as one of the main reasons for house price growth during 2000s. The argument claims that low interest rates reduce financing cost allowing house prices to increase for the financing cost reduction. This argument sounds very intuitive and as such it’s not questioned by many. So, let’s see how interest rates affect real (CPI adjusted) cost of house purchase.</div><div><br />
</div><div>First of all we should check relation between CPI and mortgage interest rates. This relation will significantly affect real cost of mortgage. On Chart 1, we may see strong correlation between the two but we should also notice that ratio between mortgage interest rate and CPI is decreasing as CPI is getting higher. In other words the lower the CPI - banks are charging higher margin. This means that the lower CPI, the more (in real terms) mortgage holder pays to bank over the life time of the mortgage.</div><div><br />
</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-mUZG444PfwU/TkWzGE9vI4I/AAAAAAAAAD4/wLPvlYADjJ8/s1600/1a.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="204" src="http://3.bp.blogspot.com/-mUZG444PfwU/TkWzGE9vI4I/AAAAAAAAAD4/wLPvlYADjJ8/s400/1a.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 1 - CPI and Standard Variable Bank Mortgage Rate</td></tr>
</tbody></table><div>To calculate cost of mortgage financing we developed Mortgage Interest Rate to CPI ratio - see Chart 2.</div><div><br />
</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-MYS0ULqCRHU/TkWzFwImOJI/AAAAAAAAAD0/mGHx4V1Eb1g/s1600/1.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="201" src="http://3.bp.blogspot.com/-MYS0ULqCRHU/TkWzFwImOJI/AAAAAAAAAD0/mGHx4V1Eb1g/s400/1.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 2 - Annual CPI and Standard Variable Mortgage Interest Rate to CPI Ratio </td></tr>
</tbody></table>From the chart we may clearly see that the lower CPI the higher ratio. During the low interest ratio periods mortgage is much more expensive relative to cost of funding. This relation can be expressed in form of chart based on historic data - see chart 3.<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-kc-w6QCv1ao/TkWzGpeUKKI/AAAAAAAAAD8/wA0mhtUir3c/s1600/2.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="203" src="http://3.bp.blogspot.com/-kc-w6QCv1ao/TkWzGpeUKKI/AAAAAAAAAD8/wA0mhtUir3c/s400/2.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 3 - Standard Variable Mortgage Rate to CPI ratio vs. CPI</td></tr>
</tbody></table><br />
<div>When CPI is low banks are charging relatively (to CPI) high interest rates; on the other hand when CPI is extremely high banks charge less that CPI (they lose money). This combined with the fact that high inflation quickly reduces principal, should make us think that in real terms high CPI and higher mortgage rates could be better deal for mortgage holders. Chart 4 shows total cost of mortgage in CPI adjusted terms for 30 years 90% LVR loan for a given CPI and calculated interest rate based oh historic relation. Cost is calculated by assuming that CPI and interest rates remain the same over the entire period of the mortgage. This assumption is used to simulate cost dependency on low vs. high interest rate "eras" - argument used by people who claim that low Interest Rates (CPI) makes house purchase financing cheaper and house prices higher.</div><div><br />
</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-1BALcjkK2R0/TkWzHsjQ6xI/AAAAAAAAAEE/j_c2OjyFYVs/s1600/4.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="202" src="http://3.bp.blogspot.com/-1BALcjkK2R0/TkWzHsjQ6xI/AAAAAAAAAEE/j_c2OjyFYVs/s400/4.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 4 - Total Real Mortgage Cost Index (30 year)</td></tr>
</tbody></table><div>Chart 4 shows that real cost of mortgage is significantly lower during periods of very high interest rates (high CPI). The reason for this is the fact that loan principal gets quickly eaten by inflation, and mortgage repayments quickly drop relative to income and other costs. It is also clear from the chart that cost of mortgage is relatively constant for periods when CPI is between 2 and 9%. So there are no reductions in total cost of financing house purchase between periods with moderate inflation (CPI 7-8%) e.g. during 1980s and periods with lower inflation (CPI ~3%) e.g. during 2000s.</div><div><br />
</div><div>Many people sell home before the end of the mortgage term so let's check what is the cost of mortgage for the first 10 years of 30 year mortgage - Chart 5. This period is selected because most of PPOR properties are held for at least 10 years before sale.</div><div><br />
</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://2.bp.blogspot.com/-tfOISY422I8/TkWzHCbWsvI/AAAAAAAAAEA/WUqEweMkqOQ/s1600/3.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="202" src="http://2.bp.blogspot.com/-tfOISY422I8/TkWzHCbWsvI/AAAAAAAAAEA/WUqEweMkqOQ/s400/3.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 5 - Real Mortgage Cost After the First 10 years</td></tr>
</tbody></table><div><br />
</div><div>As expected, cost of financing during first 10 years is higher for high interest rate mortgages, but unexpectedly for very high CPI periods cost decreases significantly. Cost of financing for the first 10 years is the highest for CPI around 8%. The difference between maximum cost for CPI of 7-8% (during 1980s) and cost for CPI of 3% (during 2000s) is around 20%. So if majority of people hold PPOR property for 10 years, cost of financing reduction due to low rates could drive prices 20% in real terms between 1980s to 2000s. </div><div><br />
</div><div>Lower interest rates also make repayments during first few years lower compared to income. This means that people can take much higher debt during low inflation periods if repayment as percentage of vs. income lending criteria remains the same. </div><div><div><br />
</div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://1.bp.blogspot.com/-kKtwRh2uBvI/TkWzH0w4rsI/AAAAAAAAAEI/BETYeVD6tTA/s1600/5.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="201" src="http://1.bp.blogspot.com/-kKtwRh2uBvI/TkWzH0w4rsI/AAAAAAAAAEI/BETYeVD6tTA/s400/5.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 6 - Real Mortgage Cost Index</td></tr>
</tbody></table><div>From Chart 6. we may see that remaining part of a mortgage after 10 years is significantly lower during periods of higher inflation. This means that people much quickly repay their debts than what is the case for low inflation periods.</div><div><br />
</div><div>We may conclude that total cost of financing has general trend of falling with CPI and interest rate increase and it is fairly constant for low (3%) and medium (7%) CPI periods. As such, it cannot be used to justify real house price increase. Short term (10 year) mortgage cost is slightly lower during low inflation periods and could be used to justify house price increase of around 20%.</div><div>Most importantly lower interest rates make initial repayments lower allowing people to take much larger debt relative to income and that could be one of the key drivers (combined with lower LVRs) for house price increase during 2000s. </div><div><br />
</div><div>Low rates (CPI) allow people to take much more debt relative to income, they make mortgages more expensive over the mortgage life and they keep people in high debt for much longer period by keeping loan principal high. This is not only the key reasons why our (spending) economy is suffering but also the reason why it will not be able to recover anytime soon (if CPI remains on these levels). </div></div><div><br />
</div><div>To avoid this debt trap caused by low CPI and mortgage rates, banks could adjust lending criteria and take into account CPI levels. They had to reduce maximum LVR and maximum repayment relative to income to offset low interest rate trap. During 2000s, not only that we let low rates to do the damage but also our banks increased LVR and maximum repayments relative to income, creating huge debt problem that will cause economic pain for extended period.</div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com2tag:blogger.com,1999:blog-2023238471006975213.post-68009899975502008042011-07-29T18:14:00.000+10:002011-07-29T18:14:20.506+10:00"Predictions" by Google Insight<div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">There are a lot of discussions about timing of Australian property bubble. It is impossible to predict timing of events such is bubble burst but to make this interesting I checked Google Insights for Search to see whether search for “property/housing bubble” can be used for predictions.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">Findings are quite surprising – see charts.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;"><br />
</span></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://1.bp.blogspot.com/-yRtfUfOrIr4/TjJoB2r2c-I/AAAAAAAAADg/TfZCeE9bNKo/s1600/Ireland.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><img border="0" height="640" src="http://1.bp.blogspot.com/-yRtfUfOrIr4/TjJoB2r2c-I/AAAAAAAAADg/TfZCeE9bNKo/s640/Ireland.PNG" width="527" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Charts 1 House prices and Google Searches - Ireland</span></span></td></tr>
</tbody></table><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-V3okvvqCxdo/TjJoCkgpfII/AAAAAAAAADk/A9zPrqt7k4w/s1600/Spain.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><img border="0" height="640" src="http://3.bp.blogspot.com/-V3okvvqCxdo/TjJoCkgpfII/AAAAAAAAADk/A9zPrqt7k4w/s640/Spain.PNG" width="530" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Charts 2 House prices and Google Searches - Spain</span></span></td></tr>
</tbody></table><br />
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<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-wWKWoojf61A/TjJoDA3oUBI/AAAAAAAAADo/nfNMmPRwgWc/s1600/UK.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><img border="0" height="640" src="http://3.bp.blogspot.com/-wWKWoojf61A/TjJoDA3oUBI/AAAAAAAAADo/nfNMmPRwgWc/s640/UK.PNG" width="520" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Charts 3 House prices and Google Searches - UK</span></span></td></tr>
</tbody></table><br />
<div class="separator" style="clear: both; text-align: center;"></div><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://4.bp.blogspot.com/-QgJdD1bkMZ4/TjJoDbHJ6RI/AAAAAAAAADs/u1Nec1oue_0/s1600/USA.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><img border="0" height="640" src="http://4.bp.blogspot.com/-QgJdD1bkMZ4/TjJoDbHJ6RI/AAAAAAAAADs/u1Nec1oue_0/s640/USA.PNG" width="506" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Charts 4 House prices and Google Searches - USA</span></span></td></tr>
</tbody></table><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><br />
</div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span style="border-collapse: collapse; font-size: small;">From charts you may notice that peak search for phrases “property/housing bubble” happened 2-3 quarters before bubbles bursted in these countries. This is very interesting and </span><span class="Apple-style-span" style="border-collapse: collapse; font-size: small;">IMHO </span><span class="Apple-style-span" style="border-collapse: collapse;">probably tells a lot about the fact that sentiment plays very important role in market movements. What is surprising to me is the fact that search for bubble information drops before bubble bursts and stays lower when most equity wealth disappears and most of people lose their homes. </span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Now, lets take a look at Australian search for "housing bubble"</span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
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<tr><td style="text-align: center;"><a href="http://3.bp.blogspot.com/-M7Y4lMU0fI4/TjJo0qQlyMI/AAAAAAAAADw/9YSbTW2WPy4/s1600/AUS.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><img border="0" height="224" src="http://3.bp.blogspot.com/-M7Y4lMU0fI4/TjJo0qQlyMI/AAAAAAAAADw/9YSbTW2WPy4/s640/AUS.PNG" width="640" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-size: small;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Charts 5 Google Search "housing bubble" - Australia</span></span></td></tr>
</tbody></table><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="border-collapse: collapse;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Search for "housing bubble" peaked in November 2010 - 8 months ago. Based on Google Insight for Search information for other countries with similar housing bubbles, Australian housing market is just at the turning point and future doesn't look good. Data that is being published these days suggests that Google might be right.</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="border-collapse: collapse;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="border-collapse: collapse;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">BTW. UK market also doesn't look promising after slight recovery in 2008, "search sentiment" is up again.</span></span></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com3tag:blogger.com,1999:blog-2023238471006975213.post-75680011954962898852011-05-28T10:10:00.000+10:002011-05-28T10:10:43.616+10:00Will RBA save the housing?<div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">There is a lot discussion around about RBA's ability to stop house price fall using rate cuts). The argument for this is 2008-2009 period when allegedly RBA stoped price fall and government even inflated prices using FHBG. Second argument people use is that USA had fixed rate mortgages that stoped similar policy work there. Other people use UK example to show that lower rates cannot stop but rather slowdown the price fall. Surprisingly to many, I think our situation is more similar to Irish.</span></div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">In 2006-07 when bubble bursted in USA situation was in many ways different than in Australia year after when GFC broke out. I would agree that RBA rate cuts in 2008 saved house prices but the timing of cuts was different from what we may expect today. Reason for RBA cuts in 2008 was not falling house prices, but outbreak of GFC. Rate cuts were just on time to save house prices that just started falling few months before rate cuts. In addition, Australian sentiment about house prices in 2008 was completely different. People believed that house price fall was caused by external disturbance – GFC, and that after disturbance is removed housing will continue growth.</span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><br />
</span></div><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif;"><div style="font-size: small; text-align: justify;"><span class="Apple-style-span" style="font-size: small;">Today, there are not so many similarities with our situation in 2008, but there are many similarities with conditions in other countries at that time. Surprisingly Ireland is in my focus. House prices started to fall in Ireland but interest rates were on rise some time after (<a href="http://popping-bubble.blogspot.com/2011/04/popping-timing.html">five rises after the peak price</a>). <span> </span>Reasons for this are EURO and Ireland’s lack of Interest rate control. This situation looks completely different than ours but the core reason looks very similar to RBA inability to respond to falling house prices. ECB had to deal with two speed economy in Eurozone. In 2007 debt driven economies of PIIGS were heading into recession (or were already there as Ireland) while some other parts of Eurozone was doing very well. ECB was not able to respond to rising inflation in some countries and falling prices in Ireland at the same time.</span></div></span><br />
<div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Our situation today is quite similar. We also have two speed economy that prevents RBA to use rates as a response on house prices only. Under current conditions and falling house prices at current rates it is unlikely that will see rate cuts soon - before economy starts feeling the pain on larger scale. Global inflation, instead deflation is this time around making RBA job even harder. This environment will force RBA make decisions in ECB rather than the FED style.</span></div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Even if RBA decides to respond on housing only while risking inflation, as FED did, rate cuts will not happen any time soon. FED started cutting rates over a year after bubble bursted (prices started to fall). By that time tipping point was already reached. Rate cuts combined with FHBG somewhat helped house prices in USA to stop falling but almost a year after first cuts.</span></div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Sentiment is one of the main drivers of bubbles whether up or down. This time, housing crush is just our own; nobody can blame external forces for crush or hope that everything will be fine if external problem gets solved. People are aware that house price fall is result of a bubble that we inflated. They know that if rates get cut again that will be just temporarily relief.</span></div><div class="MsoNormal" style="font-size: small; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Even an unlikely scenario (RBA cuts rates now to help house prices) would just prolong what must happened – significant price correction. RBA is well aware of this and they are trying to make correction slow to minimize effect on the economy. Their ultimate goal is stagnation over long period (slow fall in real terms). I don’t believe they will be able to achieve that because of two speed economy we have. Our housing is more like PIIGS’s debt while our mining is German export. Our rates will stay the same (or even go up a little bit) for some time, and when finally RBA cuts them it will be too little too late.</span></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com1tag:blogger.com,1999:blog-2023238471006975213.post-64664331069643463402011-05-16T18:33:00.001+10:002011-05-17T18:08:49.770+10:00RENT vs. BUY CALCULATOR (Australia)<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif;">Most of the existing free online BUY vs. RENT calculators are not adjusted for Australian market (like the famous NYT calculator), or they provide just a few available settings and options. I tried to a make calculator that will give people opportunity to enter certain assumptions about inflation, house price growth, IR, returns … for 5 years periods and get some meaningful results. I also tried to include as many variables as useful. There are “BUY NOW vs. RENT” and “BUY NOW vs. BUY in 10 YEARS” comparisons that may be useful under current housing conditions (expected house price stagnation or fall).</span><br />
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</div><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Calculator provides few different results: It calculates total wealth after the same amount of money is being "spent" using different options. In addition, it calculates number of years after which “BUY NOW” option is financially better off. Or in other words: How long a person has to live in that particular house to be better off financially? If for any reason (even upgrade), buyer sells the home before, he would be better off by renting all the time.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">I also added an option for renters to rent cheaper (smaller) home during first 5 years – this could be useful for young families with no children.</span><br />
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</div><div style="font-size: small;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">There are two sheets in this file: CALC sheet enables user to enter data and assumptions. It also gives basic results: “wealth after 45 years” and “number of years after BUY NOW option is better off financially”. DETAILS sheet provides all calculations and results for each year and each option.</span></div><div style="font-size: small;"><br />
</div><div style="font-size: small;"><span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">Here is link for xls file download: <a href="http://bubblingtricks.files.wordpress.com/2011/05/download-buy-vs-rent2.xls">BUY vs. RENT Calculator </a></span></span></div><div style="font-size: small;"><br />
</div><div style="font-size: small;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif;"><span lang="EN-US"><span style="font-size: small;">You need to have spreadsheet viewer or editor installed on your computer to be able to use this file. People who don’t have spreadsheet viewer or prefer not to download file, may use a link to web based spreadsheet version of calculator. It will open file in Google doc frame. You do not need to have Google account to open and use this calculator.</span></span></span></div><div style="font-size: small;"><br />
</div><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif;"><b><span lang="EN-US"><span style="font-size: small;"></span></span><a href="https://spreadsheets.google.com/ccc?key=0Aona_q7tnuPkdHFoekp2dmJUWXE2cWtPWENuWTFSN0E&hl=en&authkey=CLz2kfMB">WEB-BASED BUY vs. RENT Spreadsheet CALCULATOR</a></b></span><br />
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<div style="font-size: small;"><span lang="EN-US"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">You are free to share calculator links but please do not distribute calculator as downloaded spreadsheet file because any future fix or modification will not affect downloaded file.</span></span></div><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif;"><br />
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">Assumptions: Immediate buyer buys home with current savings; renter saves that money and difference between rent and cost of owning a home. After 10 years, "late buyer" buys the same home (for future price), giving 90% of his savings as deposit. During periods when renter or late buyer spends more on housing, immediate buyer saves the difference. Rent and other costs of owning (strata, council etc. grow with CPI). Calculator assumes that renter moves once in 3 years. FHBG is assumed to be nominally the same in 10 years. If you have questions about other assumptions not mentioned please contact me and I will provide you requested assumptions.</span><br />
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</div><span style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span lang="EN-US">Calculator uses assumptions entered by user, default assumptions or calculator results should not be </span>taken as <span lang="EN-US">investment advice. I don't have time to fully test it</span> so there might be some errors<span lang="EN-US">. I would appreciate any help in finding errors. Please post comment on the blog or contact me on <a href="mailto:rave.swei@yahoo.com" target="_blank">rave.swei@yahoo.com</a> if you find any significant error that needs to be fixed.</span></span>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com5tag:blogger.com,1999:blog-2023238471006975213.post-5512006809654324262011-04-20T19:18:00.000+10:002011-04-20T19:18:35.292+10:00Popping Timing<div class="separator" style="clear: both; text-align: center;"><br />
</div>Many people ask me recently <b>when</b> prices will fall; <b>when</b> it will hit banks; <b>when</b> unemployment will go up ...<br />
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It is impossible to predict timing of a such event. To help us understand timescale of the process I created a charts that show timings of the bubble bursts in Ireland and USA.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://4.bp.blogspot.com/-Ue5p4SAg7Vs/Ta6bMp-6rsI/AAAAAAAAADU/AocDNyvA4aE/s1600/timingAll.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="640" src="http://4.bp.blogspot.com/-Ue5p4SAg7Vs/Ta6bMp-6rsI/AAAAAAAAADU/AocDNyvA4aE/s640/timingAll.JPG" width="449" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">USA and Ireland Bubble Deflation Timing</td></tr>
</tbody></table><div style="text-align: justify;">On the chart you may see that house prices started deflating very early (July 2006 in USA and July 2006 for Ireland and few months later in Dublin). At the beginning price correction was very slow. It took almost a year and a half in USA and even longer in Ireland to drop 10% from the peak. It took two years for majority of people to realize that something is very wrong. Even the most involved people like FED chairman Ben Bernanke*, two years after process started were not aware (or willing to admit) that country is facing serious problem caused bu housing bubble burst).</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is even more interesting to see changes in major economic parameters during this period. Prices started falling while unemployment was very low. Even after correction started unemployment continued to be very low and even dropped in USA. It took more than a year after prices started to fall for unemployment to start rising and more than 3 years to reach maximum. GDP growth was very healthy at the moment prices started to fall and remained healthy for a year or more after that.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">It is also interesting to see that house prices started falling while interest rates were going up. Than prices continued to fall while rates were stable but fall accelerated with interest rate cuts. Credit was available and inflation was at normal level for the period; business and/or consumer confidence was very high. Maybe the most revealing part is saving rate. Prices started falling at the peak of the saving as a percentage of GDP. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Consequences of both bursts were severe: deep recession, high unemployment, deflation, credit squeeze, zero interest rates, drop in saving rates and confidence.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">If someone was presented with the charts up to the point of house price burst, he/she would likely say that future is bright because all economic parameters were good. In reality things were much different, high level of debt and long period of misallocation of investments into housing caused one of the most severe recessions in history. Low unemployment, high saving rates, high confidence, GDP growth and high interest rates that in theory should enable central bank to react were not enough to prevent the worst.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">What will be timeline of the Australian housing bubble burst is impossible to say. If we can learn anything from this data, that should be caution. At the beginning it always looks harmless - ordinary cycle price correction; nothing more than that. It quickly develops in galloping destruction of the economy and no action form central bank or government is able to stop it. </div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: x-small;">* Ben Bernanke (June 10, 2008) “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” </span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: x-small;"><br />
</span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: x-small;">Sources:</span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: x-small;">- http://www.tradingeconomics.com</span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: x-small;">- S&P/Case-Shiller Home Price Indices</span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-size: x-small;">- Economic and Social Research Institute (ESRI), Dublin, Ireland</span></div><div style="text-align: justify;"><br />
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</div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com11tag:blogger.com,1999:blog-2023238471006975213.post-44186480666753486822011-03-25T18:21:00.004+11:002011-03-28T21:24:47.423+11:00Construction Response on Rising House Prices<div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="border-collapse: collapse;">In addition to Rates of Construction and Rates of Occupancy that we presented in our last paper, we want to research construction industry activities. As a measure of a construction industry activities we will use construction employment data for the 15 years period (1996-2010) for Australian and USA states and period 1998-2010 for a few countries (we could not find data for Ireland and Spain prior to 1998). We calculated two numbers: Construction jobs as a percentage of total employment and corresponding Index. Sources of data are OECD, USA Bureau of Labour, Federal Reserve Bank of St. Louis and ABS.</span></span><br />
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<tr><td style="text-align: center;"><a href="https://lh3.googleusercontent.com/-DqPh5fKzGu4/TY0F6eJA8eI/AAAAAAAAADE/2oRWcGMiQIk/s1600/AU+percent.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="233" src="https://lh3.googleusercontent.com/-DqPh5fKzGu4/TY0F6eJA8eI/AAAAAAAAADE/2oRWcGMiQIk/s400/AU+percent.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial; font-size: small;">Chart 1 – Construction Jobs in Australia</span></td></tr>
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<span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span"><span class="Apple-style-span" style="border-collapse: collapse;">First we want to show historical change of construction jobs in Australia. Data is available for a period 1984-2010. From the chart we may clearly see increase in the construction jobs during the price increase since 2000.</span></span></span><br />
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</div><div class="separator" style="clear: both; text-align: center;"></div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://lh4.googleusercontent.com/-xPIm_4h7mkM/TYw16kMlOMI/AAAAAAAAAC0/SAiHV4_Z0yI/s1600/PercentageByCountry.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="262" src="https://lh4.googleusercontent.com/-xPIm_4h7mkM/TYw16kMlOMI/AAAAAAAAAC0/SAiHV4_Z0yI/s400/PercentageByCountry.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Chart 2 – Construction Jobs as % of Total</span></span></td></tr>
</tbody></table><div style="text-align: justify;"> <span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"> </span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="border-collapse: collapse;">From this chart and additional data from Ireland we may see that Ireland as well as Spain have historically higher percentage of construction workers. This may be caused by different construction methods used in different countries. These methods are not equally labour intensive (full-brick and concrete in Europe, veneer brick and wood in Australia and USA). To somehow offset for these fundamental differences we created Index with the 1998 as a base year. This way we may see relative changes of the construction activities over this period.</span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
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<tr><td style="text-align: center;"><a href="https://lh6.googleusercontent.com/-TA8SJ2CKBGE/TYw161o6_DI/AAAAAAAAAC4/0D66HFt3x0Q/s1600/IndexByCountry.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="265" src="https://lh6.googleusercontent.com/-TA8SJ2CKBGE/TYw161o6_DI/AAAAAAAAAC4/0D66HFt3x0Q/s400/IndexByCountry.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Chart 3 - Construction Jobs as % of Total - Index</span></span></td></tr>
</tbody></table><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial;">From this chart it is clear that Ireland had huge construction boom from the beginnings of 2000s with the very strong upswing in 2004. This boom lasted until crash of 2007 when construction industry collapsed below 1998 levels. Spain had much lower increase of the construction job share; it grew to 130% of 1998 levels and than dropped significantly (notice on Chart 2 that after big fall Spain percentage is still high compared to USA and UK peak levels). Australian construction jobs also grew significantly, by 2008 almost recording the same increase as Spain two years before. Australian construction jobs are still very high compared to pre-bubble period in other countries.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial;"><b>State Comparison</b></span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial;">Most of the construction activities are residential, but not all. We tried to find data that shows percentage of total construction employment that is related to residential construction. We were able to find some data, in our opinion enough to show that significant majority of jobs are related to the residential construction.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://lh6.googleusercontent.com/-nlHUxRPOPFU/TYw17e5w0OI/AAAAAAAAAC8/F8ECAN8WJwE/s1600/table1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="83" src="https://lh6.googleusercontent.com/-nlHUxRPOPFU/TYw17e5w0OI/AAAAAAAAAC8/F8ECAN8WJwE/s400/table1.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Table 1 – Percentage of the Residential Construction Jobs</span></span></td></tr>
</tbody></table><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://2.bp.blogspot.com/-R--qUeIV6qg/TZBhyMfbThI/AAAAAAAAADI/PAAt0S-DLV8/s1600/Heavy_and_Civil.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="318" src="http://2.bp.blogspot.com/-R--qUeIV6qg/TZBhyMfbThI/AAAAAAAAADI/PAAt0S-DLV8/s400/Heavy_and_Civil.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chart 4 - Heavy and Civil Construction Jobs</td></tr>
</tbody></table><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial;">From Table 1 we may see that around 25% of all construction jobs in USA are not directly related to residential activities and around 15% in Australia – slightly lower percentage in Australia. Chart 4 shows that non-building (mining and infrastructure) jobs fell during the same period. This clearly shows that most of the construction boom is related to residential building construction.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial;"><br />
</span></div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://lh4.googleusercontent.com/-ZCOgB52e7w8/TYw16BvPDpI/AAAAAAAAACw/inf7WtRpZ3c/s1600/Percentage1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="305" src="https://lh4.googleusercontent.com/-ZCOgB52e7w8/TYw16BvPDpI/AAAAAAAAACw/inf7WtRpZ3c/s400/Percentage1.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Chart 5 - Construction Jobs as % of Total (by state)</span></span></td></tr>
</tbody></table><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://lh6.googleusercontent.com/-tYXLcKHQ89k/TYw15kjPZjI/AAAAAAAAACs/hK4_NRorb_M/s1600/Percentage2.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="283" src="https://lh6.googleusercontent.com/-tYXLcKHQ89k/TYw15kjPZjI/AAAAAAAAACs/hK4_NRorb_M/s400/Percentage2.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Chart 6 - Construction Jobs as % of Total (by state)</span></span></td></tr>
</tbody></table><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: Arial;">Charts 5 and 6 show construction job percentages for large Australian states (NSW, VIC, QLD, SA and WA) as well as some of the USA states used in previous analysis (CA, FL, AZ, NV and TX). We may notice that some states have significantly higher percentage in both countries. We speculate that this is consequence of large non-residential construction activities in these states (resource activities in WA and QLD and military/tourism activities in NV). Unfortunately we were not able to find adequate data to support this view.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="border-collapse: collapse;">In other states, growth was very similar over the period before the crush in USA. After USA percentages dropped in 2007 all Australian states grew even more, reaching highest levels during the period 2008-2010. </span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://lh4.googleusercontent.com/-pFj2UaYOq78/TYw15Lu_myI/AAAAAAAAACo/EOHb8SDlfV0/s1600/Index2.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="285" src="https://lh4.googleusercontent.com/-pFj2UaYOq78/TYw15Lu_myI/AAAAAAAAACo/EOHb8SDlfV0/s400/Index2.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Chart 6 - Construction Jobs as % of Total – Index (by state)</span></span></td></tr>
</tbody></table><table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://lh3.googleusercontent.com/-2FAv_mvlUvo/TYw17utEmEI/AAAAAAAAADA/kyOaoNQvuos/s1600/Index1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="281" src="https://lh3.googleusercontent.com/-2FAv_mvlUvo/TYw17utEmEI/AAAAAAAAADA/kyOaoNQvuos/s400/Index1.JPG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;"><span class="Apple-style-span" style="font-size: small;">Chart 7 - Construction Jobs as % of Total – Index (by state)</span></span></td></tr>
</tbody></table><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="border-collapse: collapse;">On charts 6 and 7 we plotted construction job index for the same period. Please, notice that almost all USA states recorded smaller increase in construction job activities than Australian states. The only exception is California, that at the beginning of the period, was still recovering from housing bubble crash from early 90s. At that time California had by far the lowest percentage of construction jobs 4%, while the lowest in Australia was SA with 5.5%. </span></span><span class="Apple-style-span" style="border-collapse: collapse; font-family: Arial;">SA recored the largest growth of the construction job sector that clearly corresponds to largest Rate of Construction we calculated in our previous paper. </span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="border-collapse: collapse;">From all presented data we may conclude that Australian construction response to growing house prices was high relative to historical levels; it was lower than response in Ireland but very close to Spanish and significantly higher than response in USA or UK.</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="border-collapse: collapse;">The response in Australian states was at least equally strong as responses in selected USA states (measured by construction employment). These USA states are currently facing huge oversupply of homes and collapsing construction industry. This just confirms our previous statements that Australia has large oversupply of homes build during the price bubble over the last decade. It also suggest potential for a big collapse of the residential construction industry that will certainly hurt overall economy.</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;"><br />
</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">Sources:</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;"><br />
</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">- </span><span class="Apple-style-span" style="border-collapse: collapse; line-height: 18px;">Federal Reserve Bank of St. Louis </span>Construction Employment by State</span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">- 6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, Aug 2010</span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">- </span><span class="Apple-style-span" style="border-collapse: collapse;">OECD Statistics</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">- USA BOL </span><span class="Apple-style-span" style="-webkit-border-horizontal-spacing: 1px; -webkit-border-vertical-spacing: 1px;">Nongovernment distribution of wage and salary employment in construction by industry, 2000-2008</span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="-webkit-border-horizontal-spacing: 1px; -webkit-border-vertical-spacing: 1px;"><span class="Apple-style-span" style="-webkit-border-horizontal-spacing: 0px; -webkit-border-vertical-spacing: 0px; border-collapse: collapse;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">- ABC 8772.0 - Private Sector Construction Industry, Australia, 1996-97 ; 2002-2003</span></span></span></div><div class="MsoNormal" style="margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="-webkit-border-horizontal-spacing: 1px; -webkit-border-vertical-spacing: 1px;"><span class="Apple-style-span" style="-webkit-border-horizontal-spacing: 0px; -webkit-border-vertical-spacing: 0px; border-collapse: collapse;">- </span></span><span class="Apple-style-span" style="line-height: 17px;">Central Statistics Office Ireland - </span>Index of Employment in Building and Construction</span></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com4tag:blogger.com,1999:blog-2023238471006975213.post-52538789048086086602011-03-21T18:11:00.004+11:002011-03-21T21:03:38.715+11:00Australian Housing Shortage/Oversupply by State/Territory<div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">Our previous paper showed that there is very likely to be oversupply of homes in Australia. Now we want to see where all that oversupply is located. We will make comparison between different states in Australia and add comparison with some of the states in USA that are well known for their housing bubbles followed by oversupply. This way we may get a feel about different supply/demand values compared to other areas with similar demographics.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">We used data is available for all selected states and territories. Population growth and new dwelling construction data is used. There is no data available with detailed breakdown of new resident population for each state or territory. We also compared Australian states and territories with a couple of USA states that had large housing bubbles followed by price collapse and huge oversupplies of homes. We also included Texas, high population growth state that didn’t experienced housing bubble in last two decades, as an opposite reference.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">USA is selected for comparison because of very similar demographics to Australia. Main supply/demand demographic measures such are household size and change in household size, median age, population over 65 and under 14, birth rate, dependency ratio, percentage of one person households, urban population growth etc) are very similar. For new construction data in Australia we used ABS New Dwelling Unit Commencements data. For new construction data in USA we used New Private Housing Units Authorized by Building Permit provided by Federal Reserve Bank of St. Louis. Number of newly constructed dwellings for US is likely to be slightly lower because not all approvals are commenced. We used data for the most recent period from June 2000 to June 2010.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">We calculated two simple measures that we call: Rate of Construction and Rate of Occupancy. Rate of Construction is a number that shows how many new housing units are constructed per every new resident. Rate of Occupancy is the inverse number that shows number of new residents per each newly constructed housing unit. After calculation we got a few surprising results:</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-size: small;"><span style="font-family: 'Times New Roman';"><br />
</span></span></div><div class="separator" style="clear: both; text-align: center;"><a href="https://lh6.googleusercontent.com/-TlKLqtlxLqs/TYb5ig4l9AI/AAAAAAAAACk/RF6Cvjxc5Kk/s1600/construction+rate.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="179" src="https://lh6.googleusercontent.com/-TlKLqtlxLqs/TYb5ig4l9AI/AAAAAAAAACk/RF6Cvjxc5Kk/s640/construction+rate.JPG" width="640" /></a></div><div class="separator" style="clear: both; text-align: center;"></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: center;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">Table 1. Rate of Construction and Occupancy</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://lh6.googleusercontent.com/-TpjWFx3ulwU/TYb5iIHDJRI/AAAAAAAAACg/3fJtiLHHWoc/s1600/construction+rate2.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="435" src="https://lh6.googleusercontent.com/-TpjWFx3ulwU/TYb5iIHDJRI/AAAAAAAAACg/3fJtiLHHWoc/s640/construction+rate2.JPG" width="640" /></a></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: center;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">Chart 1. Rate of Construction (new dwellings per new resident)</span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-size: small;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Contrary to widespread belief, Queensland is the state with the lowest Rate of Construction in Australia (NT has even lower rate). South Australia, on the other hand, is the state with the highest Rate of Construction. Expectedly, high Rate of Construction is recorded in Victoria and ACT but surprisingly WA is ranked in lower half, followed by NSW, QLD and NT that had very low construction rate.</span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">Even more surprising is comparison with housing bubble states in USA. South Australia has significantly higher Rate of Construction than any of the famous bubble states in USA. Victoria had very similar rate to hugely oversupplied Florida. NSW has higher Rate of Construction than Arizona, Nevada and almost 20% higher than California, state that is currently dealing with hundreds of thousands of empty homes. On the other hand, all Australian states have significantly lower rate than Texas, state with the large population growth but stable house prices with no housing reported shortage.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">All this suggests that widespread beliefs about shortage/oversupply in Australia are wrong. Queensland is the state with the lowest Rate of Construction because its population grew much faster. Almost all Australian States built more dwellings than bubble states in USA that are currently dealing with huge numbers of empty homes. It is also important to notice that at the peak of the price bubble, almost all of these USA states were considered to have a shortage. That was proven to be wrong after bubble bursted and speculative demand fell.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><br />
</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: small;">It is very unlikely that there is any housing shortage (on state level) in Australia, but if there was one Queensland and NT were the most likely to have it. This is very surprising because Queensland is the state that will be pointed out as oversupplied state by most of Australians.</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><span style="font-size: small;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">Recent data shows that low construction state’s (Queensland and Western Australia) housing markets are falling, with unsold stock growing and oversupply becoming apparent. If these states with relatively low Rate of Construction are facing oversupply problem, we may expect to be followed by even more oversupplied states like Victoria, South Australia, Tasmania and New South Wales.</span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: justify;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><br />
</div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 10pt;">References:</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 10pt;">- ABS 3101.0 - Australian Demographic Statistics, Jun 2000, June 2010</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif; font-size: 10pt;">- ABS 8750.0 Dwelling Unit Commencements, Australia, Preliminary Dec 2010</span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span class="Apple-style-span" style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;"><span lang="EN" style="font-size: 10pt;">- United States Census Bureau - Census Data 2000 and 2010</span><span lang="EN" style="font-size: 10pt;"></span></span></div><div class="MsoNormal" style="border-collapse: collapse; font-size: 13px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;"><span style="font-size: 10pt;"><span style="font-family: 'Helvetica Neue', Arial, Helvetica, sans-serif;">- Federal Reserve Bank of St. Louis – New Private Housing Units Authorized By Building Permit</span></span></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com17tag:blogger.com,1999:blog-2023238471006975213.post-84300448457277430162011-02-24T19:05:00.021+11:002011-09-19T14:52:16.575+10:00Australian Residential Housing Demand and Supply<div style="background-color: transparent; margin: 0px;"><h1 id="internal-source-marker_0.695668684085831" style="text-align: center;"><span class="Apple-style-span" style="font-size: 16px; font-weight: normal; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">By raveswei</span></span></h1><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">This document will try to research one of the most controversial housing issues in Australia – supply/demand issue. Many times we heard arguments that Australia is facing a chronic shortage or that price boom is not followed by supply response. At the same time, some people claim that we have oversupply of homes for decades. In this document we will try to estimate residential demand and supply in recent years. We will focus on demand/supply for dwellings used as primary residence. This is very complex issue because of many unknowns and limited data. We will try to make assumptions that will favour shortage argument. Data for Australian cities are not available so this document will focus on all of Australia. </span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: 16px; white-space: pre-wrap;">Document will be organized in the following order: In a first few sections, we will go through the supply and demand calculations for one particular year (2007-08), showing the data sources and methodology. Later we will provide data for a period 1995-2010 calculated using the same data sources and methodology. At the end we will give a conclusion. </span><br />
<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">All raw data used is provided by ABS or Department of Immigration.</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h2 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 14pt; font-style: italic; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">DEMAND</span></span></h2><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Estimation of the demand for housing is not easy task. Demand is driven by many factors, but two of them are the most important: population growth and household demographics change. Population growth has two components: natural increase and net overseas migration.</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h3 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Migration</span></span></h3><div><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Immigration is one of the most important drivers of the housing demand in Australia. Both immigration components (permanent and temporary), increase housing demand in the short term and should be included in calculations. </span><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In 2007-08 there was 277 000 net migrants (number of immigrants minus number of emigrants). There was 149 400 permanent arrivals and 76 900 permanent departures. </span><span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;">Out of this number there was almost 38 400 “family immigrants” - large majority of them (80%) being partners and children. It is a reasonable to assume that these immigrants do not contribute to the new housing demand (do not create new households) in the first year after arrival. On longer run some of them will require new homes but that demand will be included in the demand calculation that uses households size changes.</span></span></div><span style="background-color: transparent; font-family: Times, "Times New Roman", serif; vertical-align: baseline;"></span><br />
<div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: 16px; white-space: pre-wrap;">Because of the similar demographics among permanent immigrants and emigrants we may assume that dwellings previously used by emigrants are adequate for the same number of immigrants. This assumption is based on similar age, similar proportion of children, occupation... This leaves only 38 400 permanent immigrants in need for a new home. After taking into account fact that around 15% of them are dependent children, assumption of household size of 2 persons is well on the safe side. In 2007-08 these immigrants created demand for 19 200 dwellings. </span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Net number of temporary, long term visitor, immigrants in 2007-08 was 205 200 with majority of them being foreign students and WHMs. Around 73% of all long term visitors (long term visitors include following groups: temporary workers, students and WHMs) </span></span><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;">149 800 </span></span><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;">were students and WHMs, majority of them being students from China and India. This group of a temporary immigrants add less demand for new housing than the general immigration population. Some of WHMs stay in hostels and budget hotels, not adding any demand for residential housing. Estimation of foreign student and WHM demand for residential housing is not strait forward, but based on student living habits we think that assumption that average student household size of 2.5 is well on the safe side. There are many student living arrangements that involve 3, 4 or more students sharing the same dwelling. This created demand for 59 900 dwellings.</span></span><br />
<span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: 16px; white-space: pre-wrap;">The rest of temporary immigrants (55 400) are workers and their families. We will use household size of 2 to be on safe side. It is very likely that workers who arrived with families live in larger households. It is also likely that some of the single workers share dwelling with other single persons. They created demand for 27 700 dwellings.</span><br />
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<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">References: </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">ABS 3412.0 Migration 1995-2008</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- Department of Immigration and Citizenship – Migration Program Statistics http://www.immi.gov.au/media/statistics/statistical-info/visa-grants/migrant.htm</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- Department of Immigration and Citizenship – Fact Sheet – Permanent Arrivals and Departures - http://www.immi.gov.au/media/fact-sheets/05emigration_1.htm</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- Department of Immigration and Citizenship – Population flows: Immigration aspects 2000-2009</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- Department of Immigration and Citizenship - Settler Arrivals 2001 – 2010</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- Department of Immigration and Citizenship - Immigration in Brief 2000</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h3 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Natural population increase</span></span></h3><div><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">There was 289 500 births and 140 700 deaths in 2007-08. This makes natural population growth of 148 800. Births do not directly increase the demand for new dwellings, but they affect household size and distribution. The best way to estimate internal demand for new housing is to determine housing demands generated by demographic changes and natural population increase. </span></span></div><span style="background-color: transparent; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"></span></span><br />
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</span></span></div><div class="separator" style="clear: both; text-align: center;"><span style="background-color: transparent; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><a href="http://4.bp.blogspot.com/-3GsBAGGZpPo/TWYIdFAPxrI/AAAAAAAAACc/Mcr3Dl8PMKI/s1600/fr3.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="15" src="http://4.bp.blogspot.com/-3GsBAGGZpPo/TWYIdFAPxrI/AAAAAAAAACc/Mcr3Dl8PMKI/s400/fr3.JPG" width="400" /></a></span></span></div><div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
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</span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Unfortunately the number of households is available only for census years and the number of migrant households is not available at all. Instead we will use following formula: </span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; vertical-align: baseline;"></span></span><br />
<div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; vertical-align: baseline;"><a href="http://4.bp.blogspot.com/-72leuP5Gfco/TWYFG_bbr9I/AAAAAAAAACY/RRdVSfNroRo/s1600/for1.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="39" src="http://4.bp.blogspot.com/-72leuP5Gfco/TWYFG_bbr9I/AAAAAAAAACY/RRdVSfNroRo/s400/for1.JPG" width="400" /></a></span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; vertical-align: baseline;"></span></span><br />
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<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"></span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This formula includes new housing demand from natural increase and demand from household demographic changes. Household size change includes all of previous population changes (including divorces, marriages, new household creation, previous migration …). </span><span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;">Good way to estimate demand from household changes is to use household size number.</span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; vertical-align: baseline;"></span></span><br />
<div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; vertical-align: baseline;"><a href="http://4.bp.blogspot.com/-Y6y9vhg4qd8/TWYFGlVdpwI/AAAAAAAAACU/yK9lrFzJUX8/s1600/for2.JPG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="18" src="http://4.bp.blogspot.com/-Y6y9vhg4qd8/TWYFGlVdpwI/AAAAAAAAACU/yK9lrFzJUX8/s400/for2.JPG" width="400" /></a></span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
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<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"></span></span><br />
<span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Household size change can be calculated using the closest two census data with assumption that change during short period between two censuses is linear. </span></span></div><span style="background-color: transparent; font-family: Times, "Times New Roman", serif; vertical-align: baseline;"></span><br />
<div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: 16px; white-space: pre-wrap;">It is interesting to notice that according to census based data, household size slightly increased between 2001 and 2006. For the years after 2006 we will use new ABS household projections (Series II) that projects household size shrinking in following decades. This numbers are very likely to be underestimated because two previous ABS projections were wrong (ie. in 2001 ABS projected household size to shrink to 2.5 in 2006, instead household size increased by 0.01). </span></div><span style="background-color: transparent; font-family: Times, "Times New Roman", serif; vertical-align: baseline;"></span><br />
<div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: 16px; white-space: pre-wrap;">In year 2007-2008 there was 21 432 000 Australian residents, the projected household size of 2.62 and projected household size change of -0.38%. This data gives additional demand from natural increase of population was 56 800. Demand generated by household shrinking in 2007-08 was 33 600. Combined internal demand for new dwellings was 90 400.</span></div><span style="background-color: transparent; font-family: Times, "Times New Roman", serif; vertical-align: baseline;"></span><br />
<div style="text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: 16px; white-space: pre-wrap;">Total demand for additional dwellings in 2007-2008 was 198 900. Please notice that this number is much larger that estimates provided by other people who use population increase divided by average household size (163 000).</span></div><span style="background-color: transparent; font-family: Times, "Times New Roman", serif; vertical-align: baseline;"></span><br />
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</span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">References: </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS 3236.0 Household and Family Projections (1996-2001-2006)</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS 1301.0 Year Book Australia 1995-2010</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS 3222.0 - Population Projections, Australia, 2006 to 2101</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS Census Data (1996-2001-2006)</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h2 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 14pt; font-style: italic; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">SUPPLY</span></span></h2><div><span style="background-color: transparent; color: black; font-size: 14pt; font-style: italic; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">There are two components of a housing supply. The first and the obvious one, is new dwelling construction supply. Second component of housing supply is made of vacant dwellings after resident’s death. In this section we will try to estimate these numbers.</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h3 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">New Construction</span></span></h3><div><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">For the new construction supply we will use ABS Number of dwelling units Commenced. This number is slightly lower than Number of New dwelling units Approval, what put us on the safer side because not all aproved units are built. </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">In 2007-2008 there were 158 500 new unit commencements. To get more realistic number of the new residential dwelling supply we have to subtract number of dwellings that were demolished or replaced during the same period. To estimate this number we will use available data from Queensland. During 5 year period (2001-2006) around 1% of housing stock in Brisbane LGA was replaced or demolished. The same report estimates replacement levels of 0.5% in Gold Coast City, 0.25% in other urban LGAs, and 0.1% in the rest of Queensland. To be well on the safe side we will use 1% replacement level over 5 year period for whole Australia. This estimate is likely to be well above the real number because not all of the new construction is done in central LGAs. Using the estimate that housing stock was 1.06 times higher than number of households we got 17 300 demolished or replaced dwellings in 2007-08.</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">The total number of newly constructed residential dwellings in 2007-08 was 141 200. Some of these homes were holiday homes not available for new residents, so we have to subtract holiday homes from the total number. We will use generous estimate that around 4% of all new dwellings are holiday homes. That makes 5650 of new dwellings holiday homes. So the total number of new dwellings available for primary residence in 2007-08 was 135 500.</span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span><br />
<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">References: </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS 8750.0 - Dwelling Unit Commencements </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- Queensland Department of Local Government, Planning, Sport and Recreation - Household projections, Queensland Local Government Areas 2007- Appendix A</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h3 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Other Supply</span></span></h3><div><span style="background-color: transparent; color: black; font-size: 13pt; font-style: normal; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Single person households create housing supply after the resident dies. In this section we will try to estimate number of dwellings made vacant after resident death.</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Huge majority of Australians who die are old persons, 80% of persons who died in 2008 were 65+ at the time of death. There were around 140 700 deaths in that year. According to ABS data, in 1996 38% of population 65+ were living alone. This number is projected to increase by 84% in next 25 years. This gives us 50.5% of 65+ people living alone in 2007-2008; to be safely on the conservative side we will use 5% lower estimate - 45.5%. There are also some living alone persons under age of 65 who died but to be on the safe side we will not include them in our calculation. </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">After taking into account all this we may say that more than 51 000 dwellings are made available by the resident death in 2007-08. This number significantly adds to the supply side and it is often neglected by other authors. Combined, new construction supply and supply from homes vacant after the resident death makes total supply in 2007-08 of 186 500 homes available for new residents.</span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span><br />
<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">References: </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">- ABS </span><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">3302.0 – Deaths </span><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">1995-2010</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS 1301.0 Year Book Australia 1995-2010</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">- ABS 3236.0 Household and Family Projections (1996-2021, 2001-2026)</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: italic; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h2 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 14pt; font-style: italic; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">TRENDS</span></span></h2><div><span style="background-color: transparent; color: black; font-size: 14pt; font-style: italic; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span class="Apple-style-span" style="font-size: small;"><span class="Apple-style-span" style="white-space: pre-wrap;">In this section we present results that we calculated using the same methodology we used for year 2007-2008. Some data (household size) between censuses is estimated using linear </span></span><span class="Apple-style-span" style="white-space: pre-wrap;">progression</span><span class="Apple-style-span" style="font-size: small;"><span class="Apple-style-span" style="white-space: pre-wrap;">. This is likely to be a good estimate because of the nature of data set and short period between two censuses. Table 1 shows estimated demand and supply for period between year 1994-1995 and 2009-2010.</span></span></span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"></span></span></div><span style="background-color: transparent; color: black; font-family: Times, "Times New Roman", serif; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<div style="text-align: center;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-size: small; white-space: normal;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><img height="293" src="https://lh3.googleusercontent.com/udY7Rc0uzYSNbk8pu73vPpERLlKu22-wIir4VKvEAEEdthLOwtCMy6suz7fr4e97H_auXm7DRAEp5Eo4i4toQUKhNVoQc-_ShOaxValzmQc5uORUeqU" width="554" /></span></span></span></div><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span><br />
<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: center;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Table 1. Supply and Demand for residential dwellings in Australia</span></span><br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-TPDmkUQqi_E/TnbKQx4tNiI/AAAAAAAAAG4/GGq-aqw5LEk/s1600/image01.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="380" rba="true" src="http://3.bp.blogspot.com/-TPDmkUQqi_E/TnbKQx4tNiI/AAAAAAAAAG4/GGq-aqw5LEk/s640/image01.jpg" width="640" /></a></div></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"></span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: center;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: center;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Chart 1. Supply and Demand for residential dwellings in Australia</span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span></div><h2 style="text-align: justify;"><span style="background-color: transparent; color: black; font-size: 14pt; font-style: italic; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">CONCLUSION</span></span></h2><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span><br />
<div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">By looking at the results we may see that Australia is facing huge oversupply of residential dwellings. Since 1995, there were only two years of a construction undersupply (2008 and 2009) driven by huge immigration numbers. During the years before that, Australia was building the similar number of new homes while immigration and population increase was half or even third of the 2008 or 2009 levels. After 15 years of construction, almost 950 000 dwellings that now do not have primary resident </span><span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;">were built</span><span class="Apple-style-span" style="font-size: 16px; white-space: pre-wrap;">. That is around 10% of total housing stock. This means that around 38% of newly constructed dwellings during this period were oversupply (not used as primary resident or holiday home). </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">It may look very strange that such a huge oversupply is not easily visible. The reason for this, in our opinion, is the fact that market demand for housing was huge and in large part driven by investors interested in capital gain. Similar market behaviour was recorded in some parts of USA and Europe recently. In all these places, during the period before market crush, many reports were warning of a housing shortage, just to discover huge real oversupply after bubble bursted. </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">This is an estimated number, intentionally biased toward the undersupply side and as such, it is good enough to shows that there is significant real oversupply of homes in Australia. Situation in a particular city may be slightly different but after taking into account that combined capital city population did not grow faster than general population we may say that estimates are good for most of the cities. Some of capital cities (Sydney, Hobart, and Adelaide) had slower that the average population growth. Same cities also recorded lower construction activity and slightly larger mortality rates among older population. In addition, Sydney and Melbourne population increase was mostly driven by student population that demands less housing than natural increase or other immigrants. Some of the areas with high construction activity (Gold Coast, SE and North Queensland, Mandurah) were also fastest population growing areas in Australia. </span></span></div><div style="margin-bottom: 0pt; margin-top: 0pt; text-align: justify;"><span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;">Huge real (primary residence) oversupply will significantly impact house prices in Australia in future. In the case of market slowdown, oversupply will flood the market driving prices down. </span></span><br />
<span style="background-color: transparent; color: black; font-size: 12pt; font-style: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif;"><br />
</span></span><br />
<span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: x-small;"><span class="Apple-style-span" style="white-space: pre-wrap;"><i>Calculation table:</i></span></span><br />
<span class="Apple-style-span" style="font-family: Times, "Times New Roman", serif; font-size: x-small;"><span class="Apple-style-span" style="white-space: pre-wrap;"><i><a href="http://bubblingtricks.files.wordpress.com/2011/02/table.pdf">table.pdf</a></i></span></span></div></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com10tag:blogger.com,1999:blog-2023238471006975213.post-44269071086388005382011-01-21T22:35:00.001+11:002011-01-21T23:07:21.067+11:00The Housing Bubble Arguments (part 1a)There was a lot of discussion how CPI is not good measure for house price adjustments. I agree with this statement to some extent. To show more realistic house prices we created data set for House Price Index adjusted for all male wage. All male wage is used because it is the longest available wage data set from ABS.<br />
<br />
Chart 1 shows House Price Index adjusted for All Male Wage Index. It shows how house prices change relative to All Male wage since 1961. It was oscillating around the average value until late 1990s. To reach now more than twice the average levels form period 1961-1997.<br />
<div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/_l4Hx1awKVT8/TTl22AKx37I/AAAAAAAAACI/VLUNtKrcudk/s1600/House+wage+adj.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/_l4Hx1awKVT8/TTl22AKx37I/AAAAAAAAACI/VLUNtKrcudk/s1600/House+wage+adj.PNG" /></a></div><br />
<div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;">Chart 1 House Price Index adjusted for all male wage</div><br />
Chart 2, in addition, shows employment index. Normalized employed persons as a percentage of total population. This series is used to show how increased employment affected house prices. It is clear that slow but constant rise in employment is not responsible for sudden house price jump in late 90s. During the jump in employment in late 70s house prices even dropped slightly.<br />
<div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/_l4Hx1awKVT8/TTl22dMO9xI/AAAAAAAAACM/CNuj7j3bXJI/s1600/House+wage+adj+emp.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/_l4Hx1awKVT8/TTl22dMO9xI/AAAAAAAAACM/CNuj7j3bXJI/s1600/House+wage+adj+emp.PNG" /></a></div><br />
<div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"> Chart 2 House Price Index adjusted for all male wage vs. total employment index </div><div style="text-align: center;"><br />
</div><div style="text-align: left;">These two charts clearly show unusual jump in house prices adjusted for the most realistic measure. House prices need to drop more than 30% to return to historical levels. More than 30% drop is needed because increase in employment happened in part-time and women employment. Shown house price index is adjusted for male wage which is significantly higher.</div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span class="Apple-style-span" style="color: #666666; font-size: x-small;">House prices are obtained from ABS (2006-2010), REIA (1986-2006) and BIS Shrapnel 1960 - 1985.</span></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com0tag:blogger.com,1999:blog-2023238471006975213.post-76723924037653747812011-01-18T19:28:00.009+11:002011-03-13T23:31:19.982+11:00The Housing Bubble Arguments (part 1)<div style="text-align: center;"><span class="Apple-style-span" style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;">by Raveswei</span></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><b>Introduction</b><br />
<br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">There are many definitions of a housing bubble and they all have in common a rapid price increase of real estate properties not supported by increase of incomes and other economic elements. Two “arguments” are often used in discussions about housing bubble in Australia: “it’s different now” and “it’s different here”. These are not real arguments, but often heard, so we decided to compare Australia with the Australia and Australia now with the Australia during last 15 years.</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><b>House Price Supports</b><br />
<br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">First, let’s see if there was any real house price increase since 1995. Chart 1 compares the nominal established median house price indexes for 5 Australian cities with the CPI index and the average total national wage index for all employed persons. Selection of the average total wage index is good because it incorporates labour and work habit changes. This chart does not compare absolute values but only changes over the time. Change of this wage index is very closely related to change of any other wage index (including part time and full time wage indexes) making this chart reliable comparison.<br />
<br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/_l4Hx1awKVT8/TTaMeUjmD8I/AAAAAAAAABU/lN9zTwb59ww/s1600/image002.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/_l4Hx1awKVT8/TTaMeUjmD8I/AAAAAAAAABU/lN9zTwb59ww/s1600/image002.gif" /></a></div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;">Chart 1 – Australian House Price Indexes vs. CPI and Wages</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">From the Chart 1 we can see that in just 15 years house prices outperformed CPI by more than twice and wages by almost a twice. In simple terms, this means that somebody with the average wage income only, has to work almost twice as long to buy house now (with no bank involvement) or to produce more than twice as much CPI goods and services to exchange them for the same house.</div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">We also have to consider changes in the employment because the employment may influence house price growth. From the Chart 2, we may see that total employment as a percentage of population increased by less than 10% (from 46% to 50% of total population). Almost all of the increase happened in part time employment alone; full time employment is almost unchanged since 1995. At the same time average household size decreased so the average number of employed persons per households increased by only 2.8%; from 1.3 employed persons per households in 1995 to 1.336 in 2010.<br />
<br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMe7Ae24I/AAAAAAAAABY/AcaiDZ0V3yc/s1600/image004.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMe7Ae24I/AAAAAAAAABY/AcaiDZ0V3yc/s1600/image004.gif" /></a></div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;">Chart 2 – Australian Employment</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">It is hard to argue that house price increase can be justified by wage increase, changes in employment or CPI increase alone or combined.</div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">The other argument we often hear is that house price increase is supported by increase of our wealth. There are two major components of the wealth increase that can support house price increase. First one is a wealth created by production of new goods and services (GDP growth) and the second one is wealth that we receive from overseas. It is well known that equity wealth cannot cause its own increase; it takes additional wealth to push equity wealth up. Following chart shows our GDP per capita growth index and house price index all in real terms adjusted for inflation.<br />
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</div><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/_l4Hx1awKVT8/TTaMfHgqjII/AAAAAAAAABc/7PqNMhNlMqY/s1600/image006.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/_l4Hx1awKVT8/TTaMfHgqjII/AAAAAAAAABc/7PqNMhNlMqY/s1600/image006.gif" /></a></div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;">Chart 3 Australian House Price Indexes vs. GDP per capita</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">It is clear that house prices outperformed our GDP per capita by two to three times. This means that each of us needed to increase production of goods and services twice or three times more than what we did in last 15 years so that our newly created wealth may support increased house prices. You may also notice that our real wages were growing faster than real GDP per capita. Real GDP per capita is almost flat since 2006. All our growth is coming from population increase, while our personal wages are going up. This is by itself unsustainable and will have to end sooner or later.</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMfk3Q0YI/AAAAAAAAABg/b_KMA2gg83E/s1600/image008.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMfk3Q0YI/AAAAAAAAABg/b_KMA2gg83E/s1600/image008.gif" /></a></div>Chart 4 Australian House Price Indexes vs. Net Foreign Liabilities</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">Other source of the wealth that can support house price growth is wealth received from overseas – in the form of liabilities (mostly debt). On the Chart 4 we compared nominal median house prices for 5 biggest cities and our nominal total net foreign liabilities. Growth of our liabilities almost perfectly matches growth of house prices. Most of this money is used by our banks to support mortgage credit issuance. It is clear from this data that house price increase is not supported by increase in our newly created wealth, but rather by the increase of our debt. Debt driven house prices are one of the best signs of a housing bubble.</div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;"><br />
</div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">Many suggest that people changed spending behaviour by spending more on housing now than 15 years ago. This way it is possible to increase house prices without income or wealth growth. But, this argument cannot be supported by data because our Final Consumption Expenditure grew (170%) since 1995; close to GDP (164%) growth and wages (175%) growth. People did not reduce general spending as a percentage of income. Spending on “Rent and other dwelling services” (does not includes mortgage payments) was growing slightly slower (160%) than the average spending. This means that rental income (for landlords) and imputed renal income (for home owners) was growing slower than the wages. This means that there was no additional income growth from real estate investments to be redistributed to support fast growth of house prices. More about this in a separate analysis; Ref: ABS 5206.0 Australian National Accounts: National Income, Expenditure and Product - Table 8.</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><b>Affordability</b><br />
<b><br />
</b></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">The other key element that we want to research is the affordability. Many argue that is equally easy (or hard) to buy first house today than what it was in the past. On Chart 5, we compared average FHB mortgage repayment with the average wage over the last 15 years. We calculated index using Mar 1997 quarter as a reference because this was the first period with the Interest Rate equal or close to the average interest rate for the whole periodt. This way we may see how much affordability changed compared to average Interest Rate for this period. Average state wage data is used because no city wage data is available. Rate of change of median and average house prices was very closely correlated. All these data limitations don’t affect our analysis because we calculated changes - indexes, not the absolute numbers. City wages are slightly higher but the change of city and state wages are very closely correlated. It is also important to notice that wage growth was the slowest in the most populous states with the most expensive houses.</div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/_l4Hx1awKVT8/TTaMgIolsKI/AAAAAAAAABk/I1yiynHUvKs/s1600/image010.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/_l4Hx1awKVT8/TTaMgIolsKI/AAAAAAAAABk/I1yiynHUvKs/s1600/image010.gif" /></a></div>Chart 5 Mortgage Repayment/Wage Index</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">From the Chart 5 we may see that on average repayment increased around 75% more than the average wage since Dec 1996. In some cities (Melbourne) that increase was two and a half times, in some (Sydney) FHB needs to spend 60% more of the wage income on mortgage repayment.</div><div style="text-align: justify;"><br />
</div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">To show relative affordability between cities we calculated absolute values of repayment/double wage.</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMgWcYTUI/AAAAAAAAABo/_RMo2CpIE6Q/s1600/image012.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMgWcYTUI/AAAAAAAAABo/_RMo2CpIE6Q/s1600/image012.gif" /></a></div>Chart 6 Mortgage Repayment/Double Wage vs. Employment (x10)</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">Double wage income is assumed even though there is on average only 1.33 employed people per family and large increase of single parent families in recent years. Although most of the FHB families in reality have double wage income, significant part of that income goes on day-care and similar expenses that skyrocketed in recent time. Any of these assumptions do not affect our comparison, because we assumed the same conditions for all cities. We also added change of the average number of employed persons per household to the chart to show that employment could not be cause for house price change. Until early 2000s, average double wage FHB family spend between 20 and 30% of their gross wage income on mortgage repayment. Since then it increased by more than two thirds in most of the cities. Sydney is clearly the least affordable city running constantly 10% above other cities. This numbers may not represent actual percentage of an income spend on mortgage repayments but their changes very well represent differences between the cities and changes in the affordability.</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><b>Interest Rate</b><br />
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</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">Many argue that falling interest rates are the reason for the house price growth. The following chart shows interest rate and affordability changes.<br />
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</div><div style="text-align: justify;"><div class="separator" style="clear: both; text-align: center;"></div></div><div class="separator" style="clear: both; text-align: center;"></div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/_l4Hx1awKVT8/TTaMjLsyl8I/AAAAAAAAAB0/ib3lkdVdg_0/s1600/image017b.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/_l4Hx1awKVT8/TTaMjLsyl8I/AAAAAAAAAB0/ib3lkdVdg_0/s1600/image017b.PNG" /></a></div>Chart 7 Mortgage Repayment/wage Index vs. Interest Rate</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">From the chart you may notice that the affordability is in some way correlated with the interest rate change. We may also see a general trend of rising cost of housing over the interest rate change. In 1995, interest rate of 10.5% drove repayment/double wage to 25% of double wage income, but the interest rate of 9.5% in 2007 increased repayments to more than 40% for the same cities. If interest rate goes up to 10.5%, repayment as a percentage of double wage income will be twice the percentage in 1995. This means that for the same interest rate it is twice as hard to buy house today as 15 years ago. From this point, following the period of extremely low global and local interest rates it is likely that interest rates will go over the levels in 1995-Chart 8.</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMhDqLwRI/AAAAAAAAABs/tJz05aeYg-0/s1600/image016.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/_l4Hx1awKVT8/TTaMhDqLwRI/AAAAAAAAABs/tJz05aeYg-0/s1600/image016.gif" /></a></div>Chart 8 Standard Variable Interest Rate from Bank</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div style="text-align: justify;">The normal way how interest rates affect house prices is that rising rates force house prices down and falling rates push house prices up. On the Chart 9 we may see that real house prices were increasing while interest rates were rising during the 2002 – 2007 period. After that house prices fallen together with the interest rates (2008-2009), and house prices went up with interest rates since 2009. There was a complete reversal of the relationship. Most of last 15 years house prices were following rates not the other way around that is common and logical. This does not support argument that falling interest rates drew house prices up. It just shows how unusual house price growth was in 2000s.</div><div style="text-align: justify;"><br />
</div><div class="separator" style="clear: both; text-align: center;"></div></div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><div class="separator" style="clear: both; text-align: center;"></div><div style="text-align: center;"><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/_l4Hx1awKVT8/TTaMiH8UydI/AAAAAAAAABw/J4YM8HvhR70/s1600/image017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/_l4Hx1awKVT8/TTaMiH8UydI/AAAAAAAAABw/J4YM8HvhR70/s1600/image017.png" /></a></div>Chart 9 Real House Price Index vs. Interest Rate</div><br />
</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><b>Conclusion</b><br />
<br />
</div><div><div style="text-align: justify;"><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;">Presented data clearly shows that there was unusual and disproportional increase of house prices relative to any other leading economic indicator. House price increase cannot be justified by wage growth, CPI, interest rate changes, wealth increase, spending habit changes or any other major economic indicator but the debt growth. Using any definition of housing bubble available, it is very likely that Australia is in the middle of the debt driven housing bubble, where house prices increased at least 60% more than any other leading economic indicator. In this paper we do not reject idea that house price growth can be driven by supply and demand changes. We only presented that real economic parameters were not drivers of a huge house price increase since late 90s. Supply/demand arguments will be analysed in the next paper.</div><div style="border-collapse: collapse; font-family: arial, sans-serif; font-size: 13px;"><br />
</div><span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">References: </span></span><br />
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">All data provided by ABS and RBA</span></span><br />
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;"><span class="Apple-style-span" style="border-collapse: collapse;">Chart 1, 2, 3 and 4 - <a href="http://raveswei.files.wordpress.com/2011/01/table1.pdf">Table1</a> and <a href="http://raveswei.files.wordpress.com/2011/01/table2.pdf">Table2</a></span></span><br />
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">Charts 5 and 9 - <a href="http://raveswei.files.wordpress.com/2011/01/table3.pdf">Table3</a></span><br />
<span class="Apple-style-span" style="font-family: Arial, Helvetica, sans-serif; font-size: x-small;">Charts 6, 7 and 8 - <a href="http://raveswei.files.wordpress.com/2011/01/table4.pdf">Table4</a></span><br />
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<br />
<div class="MsoNormal"><span class="Apple-style-span" style="color: #444444; font-size: x-small;"><span lang="EN-AU">- “Established Median House Price” (Table 2, 3 and 4) and “House Price Index” (Table 2, 3 and 4) columns for period after Mar 2002 is given and calculated based on </span><st1:stockticker><span lang="EN-AU">ABS</span></st1:stockticker><span lang="EN-AU"> 6416.0 - House Price Indexes: Eight Capital Cities – data - Median Price of Established House Transfers (grey data in the Table 2 is given); data for a period Dec 1995 – Mar 2002 is calculated using quarterly change data 6416.0 - House Price Indexes: Eight Capital Cities - data; Table: Established House Prices Percentage Change (from previous quarter) </span>and house prices for March 2002.</span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span class="Apple-style-span" style="color: #444444; font-size: x-small;"><span lang="EN-AU">- “Per week” and “state wage” columns (Table 1, 3 and 4) are given in </span><st1:stockticker><span lang="EN-AU">ABS</span></st1:stockticker><span lang="EN-AU"> 6302.0 - Average Weekly Earnings, Australia, Aug 2010 – Table: Earnings; Persons; Total earnings; - seasonally adjusted. Total Earnings for all Employed persons data (Table 3 and 4) is used because it combines changes in the labour – increase of part-time employees as a percentage of total employed persons and change of hours worked per person</span></span></div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><span lang="EN-AU"><span class="Apple-style-span" style="color: #444444; font-size: x-small;">- “Repayment/double wage” (Table 4) and “Repayment/wage index” (Table 3) columns are calculated based on standard mortgage loan (90%LVR; 25 years; average Standard Variable Interest Rate from Bank for a given quarter). </span></span></div><div class="MsoNormal"><span lang="EN-AU"><span class="Apple-style-span" style="color: #444444; font-size: x-small;">“Saving period” (Table 4) and “Saving period index” (Table 3) columns are calculated based on: saving of 20% of total wage, with the interest rate equal to Standard Variable Interest Rate from Bank minus 2.5%</span></span></div></div></div>ravesweihttp://www.blogger.com/profile/16220949543531012998noreply@blogger.com4