A sudden conversion of property bubble doubts

Back in the Olde Days, before the global financial crisis, when I was one of a handful raising the alarm, some of the most strident opposition to my opinion about what this might mean for housing in Australia came from Christopher Joye (who was then a Director at Rismark). We went head to head on many occasions, with me arguing that our prices were a debt-fuelled bubble, and Joye arguing that rising house prices simply reflected rising household incomes.

Fast forward to today, and though house prices have not done what I expected (see I will be wrong on house prices, November 12, 2013), one of the most prominent commentators asserting that there is a dangerous house price bubble in Australia is… Chris Joye (who is now a writer for The Australian Financial Review. There are also many others who were once on the “no bubble” side of the argument who are now warning that there is one.

I’m delighted by this shift of course, but it does beg the question “what has changed — the facts, or the commentators?” The answer, as in most things, is a bit of both — but I think more the commentators than the facts.

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Chris and I have also had a chat to clarify one point: that the numbers in his 2013/4 articles are based on a revised version of the index which results in lower numbers. Business Spectator is adding the following addendum to my article, and I’m copying it here for the record:

Amendment re index numbers

Chris has since clarified that the figures he published in 2010 and those cited this year are based on two different indices. I’ve derived the following table from Chris’s email:

Date	Old Index	New Index	Direction
31 December 2009	4.7	4.5	Peak
31 March 2010	4.6	4.5	Falling
30 September 2011	4	N/A	Falling
31 March 2014	N/A	4.4	Rising
This week		4.5(?)	Rising

Chris concluded in his email that:

“Since mid 2013, I have correctly forecast that the house price-to-income ratio would **rise** and breach its all-time peak of 4.5 times (on the current index). This is exactly what has happened—and the ratio continues to rise, which explains my concern!”

This implies that this week’s level has cracked 4.5—which I’ve included in the table—so the level now is equivalent to what it was in 2009–2010.

That makes more sense than the apparent contradiction due to changing the way the Rismark index was calculated between 2010 and 2014: the ratio was 4.5 in 2009-10, and now it’s 4.5 again and rising.

But I still don’t think this is enough to explain Chris’s radical change of tone on this topic—including claims of an . To me, this has far more to do with the point I made at the end of my article, which Chris didn’t dispute—that the change in house prices can no longer be explained by the change in disposable incomes. Instead, it’s rising leverage that explains rising house prices.

This is the issue I’ve always focused upon when arguing that our high house prices are a danger, not a national treasure, and I’m glad to have Chris raising the same alarm. As Chris argues in his blog this week:

“Yet a key insight for punters is that incomes are only half the housing story. If we take the median house price back in 1986 and grow it by disposable incomes per capita over the last 27 years, we can only explain 55 per cent of the increase in prices. But if we add in the impact of variations in mortgage rates – holding the share of incomes committed to repayments constant – we can fully account for all the capital gains registered over that period.

So purchasing power, or the amount you can afford to borrow based on prevailing rates, is a hugely important determinant of current home values. The issue is whether you choose to max out your borrowing capacity based on an unusually sharp cyclical decline in costs.” (“Rate rises will burst home owner bubble”, April 5^th 2014)

Source: http://www.debtdeflation.com/blogs/2014/04/08/a-sudden-conversion-of-property-bubble-doubts/#utm_source=feed&utm_medium=feed&utm_campaign=feed