Grantham on the Australian Housing Market

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Jere­my Grantham pricked, if not the hous­ing bub­ble itself, then at least the bub­ble that prop­er­ty mar­ket spruik­ers live in, with the quip that:

“Bub­bles have quite a few things in com­mon but hous­ing bub­bles have a spec­tac­u­lar thing in com­mon, and that is every one of them is con­sid­ered unique and dif­fer­ent.” (Hous­ing mar­ket a ‘time bomb’, says invest­ment leg­end: The Aus­tralian June 16, 2010)

How true that is. Before Japan’s bub­ble burst in 1990, we heard that Japan was dif­fer­ent: the “Ris­ing Sun” was eclips­ing the USA and house prices reflect­ed this grow­ing wealth (and—didn’t you know? —there was a land short­age in Tokyo!). Before the USA’s bub­ble burst, there were land short­ages in all the States with price bubbles—especially Cal­i­for­nia. There were prob­a­bly even Tulip short­ages in Ams­ter­dam, four cen­turies ago.

Those oth­er bub­bles duly burst, despite their “unique” char­ac­ter­is­tics, under the weight of the same force: too much debt was tak­en on by spec­u­la­tors seduced by the group­think that house prices always rise. When the rise in house prices made the entry costs for new play­ers pro­hib­i­tive, debt stopped grow­ing and house prices col­lapsed.

This is the oth­er thing that all hous­ing bub­bles (and share price bub­bles, for that mat­ter) have in com­mon: they are all dri­ven by bor­rowed mon­ey, and they can only be sus­tained so long as rate of growth of debt out­paces incomes. Once that stops, the engine of unearned income that enticed spec­u­la­tors in breaks down—since the only way that we can all appear rich with­out work­ing is if we spend bor­rowed mon­ey.

Of course, we all know that spend­ing bor­rowed mon­ey is a sure­fire route to ulti­mate pover­ty. The great tragedy of an asset bub­ble how­ev­er, is that it’s some­one else’s increase in debt that makes us appear wealth­i­er when your house sells for more than you paid for it. In effect, the hous­ing mar­ket “laun­ders” the debt mon­ey, mak­ing it appear real.

Any doubt that bor­rowed mon­ey is what has dri­ven house prices into the stratos­phere in Aus­tralia is dis­pelled by the data: despite all the hooey about Aus­tralian lenders being more respon­si­ble than those in the USA, mort­gage debt in Aus­tralia rose three times faster since 1990. Hav­ing start­ed with a mort­gage debt to GDP ratio that was just 40% of Amer­i­ca’s, we now have a high­er ratio than the USA—and ours is still increas­ing while theirs is clear­ly falling.

Notice how­ev­er that our ratio was low­er than the USA’s—and was falling too—before the gov­ern­ment brought in the First Home Ven­dors Boost. As it has always done, that gov­ern­ment inter­ven­tion in the mar­ket set off a price bubble—the gov­ern­ment in this sense is as respon­si­ble for the house price bub­ble as the banks are.

The gov­ern­ment pulls this trick because it makes it look good for a while: the bub­ble pulls in yet more pri­vate sec­tor bor­row­ing, and the spend­ing makes the econ­o­my boom. But when the grant ends and the bor­row­ing slows down, things don’t look so rosy.

That’s one way to describe the hous­ing mar­ket right now. The boost caused the num­ber of buy­ers to explode last year, and now the num­ber is fizzing: there were just 46,000 home loans tak­en out by own­er occu­piers in April, a cool 25% down on the same month in 2009. Actu­al demand (and that’s peo­ple with cash in their hands to buy now, not the hypo­thet­i­cal future demand con­cepts tout­ed by the prop­er­ty spruik­ers) is there­fore falling below actu­al sup­ply.

As the stock of unsold hous­es mounts up, it is only a mat­ter of time before the bub­ble bursts.