Housing bubble, what housing bubble? The Canberra's inner south from 2005-2013.

A_Cog said :

F&$ing comment quote not working.

Howeph:

(1) “Can you explain what you mean by “the government will ALWAYS pay it out”?”
– neg gearing is built into the tax system and isnt going anywhere. Govt will always pay it out.

(2) When I said “I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses” I meant that neg gearing prevents the magnitude of losses from increasing, by propping up housing prices. So if prices do fall and the market gets a little spooked, investors step into the market and buy (because neg geasring makes it attractive to run a loss) and this stops prices tumbling further. “Neg gearing subsidises the magnitude of losses” means Aussie losses never approach northern hemisphere experiences (US, Japan, UK).

(3) You said “And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.”
– wearing a ” The End Is Nigh” sign makes you right once.

Thinking about this issue over the last few days, I’ve realised there is no bubble (because there will be no ‘pop’). Neither party will cut aged pension or superannuation tax breaks. Too many older voters (increasing as a proportion of the population also). Well, SMSF is becoming a major superannuation vehicle, and is being leveraged into property. The same political argument holds for not clamping down on SMSF. Which means (I think it means, anyway) that as SMSF increases, and the proportion of older aussies increase (and they’re using SMSF) that house prices will not fall. House prices will continue to rise.

I think that is why I am right and Keen is wrong. I blend politics and reality into my economics, rather than just looking at the economic model like Minsky and Keen.

You’re basically describing a ponzi scheme though. Negative gearing only helps so much and is only worthwhile if there are capital gains to be made.

For real prices to keep rising you would need a very restricted supply (which I cant see becoming a massive issue) or an ever increasing amount of investment dollars from somewhere. If it just becomes a whole lot of investors trying to sell to each other at higher and higher prices then the difference between possible rental returns and capital value will become too large to sustain and prices will stagnate or fall.

Sure I don’t see this happening overnight because as you say, foreign cash and SMSF cash might be able to sustain the demand in the next few years, but unless wages keep up with the price rises, there will eventually be a correction.

F&$ing comment quote not working.

Howeph:

(1) “Can you explain what you mean by “the government will ALWAYS pay it out”?”
– neg gearing is built into the tax system and isnt going anywhere. Govt will always pay it out.

(2) When I said “I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses” I meant that neg gearing prevents the magnitude of losses from increasing, by propping up housing prices. So if prices do fall and the market gets a little spooked, investors step into the market and buy (because neg geasring makes it attractive to run a loss) and this stops prices tumbling further. “Neg gearing subsidises the magnitude of losses” means Aussie losses never approach northern hemisphere experiences (US, Japan, UK).

(3) You said “And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.”
– wearing a ” The End Is Nigh” sign makes you right once.

Thinking about this issue over the last few days, I’ve realised there is no bubble (because there will be no ‘pop’). Neither party will cut aged pension or superannuation tax breaks. Too many older voters (increasing as a proportion of the population also). Well, SMSF is becoming a major superannuation vehicle, and is being leveraged into property. The same political argument holds for not clamping down on SMSF. Which means (I think it means, anyway) that as SMSF increases, and the proportion of older aussies increase (and they’re using SMSF) that house prices will not fall. House prices will continue to rise.

I think that is why I am right and Keen is wrong. I blend politics and reality into my economics, rather than just looking at the economic model like Minsky and Keen.

A_Cog said :

howeph said :

I don’t see how government sponsored speculation, via negative gearing tax concessions, changes the equation… this just means that, all other things been equal, our real estate bubble will just burst later and higher.

This is the crux of why I disagree with Keen (and you). Neg gearing defuses the bomb of a property bubble, because the government will ALWAYS pay it out, thus propping up the market.

Can you explain what you mean by “the government will ALWAYS pay it out”?

I agree that every time the market started to look a little shaky in the past the government (Howard and Rudd) would rollout or double the First Home Owners Grant, giving the market a steroid injection, driving prices and mortgages to new heights. But do you think that that trick will keep on working for ever?

Or do you think that the government would step in and start buying houses in order to maintain prices (like the reserve bank might buy the Australian dollar to maintain it’s value in some circumstances)? That doesn’t sound plausible to me. How would they fund or justify that?

A_Cog said :

Property bubbles pop when (at least) one of the sources of capital (customers / investors / renters / creditors / banks / etc) withdraw from the property market, leading to price falls, which then turn into a torrent.

Correct.

The source of capital that has stopped flowing (but has not yet been withdrawn) is people’s appetite for increasing debt:

http://www.abc.net.au/news/2014-02-12/jericho-graph-3/5252420

Since the GFC debt growth has flatlined in real terms. People just don’t seem to be willing or able to get the ever bigger mortgages that are required to keep inflating prices.

The market started to fall in 2010, but lower interest rates held it back up again. But interest rates aren’t going to go any lower, so that shot it spent. What else is there to keep prices high? The market is looking unstable.

Potential triggers to burst the bubble are:

(a) Interest rate rises
(b) Sustained static prices leads investors sell as capital gains aren’t covering their debt repayments.
(c) Baby-boomers (who own most of these investment properties) start selling their properties to provide the cash to fund their retirement and health costs.
(d) ALL OF THE ABOVE

A_Cog said :

I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses, …

I don’t understand what you mean by this.

A_Cog said :

Yeah, Keen and Minsky are brilliant economists, but Keen’s been belting on about bubble-pops for years now (almost the entire time I’ve happily and enthusiastically read him). But still, where’s the beef?

Well that’s the difficult thing about bubbles. They are driven by irrational speculative behaviour and so by nature are very unpredictable.

And Keen was one of only a handful of economists that predicted the GFC. That’s got to count as some beef.

SheepGroper said :

Have you got a source for the statistic that currently around half of homeowners own rental property?

I’ll again look for that figure, but you are right it does appear far too high.

SheepGroper said :

The second quoted paragraph has some odd logic – you’re saying that if rent drops, properties become positively geared, which automatically leads to them being sold? If rent drops, a given property may or may not continue to be negatively geared, but surely the average investor will just drop the rent until it’s tenanted again?

We are saying the same thing, except where if the rent drops to below the threshold of where the owner can no longer make ends meet, they will be forced to sell. We had individuals on here just the other week talking about how if their rental returns it got much lower they would have to do similar.

People can only bear empty rooms for so long before they will have to sell up and cut losses. Any drive through Kingston and surrounds will show the large number of properties still sitting on the market and with lots more being developed, i’m at a loss to know who is going to buy them if the current ones aren’t being rented out.

So it’s either a bad day for the existing owners or a good day for renters and owner occupiers who want to pick up a distressed IP owner who needs to get something out as they can’t rent it.

We recently had to re let one of our units out in Bruce. There seems to be less demand as uni of canberra supply more student accommodation. Allhomes had a very long list of empty places. While we dropped the rent $20 a week we got a good tenant again after a couple of weeks of it being empty – plenty of groups came to view the place and submitted applications.

The original tenant moved into something larger.

Maya123 said :

justsomeaussie said :

I think you’ve missed my point. What I’m talking about is removing investors from buying into the cheap end of the market. I would propose is perhaps some form of income testing or investment property testing which does not allow those with significant wealth to buy low end properties. So we create supply in the market by encouraging people to sell some of their existing cheap investment properties where they can trade up into a single more expensive property barring other investors from those cheap properties.

I haven’t been following this whole conversation, but some of it I have read is worrying. Not everyone who buys a second house might be wealthy and it would be unfair to exclude them from doing so. I’ll give my example. I bought my first home; a small fibro house. I wanted a better house so I rented out the spare rooms and saved. I paid off this house in a few short years doing this. Then I saved and after about fifteen years I was able, with a loan, to buy an old cheaper house in an inner suburb. I put a tenant into this house, which by the way had extremely reasonable rent; below average. I rented this for many years until I paid off this house. Then with savings and another loan I replaced this house with a new house and moved into it. I sold my old house to clear the debt. Under your rules I might not have been able to buy this lower end house, as initially I needed to rent it out to supplement my adequate, but which was lower than the average male wage. With my savings (I lived very frugally) and a paid off fibro ‘box’, I might have been deemed too wealthy to buy a low end property. I would have been condemned to continue to live in low end housing, as without buying this investment property I would have been much less likely to have been able to afford to upgrade my housing. Not everyone who buys low end housing to rent out is wealthy. What is your definition of wealthy?

I think that’s the whole point though. Why would we actually want people to invest in property, when they are only doing so in the hope of capital gains? It would be far more productive for our economy I’d they were investing that money elsewhere. ie. Other businesses or shares.

I personally don’t think we should limit people from owning multiple properties but we definitely need to limit some of the perverse incentives currently given that often act counter to stated policy goals or actively harm our economy.

justsomeaussie said :

I think you’ve missed my point. What I’m talking about is removing investors from buying into the cheap end of the market. I would propose is perhaps some form of income testing or investment property testing which does not allow those with significant wealth to buy low end properties. So we create supply in the market by encouraging people to sell some of their existing cheap investment properties where they can trade up into a single more expensive property barring other investors from those cheap properties.

I haven’t been following this whole conversation, but some of it I have read is worrying. Not everyone who buys a second house might be wealthy and it would be unfair to exclude them from doing so. I’ll give my example. I bought my first home; a small fibro house. I wanted a better house so I rented out the spare rooms and saved. I paid off this house in a few short years doing this. Then I saved and after about fifteen years I was able, with a loan, to buy an old cheaper house in an inner suburb. I put a tenant into this house, which by the way had extremely reasonable rent; below average. I rented this for many years until I paid off this house. Then with savings and another loan I replaced this house with a new house and moved into it. I sold my old house to clear the debt. Under your rules I might not have been able to buy this lower end house, as initially I needed to rent it out to supplement my adequate, but which was lower than the average male wage. With my savings (I lived very frugally) and a paid off fibro ‘box’, I might have been deemed too wealthy to buy a low end property. I would have been condemned to continue to live in low end housing, as without buying this investment property I would have been much less likely to have been able to afford to upgrade my housing. Not everyone who buys low end housing to rent out is wealthy. What is your definition of wealthy?

arescarti42 said :

justsomeaussie said :

The key take away is that the vast majority of property investors aren’t buying new builds. They aren’t creating supply as commonly claimed. They are buying and therefore inflating the price on existing builds. So this myth that investors drive the supply needs to be debunked, the data doesn’t support it.

Correct.

I also agree this is correct.

arescarti42 said :

justsomeaussie said :

My take is that we need to encourage investors to sell down their number of properties (the cheapest first). This creates supply in housing stock, not just building more houses on the fringes of cities. That money can be reinvested in other areas of society like shares.

I still disagree with you on how useful this would be. It’s unlikely to have any real impact on prices, because it increases demand for houses to buy at the same rate as it increases the number of houses for sale (by reducing the number of properties available to rent and forcing renters to become buyers).

If more investors were selling their houses, than investors were buying them then that would represent a decrease in demand by those willing and able to pay high prices. Sure the demand in purely numerical terms remains the same (the same number of people require housing irrespective of whether they rent or buy) but the demand curve has moved to the left.

The demand curve moving to the left is a decrease in demand means prices would fall.

Falling prices would mean even more investors selling to cash out of the market before prices fall further and represents the supply curve moving to the right – i.e. the bubble has burst.

So successfully “encourag[ing] investors to sell down their number of properties” most definetly would lower prices… it would burst the property bubble.

arescarti42 said :

To have any real impact on house prices (and rents), you need to increase the total housing stock, by building more houses/apartments.

As I have said on a previous thread I don’t see any data to support the theory that it is constrained supply that is holding prices high.

Justsomeaussies link tries to make that assertion using this chart: http://www.prosper.org.au/wp-content/uploads/2013/09/HGDp4.jpg arguing that the tiny up-tick in number of people per occupied dwelling between the 2006 and 2011 censuses is evidence of constrained supply.

But I read it completely differently. It looks to me like the level has nicely settled at the market optimum of around 2.6 people per home (what does he expect? That it should keep falling till every individual has a house each?).

The fact is that house prices have been going up while the number of people per occupied private dwelling have been going down and remained low, the complete opposite to what you would expect if it was constrained supply of housing stock that was driving or holding up prices.

arescarti42 said :

I still disagree with you on how useful this would be. It’s unlikely to have any real impact on prices, because it increases demand for houses to buy at the same rate as it increases the number of houses for sale (by reducing the number of properties available to rent and forcing renters to become buyers).

To have any real impact on house prices (and rents), you need to increase the total housing stock, by building more houses/apartments.

I think you’ve missed my point. What I’m talking about is removing investors from buying into the cheap end of the market. I would propose is perhaps some form of income testing or investment property testing which does not allow those with significant wealth to buy low end properties. So we create supply in the market by encouraging people to sell some of their existing cheap investment properties where they can trade up into a single more expensive property barring other investors from those cheap properties.

Increasing supply has to come from both new builds AND existing properties. So people need an incentive to cash out of the market.

howeph said :

I don’t see how government sponsored speculation, via negative gearing tax concessions, changes the equation… this just means that, all other things been equal, our real estate bubble will just burst later and higher.

This is the crux of why I disagree with Keen (and you). Neg gearing defuses the bomb of a property bubble, because the government will ALWAYS pay it out, thus propping up the market. Property bubbles pop when (at least) one of the sources of capital (customers / investors / renters / creditors / banks / etc) withdraw from the property market, leading to price falls, which then turn into a torrent.

I think that neg gearing not only subsidises losses, it subsidises the magnitude of losses, which then keeps those losses small (and negating the possibility of a torrent). The result is a property market which has relatively minor market corrections – for example, where the OP has to cut rent by $20/wk and have a $1000 haircut, or Canberra vacancies climb up to 8% (against a background of the C/W Govt slowing and stopping new hirings altogether, and also cutting staff). That’s not a bubble.

Yeah, Keen and Minsky are brilliant economists, but Keen’s been belting on about bubble-pops for years now (almost the entire time I’ve happily and enthusiastically read him). But still, where’s the beef?

justsomeaussie said :

In the 1990s 9% of home owners owned an investment property, today that’s above 50%. Eventually like a Ponzi scheme you’ll run out of people who can reinvest. Once the middle wealthy are out you’ll end up with a small fraction of society owning be bulk of property.

A lot of vacant houses means rent drops, rent drops mean negative gearing becomes untenable and then we end up with lower prices as people are forced to sell off properties if they can’t have them untenanted for long periods. If this happens with rate increases there will be pain for a lot of people.

Have you got a source for the statistic that currently around half of homeowners own rental property? That seems rather high since most quoted statistics say only around 10% of the population own investment property, and roughly a third of the population own outright, a third own with a mortgage, and a third rent. Also, in a previous property discussion someone posted a link to ABS stats which showed that more new rental properties are bought by property investers with more than a few properties, whereas most property investers ( around 90% from memory ) only own one property and invariably that’s an established one, not new, implying that investers should buy more properties if you want more new dwellings built.

The second quoted paragraph has some odd logic – you’re saying that if rent drops, properties become positively geared, which automatically leads to them being sold? If rent drops, a given property may or may not continue to be negatively geared, but surely the average investor will just drop the rent until it’s tenanted again?

justsomeaussie said :

The key take away is that the vast majority of property investors aren’t buying new builds. They aren’t creating supply as commonly claimed. They are buying and therefore inflating the price on existing builds. So this myth that investors drive the supply needs to be debunked, the data doesn’t support it.

Correct.

justsomeaussie said :

My take is that we need to encourage investors to sell down their number of properties (the cheapest first). This creates supply in housing stock, not just building more houses on the fringes of cities. That money can be reinvested in other areas of society like shares.

I still disagree with you on how useful this would be. It’s unlikely to have any real impact on prices, because it increases demand for houses to buy at the same rate as it increases the number of houses for sale (by reducing the number of properties available to rent and forcing renters to become buyers).

To have any real impact on house prices (and rents), you need to increase the total housing stock, by building more houses/apartments.

justsomeaussie said :

But all this aside from an Australian level, there is something not right with what’s happening in the Inner South, I haven’t check the other suburbs in Canberra but it seems pretty common.

A lot of vacant houses means rent drops, rent drops mean negative gearing becomes untenable and then we end up with lower prices as people are forced to sell off properties if they can’t have them untenanted for long periods. If this happens with rate increases there will be pain for a lot of people.

Broadly speaking, rents are down, vacancies are up, and stock on market is up across Canberra due to huge increases in new home construction in recent years, and probably also worsening employment conditions (causing people to move elsewhere).

As for why this is so pronounced in the Inner South, it’s hard to say. It’s a fairly small market (roughly half the size of the inner north, and maybe a fifth the size of a district like Belconnen or Tuggeranong) which means it takes a comparatively small change in supply to have a large impact.

If I had to guess, I’d say it is probably largely caused by the increase in supply from the Kingston Foreshore development, which AFAIK isn’t selling particularly well, and looked to be quite empty when I went walking around there recently.

A_Cog said :

I read Steve Keen all the time, and he LOVES Minsky.

I’ve read some of Steve Keen’s stuff too. He seems to make a lot sense to me; more than most other Economist that I have come across (which isn’t hard).

A_Cog said :

But I still can’t agree with Keen (or Minsky) because the first criterion is actually deliberately built into our market thru neg gearing, which was designed to help middle/upper class Aussies build equity over a timeframe where property prices would increase (Minsky’s second criterion).

I don’t see how government sponsored speculation, via negative gearing tax concessions, changes the equation.

It only means that in Australia, compared to other economies, speculators can afford a wider gap between the revenue they receive from rent compared to their expenses servicing their debt. I.E. because of the negative gearing tax concessions, “investors” can carry a bigger debt; and this just means that, all other things been equal, our real estate bubble will just burst later and higher.

Here is an interesting link to read from Saul Eslake:

http://www.prosper.org.au/2013/09/03/saul-eslake-50-years-of-housing-failure/

In particular this piece:

“92% of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against about 72% of all borrowing by owner-occupiers.”

So when I read pieces like the ABC article they always focus on the supply side as if it only occurs in new dwellings. They forget that the vast majority of the supply comes from existing dwellings being put up for sale. The problem we’ve got ourselves in is that those existing dwellings are being sold at levels far beyond what a first home buyer can achieve so the market ends up eating itself where the middle wealth trade with the upper wealth.

The key take away is that the vast majority of property investors aren’t buying new builds. They aren’t creating supply as commonly claimed. They are buying and therefore inflating the price on existing builds. So this myth that investors drive the supply needs to be debunked, the data doesn’t support it.

My take is that we need to encourage investors to sell down their number of properties (the cheapest first). This creates supply in housing stock, not just building more houses on the fringes of cities. That money can be reinvested in other areas of society like shares.

Note, no one is complaing about how poorer people can’t enter the sharemarket.

There needs to be a disincentive for people to continue buy more and more houses as like with any market it will be dominated small fraction of players who can control most of the market.

In the 1990s 9% of home owners owned an investment property, today that’s above 50%. Eventually like a Ponzi scheme you’ll run out of people who can reinvest. Once the middle wealthy are out you’ll end up with a small fraction of society owning be bulk of property.

But all this aside from an Australian level, there is something not right with what’s happening in the Inner South, I haven’t check the other suburbs in Canberra but it seems pretty common.

A lot of vacant houses means rent drops, rent drops mean negative gearing becomes untenable and then we end up with lower prices as people are forced to sell off properties if they can’t have them untenanted for long periods. If this happens with rate increases there will be pain for a lot of people.

NoImRight said :

Same title, may be of some interest. Comments certainly arent.

http://www.abc.net.au/news/2014-02-12/jericho-what-housing-bubble/5252438

Thanks for the link.

For me the most interesting chart was http://www.abc.net.au/news/2014-02-12/jericho-graph-3/5252420 which indicates to me that since the GFC Australians are unwilling (or unable) to go into any more debt.

Without a willingness to increase personal debt levels, house price growth must be constrained. So if your real estate investment is negatively geared then the best time to cash out is now as your capital gains have stalled.

NoImRight said :

Same title, may be of some interest. Comments certainly arent.

http://www.abc.net.au/news/2014-02-12/jericho-what-housing-bubble/5252438

I sometimes think the RBA should relocate to NIkko. Harry Dent’s chinwag at Fairfax offers a somewhat less sanguine perspective on what the next few years might hold for Oz in general – and for us here in Canberra, add to that some ‘special circumstances”.

Same title, may be of some interest. Comments certainly arent.

http://www.abc.net.au/news/2014-02-12/jericho-what-housing-bubble/5252438

rigseismic67 said :

Agree with NoImRight. In the 1980s I was working in a low paid job (apprentice) and decided to buy a house in the Inner South. Coworkers said I was an idiot and that I should rent, later I bought another house nearby with all and sundry telling me to invest instead in Telstra shares. I paid $340,000 for both houses and they are now worth a combined $1.5 million (both owned outright). That’s my super nearly sorted. When purchased they were both around 5 years salary each, which seems to fit with todays market.
Bubble? who cares I think I will get my money back no matter what happens. I know someone who has been saving for over 10 years to buy a house and never taking the plunge, they keep saying prices will go down…….good luck with that strategy. You will likely not save enough to meet the increases in house prices. There is no time like the present.

Wow, so what you’re saying it that all we have to do is buy houses before one of the greatest increase in the real value of housing this country has ever seen?

Amazing, its just so simple, I can’t believe no one has thought of this strategy before.

rigseismic67 said :

Agree with NoImRight. In the 1980s I was working in a low paid job (apprentice) and decided to buy a house in the Inner South. Coworkers said I was an idiot and that I should rent, later I bought another house nearby with all and sundry telling me to invest instead in Telstra shares. I paid $340,000 for both houses and they are now worth a combined $1.5 million (both owned outright). That’s my super nearly sorted. When purchased they were both around 5 years salary each, which seems to fit with todays market.
Bubble? who cares I think I will get my money back no matter what happens. I know someone who has been saving for over 10 years to buy a house and never taking the plunge, they keep saying prices will go down…….good luck with that strategy. You will likely not save enough to meet the increases in house prices. There is no time like the present.

Nothing like being able to buy a house in the inner south on an apprentice’s wage. I think you’d struggle to rent a room in a share house if you were an apprentice nowadays.

A_Cog said :

But the Queanbeyan postcode 2620 also goes all the way out east to Braidwood. What to do!?!

Yeah, except it doesn’t. I believe it might cover Gundaroo to the north and Michelago to the south. I think it stretches to Carwoola in the east so approx 10-15km as the crow flies. It doesn’t cover Jerrabomberra which is 2619, or Bungendore/Braidwood/Captains Flat

howeph said :

…

The only economic theory that I can find that provides a clear definition of a bubble is Hyman Minsky’s “Financial Instability Hypothesis” which I understand identifies an asset bubble if the following conditions are met:

* revenue from the asset is insufficient to cover the interest and principal of the debt used to buy it; and
* owners are relying on the escalating asset’s value to realise sufficient capital gains upon sale to meet the costs of the debt and expenses.

So according to this definition investment properties are in a real estate bubble if property investors can’t profit from their rental income alone (negatively geared), and are relying on capital gains for their return on investment.

So by this definition I think we are in a bubble…

I read Steve Keen all the time, and he LOVES Minsky. But I still can’t agree with Keen (or Minsky) because the first criterion is actually deliberately built into our market thru neg gearing, which was designed to help middle/upper class Aussies build equity over a timeframe where property prices would increase (Minsky’s second criterion).

I hope there is a bubble, because otherwise it means that Canberra houses are NOT overpriced currently, meaning stiff chips for everyone who doesn’t yet own. And quite frankly, WTF with a 3bedder in Hackett for $750K!!! Yes, I think the first home grant in the GFC pumped prices up, yes I think SMSF is driving prices up, but unless they close the SMSF gateway or ban ‘usury’ (c’mon Bernardi you theocratic-psycho-douche-f&ckhead, you’re always “we need to return to Judeo-Christian values, let the bible lead the way…” Well, usury is a SIN -apparently, I haven’t actually read the bible, but hey, I haven’t read “Mein Kampf” either but I’m content to take history’s word for it that Adolf was a bit of a dick), then I don’t reckon there’s a bubble pop coming.

What’s the definition of an economic bubble?

Without agreeing what a housing bubble is how are we to say if the data indicates that there is one or not?

I’ve done a bit of searching. Wikipedia is no help as economists don’t seem to be able to agree if bubbles even exist or not! Amongst those that do agree that bubbles exist many seem to think that they can only be identified after they have burst (so much for our current economic understanding being a Science; a key property a true science is that is must be able to make reliable predictions).

The only economic theory that I can find that provides a clear definition of a bubble is Hyman Minsky’s “Financial Instability Hypothesis” which I understand identifies an asset bubble if the following conditions are met:

* revenue from the asset is insufficient to cover the interest and principal of the debt used to buy it; and
* owners are relying on the escalating asset’s value to realise sufficient capital gains upon sale to meet the costs of the debt and expenses.

So according to this definition investment properties are in a real estate bubble if property investors can’t profit from their rental income alone (negatively geared), and are relying on capital gains for their return on investment.

So by this definition I think we are in a bubble.

Note this does not mean you shouldn’t by a house if you are planning to live in it; in which case it is not an “investment” property. You just need to be confident that you can meet the repayments, even if interest rates rise a bit.

Nor does it mean that the bubble is going to burst any time soon, which means that many people may still be able to make more money speculating in negatively geared real estate. But it does mean that they are speculating (i.e. gambling) in real estate – not investing.

You take your chances.

Interesting link , Thanks justsomeaussie
I’m no realeste expert
My partner and I have purchases a few properties in Canberra over the past 10 years or so
I’ve run a lot on instincts and some research leading up to the time of purchase
I’ve never been keen on units in Canberra
Looks to me like there is too many units in Canberra
Thank heavens we have none!

Agree with NoImRight. In the 1980s I was working in a low paid job (apprentice) and decided to buy a house in the Inner South. Coworkers said I was an idiot and that I should rent, later I bought another house nearby with all and sundry telling me to invest instead in Telstra shares. I paid $340,000 for both houses and they are now worth a combined $1.5 million (both owned outright). That’s my super nearly sorted. When purchased they were both around 5 years salary each, which seems to fit with todays market.
Bubble? who cares I think I will get my money back no matter what happens. I know someone who has been saving for over 10 years to buy a house and never taking the plunge, they keep saying prices will go down…….good luck with that strategy. You will likely not save enough to meet the increases in house prices. There is no time like the present.

Hard to see a bubble.

Take this place : Under offer after just one open house.
Or this one down the road from it, sold after just two open house viewings.

Houses seem to be selling, and neither at vastly inflated prices (which would be case in a rising bubble), nor at discounted prices (as would be when a bubble pops).

I assume this is basically due to the breaks being slammed on for federal hiring, together with a recent boom in apartment building in the inner south, particularly Kingston. Hardly a surprising outcome, and not the first time optimistic plans have run into reality. If vacancy rates are starting to affect rents, that will presumably, eventually…… flow through to prices – modest easing, perhaps, if not bargains.

A_Cog said :

If a bubble exists, when did it start? The tables go back to Jan 05 and April 08. Pre-GFC? Post-GFC? First-home buyers trigger?

From chart’s it looks as if around early 2012 is where things starting expanding a little more dramatically than usual.

A_Cog said :

Are you saying that the purple increase (units) compared to the blue increase (houses) shows a bubble? How about the alternative interpretation? FOr example, the unit supply increases reflects a slow house market, with slow house supply and longer house construction times, and that the +2008 increase reflects developers shifting to apartment construction and/or GFC-related construction projects targetting apartments which cost less, sell for less, are more attractive to buyers and investors?

I’m saying that particularly in the inner south (I haven’t looked around other post codes much). There is a significantly high amount of stock on the market i.e. a lot of sellers and also there is a high vacancy rate which means there is also a lot of empty properties as well. In short there is low demand (as demonstrated by the stock on the market and there is high supply as shown by the vacancy rate. In the medium term this *should* mean a downtrend/stagnation in prices.

justsomeaussie said :

Also, I reckon the SQM data is pretty incomplete without adding in Quenabeyan. I reckon Quangers (!) prices affect inner south ACT prices. The Quang has 40,000 to 55,000 people living there (can’t be bothered right now digging through ABS to count ‘dwellings’). But the Queanbeyan postcode 2620 also goes all the way out east to Braidwood. What to do!?!

I agree with you regarding Queanbeyan and we are seeing very similar trends in Queanbeyan. A simple drive around Queanbeyan will reveal a larger number of apartment complexes recently finished and still ongoing.

http://www.sqmresearch.com.au/graph_vacancy.php?postcode=2620&t=1

A_Cog said :

Still, that’s only $1000 a year. Not really a bubble bursting. And yeah, I’ve been reading Steve Keen, Craig Peacock, etc, for all my “disaster scenario” economists predicting a property bubble bursting… but [all of them] + [your post] still seem to bump up against continued price growth and no bubble popping.

I’m not sure why people get all dramatic regarding a bubble. It’s more or less pretty much part of the cycle. I’m certainly not saying there is some disaster scenario coming particular in an area as rich as Canberra. The prices could ever only drop so far before they’d be picked up by another buyer again.

The reason why I posted this is that since 2012 we’ve had a pretty dramatic change in real estate something that historically I can’t find any other data on.

More to the point with vacancy rates up to 8% in some areas i’m not sure where the people will come from to fill the properties up.

Thanks for answers. [Nit-picking resumes]

If a bubble exists, when did it start? The tables go back to Jan 05 and April 08. Pre-GFC? Post-GFC? First-home buyers trigger?

Are you saying that the purple increase (units) compared to the blue increase (houses) shows a bubble? How about the alternative interpretation? FOr example, the unit supply increases reflects a slow house market, with slow house supply and longer house construction times, and that the +2008 increase reflects developers shifting to apartment construction and/or GFC-related construction projects targetting apartments which cost less, sell for less, are more attractive to buyers and investors?

Also, I reckon the SQM data is pretty incomplete without adding in Quenabeyan. I reckon Quangers (!) prices affect inner south ACT prices. The Quang has 40,000 to 55,000 people living there (can’t be bothered right now digging through ABS to count ‘dwellings’). But the Queanbeyan postcode 2620 also goes all the way out east to Braidwood. What to do!?!

justsomeaussie said :

…
Personally I’ve had to drop my rent down by $20 a week…

Still, that’s only $1000 a year. Not really a bubble bursting. And yeah, I’ve been reading Steve Keen, Craig Peacock, etc, for all my “disaster scenario” economists predicting a property bubble bursting… but [all of them] + [your post] still seem to bump up against continued price growth and no bubble popping.

Maybe I’m impossible to convince, but I don’t feel closed-minded. I dunno. Maybe this is what closed-minded feels like.

Sorry, just realised I didn’t answer much of your questions.

A_Cog said :

C’mon. How about some details.
What does the second graph show? (Is it houses for sale? “stock on market’ means what, exactly?)

Answer above.

A_Cog said :

What is the blue and purple for, in graph 2?

Purple is units and blue is houses.

A_Cog said :

Why does this data show there is NOT a housing bubble in the inner south?

Perhaps my attempt at humor was misconstrued. I was saying that there is a significantly inflated market in the inner south at the moment. Certainly doesn’t mean it will pop as long as demand keeps up. Excluding people moving from sharehouses to own homes single rentals, I fail to see where all these new people are coming from since as we can see from the last few years, we can’t fill up the rentals anymore but we keep building more developments. (supply>demand)

A_Cog said :

What is included/excluded from ‘inner south’?

It doesn’t quantify on the site but you can do a direct postcode search like:

http://www.sqmresearch.com.au/graph_stock_on_market.php?sfx=&postcode=2603&t=1
http://www.sqmresearch.com.au/graph_stock_on_market.php?sfx=&postcode=2604&t=1

which will show that Griffith (2603) has a significant number of units for sale compared to 5 years ago and Griffith’s vacancy rates have approximately quadrupled and Kingston has doubled (2604).

http://www.sqmresearch.com.au/graph_vacancy.php?postcode=2604&t=1
http://www.sqmresearch.com.au/graph_vacancy.php?postcode=2603&t=1

A_Cog said :

And if there is NOT a bubble, then how do these graphs disprove the bubble-effect shown by increases to house prices? (Which is the primary proof that bubble-panic-pushers rely on.)

As I said above I think there is already some pain being felt in the inner south. The huge growth of developments combined with Canberra typically 1% – 1.5% vacancy rate would have meant a lot of buyers have bought in expecting good returns but now those renters/buyers may not exist.

Personally I’ve had to drop my rent down by $20 a week. Still positively geared but only just. I can’t see how things will get better by building more apartments when government is hiring like it used to. The counter is that I’d love to snap up a penthouse from a distressed owner so either is good.

As I said. This is SQM Research’s free data. Their website has all the information but to directly address your question:

“Stock on market

Stock on market is defined as the total number of residential properties (including land) advertised online during the month concerned. It will include those properties that have been advertised and then withdrawn for the month

All listings are taken from online monitoring of major listings sites. Only those properties with unique addresses or with a unique listing id are used. Those advertisements with no addresses are excluded from the series. Any addresses repeated between sites are de-duped.

As SQM Research relies upon online listings only for its stock on market index, some outer regional areas which solely rely on hard-copy advertisments for their listings may be under-represented.”

But please DYOR @ http://www.sqmresearch.com.au/graph_stock_on_market.php?t=1#terms

For me what is interesting is the vacancy rates. Traditionally sitting at 1% are now at 6.5% and have been up to 8% this means that the inner south has lower rental returns and is perhaps why we are seeing he increasing stock on the market on the bottom graph.

Definition of Vacancy Rates:

“Rental Vacancies

The Rental Vacancies component is based on all monitored and unique online listings for the period of a calendar month. The series starts off in January 2005.

All listings are taken from online monitoring of major listings sites. Only those properties with unique addresses or a unique listing id are used. Those advertisements with no addresses are excluded from the series. Any addresses repeated between sites are de-duped.

Only those listings that have been advertised for three weeks or more (and are still currently advertised as at the time of collation) are used.

Established Dwellings

We use the 2001, 2006 and 2011 No. of total established Dwellings (as a base) by postcode as determined by the ABS census. In addition we estimate total dwellings for 2005, 2007, 2008, 2009, 2010 and 2012. We then multiply this by the percentage of renters for each postcode as also provided in the census. This provides an estimated available total stock for rent.

The numerator is then divided into the denominator, which provides a vacancy rate percentage.

Some have argued that using online real estate listings cannot be done because of advertising of false listings and properties that are only advertised for a fleeting moment as they are taken up immediately. We have addressed those issues.

We have left out those ads without an advertised address or unique property id and have also taken into account a whole month’s worth of listings which automatically adjusts for those ads withdrawn quickly.”

So in sum, things in the inner south are quite different from only a few years ago.

I’ve heard some experts who predicted the GFC years before it happened say that another GFC is imminent due to the Obama administrations handling of the GFC. These guys are saying this time it will be much worse. China’s economy will take a huge hit which in turn will affect us Aussies. Google Peter Schiff.

Yes we needed a new thread on this topic.

If you want to buy a house buy it. No matter what internet experts say. Theres threads on here going back several years with canny buyers all saying they will hold off buying since the Canberra bubble will burst “any day”. While they wait around for years to make that magic bargain purchase for the rest of us life goes on.

C’mon. How about some details.

What does the second graph show? (Is it houses for sale? “stock on market’ means what, exactly?)

What is the blue and purple for, in graph 2?

Why does this data show there is NOT a housing bubble in the inner south?

What is included/excluded from ‘inner south’?

What is the relevance of including both graphs? (Is there some link between the two which you could expand on?)

And if there is NOT a bubble, then how do these graphs disprove the bubble-effect shown by increases to house prices? (Which is the primary proof that bubble-panic-pushers rely on.)

this data was taken from SQM Research:

http://www.sqmresearch.com.au/free-statistics.php

Feel free to plug in your post code and/or region and explore what has changed in the property market in the last 10 years.