Monday , 21 August 2017


Believe it or Not: Australia’s Housing Bubble is Worse Than That in the U.S.

The explosion of Australia’s mortgage debt is viewed by many economists and commentators as the key factor behind Australia’s unaffordable housing [and the primary] reason why Australia’s housing bubble is larger than that experienced in the United States in the mid-2000s. [Another factor is] the strangulation of fringe urban land supply via increasingly restrictive planning processes. [Let me substantiate that contention by comparing the two countries housing situation via a number of descriptive graphs. Words: 817

So says the Unconventional Economist (www.macrobusiness.com.au) in excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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The article goes on to say, in part:

The U.S. Situation

Unlike Australia, whose home prices have risen more or less in unison, price rises in the U.S. were far more heterogenous, with only around half the housing markets experiencing a bubble/bust. The US markets, with stronger regulatory barriers to land/housing supply (‘urban containment’ policies), experienced far higher price volatility and more pronounced boom/bust cycles (and losses in home equity) than those markets operating less restrictive regulatory regimes.

An analysis of sample state-based Federal Reserve Bank of New York credit data also shows that states where strong regulatory barriers to land/housing supply are in place experienced far greater household debt levels than states where land/housing supply is less tightly regulated.

To illustrate, first consider household debt relative to GDP in states where land/housing supply has been strangled via regulation:

As you can see, household debt levels in these states is above the national average. By contrast, in states with relatively permissive land-use regulations, household debt levels are well below the national average in these states [as can be seen in the graph below].

Now consider house price volatility and affordability in both sets of markets, as measured by the Harvard University / Demographia Median Multiples (median house price divided by median household income).

First, in the states where land/housing supply has been strangled via regulation,… housing has displayed high levels of price volatility and is often quite expensive [as shown in the graph below]:

The Median Multiples in states with relatively permissive land-use regulations, [see graph below,] clearly shows that the cities/states with less prescriptive land-use regulations (planning systems) have generally achieved both more affordable housing and lower levels of house price volatility than those with more onerous requirements.

Some of the key reasons behind the lower debt levels – reduced price volatility, and improved affordability in less supply-constrained markets – were explained in a previous article [in which I said]:

…restricted land/housing supply is a double-edged sword. With supply unable to respond quickly to changes in demand, the housing market becomes overly sensitive to demand shocks, resulting in greater price volatility and boom/bust cycles as demand rises/falls.

During an upswing, the extra demand will automatically feed into higher home prices rather than new construction. In turn, the price rises and perceived scarcity will encourage speculative demand and ‘panic buying’ from first-time buyers, which helps to drive prices up even further. The opposite holds during a downturn, where unresponsive supply will help to accentuate price falls as new housing planned years ago continues to hit the market.

Texas, Pennsylvania and Ohio – all states with more responsive land-use regulations – managed to maintain far lower average land prices than the supply-restricted states (see below chart):

In the process, these states experienced a smaller build-up and subsequent decline of debt than the states where land-use regulations were strict – namely, Nevada, California, Arizona and Florida.

So where does Australia figure in all of this?

Well, we know from my previous article that rising land prices are behind Australia’s expensive housing. Now consider the chart below, which shows Australia’s mortgage debt-to-GDP relative to the US as a whole:

…and to specific US states:

Although Australia’s level of mortgage debt-to-GDP is higher than the U.S. average, it appears less extreme when compared against the epicentres of the U.S. housing bubble/bust – California, Nevada, Arizona and Florida.

Conclusion

The key point to take away from this analysis is that the supply-side of the housing market is critical and is, itself, a key driver behind increasing levels of mortgage debt. It is, therefore, paramount that authorities work to free-up the supply-side barriers that create the positive feedback loop of credit-fuelled demand feeding into higher prices and speculation. Only then can stable and affordable housing markets be achieved, and the painful deleveraging that typically follows the bursting of housing bubbles be avoided.

*http://www.macrobusiness.com.au/2011/11/the-us-versus-australian-bubble/