2 ms·

You're either understating (or simply unaware of) the extent of the real estate bubble in the US or you're overstating that bubble in Australia (or both). To s

by cletus 15y ago

You're either understating (or simply unaware of) the extent of the real estate bubble in the US or you're overstating that bubble in Australia (or both). To suggest the FHOG (which is $7,000 now and only ever got as high as $14,000) is responsible for this is disingenuous at best. What's your argument for this? There are two basic components in house prices: the cost of land and the cost of construction. Land is essentially scarce. Sure there is lots more land that we haven't built on than we have (particularly in Australia) but desirability comes into play here as do infrastructure costs. There is only so far you can effectively live from work centres. The further you have to build out the more roads, public transport (if you even have it), water, electricity, etc cost. Land has certainly increased in value in Australia but a huge component of the increases is in the cost of construction. Nowadays it's hard to build a house for less than about $200,000. That is (IMHO) a huge problem. Building apartments now is in most capital cities prohibitively expensive for the middle class. To give you an example, I pay less for my one bedroom in downtown Manhattan than the apartment I used to live in in West Perth now costs. Manhattan. Conventional wisdom is that property is a good hedge against inflation. The massive inflation in construction costs should tell you something about inflation. Despite what the ABS may say about the CPI, the standard of living in Australia has dropped massively in the last decade, particularly in Perth. This probably mirrors the massive housing inflation and the after-effects you saw in Sydney in the 70s and 80s, which results in those with homes being cash-poor and asset-rich and those left standing when the music stopped just being poor. You just can't compare what's happening in the US and Australia. In the US in many large cities you can still buy a house for <$100,000. Where can you say that in Australia?

podperson 15y ago
As an Aussie living in the US and somewhat out of touch with what's going on back home, I'm fascinated and confused by this. Are you arguing FOR or AGAINST the idea that there's a significant asset bubble in Australia? We were recently looking at relocating to Sydney and were blown away by how prices (including rents) had increased since I last lived there (in 2002). The interesting thing to me is that rents in Australia seem to have skyrocketed while prices have not (they're high, but rents are higher). In the US the housing bubble was characterized by prices increasing far faster than rents (which led to an illusory improvement in standard of living as people borrowed against "equity" and spent the difference). It looks to me as though Australian rents have risen faster than prices, which presumably has the reverse effect.
- cletus 15y ago
  I'm saying what's happened in the US and Australia is different. US prices were driven by rampant speculation fueled by shady lending practices where the lenders weren't accountable for defaults and a product that was doomed to failure from the start. While there has been speculation in Australia, it seems driven largely by structural changes in the economy. Resources has brought a lot of money in. Those people traded up for property closer to the ocean and/or the city, driving up those prices leaving new entrants to live further and further out. This is basically a natural phenomenon that happened in a somewhat accelerated fashion. I see a plateauing of prices for some years to come as a result. Rents are simply playing catch up with the change in house prices. They always lag. There's nothing surprising here. It is however concerning because Australia is very much dividing between the haves (construction/resources) and the have nots (everyone else). I largely missed this bubble as I was working in Europe at the time (2001-2004). As it turns out, financially speaking I would've been better off buying a house for $80k (in 2000, worth $350k+ in 2004-2005) and sitting on a beach in Spain for 4 years than working. Australia just isn't that attractive a place to live (for me) now and that's kinda sad.
Goladus 15y ago
> There are two basic components in house prices: the cost of land and the cost of construction. Those are the components of house cost, not price. Price is determined by supply and demand. Take two identical houses on the same street, the one in the superior school district will command a much higher price.
justsee 15y ago
I'm completely aware of the extent of both the US and UK housing bubbles. It seems you're very unaware of the extent of the Australian housing bubble, and yet at the same time illustrate in your comment just how expensive Australian real estate is (compared even to Manhattan). The Economist stated earlier this year that Australian property is now the most overvalued in the world, at 56% : http://www.smh.com.au/business/aussie-home-prices-worlds-mostoverpriced-survey-20110304-1bhhy.html http://www.smh.com.au/business/aussie-home-prices-worlds-mos... The internet is awash with plenty of detailed analysis of the impact of the FHOG on the Australian market. For instance one article talks about one of the two main drivers of the Australian bubble: "a government sector that has (to some extent unwittingly) used asset price manipulation as a cheap means to stimulate the economy". It provides a chart illustrating the impact of FHOG: http://is.gd/CckGAV http://is.gd/CckGAV You can read that particular article here: http://www.businessspectator.com.au/bs.nsf/Article/property-prices-RBA-bloxham-joye-pd20110404-FL7ED http://www.businessspectator.com.au/bs.nsf/Article/property-.... As to the FHOG being only $7000 ( and at its peak was actually $21 000, not $14 000), the article points out that $7 000 becomes $50 000 thanks to loan-to-value ratios. Even people with a vested interest in pushing Australian property are starting to give up their usually preposterous arguments (that we have a housing shortage, that we don't offer non-recourse loans like in the US etc) and admit that Australian property is destined to fall for the next few years.

by cletus 15y ago

podperson 15y ago

As an Aussie living in the US and somewhat out of touch with what's going on back home, I'm fascinated and confused by this. Are you arguing FOR or AGAINST the idea that there's a significant asset bubble in Australia? We were recently looking at relocating to Sydney and were blown away by how prices (including rents) had increased since I last lived there (in 2002). The interesting thing to me is that rents in Australia seem to have skyrocketed while prices have not (they're high, but rents are higher). In the US the housing bubble was characterized by prices increasing far faster than rents (which led to an illusory improvement in standard of living as people borrowed against "equity" and spent the difference). It looks to me as though Australian rents have risen faster than prices, which presumably has the reverse effect.

cletus 15y ago
I'm saying what's happened in the US and Australia is different. US prices were driven by rampant speculation fueled by shady lending practices where the lenders weren't accountable for defaults and a product that was doomed to failure from the start. While there has been speculation in Australia, it seems driven largely by structural changes in the economy. Resources has brought a lot of money in. Those people traded up for property closer to the ocean and/or the city, driving up those prices leaving new entrants to live further and further out. This is basically a natural phenomenon that happened in a somewhat accelerated fashion. I see a plateauing of prices for some years to come as a result. Rents are simply playing catch up with the change in house prices. They always lag. There's nothing surprising here. It is however concerning because Australia is very much dividing between the haves (construction/resources) and the have nots (everyone else). I largely missed this bubble as I was working in Europe at the time (2001-2004). As it turns out, financially speaking I would've been better off buying a house for $80k (in 2000, worth $350k+ in 2004-2005) and sitting on a beach in Spain for 4 years than working. Australia just isn't that attractive a place to live (for me) now and that's kinda sad.

Goladus 15y ago

> There are two basic components in house prices: the cost of land and the cost of construction. Those are the components of house cost, not price. Price is determined by supply and demand. Take two identical houses on the same street, the one in the superior school district will command a much higher price.

justsee 15y ago

I'm completely aware of the extent of both the US and UK housing bubbles. It seems you're very unaware of the extent of the Australian housing bubble, and yet at the same time illustrate in your comment just how expensive Australian real estate is (compared even to Manhattan). The Economist stated earlier this year that Australian property is now the most overvalued in the world, at 56% : http://www.smh.com.au/business/aussie-home-prices-worlds-mostoverpriced-survey-20110304-1bhhy.html http://www.smh.com.au/business/aussie-home-prices-worlds-mos... The internet is awash with plenty of detailed analysis of the impact of the FHOG on the Australian market. For instance one article talks about one of the two main drivers of the Australian bubble: "a government sector that has (to some extent unwittingly) used asset price manipulation as a cheap means to stimulate the economy". It provides a chart illustrating the impact of FHOG: http://is.gd/CckGAV http://is.gd/CckGAV You can read that particular article here: http://www.businessspectator.com.au/bs.nsf/Article/property-prices-RBA-bloxham-joye-pd20110404-FL7ED http://www.businessspectator.com.au/bs.nsf/Article/property-.... As to the FHOG being only $7000 ( and at its peak was actually $21 000, not $14 000), the article points out that $7 000 becomes $50 000 thanks to loan-to-value ratios. Even people with a vested interest in pushing Australian property are starting to give up their usually preposterous arguments (that we have a housing shortage, that we don't offer non-recourse loans like in the US etc) and admit that Australian property is destined to fall for the next few years.