In an eerie echo of statements made before the collapse of American housing bubbles in 2006, leading Australian bankers claim that Australia is not suffering a housing bubble. Yet prices are unsustainably high and a collapse is inevitable, though when it will happen may be unpredictable.
Median home prices in Sydney are AU$795,000 (US$606,000). More Sydney suburbs have median prices over AU$2 million than under AU$600,000.
America’s 2008 financial crisis didn’t lead Australian housing prices to fall. In fact, prices in Sydney have grown 106 percent and in Melbourne 88 percent since then. Ominously, however, prices in Melbourne, which are nearly as great as in Sydney, are falling for the first time in four years.
Meanwhile, over in Auckland, New Zealand, the median sale price in February was around NZ$945,000 (US$663,000). Sale prices may not reflect the value of all housing in a market, but this is still a high price. According to Zillow, median values in Los Angeles are just $617,000.
Some may say that these high prices don’t qualify as bubbles. According to the strict definition, a bubble only exists if sale prices are significantly higher than the “fundamental value” of real estate as indicated by rents. So if rents keep up with sale prices, there is no bubble. But there’s no reason why rents and sale prices won’t rise and fall together.
According to the latest UBS bubble index, among major cities Sydney has the fourth-highest risk of a bubble collapse, with Vancouver, London, and Stockholm coming in at win, place, and show. UBS only evaluated 18 cities, so Melbourne, Auckland, and other cities down under aren’t on the list but are probably as much at risk as Sydney.
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You’re reading it here, so you know that all of these cities are under growth constraints such as urban-growth boundaries. These growth constraints steepen the supply curve (in economic parlance, make housing supply inelastic), so small changes in demand can lead to large changes in price–both up and down.
People shouldn’t have to pay more than three times their household incomes to buy a home. Median household incomes in Australia and New Zealand were around AU$81,000 (about US$60,000) in 2014, so median home prices should be around AU$250,000, not well over twice that.
What could cause the housing bubbles to collapse? Most discussions of the U.S. housing bubble focus on foreclosure rates and the collapse of the subprime mortgage market, but prices started to fall in August, 2006 while the subprime market didn’t collapse until March, 2007.
I think what happened was a mismatch between demand and product. Buyers wanted homes in the early 2000s, but the onerous regulatory process in California, Hawaii, and other states kept homebuilders from bringing anything to market for five years or more. When they were able to put new homes on the market, the flush of new inventory combined with the departure of employers who couldn’t afford to pay their workers enough for them to live in the state led to a cooling of prices. Since so much of the mortgage market was based on steady growth of prices, the decline led bond ratings agencies to downgrade bonds. Mortgage bondbuyers panicked, some went broke trying to meet cash reserve requirements on the downgraded bonds, and the market collapsed.
Australia and New Zealand housing prices could go through the same thing. New South Wales “released” land around Sydney for development (i.e., expanded urban-growth boundaries) in 2015 and again in 2017. Similar releases have taken place in Melbourne, and the New Zealand government is talking about it for Auckland. Of course, such releases raise needless alarms about so-called urban sprawl, as if all of Australia could ever be urbanized.
Even with the release of lands, it takes several years for development approvals, so houses may not hit the market for some time. When they do, the market may weaken and then spiral downward. Though such a downward spiral would hurt people who bought homes at the peak of the bubble, it would be a good thing in the long run if the government continued to release lands to keep prices affordable.
