These Two Charts Explain The Bubble In The Australian Property Market

Data shows two most significant Australian house price cycles in the 1880s and today's unfinished boom

Melbourne and Sydney are in the grip of a property boom not seen since the 1880s.

The bubble is here. The bubble is real.

In the below graph, looking at 1999 onwards, you can see Melbourne and Sydney are in the grips of a long, sustained property boom.

This is the result of good economic conditions. But it is also due to incentives in our system for housing investment. There is a reason the current boom took-off when former Prime Minister John Howard introduced generous tax concessions for money earned selling property in 1999.

The only similar period in history was the property boom of the 1880s. The crash that followed was the worst in Australian history. It upended our political system and was one of the key events that led to federation.

Sydney and Melbourne Real Median House Prices

Stapledon, N. (2012), Trends and Cycles in Sydney and Melbourne House Prices from 1880 to 2011. Australian Economic History Review, 52: 293–317 / Via onlinelibrary.wiley.com

We're spending more of our income on houses than ever before.

The price-to-income ratio shows how much a median house costs compared to average household income. It's been going up, for forever.

Duh. They didn't have credit cards in the 1880s and not much access to mortgages.

Still, the recent increases indicate how much wealth is tied into housing and how reliant Australians are on the ongoing health of the property market.

Ratios of housing prices to household income

Stapledon, N. (2012), Trends and Cycles in Sydney and Melbourne House Prices from 1880 to 2011. Australian Economic History Review, 52: 293–317 / Via onlinelibrary.wiley.com

This economist gave us the preconditions to a bubble. All are currently being met

Economist Hyman Minsky famously described three conditions for a property bubble. All are currently being met in Australia.

First, housing prices are rising faster than incomes.

Second, more and more debt is being used to fund housing purchases.

Third, rent is not enough to cover the cost of investment.

Australians are not earning enough income to pay for the substantial increases in property prices. So instead, we are borrowing more and more money to fund investment.

At the same time, mortgages cannot be covered by income from rent. This means people are paying more for the property than its actual investment value, due to a speculative belief house prices will rise.

Don't believe the data? Well, howabout this guy?

That's Secretary to the Treasury John Fraser (our chief money man) who said in June:

"When you look at the housing price bubble evidence, it is unequivocally the case in Sydney....It is certainly, I think, the case in the higher priced areas of Melbourne"

No-one can say categorically when prices will stall or crash.

What can be said is that markets almost always revert to underlying value and incentives for homeownership enlarge the bubble if not properly directed (see negative gearing and capital gains tax discounts).

Adding to the picture, the huge mortgage debt of Australians gives our Reserve Bank less flexibility to move interest rates. Lower them in the face of poor economic growth and the property bubble may get worse as debt becomes cheaper. Increase them and watch as overzealous and over indebted investors crash out of the market causing huge damage to confidence in the economy.

So, for now it remains too hard. Too many Australians benefit from rising property prices, not enough are feeling the true string of housing unaffordability and everyone is worried about the general state of the economy.

No wonder everyone is looking a bit nervous.

Giphy / Via giphy.com