One of the biggest furphies in 2009 was the claim that Australia had a ‘bubble’ in the housing market according to Craig James chief economist at CommSec
He is reported in SmartCompany as saying It didn’t (have a bubble) and still doesn’t but to some extent you can understand where some commentators were coming from with the claims.
In Europe and the US, home prices generally tanked in 2009 but Australian home prices softened, didn’t crash and then began to grow again. The view was that the day of reckoning had merely been delayed.
Where the commentators got it wrong was by glossing over a key fundamental determinant of housing demand – population. In most advanced nations population growth is very modest. In fact, in many European economies population is barely growing or is flat. In Japan, the population is actually contracting and in the US, annual population growth is around 1%.
But in Australia, population growth had been steadily lifting since the mid-noughties. In June quarter 2004, annual population growth was just 1.2% or an extra 230,000 people. And of that total, migration accounted for an extra 100,000 people.
But those migration levels began to lift markedly over the noughties in response to the PPP policy of Federal Treasury – productivity, participation and population. The PPP strategy is an attempt to soften the blow on the economy from the ageing of the population.
In the year to March 2007, over 200,000 extra migrants came to our shores. And by December 2008 annual migration numbers had lifted to over 300,000 people. Now given that the ‘normal’ number of homes built in Australia each year is around 150,000, a lift in annual migration numbers of around 200,000 would be expected to have a big impact.
And as always appears to be the case, the lift in migration numbers wasn’t universally understood by businesses, government departments and builders. Demand for homes has tended to outpace supply over the past three to four years. In late 2007/early 2008 there was double-digit growth in home prices.
Demand for homes was temporarily choked off by higher interest rates but at the trough, home prices were down just 2.5% on a year ago.
Home prices returned to double-digit levels in early 2010 in response to lower interest rates but a combination of increased home building (more supply), slower migration and higher interest rates again have caused home prices to soften with annual growth now around 6.5%.
It’s important to note that, despite the ebbs and flows of interest rates and building over time, there is no evidence of a generalised over-supply of homes. In fact in the Sydney market the rental vacancy rate stands at just 1.2%.
The RP Data/Rismark measure that is well accepted by the Reserve Bank has continued to go sideways over the past six years. Hopefully we will hear a lot less about ‘bubbles’ in 2011.