The Bubble Delusion

In last week’s article we touched on an apparent and much hyped ‘housing bubble’ that the media and some property commentators claimed had descended on the Australian property market.

The RBA was quick to rebuff the notion, with assistant governor Malcolm Edey asserting that Australia ‘should not be rushing to reach for the bubble terminology every time the rate in house price increases is higher than average, because by definition that’s 50 per cent of the time … and you’re just going to be unrealistically alarmist by making that call’.

Among all the conversation, speculation and fear mongering, the most important factor contributing to what would be termed a bubble in housing prices is being left by the wayside. As Bank of America Merrill Lynch economist Saul Eslake notes, the necessary part of the equation is rising indebtedness. In the Australian context, this has been notably absent.

In September, the Reserve Bank released data showing that new housing lending picked up, but the impact on overall borrowings was contained by the level of loan repayments. The net result, therefore, is that the ratio of household debt to income remains relatively stable. While the market dynamics are clearly supporting prices, the credit data tends to undermine the bubble argument.

In addition, the debate has been fuelled in part by the state of international housing markets post the onset of the GFC. In August, when the Commonwealth Bank announced a $7.7bn profit, it went to considerable lengths to point out the differences between Australia and some distressed housing markets offshore, such as the US. In Australia, this simple equation remains constant: we have an excess of demand over supply and our population continues to grow at above-average rates.

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