The history of Australian Property-Real Estate Cycle
The history of Australian Property-Real Estate Cycle
It is an interesting fact that every rise in Australian property-real estate market prices has led to a downturn, with the one exception of the period between 1961 to 1964.
A popular method of determining property valuation has been comparing Australian housing prices to rents. In a stable market, the costs of buying and renting usually, closely match each other, but due to factors such as taxes and interest rates, it is unlikely that costs will equal.
Ever since the post-World War II boom, the ratio has unevenly decreased with an upswing in the ratio suggesting the presence of a bubble such as the mid 1970s, early 1980s, the late 1980s and now in 2013.
As with inflation and rents, housing and apartment prices have also outstripped incomes and unfortunately, the Australian Bureau of Statistics (ABS) does not provide a long-term median Household Disposable Income (HDI) series, so the denominator is derived by dividing aggregate real gross household income by the number of occupied households on an annual basis.
This results in an unusually high (HDI) as averages are typically greater than medians, and is further amplified as the (HDI) is combined with such things as superannuation which cannot be drawn upon to finance debt repayments.
It is easy to see the major cause of the Great Depression which had a deflating land bubble, centred in the commercial property market. Every major rise in the ratio has resulted in a downturn, correlating with, and arguably causing, the economic recessions of the mid-'70s, early '80s and early '90s.
The ratio has doubled from 1996 through to the peak in 2010 and the substantial rise in the ratio during the late 1970s was likely due to an anomaly in splicing multiple land value series together, though part of the rise is justifiable because of a residential bubble. The primary determinant of the boom and bust cycle in the land market is availability of credit/debt used to speculate on rising capital values of real estate. While data on private debt goes back to 1861, aggregate land values only begin in 1910.
Debt peaked in 1893, driving a colossal commercial land bubble that burst, causing the worst depression in Australia's recorded history. This also occurred in the 1920s, with the same result. It took until the 1970s for the debt cycle to assert itself once again, with one boom and bust after another.
Debt reached the highest peak on record in 2008, driving the largest land boom on record and unsurprisingly, the cause for the massive rise in housing prices and land values, along with net rental income losses, is the colossal increase in household debt, primarily composed of mortgage debt.
It has more than quadrupled since 1988, rapidly accelerating during the 1990s and 2000s when the ratio peaked in 2010, as did housing prices, which is clearly no coincidence. While land booms have been a continual feature of the Australian economy, what separates this cycle is the relative size of the boom in both land values and private debt and it is often claimed that “this time is different”.
And it certainly is different, but not for the reasons usually given because Australia has not experienced a land boom, or bubble, of this magnitude before in its history.
