My old economics professor used to have a saying: “Bubbles are like pornography. It’s impossible to define, but you know it when you see it.”
(No, he didn’t get out much.)
This gets to the heart of the problem with all the talk you hear about Australia’s “property bubble”.
No one can actually define what a bubble is.
It’s funny, when you think about how many newspaper pages or TV hours are devoted to talk about Australia’s “property bubble”, that no one can tell you exactly what they are.
And so I can understand why a lot of my students are scratching their heads and not sure what to make of all this ‘bubble’ talk – especially at the moment.
And so people say to me, “Of course there’s a property bubble Dymphna! Just look at how expensive property is.”
But this is the first thing to remember about bubbles. Just because something is expensive, doesn’t mean there’s a bubble.
Take a bottle of Penfolds Grange, 1969. I had a look on e-bay and I can get one of those for $899.
Seems like a lot to me for a bottle of plonk, but there you go.
Is it expensive? I think we’d all say yes.
Does that mean there’s a bubble in Penfolds Grange?
Probably not. Penfolds has established a reputation for quality, and there’s very limited supply of the 1969 vintage. People are willing to pay that much for it.
The market is just doing its thing.
And the market has set an expensive price.
The tricky thing about property is that we’re also talking about people’s homes. So when homes start getting expensive, it quickly becomes an emotive topic.
And I can understand that. When your kids are locked out of the property market, that’s a problem.
(You’ve been wanting to turn their bedroom into a multi-media room for ages.)
And I think that as a society, if there isn’t enough affordable housing available – if we’re making it difficult for people to get onto the property ladder – then we’ve got a problem.
There is an issue of fairness here.
But while that might be a problem, it doesn’t mean that the market isn’t working. We might not like the outcomes that the market comes up with, but it doesn’t mean that the market’s broken.
And it doesn’t mean there’s a bubble.
So if an expensive price isn’t a definitive guide, what is a bubble?
Whatever definitions are out there, there’s seems to be a common theme that bubbles occur when prices are trading at a disconnect with fundamental or intrinsic values.
But that opens up another can of worms? How do you measure intrinsic value?
Take our bottle of grange. What’s the intrinsic value of a bottle of wine?
I could say that the average bottle of wine in Australia is $30 a bottle. Therefore Grange is 3000% overvalued. But this ignores a whole raft of factors.
And really, the price of something is only ever what someone is willing to pay for it.
But you see a lot of this kind of analysis in Australia. House prices are compared to incomes, rents, other countries, automobiles, French buns, whatever.
But none of this really gets to what people are willing (and able) to pay. The only thing that really gets to this is supply and demand.
(You knew it was coming didn’t you?)
Trusty ol’ supply and demand.
And what’s been going on in Australian supply and demand? Well, a few weeks ago I showed how housing construction has been consistently falling behind population growth over the past 15 years. (Read it here.)
Supply has constantly lagged demand.
And it’s not just population growth. Incomes have risen sharply over the past twenty years, as has our access to finance and credit. Interest rates have fallen. All these things feed into our ‘ability’ to pay.
Remember demand isn’t just about people. It’s also about what they’re able and willing to pay.
So if ‘fundamental value’ is too slippery a concept, what else have we got?
Well, there’s a couple of other features that are commonly associated with bubbles.
The first is that people’s expectations become amicably divorced from reality.
You saw this with the dot.com bubble. There were tech stocks valued at hundreds of millions of dollars, even though they hadn’t generated a cent of revenue. They didn’t even have a proven revenue model in place.
People expectations had been built on the promise of some golden age of e‑commerce. But it was pie in the sky stuff.
Once people realised that their stocks were built on science fiction rather than intrinsic value, the market collapsed.
But what’s the ‘fantasy’ under-pinning Australia’s so-called property ‘bubble’? Land ownership is older than capitalism. It’s hardly flash in the pan stuff.
And no one’s hanging their hat on some sort of radical innovation in the science of sheltering people.
Sometimes in bubbles, the fantasy is simply about prices themselves. Prices have gone up, therefore they will keep going up.
Any rising market attracts speculators – people who buy with the sole intention of selling at a higher price later.
But I really don’t think speculators are having that big an impact on the market. And after 5 or so years of prices flat-lining (more in some cities), it kind of seems silly to say that the market is based on the belief that prices always go up.
(I know a lot of people who’ve been sold on the dud of negative gearing might be hanging their hats on it, but you’re not one of those folks, are you!)
So where are we at?
Is property expensive. Sure.
Is property unfairly expensive? Maybe. Maybe it is for some people.
But is it a bubble? No.
Is the price of housing out of whack with the fundamentals? I don’t think so.
Is the market driven by speculators or supported by some fantasy about unrealistic price growth or some other change in the market?
Without any of these factors in play, I think it just doesn’t make sense to talk about a bubble in Australia.
…as much as the media might want to at the moment.