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Nobel laureate, Professor Vernon Smith: "Pretty good bubble in Sydney & Melbourne"

Discussion in 'Property Market Economics' started by Bullion Baron, 30th Jul, 2015.

?

How large a nominal bust (over 3 years) would confirm a bubble had existed?

  1. Over 10%

  2. Over 15%

  3. Over 20%

  4. Over 25%

  5. Over 30%

  6. Other

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  1. Bullion Baron

    Bullion Baron Well-Known Member

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    http://www.afr.com/real-estate/nobe...ate-have-a-pretty-good-bubble-20150729-gimq85
    He says further:
    And this is how rent growth is looking at the moment (via http://petewargent.blogspot.com.au/2015/07/slowest-rental-growth-since-1995.html)
    [​IMG]

    I know that many here don't rate economists highly... but plenty of PC'ers have also said the Sydney & Melbourne property markets are overheated.

    My view is that a bubble is only confirmed once you get the pop (if you don't get that it was just expensive/overvalued), so how large does that nominal bust need to be? In my opinion (at a capital city level) if we saw a greater decline (in the median) than 15% over 3 years then it was a bubble. I think there's a good chance of seeing that in Sydney & Melbourne once the peak is in.

    What's your view?
     
  2. willair

    willair Well-Known Member Premium Member

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    [​IMG]

    By looking at that angle of the photo he may be inside a building in Pitt st,and I have read some of his work ,just look back what started all this then you will once that changes wacko,there is a generation out that have only seen one way only up,and when that changes as it will ,I will start investing in startup pharmaceutical new drug anti-depression unlisted German based companies..
     
  3. Perthguy

    Perthguy Well-Known Member

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    It's a boom, not a bubble.
     
  4. Bullion Baron

    Bullion Baron Well-Known Member

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    So how would you personally differentiate between a bubble and boom?
     
  5. Perthguy

    Perthguy Well-Known Member

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    Personally, I think a housing bubble is caused by factors that go beyond normal market forces. There is something artificial that drives a market into bubble territory and it is catastrophic when it crashes. The sub-prime market in the US is an example. The artificial thing that drove the market was banks lending to people who could no afford to pay their mortgage repayments. That's not real, that's artificial. I don't see anything artificial driving the Sydney market and I don't expect it to be catastrophic when it crashes. But then, I remember the last Sydney boom. The only difference is that last time it wasn't trendy to call it a 'bubble'.

    The definition of housing bubble is that prices will drop back to when the bubble formed.

    http://news.domain.com.au/domain/real-estate-news/the-housing-bubble-explained-20150606-ghha4m.html

    Commentators are claiming the Sydney bubble started forming in 2000, so if this is a bubble and it "pops", prices would go back to 2000 levels. I could actually afford to buy in Sydney at 2000 prices ;)
     
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  6. Perthguy

    Perthguy Well-Known Member

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    What do you see as the main differences between a housing boom and housing bubble?
     
  7. Bullion Baron

    Bullion Baron Well-Known Member

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    As I said in the OP, my view is that a bubble is confirmed once you get the pop. I believe a decline of >15% at a capital city level in nominal terms would be larger than any we've had in recent decades.

    No pop, no bubble.
     
  8. Perthguy

    Perthguy Well-Known Member

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    Fair enough. Out of interest, do you know how much the Sydney market declined after the last boom? I remember the last boom was a big one but I didn't really follow the fallout after it all went south.
     
  9. KDP

    KDP Well-Known Member

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    I'm with @Perthguy, surely a popped bubble would mean it goes down to the level before the bubble formed.
     
  10. Shadow

    Shadow Well-Known Member

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    Every housing bubble that has ever burst, anywhere in the world, has always been characterised by a strong increase in house price to income ratios for 5-10 years immediately preceding the crash. There has never been a crash without this preceding immediate surge in the price/income ratio.

    Sydney's price income ratio has been increasing for three years, since mid 2012, after having declined for the previous decade. So far, that's not sufficient to cause a crash if all the other global housing crashes are a guide. If Sydney keeps surging at this rate for another couple of years, then it could be in danger of crashing.

    Australia's other cities are even less likely to be in a bubble, given their weaker recent growth.
     
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  11. Kangabanga

    Kangabanga Well-Known Member

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    do you see "irrational exuberance" with property investors in Sydney/Melbs at auctions? Do most property investors think the only way is up and there is not much chance of a significant downturn? Are prices being funded by excessive easy credit and leverage?

    If the answer is yes, then we are definitely looking at a bubble.

    Its not that hard to spot a bubble, the impossible part is knowing when it pops.
     
  12. Shadow

    Shadow Well-Known Member

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    No moreso than in the early 2000s, or in 2009 after Rudd boosted the FHOG.

    No more than usual.

    No moreso than in 2000 or 2009. Credit growth is actually quite low now compared to the late 90s and early 2000s period.
     
  13. Bullion Baron

    Bullion Baron Well-Known Member

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    Only declined around 7% (nominal) from the peak in Sydney according to some Residex data I have on hand, but if I recall correctly I think ABS shows a little more.

    How do you measure where the boom turned into the start of the bubble?
     
    Last edited: 30th Jul, 2015
  14. Shadow

    Shadow Well-Known Member

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    Sydney fell 20% in real terms from 2003 through 2008. It wasn't until 2013 that Sydney's price/income ratio finally recovered back to it's previous 2003 peak.
     
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  15. Tekoz

    Tekoz Well-Known Member

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    @Bullion Baron & @Shadow

    The Aussie economy has no alternative industry to speak of other than the resources sector.
    Last year, of Australia's top 20 exports, 19 were natural resources (including agricultural products). The one that wasn't in natural resources?

    Have a guess....
    It was car exports. And if you need any reminding, the Aussie car industry is on the fast road to terminal death. Adelaide is the example for this as you can see on the property price index.​

    Australia's biggest industry is now housing and construction?

    The major issue that sent the US economy over the edge in 2007 and 2008 was that its economy had become overweight due to consumption rather than production.

    [​IMG]
    Proof:http://www.tradingeconomics.com/australia/gdp-growth-annual
    if you are looking into that graph you'll see the continuous slump in the GDP growth.

    What is a house if it isn't a high-priced consumption item? Housing certainly isn't productive. If I'm being cold about it, the reality is that any level of housing that exceeds basic shelter and sanitation is more unproductive — the bigger it is and the more resources it consumes.

    Now, I'm not saying that everyone should live in tiny houses. I happen to like my big house in the suburbs. What I'm saying is, don't mistake a booming housing market for a booming economy.

    One is not necessarily the other.

    Remember that Australia has gone 25 years without a recession. That isn't normal. The US economy tends to suffer a recession on average every seven years.

    The bottom line is that Australia is long overdue for a downturn. The Australian federal debt continues to grow, and budget deficits will only get bigger and bigger…adding more to the debt.
     
  16. acorn123

    acorn123 Well-Known Member

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    Just to mention that Sydney & Melbourne are international cities/markets.
    20% increase of house price is actually offset by ~30% decrease of AU$.
    Your net worth is more or less decreased.
     
  17. Tekoz

    Tekoz Well-Known Member

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  18. acorn123

    acorn123 Well-Known Member

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    These people are aiming for longer terms: preparation for their next generations perhaps.
    A 5~10% decrease of house price will attract more buyers ....., with the declined AU$.
    Continuing population increase is the key for Sydney/Melbourne.
    And state governments are happy to collect more $$ ....
    Sense the long-term trend?
     
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  19. Tekoz

    Tekoz Well-Known Member

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    @acorn123 well if that's the case then Sydney and Melbourne market will become more expensive in the next few years. Hence it will not be affordable for the first home buyer anymore.

    Only wealthy investors and rich family can afford to assist their kids property.

    Interesting years ahead for Sydney market that never seems to bust or goes down except in some areas where the mortgage stress has striked during the GFC (as mentioned by @sash in other thread).
     
  20. acorn123

    acorn123 Well-Known Member

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    ARPA is actually helping home buyers by suppressing investors.
    Unfortunately, in general, Abbott/Hockeys policies are for "rich class".......
    Abbott supports cutting workers Sunday penalty rate is a typical example:
    let the poor get poorer.
     
    Last edited: 5th Aug, 2015
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