I found an interesting conversation with Jeremy Grantham who believes there are two additional housing bubbles. One is in the UK and the other is in Australia. http://video.ft.com/v/79128759001/Apr-19-Jeremy-Grantham-on-bubbles
The Australian bubble is especially interesting because many reports show that high house prices are a direct result of a crippling shortage of supply, caused by restrictions on the rezoning of land on the edges of major cities, and policies that force property developers to foot the bill for the cost of delivering water, sewage, road and electricity to new housing estates.
My question would be how far can the relationship of housing prices to family income get out of whack if there simply aren’t enough houses ?
Goldman Sachs issued a report this week specifically on the Australian market. Goldman suggests Australia does face a looming and acute housing shortage. At the same time, he estimates that Australian housing prices are currently between 25-35% overvalued. His conclusion is that should Australia’s economy begin to suffer due to a decrease in China led export growth there could be a rapid correction in housing prices.
The housing shortage is being driven both by a much faster than expected birth rate and by strong net migration into Australia. Australia simply hasn’t been building homes fast enough to keep up. The Goldman report shows that in the 20 years between 1985 and 2005, Australia built an average of 150,000 homes each year for every 240,000 increase in population. That translates to 60% of a new home constructed for each new person. In the past six years, this trend has changed. By mid-2009, the population had to rise by 480,000 in order to achieve the 150,000 new homes constructed in a year. For each new person, only 30 per cent of a home was constructed. And the impact of this is compounded by a change in the demand for housing, as the children of the Baby Boomers are now hitting the key household formation age.
Over the past five years, there's been a surge in the growth rate of the 25-29 age group – which has been rising by an average 3.7% each year. This will result in an average 2.7% annual growth rate in the 30-34 year age group in the five years to 2016. This is a dramatic increase, considering these two age groups averaged growth rates of less than 0.3% per annum for the 15 years up to 2006.
According to the Goldman Sachs report, "We see an acute housing shortage developing in coming years. At the national level, our base-case forecasts suggest that in 2010 there is currently a demand for housing requirement of 190,000 in 2010, which is set to rise to 196,000 in 2015. This compares to housing completions of 145,000 in 2009."
It warns that "in the absence of a large and sustained rise in housing completions in the next 5 years, an acute shortage in housing is set to accrue."
The report estimates there is a national shortage of around 157,000 housing units at present (which compares with the largest historical housing shortage of 28,000 at the end of 1997). The report estimates the housing shortfall will increase to 250,000 units by the end of 2012. It says the housing shortage is most pronounced in Queensland, NSW and Western Australia, while South Australia is the only state with a moderate housing surplus.
However, while Goldman sees a shortage in housing, they also note the disconnect between housing prices and household income / rental rates.
Goldman Sachs says that it uses two methods to calculate whether housing prices are excessive. The first measures housing affordability (which takes into account house prices, income, lending criteria and mortgage rates), and compares it to its long run average. On this basis, it says, "Australian house prices are 35% overvalued".
A second measure, which Goldman prefers, includes rises in rents, along with housing affordability. This approach, the report says, "currently suggests that house prices are 24% overvalued."
But the report says that the Australian housing market is not a speculative finance-fuelled bubble, despite being overvalued. It notes that the refinancing of established homes is at a nine-year low, and that the loan to valuation ratio of established dwellings is well below the levels that we saw at the beginning of the decade.
I’d have to say that does sound a little different than the American housing bubble which was built on shoddy loans, property flipping and created an excess inventory.
