EMH versus asset price bubbles

Ratio eases

Macroprudential intervention saw the better part of A$½ trillion wiped off the value of Aussie dwelling stock over a two-year downturn for housing markets, and the credit squeeze played a role in slowing Aussie GDP growth to about 1½ per cent in FY 2019. 

The ratio of the Aussie dwelling stock value to annual GDP has accordingly declined from a peak of 3.8x to about 3.4x, though now there's been a return to solid price growth since the election.

International housing market comparisons are usually dubious, especially when they include measures of GDP.

There was a theory doing the rounds some years ago that because the 1998 Hong Kong market went down with the Asian crisis from a ratio of about 3½, and because Ireland's famous collapse also dropped from an equivalent ratio of about 3½, then Australia and New Zealand must be in a ‘bubble’ upon reaching that ratio.

The earlier Japan bust of the late 1980s began when the ratio was just under 4x. 

The problem since 2007 is that everything that goes up is automatically ascribed the 'bubble' moniker by contrarian commentators. 

Yet just as proponents of the efficient markets hypothesis (EMH) ratio predicted, the ratio has mostly proven to be a worse than useless indicator.  

Of course, whenever you look back at absolute market peaks asset prices will always look expensive, in retrospect, but importantly this would be true even if there was no such thing as a bubble, as elucidated by Scott Sumner and others.  

By 2012, when interest rates were higher than today, then RBA Governor Stevens had finally heard enough of the bubble talk, commenting: 

'We’ve been around this level of house prices to income for 10 years - it's taking a long time to burst if it is a bubble'.

Were he not a central banker Stevens might've inserted an additional adjective.

If you adopt the EMH as your default position, you'd also point out that Hong Kong housing prices promptly quadrupled between 2000 and 2018.

Can you argue that something valued at 100 was a 'bubble' because it fell to 60, if it subsequently went up to 400? Sounds tenuous. 

Hong Kong's dwelling stock to GDP ratio had ripped back to well above 4x in 2018, while China apparently looks destined to steam to the top of the charts.

The figures for Q3 2019 will likely put Australia at about 3.4x, while led by Auckland housing prices in New Zealand have exploded higher since 2012 (confounding a thousand experts predicting the opposite) to hit new record highs this week. 

Don't Japan me...

Just as surely as every stock market conversation on the subject of mean reversion ends up with someone saying 'but in Japan...' all conversations on Aussie real estate must end with 'yeah but in Ireland...' (even though Australia has a floating currency and a contrasting labour force dynamic).

Coincidentally, I spent quite a lot of time in Dublin over the European summer spread across a couple of trips to the Emerald Isle. 

The GDP figures in Ireland are now an international joke.

But I noticed that while a macroprudential restrictions game of whack-a-mole has sort of kept of a lid on housing prices, it's instead manifested a rental crisis with rents going bananas, ballooning to way in excess of anything seen before or since the financial crisis.

Smartest guys in the room

When you drop down a level from the macro view, it's clear to see that in real terms housing prices - and particularly debt serviceability - have improved dramatically in parts of Australia, from Perth, Darwin, Adelaide, and many mining towns, to apartments in Brisbane, Gold Coast, and elsewhere. 

Surprisingly Sydney has been the worst-performing capital city housing market since September 2003 - although this is a little misleading because 2003 was a cyclical peak for the harbour city - but as the most expensive city in Australia, Sydney attracts much of the attention. 

Over recent years I've sought out personal meetings with the sharpest brains in finance from hedge fund managers to investment researchers, and advisors, and regulators (Hempton, Tepper, Aitken, Drehmann from the BIS, and many others within Australia). 

The consensus analyst view seems to be that inner-Sydney/prestige property prices are broadly in line with those of many other international cities, but the further west you travel the more eyebrow-raising housing markets can become.

I might add that the new high-rise apartment sector is likely to remain a quagmire for some time, at least until the next dwelling shortage increases buyer urgency from around 2021. 

Debt serviceability

The BIS view is that debt serviceability is critical, as I discussed with them directly in London here. 

Australia has long had relatively high household debt levels, in part because there's so little public housing and private landlords account for almost all of the net increase in rentals. 

But our ability to service that debt has improved markedly over the past dozen years - the household interest payments to income ratio has already fallen by a third, and is now well below where it was in the late 1980s. 

No-one knows anything

A dozen years on from the crisis, is EMH is reasserting itself?

Iron ore hasn't gone to $10/tonne as some predicted (at the last close it’s at about A$125). 

China's housing market and economy have generally ploughed on, despite endless doomsday predictions about debt and the empty ghost apartments, and rents in Dublin are spiralling to record levels.

House prices in New Zealand have just hit new record highs. Even if prices do revert lower - which they may not - they'll still be higher than when they were initially described as a bubble.

Across Germany's dispersed business landscape with the Mittelstand at the heart of its economy, once the poster child for how affordable housing markets should operate, housing activity is booming.

I don't know much about Canadian real estate - except that people like to lecture me about it on Twitter - but instead of collapsing as publicly predicted in 2015 the Canadian house price index has increased to a record level. 

The Dow Jones and S&P 500 have confounded a million 'it's going to burst' predictions since 2016 to close out this week at record highs, leaving the expert stock pickers and fund managers in the dirt.

The NASDAQ is trading above 8,500, which makes the 'tech bubble' levels look distinctly not like a bubble, and Bitcoin didn’t crash at $1,000, or even $10,000 (mea culpa).

Even the sharp economic contraction and escalating civil unrest hasn't brought down the Hong Kong housing market...at least, not just yet.

Ironically it's partly capital flight from Hong Kong that will see Sydney and Melbourne prices rise to new highs by the first quarter of 2020.

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