Bubbles in property around the world usually come through a mixture of low-interest rates, credit supply, and a gap between supply meeting demand. It is further perpetuated by hubris, relaxed government measures, speculation, and the famous ‘FOMO’ (fear-of-missing-out).
A key thing to remember is that property here in Australia or property around the world shouldn’t be treated as the same or even comparable to other asset classes. Despite being influenced by the same factors mentioned above, the property remains an illiquid, immovable, tangible, non-duplicate asset with high barriers to entry. This means that it is not easily converted to cash, you can’t take it with you, you can touch it, feel it and live in it, and no two properties are the same.
Property around the world is subject to different legal rights, protections, and culture. Therefore what happened or what may happen in those countries can be taken as a cautionary tale but by no means a mirror to the Australian market.
Price Growth of property around the world
A trend from the pandemic has been the surge in house prices across the world. In Sweden house prices jumped 17% within the year with a record number of houses being sold. Household indebtedness has grown to 190% of gross disposable income and the median house price in Stockholm sits at AUD$942,359. In New Zealand, the median house price is AUD$1.09 million. The Kiwi market saw an increase of 31% over the year to July. In Canada, house prices have increased about 25% since the pandemic began. The Canadian Real Estate Associations MLS system does not specify the type of average used in its statistics. It states that the average national price is AUD$775,750.
In Australia, the median house price is $955,927 with an annual increase of 18.8%. According to the Bloomberg Economics Global Rankings, when compared with property around the world. Australia only takes the 15th spot and is considered ‘overvalued’ but not a bubble. The biggest bubbles were in New Zealand, Canada, and Sweden. The rankings were established through analysis of home price to rent ratio, price to income ratio, price growth, and growth in home loans. How did we only get 15th when compared with other property around the world?
Bubbles around the world
The metrics that were chosen to develop the ‘bubble rank’ only take on comparable metrics which show how similar each market is, but fails to show the metrics of how different each housing market is and probably a more influential indicator of price growth. How is the tax treatment of property in Sweden, New Zealand, and Canada? How is the net migration of each nation? What are the personal tax rates that impact the disposable income of its citizens? What are the lending criteria in that country? The lifestyle of the country? Are there secure property rights with a firm rule of law and low corruption?
Despite these gaps, the ‘bubbles’ ranked in the study, pale in comparison to the mother of all bubbles. The Japanese house price bubble and the economic implications that entailed is a cautionary tale for all with respect to credit availability, delay economic responses, and hubris.
Japan’s cautionary tale
During the 1980s, property prices in Japan increased between 6 to 7 times. Japan’s post-war economic miracle encouraged Japanese corporations flooded with cheap money to make large international property purchases. The Yen appreciated against the US dollar which led to a loosening of interest rates adding fuel to the fire. The corporate tax rate dropped from 42% to 30%, the top marginal income tax rate dropped from 70% to 40%. At the peak of the frenzy, the Imperial Palace was valued higher than all the property in the state of California. The ritzy neighbourhood of Ginza 4 Chome was being traded at $750,000 per square metre.
The subsequent bursting of that bubble led to a dark period known as ‘the lost decade.’ A period of stagnation or low economic growth. By attempting to control an already out-of-control behemoth, they unintentionally cause it to burst through a combination of restricting the availability of credit and increasing interest rates.
Japan’s interest rates have declined since 1990 and have remained close to 0 since around 1996.
Will this happen again somewhere else? probably yes, but when? Who knows
Alexander Gibson