Bubble brochure: lots of emotion and very little substance

By Terry Ryder, 26th January 2010

Lunatic fringe Australians worried about a non-existent house price “bubble” are delivering 20,000 brochures in Prime Minister Kevin Rudd’s electorate to mark Australia Day.

The brochures, put together by a couple of obscure websites, highlight “the size of the Australian house price bubble” and detail the causes and consequences of this phenomenon that doesn’t exist. I’ve looked at the brochure and it’s emotive nonsense, unsupported by facts. To label Australian house prices as “The greatest bubble in history” is plain silly, not to mention sensationalist.

It features an RBA graph showing that Australian house prices relative to household disposable income have been higher than in “other major English-speaking countries for nearly three decades”. This “nearly three decades” is actually 24 years.

What about non-English-speaking countries? What about countries not considered “major”?  The claim in the brochure that our houses are the “most expensive in the world” is supported by comparisons with just five other nations. And the difference between Australian prices and prices in three of those five nations is very minor, the gap having closed considerably in the past five years. Australia, the UK, New Zealand and Ireland all have a house-price-to-income-ratio in the 5.0 to 5.5 range, according to this graph.

Below the RBA graph there is the caption: “Is this really what you want for our country and our kids?” My answer to that question is YES. We do want a situation where the major asset owned by most Australian families has a high value, bearing in mind that 70% of households own their homes and have a strong interest in having their values grow steadily.  And let’s remember that a significant proportion of remaining households are renters by choice.

According to Brett Edgerton, founder of the website homes4aussies, it’s all about the ideal of a “fair go”. In saying that, he overlooks the inherent unfairness in de-valuing the major assets of most Australians (which is what he wants, apparently) in the interests of that small percentage who aspire to home ownership and haven’t yet achieved it.

Predictably, the brochure draws heavily on the views of the Nutty Professor (sorry, that’s Associate Professor) Steve Keen, who famously predicted that house values would fall 40% in 2009 and has been proven spectacularly wrong.

Claims of a “bubble” sprung out of widespread media mis-reporting of a speech by RBA Governor Glenn Stevens last year. Newspaper reports claimed Stevens had said he was worried about a housing bubble, when he said nothing of the sort – and did not use the term “bubble”. But it is now accepted as fact and often repeated by journalists who don’t do their jobs properly.

Consequently, media who reported on the brochure production stated the “house price bubble” as fact, rather than theory from a noisy minority, and also spoke of a “consequent housing affordability crisis” as a fact.

What crisis? Housing affordability improved markedly over 12 months until late in 2009 when the RBA started raising interest rates again. We have had a period of huge activity from first-home buyers, created by a dramatic improvement in affordability from the latter part of 2008 until late in 2009.

The brochure says Australian prices have been high by international standards for nearly 30 years and that this is a dangerous thing. Yet, prices have not collapsed and are currently rising steadily. Our home ownership rate is high by international standards. Home ownership is, in many ways, easier to achieve than 30 years ago when I started out as a first-home buyer – it’s certainly easier to get a loan these days.

The brochure overall presents no information that confirms we have a “bubble” and consists primarily of sweeping statements and claims of future disaster, including “future tax increases” and “reductions in Government services”. It does little credit to the people who wrote it.

ENDS