Sunday, December 19, 2010

"One of the biggest furphies in 2009 was the claim that Australia had a 'bubble'"

THE WEEK AHEAD: Where will interest rates move in 2011? -- Craig James
The title belies the lede on this one. And I haven't done a "noted" in too long. Too much to note recently to pick out what deserves to be pointed and laughed at later.
One of the biggest furphies in 2009 was the claim that Australia had a 'bubble' in the housing market. It didn't and still doesn't . . .
He trots out the standard, the population is growing faster than than new housing, conveniently cutting off his data at 2008. Also, he ignores what Americans are very familiar with now, and that is how many households get destroyed (compressed, in noneconomic terms) when housing becomes too expensive. What you care about is net household creation, not immigration. Funny enough, those aren't exactly the same thing, especially if interest rates continue to rise and your young people and older people all move in with the middle-aged people. Easy enough given the oversized houses so conveniently provided by a steroid-taking building industry.
The other event of note in the coming week is the minutes of the December 7 Reserve Bank Board meeting. As widely expected, the Reserve Bank left rates on hold at that meeting. This was well flagged by the Reserve Bank Governor and he also provided guidance that the next move in rates wouldn't occur any time soon.
What is it with these guys who are so certain there is no bubble, yet they sound like a condemned prisoner getting letters from the governor whenever central bank rates are announced?
And affordability? The RP Data/Rismark measure that is well accepted by the Reserve Bank has continued to go sideways over the past six years. Hopefully we will hear a lot less about 'bubbles' in 2011.
I drink your delusional milkshake. I drink it up.

Well, I would, but I don't know what flavor a furphy is. (Shouldn't that be spelled "phurphy"?)

Your word of the day, compliments of wikipedia.
furphy, also commonly spelled furfie, is Australian slang for a rumour, or an erroneous or improbable story.
The word is derived from water carts made by a company established by John Furphy: J. Furphy & Sons of Shepparton, Victoria. Many Furphy water carts were used to take water to Australian Army personnel during World War I. The carts, with "J. Furphy & Sons" written on their tanks, became popular as gathering places where soldiers could exchange gossip, rumours and fanciful tales—much like today's water cooler discussion.

A furphy is water flavored. Figures.


jesse said...

It's interesting how the talking points in Canada and Australia/NZ, the last bastions of Anglo-Saxon house price bubbles, are similar and different.

I see little talk of restrictive building policies in Canada. So does that mean Canada will not be supply constrained? Does that mean prices will fall in Canada first?

If Australian rents aren't increasing significantly, there is no housing shortage. Sorry if that's too obvious.

Asian immigrants: similar logic and message.

Interest rates: there is a ton of talk of low interest rates in Canada, especially recently as the Bank of Canada has gone on a press blitz warning of the dangers of taking on too much debt at low rates. In Australia, with rates significantly higher, I don't hear much debate on that front.

Two bubbles, two different explanations, save rich Asians ;)

GG said...

It's certainly true that Australia should not be running out of land. Water, maybe. Land not so much.

The root cause is the same everywhere. Too much money being funneled to mortgages. Less so the rates the money is at (although that certainly makes the buyer feel good). Aussie Boy over on Garth's blog had a brilliant suggestion: Bank appraisals should be based on price to rent ratios, not recent sales. Imagine if we had that where these bubbles would be? Starved for lack of crazy money is where they would be.

GG said...

Hm, I can't edit my comment. Make that Aussie Roy.

I can't edit my own comment on my own blog. Brutal.

jesse said...

@GG the suggestion to tie capital ratios to underlying fundamentals is a good one but not new: Germany does this and, surprise surprise, doesn't have much in the way of a housing bubble.

The suggestion is also coincidental with what BoC Governor Mark Carney has hinted in a recent speech, so-called "through-the-cycle" margining is a form of this. It is actually one of the proposals coming out of Basel for changing how banks set their capital ratios.

Long story short, the Aussie Roy's suggestion will likely see the light of day in the coming years.