Senin, 20 April 2009

The Australian housing bubble: the view from the OECD

Here on the Brown Couch we love charts and graphs. So here are a couple more, this time generated from data from the OECD that measure movements in house prices in OECD member-states. (I don't believe these data have been reported by the Australian media – you saw them here first at the Brown Couch!)

We'll be looking in particular at Australia, the United States and the United Kingdom. The latter two countries – the US especially – are often reported here as having experienced a house price bubble (which is now collapsing). Have Australian house price movements been so very different?

The OECD data are interesting because they several things all at once. First, they give us two ways of thinking about the level of house prices, by comparing house prices with rents (Figure 1: house prices to rents ratios), and house prices with incomes (Figure 2: house prices to incomes ratios).

Second, they show how much these ratios vary, in any given year, from the long-term average ratio for each country – that is, the average ratio of prices to rents, and prices to incomes, over a 35-year period. In other words, the data show whether prices are out of whack from their long-term relation to rents and incomes.

Third, they adjust the long-term average ratio for each country to a base of 100, so we can compare movements in the ratios in the different countries.

Hopefully all this will become clearer when we look at the graphs:



(Figure 1: House prices to rents ratios, Australia, US, UK. Source: OECD Economic Outlook No 84 and Economic Outlook Interim Report March 2009. Click on the image for a better view)


So what does this tell us? It tells us that from around the turn of the century, house prices in the United States, home of the sub-prime bubble, moved out of whack from their long-term relation to rents by about 30 per cent, but lately the relation has moved back close to the long-term average. In the UK and Australia, house prices moved even more out of whack: in each country, they got out of whack by up to 80 per cent. Last year in the UK, the relation started sharply coming back into line, but there's still a way to go. In Australia, house prices are still out of whack from their long-term relation to rents by 70 per cent.

(Now, one might object that what this shows is not that Australian house prices are too high, but that rents have been, and remain, too low. Hardly – rents have kept up with inflation, and lately have increased more than that. Figure 2 also shows that the trouble is on the house price side of the ratio.)

On to figure 2:



(Figure 2: House prices to incomes ratios, Australia, US, UK. Source: OECD Economic Outlook no 84 and Economic Outlook Interim Report March 2009. Click on the image for a better view)

Similar story here: US house prices significantly moved out of whack from their long-term relation to incomes, but this movement seems modest when compared to the movements in the UK and in Australia. And again, the US's and UK's respective house price to income ratios are moving back towards their respective long-term averages, while Australia's has yet to move back.

(Anticipating another objection: don't these graphs also show that house prices getting out of whack has been an international phenomenon, so no single decision or policy by national governments can be blamed for the problem? That's true, but it does not get Peter Costello off the hook. While the world caught the bug for gambling on house prices, in Australia Peter Costello was, as we have previously described him, like the tout at the door to the casino, offering punters free chips (ie tax breaks) if they borrowed up big and played.)

We're used to talking about a US or UK housing bubble; we should call Australia's recent history of house price movements a bubble too. And we should welcome their return to something more like their long-term relation to rents and incomes, after being so far out of whack.