All of the major daily news funnels are full of it. Literally. Everyone and anyone is pontificating and calling the current property cycle a “bubble.”
Lucky for you, you are reading this article, because I’m about to make you smarter than most PHD economists.
Here’s why we’re NOT in a property bubble.
The credit data show us that we’re still in the very early stages of an upswing, and a bubble is miles down the track. There’s no sense talking about a bubble until these credit numbers come up off the floor.
Modern economies are built on credit. Fiat money is created when some boffin in Canberra just goes and makes it up, and essentially extends a line of credit from the government to whoever is holding cash.
From there, a fractional reserve banking system (where banks only have to keep a fraction of their actual deposits in their vaults) allows the money supply and the economy to expand.
The modern economy is a towering edifice built on a foundation of credit.
Now you might wonder if that’s a good thing. Fair enough. I know a lot of my readers who have really started thinking for themselves are looking at this and thinking it all looks a bit odd – like some kind of cheap smoke and mirrors trick.
Maybe it is.
But like it or not, this is the way it is, and until the global economic order is overturned in favour of capitalism or communism 2.0, credit is gong to remain central to the story.
So I wanted to have a quick check in with the credit data, just to take stock of where we’re at.
It’s important to look at right now for two reasons. First up, it gives us a sense of where we’re at in the cycle. As the property clock turns, and things start picking up again, credit starts expanding at a quicker pace. More people are borrowing to buy property, and credit growth rises. The opposite happens as the clock turns south.
The second reason is that credit gives us one of the best early-warning bubble signals. In your classic bubble, everyone gets carried away, they believe that the market will keep rising at a ridiculous pace forever, and they borrow accordingly. They take on way more credit than they can handle and sink it into the bubble stock.
This then sets up one of the most important bubble crash triggers. If the stock price starts falling, and banks start calling in their loans, the credit ladder becomes a slippery dip. Everyone’s in a rush to sell, and prices go into free-fall.
So with more and more people banging on about a bubble in Australia, I wanted to take a look at what the housing credit data is doing, and see if there’s any red lights going off in the little engine room.
The first thing to note is that total credit growth is actually pretty muted right now.
This charts shows that credit growth collapsed following the GFC, bounced back a bit in 2010/11before finding another trough in 2013. Since then, it’s been coming back, but it remains well, well down on the averages of the past 15 years.
If the Australian economy’s at risk of a bubble collapse, there’s no sign of it here.
Likewise if we look at total credit as a percent of GDP.
From 1994 to 2007 there was a solid ramp up in total credit in the system, but the GFC knocked that one on the head, and households and business have continued to consolidate in the years that have followed.
Some analysts actually say that this measure understates how much households have deleverage in the past 5 years. The growing popularity of mortgage offset accounts messes with the numbers a little bit.
If you have a mortgage of 300K and 30K in an offset account, then the statistics say you’ve got credit of 300K, and a deposit of 30K. But your actual ‘leverage’ position is really 270K. So it’s likely that the extent of deleveraging has been understated.
If we look at the break down in credit, we can see that the run up in credit right up to the brink of the GFC was actually driven by business, and to a lesser extent, personal credit. Housing credit growth had actually peaked back in early 2004, and it’s been on a downward trend since.
I wanted to have a look at this on a bit of a longer time frame, and break it down between investors and owner-occupiers, so that’s what these next two charts show.
First up is owner-occupier credit growth. That’s been on a trend decline, and although it’s picked up over the past 6 months, it remains around 20-year lows.
So is all the action in investors then?
Well, partly. It’s true that we’ve seen a stronger pick up in investor credit growth. It’s currently growing around 9% – which is around post-GFC highs.
But as you can see, it’s way, down on previous peaks – in 2003, 2000, 1999 and 1994. On all of those occasions, credit growth tilted towards 30%. We’re currently less than a third of that.
So this should put it all in a bit of perspective.
Housing credit growth is turning, which is what you’d expect with this early stage in the cycle. It also gives you a sense of how much further we’ve got to run. We’re coming off a very low base.
The other point is that talk of a bubble actually looks a bit silly. In 1994, owner occupier growth was 20% (4 times what it is now) and investor growth was 30% (3 times what it is now).
What followed was a consolidation, but it was certainly no collapse, or cataclysmic bubble pop.
Until these credit number triple (at least) all this talk of a bubble just seems a little premature.
The way I see it, the housing upswing has only just begun.
What do you think?
Any veteran property investors in the game back around 2003, or way back in 1994?
How did those markets compare with today’s?
If you’re buying now, where and what are you buying?
Vesta says
I’m just curious to know in the stage of the market cycle that we’re in at the moment, would it be wise to be investing or opening up businesses? I’ve been thinking about purchasing or opening up a food business and wanted to know if anyone has any advice or thoughts to share? Thanks
Emily Reid says
Well, everyone eats regardless of where we are in the cycle. I’d be looking at location, competition, demand, point of difference (why your establishment is better than the others), and have a strong marketing ‘Opening’ campaign so people know you have opened up. ..Then if your food business gets people talking about something fabulous in it, you are on your way.
Vesta says
thanks for the reply Emily. I agree with what you’ve said, that everyone eats regardless of the cycles, however speaking from what i’ve seen in the past, and other cycles, some have been more devestating to the retail & especially food industry. Its more complex than just saying people will eat regardless, as their expenditure starts tightening up, and priorities arise, the take outs/dining/ and indulging in the cafe scene takes a place in the background. Also, one must remember the effects of the late 80’s/90’s recession, the GFC & the effects it had on alot of businesses that went belly up. Just food for thought 😉
Leo says
Hi Vesta, I think you may have answered your own question. If you don’t feel comfortable or confident with your proposed venture, then you are probably right not to go ahead. There are many other ways/businesses you could put investment money into. Confidence is paramount. There is no ‘bad time’ to be going into business, it depends on the business. If you open a business that is about solving ‘bad time’ problems, you will do well.
Your passion may be retail, then find a service you can provide that people are looking for. Preferably not something in decline or uncertain, like fast food , cafes or restaurants.
Cheers, Leo
Tom says
Historically, most young spenders have been embroiling themselves in excessive mortgages over their “dream home”. Therefore, their discretionary spend becomes very suppressed when things go bad.
With home ownership among the young going into decline, many of the well paid, in areas where the bulk of residents are renting, will still be free to maintain their “Life Style” spending. So such areas, with lower rates of owner occupiers, may be a better choice of location.
Do you really want to take on all the extra effort, responsibility and time commitment involved in such a business? Might you not be better off following Dymphna Boholt’s ideas of passive income from positive cash flow property investment?
Best of intelligent due diligence (not LUCK!!!) to you.
Vesta says
Thanks for the reply & advice Tom.
Yes valid points. I have been following Dymphna for a while, and have set up some long term investments with substantial returns & outlook, however I have a different passion, one which involves being hands on in retail also. But your point taken, just not sure where the market indicators are pointing with regards to business & the likelihood of near future suppressed spending? Some have been saying that it’s a bad time to be going into a business :S ?
jason says
vesta don’t do it,all you end up doing is employing people and paying tax.small business is a marriage you need to be prepared to give up life as you know it and commit all your energy and money to build it up.hospitality nearly destroyed my sanity,while everyone else is enjoying life your stuck serving them,particularly holiday season which is when you actually make money,the rest of the time it’s a struggle.you also need to stay in it for a few years to build it up,so if you have to survive a bad year or two due to bad weather,gfc,personal illness,our just a general lack of tourists(being your best customer’s unless you’re in a cbd)your overall figures get slaughtered,and the more you build up your business to sell with good looking rising figures the more tax you pay.my biggest problem was finding and keeping decent honest staff it’s a nightmare,remember eating out its a luxury,and the first to go in the average persons budget,stick to real estate and make money.
Mark says
So 10 times earnings is not a bubble? So u all think Sydney house prices are going to go to 15 times earnings? Or 20 times earnings? How is this credible?
How’s this for a scenario…Iron ore price is collapsing, on softening Chinese demand. Our terms of trade and currency are collapsing with it. As our currency heads to our long term PPP rate of circa 80 US cents, as we a net importing country, we will start importing inflation big time.
The RBA will have no choice but to gently raise rates (its number one goal is inflation targeting right, not supporting a hot housing market….)
I would be very very very reticent to gear up heavily at this point in time…. Far to much downside risk…
Do u really think house prices can go up faster than wages and inflation for ever??
Do u really think Australia can avoid a recession, or a drop in house prices for ever?
Did you know that GNI per capital has been falling for 2 years now?
Jon, i have to diasgree with your entire post here.
What u are missing is that absolute levels count, its not all just rate of change!!
A quick analogy…. Your VE Holden Commodore has a top speed of say 230kph.
If u are rolling down the freeway at 130, you can hit the throttle and accelerate up to 150 very easily.
Suppose you want to go faster…. no worries… you can hit the throttle again, and accelerate up (annual rate of change in credit) pretty quickly…
At some point however, you hit the maximum capability of the car, where it just will not go any faster… The maximium power from the engine is equal matched by the wind and rolling resistance…
Its the same with outstanding credit.
In 1995 private debt was like 50% of GDP… with plenty of room to accelerate, and grow year on year…
Now its like 150% of GDP….
Very large risk that we are hitting the upper bounds in absolute terms, of the debt we consumers can carry, at which point, no more growth is really possible….
Only focusing on credit growth rates ignores this, and is fool hardy…
Sure we can debate, exactly at what point that maximum speed, or maximum credit burden is….Are we there yet? Probably getting close… no one has ever gone further than we are right now!!!!!
So again, good luck with that guys!!!
George says
Very well put Mark…..which are some of the reasons I have been investing heavily since 2011 in the USA market which has performed, continues to do so, phenomenally for me.
Way more money to be made in the USA….obviously you really need to know what you are doing over there.
jacktheinvestor says
Jon, firstly historical credit growth cannot continue as we have to look at the levels of debt which were prior to 2000 which fuelled this and asset prices then. Today even if interest rates go to 7% it would seem like they are 10% due to the massive debts many people have. The past credit growth was mainly responsible for fuelling the massive growth .
Also what you talk about consolidation is actually because unlike the US in Australia you cant leave the property to the bank and forget the mortgage and thats why the market has not collapsed here