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?