Seeking Alpha

Freddy Hutter, ...'s  Instablog

Freddy Hutter, TrendLines Research
Send Message
As a data analyst, Freddy Hutter of Trendlines Research provides guidance in chart format on the specialties of peak oil, realty bubbles, baseline GDP projections and election predictions. Virtually each day an update is published to the website's MemberVenue. All charts are made publicly... More
My company:
Trendlines Research
My blog:
TrendLines Chart Blog
  • Australia & UK added to our Realty Bubble Monitor ... only USA has completed correction 12 comments
    May 31, 2010 10:20 PM
    click to enlarge ... more macro economic charts at our website
    click to enlarge ... more macro economic charts at our website

     Overpricing of Avg Home in April 2010:

    $

     Bubble TodayBubble @ Peak
    $132,000Australia41%$155k & 56% (2007)
    £ 85,000UK108%£ 108 & 146% (2007)
    $76,000Canada29%$76k & 29% (2010)
    $ 2,000USA1%$77k & 35% (2005)

     Australia's Housing Bubble rises to $132,000 in March

    Australian median home prices had already detached from the long term Price/Family-Income ratio of 3.1 back in 1996.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.8 in 2007.

    The annual price peaked in 2009 @ $451,000.  Despite the rise in price, 2007 is still considered the Bubble Peak as price in that year was $155k (56%) above the trend line.  In its third year of correction, median Price exceeds our 2010 target by $132k (41%).  As shown by trajectory in the chart, it is probable that new highs for median Home Price will not be set 'til 2019.


     UK's Housing Bubble rises to £ 85,000 in April

    UK average home prices had already detached from the long term Price/Family-Income ratio of 2.0 back in 1996.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.9 in 2007.

    The annual price peaked in 2007 @ $181,364 and was £108k (146%) above the trend line.  In its third year of correction, avg Price exceeds our 2010 target by £85k (108%).  As shown by trajectory in the chart, it is probable that new highs for the avg Home Price will not be set 'til 2048.


     Canada's Housing Bubble rises to $76,000 in April ... Canadian Homes 2 x's USA

    Canadian average home prices had already detached from the long term Price/Family-Income ratio of 2.7 back in 2001.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments.  Subsequent irrational exuberance has swept the P/I ratio to an unsustainable bubble high of 3.5 in 2010.

    The year-to-date annual price of $337,520 is $76k (29%) above the trend line.  As shown by trajectory in the chart, and assuming a 2010 Peak, it is probable that new highs for the avg Home Price will not be set 'til 2017.  Unlike Australia, the UK & USA, Canada's real estate sector has not commenced its inevitable correction.

    With an April avg price of $345k vs $173k in the USA, this was the seventh consecutive month where Canadian homes were double the price of a similar home in the USA.  Since year end, the Canadian Real Estate Bubble has increased by $9 thousand.  For comparison sake, the USA Housing Bubble was 35% ($77k) above the P/I ratio trend at its peak in 2005.


    Canada Backgrounder ~ (rev 2010/5/29) TrendLines Research first drew attention to the topic of Canadian Housing Bubbles in 1989.  Although that particular Bubble was only $53k, it was actually a more severe event as the average price of the time was an unprecedented 55% above the P/I ratio trend ... almost double the current episode.  Families were paying an astonishing 4.2 x's their Income. 

    Rather than the recent rapid 4+ year correction (-24%) witnessed in the USA, it took ten long years for the Canadian average price to surpass the 1989 high.  Avg Home Price fell a mere 6% over the first five years.  Considering the momentum in play within the present economic Recovery, it is not unreasonable to expect a repeat of the long-term sideways correction ... with perhaps an absence of new highs 'til 2017.  It would be prudent for CMHC to temporarily increase its down-payment requirements for high-ratio insured mortgages to 10% (from 5%) until the downside risk dissipates.

    This recommended action may be difficult in an environment where economists for four of Canada's largest banks have been unequivocal in recent weeks that "there is no real estate bubble in Canada".  They join the Gov't of Canada and the Bank of Canada (see our Wall of Shame below).  We heard their same chorus of rationalizations in 1989 & from their counterparts south of the 49th in 2005!  Both events posed an assault on the Disposable Income of consumers, and wealth effect ramifications resulted in imminent Recessions within twenty-four months.  As elaborated in our Canadian Recession Meter, failure by the Bank of Canada & CMHC to address a winding down of the Housing Bubble could easily turn the expected 2012Q1 economic downturn into a full fledged Recession.

    USA's Housing Bubble rises to $2,000 in April ... -$8k for New Homes


    Disclosure: no positions

     New Homes:  Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive New Homes w/o increasing their mortgage payments.  Added to pent-up demand, this caused median price to rise above the long term Price/Income ratio of 2.4 starting in 2001.  As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/I ratio to an unsustainable high of 3.1 in 2005.

    The annual & monthly prices peaked in 2007 @ $247,900 & $262,600 respectively.  Despite the rising price, 2005 is still considered the Bubble Peak as price in that year was $52,000 (27%) above the trend line.  Using annual figures, classic "return to the mean" was virtually complete, with median price a mere $2,056 shy of our 2009 target.  But, year-to-date data for 2010 reveals the correction continues in "overshot" mode.

    Annualized, this year's target value of $222,000 had been overshot by $8k (2.3 ratio) to the end of April.  Using monthly data, April's $198,400 median price is down $64,000 (24%) from the all time high of $262,600 in March 2007.  More importantly with regards to the economic recovery, unit sales have improved 49% since the February 2010 trough.  As shown by trajectory in the chart, it is probable that new highs for New Home Price will not be set 'til 2013.


     Existing Homes:  Record low interest rates coming out of the 2001 Recession enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Added to pent-up demand, this caused median price to rise above the long term Price/Income ratio of 1.8 starting in Y2k.  As slack lending guidelines and outright fraud became entrenched, irrational exuberance took the P/I ratio to an unsustainable bubble high of 2.8 in 2005.

    The annual price peaked in 2006 @ $221,900 & the monthly median had its high of $229,000 in 2007.  Despite the rising price, 2005 is still considered the Bubble Peak as price in that year was $77,000 (35%) above the trend line.  By the end of its fourth year in bubble correction (2009), the annual Existing Home Price was within $12k of our target.

    Using year-to-date annual figures to the end of April, classic "return to the mean" is $2k from being completed.  Using monthly data, February's $164,600 was down $64,400 (28%) from the all time high of $229,000 in June 2007.  More importantly with regards to the economic recovery, unit sales have improved 27% from the January 2009 trough.  As shown by trajectory in the chart, it is probable that new highs for Existing Home Price will not be set 'til 2018.


    USA Backgrounder ~ (rev 2010/5/29) In May 2008, TrendLines Research published guidance that the correction of the USA Housing Bubble would neither be as drastic as forecasts painted by self-appointed pundits, nor would it be as soft as the media voices openly rationalizing the USA housing market was not in a bubble,  Our scenarios predicted the collapse would only be as severe as needed to return the USA's median Existing & New Home Prices to their Price/2-earner Family Income ratio trend lines.

    Shortly thereafter (2008/11/18), McDoomer Nouriel Roubini was predicting a 40% collapse in housing prices and that 1,400 banks would "go bust in 2009".  Well, he was out by 1,250 on the latter call, and to date, existing home prices have declined only 28%.  A growingly tabloid-style mainstream media seems obsessed with extreme positions.

    Following a long time commitment to Home Price/Family Income ratios to measure real estate bubbles, our first publicly available effort illustrated Existing Homes were inflated by $74k (51%) at the bubble's crest.  Based on our experience with the Canadian Real Estate Bubble of the 90's, we speculated prices would decline 'til at least 2017, and there would be no new American highs set 'til 2029.  But to our amazement, the classic "return to the mean" did not even come close to mirroring the Canada episode, and the correction for both New & Existing Homes was virtually complete by January 2009.  It was no coincidence the economic Recovery commenced the following month ... long before any fiscal stimulus cheques.

    While waiting for the realty sector (and general economy) to correct (recover) completely, we had been awaiting four bottoms.  The first two were Existing Home transactions/month & Existing Home Median Prices.  Done ... January & January (2009) respectively.  The remaining pair were New Home monthly sales & Prices.  Done ... January & March (2009) respectively.  An increase in monthly transactions was important to the Economy 'cuz it brings on increased revenues via purchases of furnishings, appliances, landscaping/gardening,  With respect to New Homes, rising sales also mean "jobs".

    The passing of the bottom of Prices for both categories is important 'cuz the subsequent apparent increase in "wealth effect" affects consumer demand and durable good sales.  As the economic Recovery took hold, New Home Price rebounded 10% within 20 weeks of the March 2009 low.  Unit sales rose 27% from the January 2009 bottom by July.

    A return to the mean is both natural and necessary for economic stability.  In the early 80's & 90's, we twice saw the Fed raise rates to embattle the Inflation cycle.  An upward effect on mortgage rates left less Disposable Income for consumers to spend on holidays, clothing, durable goods, etc ... and Recessions ensued.  The purpose was to quell overheating Economies.  And it worked.

    Due to winterization costs, Canadians spend an average 2.7 x's 2-earner Family Income for their residences, compared to a 1.8 factor in the USA.  Analysis reveals avg Home Price in both nations detached from the home price/family income ratio trend line after 1999 (see charts) along with avg New Home Price.  Lower interest rates made upgrade purchases almost painless.  Then irrational exuberance set in...

    In 2001 the Fed lowered interest rates to draw the Economy out of its Technical Recession.  Many consumers, recently burned by the Dotcom fiasco, began to invest heavily in Real Estate rather than the volatile, collapsing Stock Market.  Low interest rates enabled the purchase of more expensive homes for the same monthly servicing cost, even w/o an increase in Family Income ... and housing inflated.  At the same time, new sub-prime mortgages flourished, compounded by rampant fraud by buyers, mtg brokers, appraisers, lawyers, lenders, mtg aggregators, investment banks and bond rating agencies.  Artificial Demand was greater than Supply, and the Realty Bubble was under way.  As Existing Home Prices attained levels of 2.8 x's Median Family Income, it was all to clear that irrational exuberance was fuelling the frenzy.

    The USA norm for Median Existing Home Price is only 1.8 x's the  median of 2-earner Family Income.  With extraordinarily higher prices, many families were drawing from their Disposable Income to pay higher monthly mortgage payments.  This left less funds for family budget spending on holidays, clothing, durable goods, vehicles, etc.  Coming out of the Recession, mortgage interest rates began to rise.  Add to the fray the higher energy costs for transportation and heating fuel that was in play, and we had the recipe for a Severe Recession.  The Fed recognized this scenario unfolding and attempted a succession of lower Interest Rates to keep the Economy humming ... but alas, could not avert negative GDP growth rates.

    The realty correction plunge was unexpectedly swift ... much faster than we originally forecast, and resulted in a return to the trend line in January 2009 using monthly data.  It is no accident that the Severe Recession came to an abrupt end in July ... prior to delivery of the first fiscal policy stimulus cheques.  Nasty real estate & mortgage practices caused the economic contraction, and the return to norms also helped in getting out of the downturn by restoring Confidence

Back To Freddy Hutter, TrendLines Research's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (12)
Track new comments
  • Paul Hanly
    , contributor
    Comments (840) | Send Message
     
    Thanks for posting your article. I hope you have time to read a couple of comments below.

     

    Australia is not the only country with high house prices.

     

    The Economist interactive house price graphic:
    www.economist.com/busi...
    seems to show that if you look at 1993 Q1 as your start ( deep in recession in most countries) then Australia seems to be around the same as Britain, Spain, Denmark and New Zealand.

     

    If you add Germany the data needs a start date of 2003, also deep in a recession. With this new start date you see that Hong Kong is the big bubble, and Sweden, Belgium, China and France are up there with Australia, although some of the other countries have dropped away with the later start date.

     

    Then look at the fundamentals for some of those countries, particularly the Euro ones which are having austerity imposed on them because they don't issue their own currency and Australia looks to have other company that is more vulnerable.

     

    Demographia's recent survey of English speaking developed countries also finds that Australian cities are grossly overrepresented in the top 10 most UNaffordable cities, although Vancouver is the most UNaffordable.
    demographia.com/dhi.pdf

     

    None of this is to say Australia's house prices might not also be vulnerable.

     

    Steve Keen has done a lot of work on the private debt impact on demand and on long term house prices in both the US and Australia and the potential effect of either 0 credit growth or actual deleveraging by consumers:
    www.debtdeflation.com/...
    1 Jun 2010, 01:04 AM Reply Like
  • renim
    , contributor
    Comments (1259) | Send Message
     
    2 factors are at work in Australia's house prices

     

    1 - ever increaseing local planning red tape

     

    2 - massive export growth to China.

     

    In the southern states areas like Sydney are maxed out price wise, but in the boom (mineral export) regions, we could be looking at a 20-30 year boom.
    22 Jun 2011, 07:05 AM Reply Like
  • John Lounsbury
    , contributor
    Comments (3996) | Send Message
     
    renim - - -

     

    See what Australian professor Steve Keen thinks about the housing bubble situation in Australia: econintersect.com/word...

     

    The article starts with:

     

    "In last week’s post I showed that there is a debt-financed, government-sponsored bubble in Australian house prices (click here and here for earlier installments on the same topic). This week I’ll consider what the bursting of this bubble could mean for the banks that have financed it."

     

    This article is worth a read for everyone, but especially Australians.
    26 Jun 2011, 12:26 PM Reply Like
  • renim
    , contributor
    Comments (1259) | Send Message
     
    Over the next decade there is $160 billion dollars of investments in LNG alone in Australia. This will mean either Australia or Qatar will be the world's largest LNG exporter, depending on how the Arab Spring slows down business, the odds are currently favoring Oz.
    Then there is the coal boom, the iron ore boom, the nickel, gold etc, etc

     

    The professor is in Western Sydney, its kinda equivalent of Detroit, but in general there is massive boom, with a re-balancing of values.

     

    I've got relatives in Sydney, its been overpriced and stagnate for a long time, but consider this, the fed interest rate in Australia is 4.75% www.rba.gov.au/ in a country where the vast majority of mortgage is variable and very responsive to interest rate changes. There is a lot of powder kept dry in the keg.There is a fundamental reason to the strong Aussie dollar, and its not related to the weakness of the euro or US dollar.
    27 Jun 2011, 05:46 AM Reply Like
  • John Lounsbury
    , contributor
    Comments (3996) | Send Message
     
    Freddy - - -

     

    Nice comprehensive review. I have a couple of comments:

     

    1. The correct baseline for U.S. housing "normal value" is open to debate. Using a baseline based on price to income ratios, historical real price trends going back further than 1993 and price to rent ratios all produce different results. Many of these other results show larger bubbles remain in U.S. home prices.

     

    2. The Economist analysis cited by Explorer has a flaw in that it includes the entire bubble in the reference baseline. I had started an article to show how that biases the valuation model unduly. I have been distracted by other work. I need to get back to that because the Economist data is being widely cited and I believe it is invalid.
    3 Jun 2010, 12:06 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Author’s reply » Jeff, I agree that the strict P/I ratio is not the ideal metric, just one that gives best guidance over time. Unfortunately, it assumes everyone has bought their homes via cash transactions.

     

    My eventual hybrid will reflect a portion of purchases being influenced by then current mortgage rates. During low interest rate regimes, advantageous affordability would be reflected by adjustments to the baseline allowing it to rise by a greater increment than would be indicated by simple annual increases to family income. This would soften the bubble component figure ... and vice versa during higher interest rate periods.

     

    We know the Fed rate & mortgage rates will drift up about 4% during this new business cycle, peaking in 2013. From an affordability perspective, this should infer a further collapse of avg prices than the apparent correction to the mean. Because it hasn't happened in the past, we can only assume that issues like supply shortages are in play when confidence rebounds during recoveries that counteract the apparent servicing cost disadvantage.

     

    The above international Price/Income chart & the similar USA Existing/New Homes version are updated monthly at my website: www.trendlines.ca/econ... as well as SeekingAlpha.
    3 Jun 2010, 05:09 PM Reply Like
  • Tom Au, CFA
    , contributor
    Comments (6783) | Send Message
     
    I'm not convinced that the U.S. has completed its correction.

     

    But we ARE further along than the others.
    3 Jun 2010, 12:21 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Author’s reply » You were right, G&D! Prices fell another $19k in the past year (using monthly data). Good call...
    18 Jun 2011, 12:59 AM Reply Like
  • Tom Au, CFA
    , contributor
    Comments (6783) | Send Message
     
    I have often been early, and sometimes wrong with these calls. But have been generally correct in believing that things are actually worse than most others believe them to be.
    1 Jul 2011, 12:43 PM Reply Like
  • siliconhillbilly
    , contributor
    Comments (2357) | Send Message
     
    Given the information presented, can any inference be made about the Chinese investment property bubble? I'm referring to mostly unoccupied property with absent owners that was bought as a "safe" investment.
    17 Jun 2011, 11:11 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Author’s reply » Sorry, SH. I've haven't looked at China's data to this point.
    18 Jun 2011, 01:00 AM Reply Like
  • siliconhillbilly
    , contributor
    Comments (2357) | Send Message
     
    FH, thanks for the response.
    18 Jun 2011, 12:46 PM Reply Like
Full index of posts »
Latest Followers

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.