Bubble trouble: Measuring housing market hype

Housing bubble index: CommSec has compiled a “housing bubble index” – measuring the number of times that the terms “housing” and “bubble” have been mentioned together in articles by the Australian media. The housing bubble index hit a decade high of 194 in September.

Home prices set to peak? Interestingly, over the past decade the housing bubble index has tended to peak around the time that annual growth of home prices has peaked.

What does it all mean?
•    Yesterday the Reserve Bank Governor called for some calm in the housing market following recent price gains, telling buyers to “take due care”. Certainly home prices have lifted markedly in recent months but overall Australian home prices have recorded positive annual growth for just the past nine months after 20 months of declines. The home price gains are a relatively new phenomenon and strength is largely limited to a few capital cities, but the term “bubble” has been sighted more regularly in the media.
•    CommSec endeavours to use different methods in analysing economic and financial market trends. The State of the States report, iPad index and Mums and Dads share index are some of the approaches used to look at topical subjects.
•    To assess the recent tendency of commentators to use the term “bubble” to describe the recent lift in home prices, we have compiled a “housing bubble index”. The index measures the number of times both housing and bubble have been used in articles in the Australian media. To compile the index, the Dow Jones Factiva service has been utilised, with search term of “housing bubble” limited to references in Australian newspapers, wire services and ABC radio transcripts.
•    From the start of the index in 2003, the peak month was in September 2003 (201 mentions) while the low point was April 2007 (just one mention). The recent peak was 194 mentions in September 2013.
•    Interestingly the housing bubble index has tended to peak around the peak around the time that annual growth of home prices has peaked. But each time that home prices eased over the past decade the slowdowns were orderly events in common with the cyclical tendency of housing markets over time.
•    In a number of capital city markets such as Sydney, home buyers (especially investors) are currently responding to a raft of positive factors such as historically low interest rates and unemployment rates, grants for home construction or new home purchase, tight rental markets and attractive housing affordability levels.
•    It is to be expected as home prices rise and become less affordable and as new supply of homes increase that annual growth of home prices eases to more sustainable levels in line with growth of household incomes.

What do home price figures show?
•    Over the year to September, capital city home prices were up 5.5 per cent on a year ago according to the RP Data-Rismark Home Value index. While this is the fastest annual growth rate in almost three years (34 months), prices have just been rising in annual terms for nine months.
•    As has often been the case over time, housing markets across the country are at different points in their cycles. Sydney home prices are 8.0 per cent higher than a year ago. But average growth over the past three years has just been 1.6 per cent – below the rate of inflation – and 2.5 per cent over the past eight years.
•    Over the past eight years, Australian home prices have grown on average by 4.5 per cent a year but while Darwin prices grew by 9.7 per cent on average over that time and Melbourne prices by 6.7 per cent, Sydney prices grew by just 2.5 per cent per year.

What does the CommSec housing bubble index show?
•    Using the Dow Jones Factiva service, CommSec found there were 194 mentions of “housing” and “bubble” in articles published by Australian media in September 2013 – the highest level in a decade (since September 2003). In October 2013 to date there have been 106 mentions of housing bubble in Australian print media.
•    In the lead up to the recent peak, there were just 18 mentions of “housing” and “bubble” in articles published by Australian media in June 2013 followed by 32 mentions in July and 50 in August. In general over the past decade, September and October have been peak times for mentions of the word “bubble” in relation to housing, coinciding with the key Spring selling season.
•    The previous high for mentions of “housing bubble” in the press was in October 2010 (107). But at that time annual growth in home prices was 8.2 per cent, off the high of 14 per cent annual growth recorded in January 2010.
•    In the 2007 housing cycle, home prices peaked in December 2007 at 13.0 per cent annual growth but use of the term “bubble” was surprisingly absent – presumably commentators were more interested in the frothy sharemarket at that time.
•    In the housing cycle of the early noughties, annual growth of home prices peaked at 21.0 per cent in May 2002 with a gentle easing to 15.8 per cent in June 2003 then the final peak in October/November 2003 at 17.8 per cent. Interestingly the peak for mentions of the term housing “bubble” was September 2003 (201) followed by October (81), November (151) and December (90).

What is currently driving the housing market?

•    It is clear that a raft of influences is conspiring to drive up demand for residential property and in turn home prices.

Unemployment: While unemployment rates have lifted over the past year, the national unemployment rate of 5.6 per cent is still historically low and not far away from the perceived “full employment” region of close to 5 per cent.
Interest rates: Variable mortgage rates are around 20 basis points above the 41-year lows recorded in April-May 2009. Fixed term rates are at or near record lows.
Tight rental vacancy rates: Generally it regarded that supply and demand for rental properties are in balance when rental vacancy rates are near 3 per cent. SQM Research recently reported that vacancy rates were below 2.7 per cent in all capital cities. Melbourne had the highest vacancy rate at 2.7 per cent followed by Canberra at 2.2 per cent. Other rates were between 1.5-2.1 per cent while Darwin had a 0.9 per cent vacancy rate.
Undersupply of homes: Population growth has been lifting but new building hasn’t responded similarly as evidenced by the tight rental markets.
Good housing affordability: Rismark has estimated a median dwelling price to income ratio of 3.9, up from recent lows of 3.7 in September 2012 that was equal to the lowest (best) affordability rate in a decade.
State & territory grants: Grants are now generally applied to the construction or purchase of “new” homes and aren’t limited to first home buyers or “established” (existing) properties.
Home prices have been subdued: Over the past three years, average annual home price growth across the capital cities was just 0.1 per cent.
Investors are shifting away from cash: Investors are putting money to work in housing and equity markets on the perception that the global financial crisis is over.
Federal Election is over: Home buyers are more active given the fact that the uncertainty about the election result is out of the way.

What is the importance of the index?
•    The CommSec housing bubble index records the number of times that the terms “housing” and “bubble” are used together in articles in Australia print media. While the index doesn’t record all media discussion of housing bubbles, the index is useful as a guide to community interest in the sustainability of rising home prices.
What are the implications for interest rates and investors?
•    Analysts have been waiting for some time for the Reserve Bank Governor to wade into the discussion about home prices. And he attempted to quell the hype by telling buyers to make “sensible assumptions about future returns.”
•    Chicken or the egg? Is it the discussion of “housing bubbles” that causes people to become more hesitant on home purchases or does that discussion merely emerge late in housing cycles? The good news is that discussion of housing “bubbles” – just like other issues like climate – gets people focussed on the issues, fundamental drivers and possible responses.
•    Home prices have posted solid gains in recent months for a variety of reasons. Certainly home prices had gone nowhere for the past three years and there is a raft of positive drivers currently underpinning demand for homes. If you take the view that a “housing bubble” is an unsustainable lift in home prices, the jury is out – it is too early to say. At some point the housing market drivers will be less positive, such as housing affordability, and prices will rise at a slower pace.
•    Home construction is responding to the increased demand for homes and higher prices, with implications for building material companies, developers and housing-dependent stocks.

Source - Craig James, Chief Economist, CommSec