Looks like Australia's Housing Market is about to go Bust!

Judging from this Australian edition of 60 Minutes, Australia seems to be undergoing a massive housing boom, fueled, no doubt, by cheap money and lax credit standards, echoing the subprime crisis in the United States.

This has shown up in the charts, as pictured below.  In a little over 12 years, house prices in Australia have massively outstripped inflation by 135 percentage points, from a base of 100.00 in the last quarter of 2002 to 268.59 in the third quarter of 2015.  In the same time period, general consumer prices rose from a base of 100.00 to 133.0 as of the third quarter of 2015. The gap between Australian House Prices vs Inflation is one of the largest seen in recent history.  Only Hong Kong has developed a higher gap in a slightly shorter time frame.

Given that the Australian Housing Bubble is beginning to pop, the country could experience massive declines in house prices, similar to what happened in the US.  The US House Price Index peaked at 135.81 in the first quarter of 2007, then declined by over 20% to bottom out at 107.74 on the second quarter of 2011.  This was almost 10 percentage points below inflation adjusted level of 117.39 at that time.  Since then, US Housing prices have rebounded past inflation adjusted levels and the index is now at 134.27 as of the third quarter of 2015 while inflation adjusted levels remain at 125.60.

Sources: 60 Minutes Australia, Global Property Guide, www.worldbank.org, Trading Economics

Another Sign that the Philippine Real Estate Bubble May Have Already Peaked? - Updated as of 4th Qtr. 2014

In a technical analysis of the price trends of financial securities, volume is a very important technical indicator. If the volume moves with the trend, the volume confirms the trend.  When price and volume diverge, it is often indicative of a shift in the trend. For example, if an uptrending stock price is accompanied by lower and lower volumes, it may indicate that the price trend is weak and that prices may start to decline.

The same holds true for the real estate market.

US Real Estate Market

In the US, sales volumes peaked for US Total Home Sales (New and Existing Home Sales) at 8,4 million homes in 2005, a year before the US Median Sales Price peaked at US$ 225K in 2006.  By 2007, the US Median Sales Price slipped by only 1% to US$ 223K while sales volumes had already dropped an astonishing 30.58% from the peak sales volume in 2005, to 5.8 million in 2007.

From then on, the US Median Sales Prices continued to decline year after year, bottoming out at $170K in 2011, or some 25% below the peak price level.  By then sales volumes had already bottomed out a year earlier in 2010 to 4.5 million homes, or some 46% below peak volumes.

As of 2014, Median Sales Prices and Sales Volumes have begun to diverge, indicating a slowdown in the US Housing market.

Sources: Realtor.org, St. Louis Fed
Median Sales Price is a weighted average of the median sales prices of New Home Sales and Existing Home Sales


The same dynamic played out in both segments of the US Residential Real Estate Market: New Home Sales and Existing Home Sales.


Here is the chart for New Home Sales:

For the past year, US New Home Sales volumes have already flatlined.  


And here is the chart for Existing Home Sales, the much larger market segment.

In 2014, US Existing Home Sales volume have begun to decline, and could be heralding another decline in US Home Prices.


Philippine Real Estate Market

Might the same dynamic be playing out in the Philippine residential real estate market?  One problem bedeviling such an analysis is the dearth of data.

To my knowledge, the Philippines does not have adequate market data.  For instance, there seem to be no published figures for sales volumes for residential homes.  The best approximation of such data is HLURB's statistics for licenses to sell residential homes.  This statistic represents only new homes and only represents licenses to sell for each residential unit and not the actual sales volumes.

Another issue is that there seems to be no price data on residential sales.  The best data is assembled here, which in turn, is assembled from the Philippine Office of Colliers International, a global real estate agency.  These prices, in turn, are based on the average prices of a prime 3 bedroom condominium unit in the heart of the Makati Central Business District.  This is like basing nationwide US housing prices on the price of a prime 3 bedroom coop unit in Manhattan in New York, one of the priciest real estate markets in the US.  The data available in the Philippines is not representative of the true state of the entire national residential real estate market.  At best, it is an approximation of the Philippine Real Estate Market.  The BSP has stepped into the picture to overcome this deficiency by developing their own real estate index, which would be more comprehensive in scope. Here is a possible candidate for such an index.


But based on the data available, we arrived at this chart:

Based on this data, volumes (as indicated by Residential HLURB licenses to sell) may have already peaked in 2012, while prices have continued their upward climb to date.  Volume seems to have peaked at 264,237 units in 2012 and dropped 15% to 225,051 units in 2013.  In 2014, volumes declined further to just 212,081 units or 20% below peak volumes. In other words, sales volumes have been declining for two solid years in a row.

Prices though, have continued to climb since 2012, another 14% in 2013 and another 7% in 2014, representing a 22% increase over 2012 prices.


Is the same dynamic that played out in the US Residential Real Estate Market playing out in the Philippines?  It looks like it now that the downward trend in sales volumes has continued for two solid years in a row, but it may still be too early to tell.

Great Depression vs. Great Recession

Why does the US Recovery from the Great Recession feel so sluggish?  That's because it is!

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak in 2011, only four years after the Great Recession started in December 2007.   In 2014, the US economy is only 10.9% larger than the bottom in 2009, averaging only 2.1% growth every year since the Great Recession bottomed out.

The overall economic contraction during the Great Depression was much more severe (-26.7% from peak to trough) and took much longer (four years from 1930 to 1933).  Economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years for the US economy to reach parity with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the five years since the US economy bottomed out in 1933, the US economy was 38.6% larger than the bottom in 1933, averaging 6.7% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"


Why was the recovery during the Great Depression a lot more robust than the Great Recession?  That is the subject of future blog posts.

Another Sign that the Philippine Real Estate Bubble May Have Already Peaked?

In a technical analysis of the price trends of financial securities, volume is a very important technical indicator. If the volume moves with the trend, the volume confirms the trend.  When price and volume diverge, it is often indicative of a shift in the trend. For example, if an uptrending stock price is accompanied by lower and lower volumes, it may indicate that the price trend is weak and that prices may start to decline.

The same holds true for the real estate market.

US Real Estate Market

In the US, sales volumes peaked for US Total Home Sales (New and Existing Home Sales) at 8,4 million homes in 2005, a year before the US Median Sales Price peaked at US$ 225K in 2006.  By 2007, the US Median Sales Price slipped by only 1% to US$ 223K while sales volumes had already dropped an astonishing 30.58% from the peak sales volume in 2005, to 5.8 million in 2007.

From then on, the US Median Sales Prices continued to decline year after year, bottoming out at $170K in 2011, or some 25% below the peak price level.  By then sales volumes had already bottomed out a year earlier in 2010 to 4.5 million homes, or some 46% below peak volumes.

Sources: Realtor.org, St. Louis Fed
Median Sales Price is a weighted average of the median sales prices of New Home Sales and Existing Home Sales


The same dynamic played out in both segments of the US Residential Real Estate Market: New Home Sales and Existing Home Sales.

Here is the chart for New Home Sales:

And here is the chart for Existing Home Sales, the much larger market segment.

Philippine Real Estate Market

Might the same dynamic be playing out in the Philippine residential real estate market?  One problem bedevilling such an analysis is the dearth of data.

To my knowledge, the Philippines does not have adequate market data.  For instance, there seem to be no published figures for sales volumes for residential homes.  The best approximation of such data is HLURB's statistics for licenses to sell residential homes.  This statistic represents only new homes and only represents licenses to sell for each residential unit and not the actual sales volumes.

Another issue is that there seems to be no price data on residential sales.  The best data is assembled here, which in turn, is assembled from the Philippine Office of Colliers International, a global real estate agency.  These prices, in turn, are based on the average prices of a prime 3 bedroom condominium unit in the heart of the Makati Central Business District.  This is like basing nationwide US housing prices on the price of a prime 3 bedroom coop unit in Manhattan in New York, one of the priciest real estate markets in the US.  The data available in the Philippines is not representative of the true state of the entire national residential real estate market.  At best, it is an approximation of the Philippine Real Estate Market.  The BSP has stepped into the picture to overcome this deficiency by developing their own real estate index, which would be more comprehensive in scope. Here is a possible candidate for such an index.

But based on the data available, we arrived at this chart:

Based on this data, volumes (as indicated by Residential HLURB licenses to sell) may have already peaked in 2012, while prices have continued their upward climb to date.  Volume seems to have peaked at 264,237 units in 2012 and dropped 15% to 225,051 units in 2013.  In the first quarter of 2014, volumes declined further on an annualized basis, to just 189,668 units or 28% below peak volumes.

Prices though, have continued to climb since 2012, another 14% in 2013 and another 2% in the first quarter of 2014, representing a 16% increase over 2012 prices.

Is the same dynamic that played out in the US Residential Real Estate Market playing out in the Philippines?  It looks like it, but it may still be too early to tell.