What's it like inside a bubble?
27 October 2010
Sean Russo
I’M mad as hell and I’m not going to be quiet about it anymore! There is a housing bubble in the country and quite frankly when an overpaid CEO like Ralph Norris says, “there is nothing to sustain the view there is a housing bubble as such” (Australian 22/10/10), it’s just plain offensive.
The Sixteen Million Dollar man could buy a really nice house for one month’s take home pay. Chances are he pays more like 3-6 months pay to get what he likes and he’s got several of them. He’s so far out of touch, and quite frankly so conflicted by virtue of his own company’s position in the housing market, he should avoid any comment.
Of course he will say that he has to comment because there is concern his share price is at risk to people who might mislead you into believing there is a property bubble. But we care about his view of housing like we trust Marius Kloppers or Twiggy Forrest to have a balanced view on future iron ore demand.
Mr Norris, think back to when you were 23. What did you get paid and what did you pay for your first house? It was multiples (not fractions like now) but it was nothing like a 23-year-old faces today. When I was 23 back in 1986 my mates and I earned $20k-$30k pa. (As a benchmark, accounting graduates probably earned $25k). I bought a 12-foot wide terrace house in Newtown, no parking, no bathroom and a flush toilet near the back fence where the ‘thunder-box’ used to be. It cost $60k. Like most 23-year-olds I didn’t have any savings. Luckily I had a mate who had the six grand for the deposit and my employer stumped up the finance.
So, I when I started out I could buy a house that cost 2.4-times the average pay of my peers (call it three times with a bit of renovating) and it was a struggle to still have enough cash left over to maintain the alcohol intake considered polite for young men of that age.
Admittedly housing was cheap at the time in Newtown but that was because rent-controls (under Residential Tenancy Act 2a) which had been in existence since the 1930s were only just rolling off but you don’t want to even go there if you’re in the “no such thing as a housing bubble camp”.
I saw the house sell again recently in the mid-$700,000s. I feel sure it has a bathroom by now, and an inside toilet (luxury!) But it’s still 12ft wide and it’s still in Newtown.
Meanwhile, my 26-year-old daughter and her mates are told they should be delighted to be paid circa $50k pa as a first year accounting graduate. Many of them live at home; not out of some Generation ‘Something’ laziness the demographers like to prattle on about, but out of necessity.
Tell me Mr Norris, how long do you think it should take them to save a sensible deposit now that your industry has figured out lending 105% of the purchase price is not such a good idea? You and I bought our first homes at a multiple of two, possibly three times our annual salary. Nowadays young professionals buying their first home might need to pay 14-times their annual salary to buy a comparable property; a 20% deposit is 2.8-times ‘gross’ salary. How long to save that while you pay rent, or atrophy at home? Probably a decade.
And, what’s really scary is I have friends who are taking out a mortgage(s) on their own home to pay the deposit for a home for their kid(s) because they feel they owe it to them to help get them on the ‘property ladder’. That might sound like great business for you and your three mates and you might even convince yourself that behaviour and those multiples is not ‘bubble like’ but from where I stand it looks more like a “property treadmill” than a ladder. How on earth can we ask our kids to take on this kind of debt and tell them it’s okay, to trust us there's ‘no bubble’?
In 1986-1988 to meet similarly irrational property prices the Japanese banking system invented the 100-year mortgage. I look forward to the CBA TV commercial for that lending product, and yes black and white would be exactly the right way to film it.
So in my direct experience our house prices since 1986 have gone from 2-3 times to 10-14 times gross salary for professional first time buyers. In the same period the Japanese who decided to get their kids on the property ladder at about the same time as I did have seen property prices fall to one-third of what they paid. There's a treadmill.
On the same day (Sydney Morning Herald 21/10/10) I read that according to a survey 27% of Australian workers are too busy to go to the doctor and that chronic overwork has become a creeping problem in Australia and most Australian workers are unaware we clock up the longest weekly working hours internationally.
Doesn’t sound like a good starting point for continuing growth in business, which is key to keeping bubbles growing. Many of the workers are buggered and I bet it’s because they are slaves to their mortgages.
No! No bubble here Mr Norris. Or perhaps it’s simply not visible from inside the biggest bubble of them all: CEO remuneration.
(For full disclosure: I don't own a house and couldn't in good conscience encourage my kids to commit to debt against property at this time and yes I have been wrong for some time, like most experts were about gold at the turn of the century.)