Australia, you are getting complacent.
Over the ditch, the big lesson of the last few generations is that house prices always go up. That lesson has been learned, passed on, reinforced by experience and passed on again. Generations of Australians have grown rich and comfortable by sinking their earnings into real estate.
Parents encouraged their kids to get a house and even sometimes helped fund it. Getting into the biggest possible mortgage has been terrific advice. For just about every Australian adult with a mortgage the house was worth far more than the debt you took on to buy it after just a short while.
Meanwhile, investment properties have been a good idea, and a big fat debt funded portfolio of investment properties has been a ticket to early retirement.
We are not too concerned by the recent news that house prices have faded a little bit in Sydney. No matter how many articles may have warned of the dangers of a big house price crash, true experience has been stronger. House prices go up. Australians know this to be true, because that's what the evidence keeps showing them.
Across Australia, house prices are up over sevenfold since 1986. In Sydney, it's nearly ten fold. (So a house that cost $100,000 32 years ago now costs nearly a million.)
The following graph shows price growth is happening at a hectic pace, especially in Sydney, the hottest market in the country.
Source: Stapledon 2012.
As an Australian, I find this graphic concerning. If I lived in Sydney I'd be downright frightened. It's only a rule of thumb, but when graphs go vertical like the Sydney one has, it can be a sign things aren't too sustainable.
The lessons that brought profit to previous generation could harm the next one. Any parents encouraging their kids to get into property now should proceed very carefully.
WHEN UP TURNS TO DOWN
Asset prices fluctuate. It happens to stock markets, paintings, commercial property, gold, bitcoin, and bonds. They go up and down. Sometimes they fall calamitously. Crashes happen to house prices too. We have seen them in Europe, North America and Asia, and even, a long time ago, in Australia.
Check out the peak house prices hit in 1890 in Sydney and Melbourne. They went up to almost $100,000 (in inflation adjusted terms). It took another sixty years for prices to rise above this level again.
In the same way you can have a once in 100-year flood, or a once in 100-year fire, we can have a once in 100-year house price crash. What makes rare events so debilitating is that we've forgotten how to prepare for them. Very rare events are the most dangerous. Once all the people who lived through something die off, we get complacent.
Like, for example, the enormous earthquake that is due to take out Seattle. Geologists only recently discovered the city is built on an unusual kind of fault-line — one that goes off rarely but goes off big when it does. It last went off before any western people lived in the area, and nobody was sure what to make of the stories of the local indigenous people before when they told tales of a great flood many generations earlier (now known to have been caused by a huge tsunami).
In a way it's silly to look so far back for examples of house prices falling. It has already happened in Perth and Darwin, where prices have sunk 12 per cent and 17 per cent respectively since 2014.
AUSTRALIA IS … UNUSUAL
Australia's belief in the inevitability of house price growth may be a special case. We hold the record — 50 years — for the longest house price rise in history. On average, house prices in advanced economies go down after 12 years of going up. And when they fall they do so for an average of five years, but the record is 18 years of falling house prices (in Japan).
Data: Bank of International Settlements 2017.
Australia hasn't had a five-year period where national house prices go backwards for a couple of generations. The memory of it is almost forgotten and Australians have started to believe it won't happen there. And that just makes us all the more vulnerable.