What COVID-19, toilet paper and the Australian housing market bubble have in common

This picture is of a fight over toilet paper in an Australian supermarket.

This picture possibly illustrates the Australian housing market better than any graph like the one below showing house prise relative to per capita income.

I think what both of these pictures have in common is that at their basis they have to some extent, been driven by fear and irrationality. I admit in the case of housing it is a little more complicated, but I'll get there in a sec.

Firstly I'd like to explore the similarities, then I'll get onto the one big difference, and perhaps other smaller ones.

The big similarity is this idea of shortage. The rush on toilet paper in Australia with the COVID-19 coronavirus outbreak was based on the idea that there might be shortages, that people might need to bunker down at our houses for weeks and therefore we'd need to have bum-whipping capabilities far exceeding our immediate needs. Once a few people got this idea into their heads they stacked their trolleys high and walked out into the supermarket carpark where other people with similar views started looking at them and thinking, 'oh shit, better get some toilet paper' and they rush in and do their business and so on and so forth, until old people like us can't get a roll when we damn well need it.

It's the fear of missing out that drives this irrational behaviour, driving demand up and therefore putting pressures on available stock. In the case of toilet paper this does not seem to have translated to price rises but the same type of fear is one of the primary drivers for irrationality in the housing market. And I'm not writing about whether you really want that pink house in the shape of a unicorn and you're willing to pay anything for it. I'm writing about the bog standard house - just one with doors and windows, and maybe a kitchen if you're lucky - which, as the graph above shows, now has a price completely divorced from reality.

Just as with the toilet paper, people see houses being snapped up and they start think, bloody hell I better get me one of those houses before it's too late! And then that person jumps into the market - assuming they have amassed the 10% deposit - and they are willing to get it at any price, but unlike the toilet paper in the supermarket, they find they can't just do some ninja stuff and attack the other person for the house, they have to actually outbid them, well, because if they miss out they'll never be able to wipe their bum again (in their own house at least).

But it's not just panic that's driving the housing market up you say. And you'd be correct about that, so pat yourself on the back. There's also been one other big factor, well actually it's a little factor - so low interest rates for borrowing. This has been the case all around the world, central banks lowering interest rates to stimulate their economies. In Australia it is now under .75% and many countries are heading towards zero. Not like when I finished school in 1989 where it was  up around 18% see graph below.

Interest rates since I left school (which was 1989 if you didn't know already)

So what? You ask, land is limited and house prices ALWAYS go up (der, roll your eyes like a teenager). So it's a great investment, this will be great for my retirement. Well, for a start it probably will be good for your retirement if you can pay off the house while you're working, I'm not going to argue about that, but I'll ignore it for moment and just focus on the price.

Basically, as we can see from the price relative to earning graph, we are paying way to much for housing and this now, and has been for sometime, generating one huge bubble. What is a bubble - well you get detergent and something roundish and you dip it in water and then you blow the glistening detergenty water and out comes a bubble, and sometimes the bubbles is big and sometimes it is small, sometimes you can see rainbow swirls in it, and then it floats away and goes on and on forever in bubble world. Well, probably you're fairly familiar enough with bubbles and hopefully  sarcasm to know that's not true.

And that gets us to COVID-19 the coronavirus. If you discover this blog post in the year 2055, you might be saying carona-what I just drink 5 corona beers a day because that's what health authorities are telling me to do now because they finally found beer was good for me (fingers crossed), but at the time of writing everything is about COVID-19, including wiping your bum.

But first another graph. The graph below shows how hocked up we Australians are. To put it in technical terms, we are hocked up to our eyeballs.

But don't worry, house prices are always going up and our wages are safe, and we haven't had a recession in like 30 years (I know I was there, and it sucked!). Well I can't be bothered finding/ stealing off the internet a graph showing wages, but if you have been earning a wage you probably know wages are stagnating, they are just on par with inflation at the moment. Which leads me to asking this question: where the hell are you getting all that money from to bridge the gap between the growing house prices are your stagnating wages? Well it's in debt. Buying your house debt to live in, which is fine because hey you probably can pay that off if you keep your job, don't get divorced, etc, but you've also got the assortment of other personal debts, credit cards, personal loans, that sort of thing. But no worries, if you need to you can borrow more you can borrow against the equity you've built up in your house to pay those off. No problems so far, you are probably wondering why you bothered reading this shitty blog at this stage, because it's just telling you how awesome the economy is.

Well getting back to COVID-19, the sneaky coronavirus that has nothing to do with beer! Something like this virus is quite possible the thing that will burst your pretty rainbowy illusionary glistening bubble. In Australia we've had relatively low unemployment for quite a while now, we've had good exports of minerals, China being our biggest market, and tertiary studies (i.e. uni) with our biggest customer being China, and tourism contributes tons of money to the economy, with people from lots of countries, like Italy, the UK, New Zealand and China. But what happens if all these students and travellers don't come? If you finished school in 1989 you might remember, it was all about Japan then, until their economy flatlined and their housing prices tumbled dramatically into the abyss - oh, and you think that can't happen in Australia because land is so scarce, well have a look at the land scarcity in Japan next time you're there and you'll realise that's one notion you ought to get out of your head. 

Well anyway, COIVD-19 is in full swing and Ah Bun (which is my great, great grandfather's name) can't get to Tasmania, along with lots of other peeps, so Bob the lecturer at the University of Tasmania doesn't have a class to teach, so he's put off. Bob used to buy coffee from Jill's bubble tea café, and so did a bunch of other students, so Jill has to put off Tina, Tina is chipping in to pay the mortgage at home with her wife Claire Fraser (yes from Outlander fame), which is now like 40% of their combined income, so now Claire has to pay 50% of her income to keep up with mortgage payments while Tina finds another job (that might take a while by the way), which means Claire and Tina don't go out for fish and chips that much anymore, so, well you get the picture, it's not looking good in Tasmania.

But wait, there's more, Ah Bun was going to fly on Qantas to get to Australia along with a bunch of other tourists, and now they are all staying at home, so Qantas has to put off thousands of staff, including one called Jamie Fraser an 18th century Scotsman from Outlander, and reduce its flights by a quarter for the next six months. Anyway, blah, blah, blah, they all bought coffees and had mortgages and ate out and stuff, and now times are a bit leaner so James starts thinking, screw it, I'm gonna move from Cairns, where 18th century Scottish characters from Outlander are often know to live, and move to Brisbane (not as renowned for 18th century Scotsman) so James wanders off to sell his house and he can't wait very long because he's only got a few months redundancy anyway he will accept a bit less for his house, but hang on there's not too many people buying now, he actually has to accept a fair bit lees than was thinking if he wants to sell quick. But he gets off okay. Murtagh Fitzgibbons, on the other hand, he's used the equity in his house to buy shares, and it seems that share prices are tumbling, we all know that happens from time to time, we've heard of the 1929 crash, and the 1987 crash, the GFC. So he's forced to sell, and you know, he ends up getting what he gets for it, and he's lucky if he breaks even.

Anyway there's a bunch of other people, let's call some of them Jonathan and Frank Randall from Outlander, and they are looking around their investment properties and seeing the prices coming down a bit, so they decide to hold onto their property until the market improves, so let's ignore Jonathan and Frank for a while, they are evil bastards, except those evil bastards have been borrowing against the equity in their house to buy shares, and the dividends are gonna be low for the next few months, so they decide they don't want to eat out at that fancy place in town, so now the fancy place is forced to reduce hours for staff, and they also don't have that equity in the house anymore to borrow more houses so they leave the housing market to the other mugs. And then there's that fancy stationary store where Frank got all his pretty stationary, and he's like, you know what I could do with some regular non-Swedish stationary, and so the stationary store goes bust almost immediately, and staff are put off etc.

And sooner or later everyone starts realising there's not enough cash flowing around the economy, so they hunker down with their toilet paper and all the while COVID-19 thing continues to rage, and remember, we had that record debt level, and low interest rates, but we don't want to borrow anymore anyway, and at this stage that housing market is looking more like the toilet paper after you use it, and just like the stock graphs, it starts bending down towards a more reasonable level and people are left with that thought of the shitty rainbowy bubble that just drifted off and burst in the field.

So, that's a long way to say I reckon housing prices in Australia are headed for a correction, just like the stock market has been doing. And all they needed was a little nudge from a cold or flu like virus which someone first caught because they we eating some armadillo thing in a Wuhan market. Mind you, I also think there will be many more bubbles to come after the economic downturn that is likely to occur, because, you know people follow some pretty shitty logic at times.