[cobran20]

DebtWatch

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The ABS house price data for December 2011 has just been released, and it shows that house prices fell 4.8% in nominal terms between December 2010 and December 2011. The usual suspects are already trying to see this as marking the bottom, while “just the facts, ma’am” reporting simply emphasises the scale of the downturn. A couple of media outlets have asked my views on the next calendar year, so here they are–along with some historical perspective on the house price bubble.

Figure 1 deflates the ABS series by the CPI, and sets the real price index at 100 in mid-1986, when the ABS Data began. The peak was 261 (which means that real house prices were 2.6 times as high in 2010 as they were in 1986), the December 2011 value was 237, a fall of 9.3%. That’s in the ballpark of the figure I anticipated at the beginning of 2011 for the fall from the peak; over the calendar year of 2011, real house prices fell 7.7% (from 256 to 237), which is still in the range of 10 percent (see Figure 1; the vertical blue lines on this chart mark the beginning of 4 of the 5 incarnations of the First Home Owners Scheme [ its introduction was under Hawke in 1983; its last spin was the doubling and trebling of it by Rudd in 2008-10]).

Figure 1





I expect this rate of decline to keep up for 2012, so I’d expect prices to be of up to 10 percent lower than they are now by the end of 2013, in inflation-adjusted terms.

The force driving prices down is the same one that drove them up. Houses are overwhelmingly bought with borrowed money, so keeping house prices where they are requires a constant supply of new mortgages at the same level (relative to GDP per household) as now; rising house prices require new mortgages to be growing compared to income; and house prices fall if mortgages grow more slowly than income. That we’re now in a period of mortgage debt falling relative to income is finally obvious; only the FHVB delayed this happening.

Figure 2




The key indicator of the direction in which house prices are likely to move is the Mortgage Accelerator, which is the change in the change in mortgage debt (scaled by GDP). The logic is that since the rate of change of mortgages determines the demand for houses—and hence the price level—the acceleration of mortgages determines the change in the demand for housing—and hence the change in the price level.

Mortgage debt is now decelerating almost as much as it was prior to the introduction of the First Home Vendors Boost—the rate of acceleration is now about minus 1.5% of GDP, versus -2% before the Rudd Government meddled with house prices in its attempt to sidestep the GFC. The annual rate of decline of house prices is also of much the same rate as it was before that intervention: they are now falling at a rate of about 8 percent per annum in real terms. So a fall of that magnitude—somewhere between 6 and 10 percent over 2012—is quite likely.

Figure 3




The government might well attempt to intervene again as it has in the past, but I don’t think it will and I doubt that intervention would work anyway.

The 2008 squeeze of the First Home Vendors Sauce Bottle was very successful, which makes another squeeze much less likely to work: potential buyers from 2011 and beyond were already dragged forward into 2009-10 by the last squeeze, and house prices rose so much—by over 18% in real terms from the early 2009 trough to the peak early 2010 peak—that another Scheme would be hard pressed to entice new buyers in.

The NSW State government did its bit for the bubble by abolishing Stamp Duty for First Home Buyers in 2011, but that’s so expensive for the bottom line of State budgets that I don’t think they’d contemplate a repeat.

So overall, the likely outcome is a fall of 6-10% in real terms over calendar year 2012

[cobran20]

SMH: A property crash? Don't bet on it

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Once again, the Apocalypse has been averted and the four horsemen have ridden off to create havoc elsewhere.

Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.

There's little doubt that Australian property is likely to be subdued for at least the next few years and that values here are likely to decline.

Advertisement: Story continues below As in previous times, the property market appears to be settling in for a prolonged hibernation after a debt-fuelled run-up.

But those gleefully predicting a US-style crash in the Australian property market are so far wide of the mark it beggars belief that anyone bothers to listen.

In fact, about the only place there has been a US-style property market crash in the past few years is in the United States of America, a catastrophe sparked by reckless lending and a total failure of regulatory oversight that ricocheted around the globe in 2007, sparking round one of the global financial crisis.

Those US-style excesses (loans to borrowers with no ability to repay) were almost universally repelled in this market. As a result, we've largely avoided the after-effects.

That hasn't stopped the hyperbole by an ever-increasing mob of normally reputable commentators.

But the facts are far more sobering.

The official figures released this week by the Bureau of Statistics clearly show a downward trend in the domestic housing market.

Overall, we experienced a 4.8 per cent national decline in the year to the end of December. But the manner in which the declines were carved out provides the most interest.

Australia may be a nation in the throes of a once-in-a-generation economic transformation, with resources squeezing out traditional industries, but there has been little evidence of that in housing demand.

Among the biggest surprises was that Brisbane, one of the beneficiaries of the resources boom, led the housing market price declines with a 6.7 per cent drop in the year to the end of December.

Adelaide and Melbourne were next in line. But the biggest surprise was the pullback in Perth residential real estate, shedding a whisker under 5 per cent.

Unlikely as it may seem, Sydney was the best performer of all with a decline of just 2.7 per cent over the year. (OK, Canberra outdid Sydney with a 2.6 per cent drop but no one ever pretended it was a normal city.)

Australian residential real estate is expensive on just about any measure you care to nominate.

And it is clear that it has reached a tipping point. For it has outgrown the capacity of Australians to service the debt required to buy a property. Not only that, the stronger dollar has made our property more expensive for foreign investors.

But to employ that argument as the exclusive rationale for a domestic property market collapse is naive in the extreme and ignores the fundamentals of market operations - supply and demand.

Given the tighter lending criteria imposed upon our banks during the boom years until 2008, the only way that we will experience a US-style property crash here is if there is a serious rise in unemployment - a change that would spark loan defaults and flood of distressed property on to the market.

That's not impossible. But it is highly unlikely given our historically low unemployment right now and our place in the global economy as a resources supplier plugged into the only growth region in the world right now.

For a US-style property collapse to occur here, we would need sovereign debt defaults across Europe, the disintegration of the European Union and a banking crisis that would cripple even China. And if that happens, we'll have bigger concerns than the price of our homes.

As with any market, there is a delicate balance between supply, demand and price. For those pining for ''the good old days'' when we had ''affordable housing'', it is time for a reality check.

The truth is that housing was never affordable. All that's changed in recent decades has been a shifting of the equation surrounding supply, demand and price.

In the good old days, the only reason housing was far cheaper - on an average earnings basis - was that credit was restricted.

Up until financial deregulation in 1983, our banks had to labour under the yoke of federal regulations that prohibited them from offering home loans to customers above 13.5 per cent. Credit was in such short supply, few were offered enough cash to buy a home.

It wasn't until our banks discovered cheap offshore credit in the mid-1990s and brought the cash onshore that we suddenly had ''affordable'' home loans. But the cheaper credit simply shifted the price of real estate higher.

It was a windfall for the banks. For the real estate boom resulted in ever larger loans. And those larger loans bloated the earnings of our major banks, a financial perpetual motion machine that came to an end more than two years ago.

As a nation, it's left us with a serious but not insurmountable foreign debt problem. (That's right, it's a private not a government debt that is the problem).

It also is the reason global ratings agencies are seriously considering downgrading our banks, particularly given the threat to international finance from the ructions in Europe. And it goes a long way to explaining why our banks have aggressively switched back to domestic funding, to raising their cash at home.

The adjustments are in place. A crash? Don't bet the house on it.

[tom]

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The NSW State government did its bit for the bubble by abolishing Stamp Duty for First Home Buyers in 2011, but that’s so expensive for the bottom line of State budgets that I don’t think they’d contemplate a repeat.

First home buyers were exempt from paying stamp duty back in 04 (about then at any rate) by the then state Labor government.

The Liberals have rolled this policy back to only applying to new homes. It is the expiry of this scheme that has caused some people to jump in in NSW not the implementation of it over 5 years ago.

Anyway after seeing his graphs so often I started to pay less attention, thinking just another repeat but I forgot just how compelling the mortgage acceleration v house price movemements was. I am convinced; 5 - 10% falls for 2012 are well and truly on the table.

[Crest]

Solid analysis by Steve Keen.

What I like most about his work is that he always factors debt into the housing equation. This is what the vested interests and spruikers who cheer on housing infation (ie Joye) want us all to ignore.

The reason being that many of these commentators in some way earn their money from the debt industry. Every $10,000 increade in house price means a $10,000 increase in homebuyer debt. Good news if you are in the debt business. Not so good if you are the sucker having to pay it back - while the finance industry guys are cruising around Sydney Harbour in their yachts.

[cobran20]

One Down, Ten to Fifteen to go

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The latest installment of the official House Price Index from the Australian Bureau of Statistics (ABS) was released today showing Australian house prices continued to fall in the December 2011 quarter. The weighted average of the eight capital cities fell 1.0 percent in December, ending a year where house prices fell in every quarter. For the year, 4.8 percent was wiped of the value of Australian homes.

Brisbane led the falls, slashing 6.7 percent from values. Adelaide, considered one of the more affordable capital cities racked up second place at 6.4 percent.









Assuming there is no further government interference in Australia’s housing market, this year’s falls is considered to be the start of many in a long period of painful deleveraging. The Economist Magazine reports Australia has one of the largest property bubbles in the world and is overvalued by 53 percent on a rent to price metric. It also believes Australia, Belgium, Canada and France have property markets that are more overvalued today than at the peak of the American housing bubble.





While housing lobby groups in the USA cried a chronic shortage of houses, and central bankers said not to worry – there is no bubble, thus there can’t be a crash, Yale Professor Robert Shiller was raising concern about America’s housing bubble. His real house price index is shown above in blue.

After 5 years and 5 months, the S&P/Case-Shiller Home Price Index for 10 composite cities show house prices have fallen 32.8%.

In Australia (red/orange line), some analysts believe house prices may have bottomed out. On a more serious note, Henry Blodget asked the same question to Robert Shiller about the United States property market while in Davos on the weekend.

Shiller answered, “When people phrase is that way, they say ‘we’ve reached the bottom.’ That suggests that we have the expectation of a major turning point right now. But I don’t see that. I don’t see any reason to think that prices are going to start heading up dramatically now. We do have some good news. Permits are up. Notably, the National Association of Homebuilders Housing Market Index is up and that’s a forward-looking index. But it’s not up very much. If you look at the rate of change it looks dramatic but it’s still at a low level. ”

Blodget suggested property prices in the United States was starting to look like ‘fair’ value relative to long term historic trends (i.e. graph above of real house prices), but Shiller argues what does ‘fair’ value actually mean in an economy like this. Shiller is questioning if America will overshoot. “Now the question is whether we’ll overshoot, which is a common thing that happens after bubble burst.”

As Shiller has looked at bubbles going back hundreds of years, Blodget naturally asked if Shiller has ever seen a bubble where there wasn’t a major overshoot. His reply “Well, the problem is we’ve never had, in the United States, a bubble like this, of this magnitude before. That’s the problem. That’s the fundamental problem of economics.”

But this isn’t a problem limited to America. In Australia, Dr Nigel Stapledon from the University of NSW and former Westpac Bank Chief Economist has compiled real home prices for Australia. In a Morgan Stanley research paper written by Gerald Minack titled “Australian Strategy and Economics : Living in a bubble”, Minack provides the following graph of real median Melbourne house prices dating back further than our graph above.





As you can see, today’s prices are unprecedented in Australia, eclipsing the speculative land boom in Melbourne after the gold rush era (we were digging up stuff then, too) and leading to the Australian Banking Crisis in 1893.

[Solomon]

cobran20, on 02 February 2012 - 08:50 AM, said:

One Down, Ten to Fifteen to go

Oh dear!!
What goes up......!

[mattau]

yeah solomon.. those graphs show a very massive UP... may come down very hard then
*ouch*

[cobran20]

mattau, on 03 February 2012 - 09:50 AM, said:

yeah solomon.. those graphs show a very massive UP... may come down very hard then
*ouch*

The current spike looks similar to the one in 1891 and that took around 30 years to find a lasting bottom!

[Sean]

There's a couple of dips for WWI and WWII, but the trend after 1995 looks bad -- that was the rise of Aussie Home Loans and the other NBLs and credit liberalisation, of course. I think our own saved super money is being lent back to us in the form of higher mortgages and house prices, isn't it? Talk about unanticipated consequences...