FHB Boost is Australia’s “Sub-prime Lite”

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The First Home Own­ers Boost (as it is offi­cially known) has cer­tainly given the Gov­ern­ment bang for its buck. By spend­ing roughly $200 mil­lion of its own money to date, it has added about $3 bil­lion to the hous­ing mar­ket. But the addi­tional $2.8 bil­lion has come from increased mort­gage debt taken on by those most vul­ner­a­ble to a seri­ous eco­nomic down­turn, at a time when the lat­est “unex­pected” increase in unem­ploy­ment indi­cates that, like it or not, the global down­turn is com­ing our way.

Amer­ica tried a sim­i­lar trick in 2000, when the col­lapse of the Dot­Com bub­ble threat­ened to cause a seri­ous reces­sion: it was called Sub­prime Lend­ing. There should be lit­tle doubt now that that scam–which at the time received sub­stan­tial gov­ern­ment backing–simply delayed the day of reck­on­ing, and made the even­tual cri­sis much, much worse.

With Australia’s belated ver­sion of Sub­prime-Lite, we appear to be mak­ing the same mis­take (The Sun­day Tele­graph made this issue their page one lead today–“House Price Cri­sis Looms”–and fol­lowed up with the fea­ture Our home-grown sub-prime cri­sis). It’s on a smaller scale, and the bor­row­ers aren’t so trans­par­ently uncred­it­wor­thy. But we are attempt­ing to avoid an eco­nomic cri­sis caused by too much bor­row­ing, by encour­ag­ing the poor­est in our com­mu­nity to take on yet more debt.

Very few of those who’ve received the FHOB would qual­ify as Sub­prime as it was defined in America–a bor­rower actu­ally had to have a poor credit his­tory to get a Sub­prime loan. But First Home Buy­ers are, almost by def­i­n­i­tion, young and newly in the work­force. They will be amongst the first to lose their jobs when the down­turn bites.

So while The Boost may give a tem­po­rary fil­lip to the bot­tom end of the hous­ing mar­ket, the con­struc­tion indus­try, and the econ­omy, when unem­ploy­ment con­tin­ues its unex­pected (there’s that word again!) rise, many First Home Buy­ers will be at the head of the dole queues. And as well as being unem­ployed, they will also be home­less and bank­rupt.

Had they not been enticed into the hous­ing mar­ket at absolutely the worst time by a mis­guided Gov­ern­ment pol­icy, they would still have lost their jobs. But at least they would not also be fac­ing bank­ruptcy as well.

There are mul­ti­ple influ­ences that have enticed a flurry of First Home Buy­ers into the market–falling mort­gage rates, and the cease­less spruik­ing of The Aus­tralian Dream amongst them (the lat­ter reminds me of the promo for the Terry Gilliam movie Time Ban­dits: “Like all the dreams you’ve ever had. And not just the good ones”).

But The Boost clearly was the major force behind the 4% jump in the pro­por­tion of hous­ing loans going to First Home Buy­ers in Novem­ber 2008. The extent to which First Home Buy­ers have been used as pawns by gov­ern­ments of both polit­i­cal per­sua­sion to reflate the hous­ing bub­ble is obvi­ous in the fol­low­ing chart:

First Home Buy­ers went from 19.4% to 23.6% of the mar­ket in the first month of The Boost, and their share of new house pur­chases has since risen to 26.5%–the high­est share since records began in 1991. Rumour has it that a major moti­va­tion for The Boost was Treasury’s advice that the same trick had pre­vi­ously worked a treat for Howard, and the evi­dence for that sticks out like two sore thumbs in the data.

On these num­bers, Rudd’s Boost has prob­a­bly enticed an addi­tional 10,000 pur­chasers into the mar­ket in its first 3 months, with each tak­ing out, on aver­age, $270,000 in debt.

These First Home Buy­ers have also bor­rowed more on aver­age than other pur­chasers: the aver­age for non-First Home Buy­ers was about $250,000. Over the long term, loans to estab­lished buy­ers have been larger than those to new entrants into the mar­ket, as you would expect:

How­ever since 2005, as often as not, new entrants have bor­rowed more than estab­lished buy­ers. The dra­matic rise in the amount bor­rowed by First Home Buy­ers pre­ceded The Boost, and the phe­nom­e­non was com­mon to estab­lished buy­ers too; so it can’t be blamed on The Boost alone. Nor can it be attrib­uted to Aus­tralians increas­ing their debt lev­els in response to lower inter­est rates–the stan­dard fur­phy that the RBA has pushed occa­sion­ally to jus­tify ignor­ing ris­ing pri­vate debt lev­els. In fact, the increase in the aver­age level of mort­gage debt began in March 2008, the date of the RBA’s final 0.25% increase in the cash rate in its Quixotic bat­tle against infla­tion.

But it is obvi­ous that at a time when the rest of the Aus­tralian com­mu­nity has started to reduce its level of lever­age, First Home Buy­ers are still increas­ing theirs.

Demo­graph­ics on First Home Buy­ers are unavail­able, but they are cer­tain to have lower incomes, and (were it not for The Boost) lower deposits, than those who have pre­vi­ously pur­chased a house. They are also cer­tainly buy­ing cheaper houses than estab­lished buy­ers. This means that they have higher debt ser­vic­ing costs, on lower incomes, than estab­lished buy­ers, and have pur­chased less valu­able prop­er­ties with them.

A sur­vey by Fujitsu Con­sult­ing (which has con­sis­tently pro­duced real­is­tic and empir­i­cally grounded reports on eco­nomic and finan­cial issues) found that 30 per­cent of First Home Buy­ers had loan to val­u­a­tion ratios of 95 per­cent (Aus­tralian Finan­cial Review, March 21–22 p. 20). Only 12.5% of First Home Buy­ers had a loan to val­u­a­tion ratio of under 80% (Fujitsu Con­sult­ing Feb­ru­ary 2009 Stress-O-Meter Update, p. 39). Together with anec­do­tal evi­dence that The Boost has ignited activ­ity in the sub-$500,000 price range, this implies that the aver­age First Home Buyer is rely­ing upon the gov­ern­ment grant for more than 50% of the deposit.

Indi­vid­u­als with the most vul­ner­a­ble jobs, low­est incomes, and the low­est net worths, have thus been enticed into debt at a time when the rest of soci­ety is busy de-lever­ag­ing. They are there­fore surely more highly geared, and more finan­cially frag­ile, than the rest of the com­mu­nity.

From the government’s point of view, these might be–dare I say it–“a beau­ti­ful set of num­bers”. Cour­tesy of The Boost, 10,000 or so extra bor­row­ers, spend­ing between $14,000 and $24,000 of gov­ern­ment-sourced money, plus on aver­age $270,000 of bor­rowed money, and their own sav­ings of less than $15,000, have added at least $300,000 each to the Aus­tralian hous­ing market–and indi­rectly the econ­omy. This is a $3 bil­lion boost to the econ­omy: roughly an addi­tional $1 bil­lion a month.

Not a bad return for a Gov­ern­ment pol­icy that has cost it well under $200 mil­lion: pump in $200 mil­lion, and get $3 bil­lion worth of stim­u­lus for the econ­omy.

The prob­lem is, this may not be pump-prim­ing the econ­omy, to bor­row an over-used and inap­pro­pri­ate anal­ogy, but sub­prime-pump­ing it.

The Rudd Gov­ern­ment may well rue Treasury’s “sure thing” advice when unem­ploy­ment here starts to sky­rocket as it has in the USA and else­where. They will then have a cohort of–on cur­rent trends–at least 30,000 First Home Buy­ers who are in the fir­ing line for unem­ploy­ment, home­less­ness, and bank­ruptcy cour­tesy of yet another futile attempt to stim­u­late the econ­omy by main­tain­ing the Great Aus­tralian Dream.

This eco­nomic turn­around is inevitable, because the dri­ving force behind it is de-lever­ag­ing: credit growth is evap­o­rat­ing, and as it dimin­ishes, the debt-financed com­po­nent of demand is col­laps­ing and tak­ing eco­nomic activ­ity with it. This process is now ram­pant in the USA:

And it is also build­ing up a head of steam in Aus­tralia:

The rise in unem­ploy­ment will impact severely on house prices, since, as Ger­ard Minack com­mented in today’s Sun­day Tele­graph, “I don’t care what rate you’re pay­ing, if you have a mort­gage five times your income and you lose your job, you’re toast”.

Aus­tralians in gen­eral, and the prop­erty mar­ket com­men­tariat in par­tic­u­lar, are in denial about the extent to which Aus­tralian house prices are overvalued–and there­fore over­due for a fall that The Boost is only tem­porar­ily delay­ing. Even a sim­ple com­par­i­son of the ABS House Price Index for Aus­tralia to the US Case-Shiller Index, when both are deflated by the CPI, shows that the Aus­tralian house prices bub­ble was sub­stan­tially larger than America’s:

How­ever, even this under­states the degree of rel­a­tive over­val­u­a­tion here, since the late 1980s, when the ABS series began, was itself a time that there was a bub­ble in Aus­tralian house prices. To make a fair com­par­i­son, we need a time series that goes back as far as the USA’s, and there­fore is unaf­fected by short term bub­bles and slumps.

Nigel Sta­ple­don at UNSW pro­duced such a time series for his PhD, and I repro­duce his data here, with the value in 1890 set to100– the same value as for the Case-Shiller Index, which begins in that year. This enables a more real­is­tic com­par­i­son of the size of the hous­ing bub­ble in the two coun­tries.

This chart gives a more real­is­tic pic­ture of the most recent Aus­tralian house price bub­ble:

On this basis, the cur­rent Aus­tralian house price bub­ble is about 75% more extreme than the USA’s, which is now clearly in free-fall. A fall in Aus­tralian house prices is inevitable, and it will be dri­ven by the house­hold sector’s attempt to de-lever from its cur­rently unprece­dented level of debt.

This de-lever­ag­ing will drive the econ­omy down, tak­ing employ­ment with it–and espe­cially the jobs of First Home Buy­ers, who are def­i­n­i­tion have less secure employ­ment than older, estab­lished home own­ers.

As I argued when The Boost was first announced (Res­cu­ing the Econ­omy or the Bub­ble?; Debt­watch Blog Octo­ber 19 2008), the pol­icy is a mis­take that will back­fire on the Rudd Gov­ern­ment when the global finan­cial cri­sis finally comes home to roost here. Despite the bleat­ings of the prop­erty lobby, it should not be extended past its cur­rent ter­mi­na­tion date.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • ferb

    As for whether or not to buy or rent.

    Even if the costs of own­ing were even, the cap­i­tal deval­u­a­tion of prop­erty thats is pend­ing, will force most mort­gage hold­ers to become “upside down”, where the the value of there home is less than what they owe.

    no option but to hold onto the prop­erty in the hope of increased val­u­a­tion over the future years…provided one can keep there job, no probs. lose the job and you will fore­close, and still end up being held account­able to pay the remain­ing debt to the bank. 

    buy the median house price in Perth for $445,000 with 10% deposit. if you buy now and the value of this drops 40% you will lose $175,000 in value. So now you still owe $400k but the value of prop­erty is $270k. lose your job and you owe the bank $130k.

    if u can’t pay the debt in this case you file chap­ter 11, and the banks take the losses. then we have our own bank­ing credit prob­lems on top of the global one here now.

    why buy a house now, when the risk is so big, regard­less of rental com­par­isons.

  • home­s4aussies

    Yes Ferb, expressed another way — I’ve heard a cou­ple of ana­lysts do this — the REAL (house price infla­tion adjusted) mort­gage rate will be around 15% pa this year (assum­ing price falls of 10% pa, which is what a num­ber of the typ­i­cally more bull­ish com­men­ta­tors expect, eg. Chris Joye, APM). That is his­tor­i­cally very, very high.

  • home­s4aussies

    Your com­ment, Rooivis, raises per­haps the most impor­tant long term issue, in my view.

    Much of the debate has focused on whether the Rudd stim­u­lus plan will pre­vent our hous­ing bub­ble from pop­ping like in the US and UK.

    But I believe a more impor­tant issue is whether it is even advis­able to try.

    Many here know that I have a deep con­cern for the kids that are tak­ing on more debt than they can han­dle, and for the lower income renters who have been squeezed for up to a decade now (some of whom have become home­less, or unfairly under­housed eg. dad and two kids liv­ing in a trailer as seen on SBS Insight when the dad worked 2 jobs!) — and I gather many share those con­cerns.

    Now, the social ben­e­fits of a sig­nif­i­cant reduc­tion in hous­ing costs would be enor­mous, in my view (instead of gim­micky social hous­ing plans — which will only help a few — but have the real aim of pre­vent­ing a hous­ing cor­rect­ing so that ALL mar­gin­alised and young Aussies ben­e­fit!)

    But there is also a very strong eco­nomic case. Sure, their argu­ment that the eco­nomic con­se­quences of loss of “wealth”, illu­sory as it was, will be sig­nif­i­cant.

    Here’s the thing. Every time income tax scales are dis­cussed, it is said that they need to be reduced for Australia’s long term com­pet­i­tive­ness — to attract the mobile skilled labour, in a com­pet­i­tive mar­ket, that is needed to drive our econ­omy in this cen­tury.

    The amount of tax one pays deter­mines one’s dis­pos­able income, and if hous­ing in Aus­tralia already costs twice the level of house­hold dis­pos­able income as in the US, then surely we are already at a very, very sig­nif­i­cant dis­ad­van­tage.

    See this graph from the RBA which I believe will be updated this week:
    http://www.rba.gov.au/Speeches/2008/_Images/270308_so_graph7.gif

    Now you will notice that we Aus­tralians have needed to com­mit a greater pro­por­tion of our dis­pos­able income to hous­ing than any other major Anglo­phone coun­try for 21 of the last 22 years!

    And I would sug­gest that is largely due to there being a greater, often much greater, spec­u­la­tive pre­mium in our mar­kets due to gov­ern­ment pol­icy to encour­age the pur­chase of mul­ti­ple invest­ments houses (it’s inter­est­ing an Amer­i­can con­trib­u­tor above felt tax incen­tives for the home was a major dis­tor­tion — which it is — but Aus­tralian investors/speculators have incen­tives to buy an unlim­ited num­ber of houses!)

    Now with the (smaller) bub­bles in all of these other Anglo­phone coun­tries col­laps­ing, we surely have even more expen­sive hous­ing (real­i­tively speak­ing — though I’m won­der­ing whether the Decem­ber hand­outs, which “boosted” dis­pos­able income, may make this look less strik­ing when the graph is updated?)

    Few doubt the polit­i­cal ben­e­fits to prop­ping up this once in a life­time hous­ing bub­ble. But it seems that the eco­nomic case for doing so, let alone the social case, is never ques­tioned. It is time to address that!

  • bfg

    To the peo­ple that have sold, or or plan­ning to sell their houses — if I may ask, what have you done, or what are you going to do, with the pro­ceeds?

  • dearpru­dence

    To all,

    Fas­ci­nat­ing thread. Like oth­ers here I have watched in stunned dis­be­lief over the last 10 years at the increas­ingly insane prices paid for res­i­den­tial prop­erty in this cheap credit fuelled boom. How any­one can claim it is cheaper to buy than rent beats me — if so, “neg­a­tive gear­ing” for prop­erty spec­u­la­tors would not exist (i.e. rental income fails to cover net costs of aquir­ing the asset, hence neg­a­tive cash flow of prop­erty invest­ing and reliance on spec­u­la­tive cap­i­tal gains).

    While the FSA in the UK is con­sid­er­ing cap­ping home mort­gage lend­ing to a max­i­mum of 3 times the bor­row­ers income (yep, really!), here in Mel­bourne a beach box sells in the ball park range of three times indi­vid­ual median income:

    http://www.theage.com.au/national/property-price-fall-hits-brighton-20090315-8yz8.html

    That just about says it all, yes?

    Can some­one explain why, when the costs of hous­ing — our biggest expense — has grown so dras­ti­cally over the years, that some­how gov­ern­ments have claimed we have had low infla­tion? “Great mod­er­a­tion” my a***. Why is it that hous­ing price asset bub­bles fail to show up in the infla­tion fig­ures?

    LT asks a very good Q as to why we haven’t had more building/supply here, chas­ing these crazy prices? Costs of build­ing too high (as Rhino says)? 

    With the Henry tax review, is it not time that a dol­lar was treated as a dol­lar? Get rid of the cap­i­tal gains tax con­ces­sions (treat it just like income), and dis­al­low claim­ing real estate expenses against other (non-rent) income. I object to tax­pay­ers fund­ing prop­erty spec­u­la­tors chas­ing asset price rises. Does any­one NOT think our stu­pid neg­a­tive gear­ing pol­icy has some­thing to do with our homes being among the most expen­sive in the world? 

    Both buy­ing and rent­ing is way too high in this coun­try. Its very unhealthy. Its ter­ri­ble for young peo­ple and those on low to median incomes. Gov­ern­ments of all per­sua­sions should be utterly ashamed of them­selves for pro­mot­ing these high prices as pol­icy.

  • ferb

    dearpru

    exactly — how is infla­tion not con­sid­ered high when the value of realestate and the cost of build­ing have gone nuts? because the gov­ern­ment fudge the fig­ures.

    http://www.shadowstats.com/

    i would imag­ine sim­i­lar fig­ures here in aus­tralia.

    as for prices, either wages go up accord­ingly in all employ­ment sec­tors, to match the min­ers, or house prices have to drop. and small busi­ness is not going to cope well with those kind of wage cost increases with­out trim­ming the fat some­where.

  • home­s4aussies

    Accord­ing to Melissa Ketchell’s blog on the Courier Mail web­site:

    Up to 15 per cent could be slashed off the price of ren­o­va­tions as the slow­down in new com­mer­cial projects see more tradies head to the res­i­den­tial sec­tor. In its quar­terly cost guide Archi­cen­tre is pre­dict­ing falls in costs of 5 to 15 per cent in some states”

    Should flow through to new home build­ing, too, as long as Gov­ern­ment dis­tor­tions (like buy­ing up “social hous­ing” at bub­ble prices) do not pre­vent the adjust­ment.

  • rooivis

    Dearpru­dence

    You ask:“LT asks a very good Q as to why we haven’t had more building/supply here, chas­ing these crazy prices? Costs of build­ing too high (as Rhino says)?”

    It is because the cost of build­ing is in fact a minor part of of the new house. The land cost is the big ticket item. At the exor­bi­tant prices many peo­ple made the deci­sion not to buy. Maybe they felt prices to high or per­haps the prices were above what they could afford.

    An inter­est­ing devel­op­ment that I observed in Mel­bourne was that as in all nor­mal prop­erty booms, the price esca­la­tions started at the higher end of the mar­ket, inci­den­tally sub­urbs close to the city, and had a rip­ple effect towards the out­ly­ing sub­urbs of gen­er­ally lower prices. Bit like the rip­ples you get when throw­ing a stone into a pond. What hap­pened next was some­thing I had not observed before. The FHOG cre­ated such a demand at vir­tu­ally any price in the outer sub­urbs, that it placed pres­sure on the supe­rior closer lay­ing sub­urbs and forced priced up in a reverse rip­ple effect towards the prop­erty that started the boom. Now once it got back things started going really crazy.

    Falls in the prop­erty mar­ket usu­ally also starts from the cen­tre, as we see hap­pen­ing. A val­uer friend of mine said Brighton had already lost around 30% of its value. I do not know where the arti­cle get their 3% growth for Mel­bourne dur­ing 2008 from. My expe­ri­ence was at least a 10% fall for the year. Most of the prop­erty sold in my local area lately were upmar­ket unit devel­op­ments. Includ­ing such sales may cre­ate the false impres­sion that sales are up based on aver­ages. How­ever when com­par­ing like for like the pic­ture is not that rosy. I con­cen­trate on the low­est sales of 550M sqr prop­er­ties. This gives me an indi­ca­tion of the prices for 1950 to 1970 ren­o­vated prop­er­ties. Essen­tially these type of homes add very lit­tle to the prop­erty an is often knocked down. So what you are really look­ing at is land value. This pro­vides a much bet­ter guide as to the state of the prop­erty mar­ket in my opin­ion.

  • pareel

    Steve,

    I see the % FHB has grown. Can you show the total num­ber trend of FHB in the mar­ket against the % trend? Is the num­ber of FHB grow­ing or just their share of a falling mar­ket in Nov 2009.

  • Otto C.

    Just a few thoughts on house prices and rents; would be inter­ested in your feed­back.

    Based on data from the REIA until 2003 and ABS in lat­ter years I devel­oped data series for house prices and rents from 1982 to mid-2008 mak­ing some rough adjust­ments in an effort to align the num­bers from the dif­fer­ent sources (I’m too mean to pay for the REIA data after 2003). Whilst the num­bers may not be spot-on, hope­fully they tell the story.

    By this reck­on­ing the house prices increased by a fac­tor of 8 over the 26 years and the rent by a fac­tor of about 3.2 times. The rents seem to cor­re­late quite well with the CPI over this period.

    This seems to tell us a few things: 1) in 1982 (indeed most of the 1980’s) the returns an investor would get from rental prop­er­ties would have been a lot bet­ter than in recent times; 2) if we add the increased lever­ag­ing on houses men­tioned by Steve the fall in afford­abil­ity of hous­ing is even worse than the growth in prices indi­cates; 3) whilst prices can rise steeply over time (due to easy loans and spec­u­la­tors aim­ing to make cap­i­tal gains, e.g. neg­a­tive gear­ing), it is not pos­si­ble to raise rents steeply year by year because ten­ants just couldn’t afford it; 4) the close cor­re­la­tion between rent and infla­tion sug­gests that the real cost of rent­ing hasn’t changed that much over the years and there­fore hous­ing for ten­ants (at least on aver­age) should not be less afford­able than 26 years ago.

    Based on this I put for­ward the fol­low­ing ideas and would be inter­ested in com­ments from other par­tic­i­pants.

    The yields avail­able from prop­erty invest­ing in recent times with­out cap­i­tal gains were very poor and often neg­a­tive, a sit­u­a­tion that can­not be sus­tained, so prices must fall. If prices were to fall to a level were they again match the index of rents they would have to fall from 800 to 350, a fall of 56%. Fur­ther­more, we’ve seen in stock­mar­kets that the mar­ket usu­ally over-cor­rects on the upside and down­side, so maybe it could fall by even more, say 65 or 70%.

    Intu­itively, I don’t quite believe it would fall by this much and think that Steve’s 40% will be closer to the mark. But, hey, any­thing is pos­si­ble.

    As far as rents are con­cerned other blog­gers have pre­dicted a fall in rents. It’s pos­si­ble in the short term, but isn’t it more likely that rents will just flat­ten out rather than fall sig­nif­i­cantly? If the cor­re­la­tion with infla­tion con­tin­ues, then per­haps when Aus­tralia goes into defla­tion rents will fol­low that trend down.

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  • home­s4aussies

    Pareel, yes — you saw through the baloney. As I said above, I’ve plot­ted the NUMBER of nonFHBs (and their 6 month mov­ing aver­age) since the ABS data series com­mences and it shows that the num­ber of nonFHBs is the low­est in 8 years.

    http://www.geocities.com/homes4aussies/nonFHBs.jpg

    Con­versely, the NUMBER of FHBs is back up to where it was through 2007 — the boost did lift NUMBERS up from low lev­els in 2008, and Dec 08 num­bers were fairly high (per­haps a peak?), but already in Jan 09 the num­ber of FHBs was down to 12,499 (2 months in 2007 recorded a sim­i­lar num­ber, and most other months in 2007 recorded nos. in the 11,000s — though there could also be a sea­sonal affect — we’ll need to see fur­ther reads, but with unem­ploy­ment and under­em­ploy­ment ris­ing it’s likely to drop back)

    See the ABS series at

    http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0?OpenDocument

    And if you have an inter­est in Bris­bane, I’ve plot­ted the Bris­bane data in a paper on my web­site

    http://www.geocities.com/homes4aussies/090207Bris.pdf

  • home­s4aussies

    Otto

    Your work is inline with work by the RBA

    http://www.rba.gov.au/Speeches/2008/_Images/270308_so_graph1.gif

    I agree with every­thing you say with one excep­tion. I do think it is pos­si­ble for rents to fall sig­nif­i­cantly, rather than just plateau, because the build­ing indus­try is strongly lob­by­ing for assis­tance as it is such a large employer. Above are a lot of com­ments about how the “under­sup­ply prob­lem” will evap­o­rate going for­ward. If this even­tu­ates, and the Gov­ern­ment con­tin­ues to prop up the res­i­den­tial prop­erty indus­try, they are effec­tively fund­ing “bridges to nowhere” or “dig­ging then fill­ing in holes”. As I’ve said, I’m not too con­cerned about this type of wasted resource because it should see rents fall for the long suf­fer­ing low income Aussies.

  • Bull­turned­bear

    Hi Guys,

    Inter­est­ingly on the build it and they will come the­ory. Mish posted a story yes­ter­day how in Michi­gan some sub­urbs are now so vacant that it would be more cost effec­tive to pay the remain­ing few own­ers to move, then bull­doze the houses, than it would be to keep the ser­vices up to the area.

    So stim­u­lat­ing con­struc­tion may just be build­ing houses that will be knocked down later. Crazy.

    These guys just don’t believe that demand can fall. They are con­vinced that demand is a straight line.

  • home­s4aussies

    A quick note before even read­ing the arti­cle — just in case a reporter or some­body attend­ing the con­fer­ence reads this — Tony Richards’ paper on hous­ing did not include an update com­par­ing the ratio of house prices to dis­pos­able incomes across the major Anglo­phone coun­tries. Won­der why?? Per­haps there was a great deal of sen­si­tiv­ity of show­ing that our hous­ing has got­ten even more expen­sive rel­a­tive to the other coun­tries?? (And that would run counter to the polit­i­cal objec­tives of those “who must be obeyed”)

    Also, did a search for the word “suf­fer” — no hits — a bit too polit­i­cally sen­si­tive I guess to show con­cern for low income Aussies (when the objec­tive is to keep the bub­ble going to pro­tect the higher income Aussies that have “ben­e­fit­ted”)

    The paper is at:

    http://www.rba.gov.au/Speeches/2009/sp_so_260309.pdf

  • home­s4aussies

    A BLOW BY BLOW OF THE LATEST RBA PAPER ON HOUSING BY TONY RICHARDS.…

    index of the ratio of aver­age house­hold dis­pos­able income to the prin­ci­pal and
    inter­est repay­ments on a new mort­gage for a median-priced dwelling (Graph 2).1 It
    should be noted that mea­sures such as this one do not incor­po­rate the effect of grants
    for first-home buy­ers which have recently been boosted by the fed­eral gov­ern­ment
    and some states. The data in this graph go up to the Decem­ber quar­ter of 2008 and
    the dot shows an esti­mate of this mea­sure based on the cur­rent level of mort­gage
    rates. It is quite clear that pur­chase afford­abil­ity has recently improved very
    sig­nif­i­cantly in Aus­tralia.”

    BUT IT IS IMPACTED BY THE STIMULUS HANDOUTS WHICH BOOSTED THE DENOMINATORTHE DISPOSABLE INCOME!!! WAS IT ENOUGH TO GET THE DECEMBER 2008 QUARTER JUST OVER THE LINE IN GRAPH 2???

    SAME COMMENT FOR THE RATIO OF HOUSE PRICES TO INCOME FOR AUSTRALIAAND NOTE THEY QUOTE THE AVERAGE SINCE 1993 (SOME FAIRLY BUBBLY YEARSWHEN DID SYDNEY’S BUBBLE START??)

    The recent sharp improve­ment in afford­abil­ity
    clearly mostly reflects the sharp fall in mort­gage rates over the past half year”

    HOORAY — A LITTLE BIT OF BALANCE ! (OR WAS THAT CREDIT TAKINGBUT THEY DIDN’T CAUSE THE AFFORDABILITY CRISIS 🙂 )

    In Aus­tralia, the cash rate has now been cut by 400 basis points since
    Sep­tem­ber 2008, and stan­dard vari­able hous­ing rates have fallen by 375 basis points
    (Graph 4).”

    AGAIN, BRAGGING ABOUT TRANSMISSIONBUT DON’T MENTION THAT WE CAME FROM MUCH HIGHER LEVELS THAN THE OTHERS SO DID NOT, UNTIL NOW, BUMP INTO THE REAL PROBLEMTHE INTERNATIONAL COST OF FUNDS

    MOREOVER, THIS IS PRECISELY THE ISSUE THAT IS GOING TO LEAVE US VULNERABLEVARIABLE RATES ARE ALMOST 2% CHEAPER THAN 10 AND 15 YEAR FIXED LOANS (WHEREAS IN US LOANS ARE OFTEN FIXED FOR 15 OR 30 YEARS). NO PRIZES FOR GUESSING WHAT’S GOING TO HAPPEN WHEN OUR RATES INCREASE!

    In aggre­gate terms, the fall in bor­row­ing rates has reduced
    the debt ser­vic­ing bur­den of the house­hold sec­tor by approx­i­mately 5 per cent of
    house­hold dis­pos­able income (Graph 5). That implies a sig­nif­i­cant amount of cash
    flow relief, for spend­ing on other goods and ser­vices or to save and/or pay down
    debt.”

    YES, BUT THE GRAPH SAYS IT ALLEVEN AT THESE HISTORICALLY LOW INTEREST RATESON THE VERGE OFTHE GREAT RECESSIONHOUSEHOLD INTEREST REPAYMENTS REMAIN HIGHER THAN AT ANY OTHER TIME SINCE AT LEAST 1979!

    CONTINUES ON ESSENTIALLY SAYING THAT GROWTH OF REAL DISPOSABLE INCOME OUTPACED HOUSE PRICE GROWTH, BLAH, BLAHLET’S SEE WHETHER REAL DISPOSABLE INCOME CAN REMAIN AT LEAST FLAT OVER THE NEXT BIT, BECAUSE IF IT BEGINS TO FALL FROM SURGING UNDEREMPLOYMENT, BUT HOUSE PRICES DON’T FALL, THEN THE RATIO GOES BACK UP! (SOMETHING NOT TOUCHED ONTHE ONLY REAL DISCUSSION OF ECONOMIC TURMOIL IS IN DISCOURAGING CONSTRUCTION)NOW HOW MUCH PUBLIC DEBT CAN WE TAKE ON FORSTIMULUS PACKAGESTO INCREASEDISPOSABLE INCOME”???

    GIVES A BIT OF BALANCE THAT PERHAPS THE UNDERSUPPLY ISSUE IS NOT AS GREAT AS SOME MIGHT SUGGESTSTHOUGH SOFTLY, SOFTLYTHIS IS A HOUSING CONFERENCE AFTERALL.

    TONY REDEEMS HIMSELF A LITTLE WITH THIS AT THE END

    Regard­less of the broader eco­nomic
    fac­tors that are cur­rently influ­enc­ing the hous­ing mar­ket, it is impor­tant to keep
    think­ing about medium- and longer-term reforms in the hous­ing mar­ket that can
    improve the func­tion­ing of the mar­ket and poten­tially lower the cost of hous­ing over
    the longer run, espe­cially for lower-income groups.”

    COME ON TONY, YOU COULD HAVE SAID IT AGAIN, JUST ADD 8 WORDS TO THE ENDINGWHO HAVE SUFFERED SO MUCH FROM RISING PRICES

    ANYWAY, ENTERTAINING ARTICLE IF YOU TAKE IT WITH A GRAIN OF SALT DUE TO THE POLITICAL BACKDROP.…

  • BH

    I’d guess that baby boomers are mak­ing a dimin­ish­ing con­tri­bu­tion to Graph 5 “House­hold Inter­est Pay­ments” in the RBA paper because they are more of the way through their mort­gages and inter­est pay­ments tend to dimin­ish as the loan is paid off. I won­der how much the new­com­ers are pay­ing from their income just in inter­est.

  • dearpru­dence

    To all,

    re RBA’s paper on hous­ing afford­abil­ity (cough cough) ref­er­enced by home­s4aussies…

    Hmm, lets see now. Accord­ing to Graph 2 on p4, the Median Dwelling Price Afford­abil­ity Index, over the last 30 years hous­ing afford­abil­ity has oscil­lated within +/- roughly 30% of its long term aver­age, and is cur­rently just at that long term aver­age.

    WTF??? Jaw richo­chets off floor and bounces up and down.

    I obvi­ously must have been liv­ing in an alter­nate uni­verse over the last 30 years to that of Tony Richards. Proof per­haps for the “many-worlds inter­pre­ta­tion” of quan­tum physics?

    Sigh. All strength to your arm home­s4aussies, and keep up the great work on your site. Thanks for post­ing this cre­ative piece of black com­edy from the RBA.

  • chew­man

    It was good to hear today that Louis Christo­pher was warn­ing against FHBs rush­ing in just to grab the FHOG, given that “it’s pretty hard to repay a mort­gage with­out a job”. He also pointed out the irony of a gov­ern­ment warn­ing all and sundry that unem­ploy­ment is on the way up, at the same time as it’s telling FHOs to jump into the (over­heated) mar­ket.

    Of course there’s been the nor­mal band of vested inter­ests (real estate agents and devel­op­ers) say­ing what a great suc­cess the FHOG has been. For this, of course, read that 30000 peo­ple have done the right thing and helped to keep agents and devel­op­ers mak­ing money, even if they’re putting their own future at risk if they lose their job or the mar­ket tanks.

    A ques­tion for any legally minded out there: Given the PM has told FHBs to dive in, grab the money and buy a house and there was not a dis­claimer to be seen about “the advice being gen­eral in nature and indi­vid­ual cir­cum­stances should be con­sid­ered, blah blah blah…”, what is the posi­tion regard­ing a lack of qual­i­fi­ca­tions to give such advice? Would there be an open­ing for some sort of legal action if a FHO were to lose their job or oth­er­wise not be able to meet their com­mit­ments because they took the PMs advice?

    Just a thought.

  • rooivis

    I had this speech sent to me this morn­ing.

    Chew­man,
    I had sim­i­lar thoughts, but more about the RBA and Mr Richards him­self. What a spin DR. They, the RBA, is deep in the S… and is now busy try­ing to spin them­selves out of it. But at the same time they are attempt­ing to get young peo­ple into trou­ble.

    home­s4aussies,
    I share your thoughts on this spin mer­chant. His graphs were care­fully com­piled to match the speech, but could net keep all the bad news out.

    As I men­tion ear­lier in this post, aver­age homes in my area have dropped by around 17%, not 3%. They can no longer keep on spin­ning that things are hunky dory, so they spin that only the upper end of the prop­erty mar­ket has now dropped. We shall see Mr Richard, I will like to remind you of your words, and I would like to know if you are going to vacate your posi­tion for a real econ­o­mist like Dr Keen when that hap­pens. Ooo sorry I for­got, you guys don’t put your money where your mouth is. Bet­ter to use some­one else’s money.

    Extract of his sum­mary;
    First, the recent sig­nif­i­cant falls in the cash rate are hav­ing pos­i­tive effects on the
    econ­omy and the house­hold sec­tor, and have con­tributed to a sig­nif­i­cant improve­ment in house­hold cash flows and in mea­sures of hous­ing afford­abil­ity for peo­ple pay­ing mort­gages or con­tem­plat­ing home-own­er­ship. COUPLED WITH THE LAST PARAGRAPH ON PAGE 5 WHICH READS So the ques­tion arises whether a period of low inter­est rates in Aus­tralia (com­bined
    with the boost in grants to first-home buy­ers) could lead to an expan­sion of lend­ing to
    riskier bor­row­ers who will only be able to afford their mort­gages as long as inter­est
    rates remain low. I think there are good rea­sons to think this is not a major risk. UNFORTUNATELY YOU DO NOT TELL US WHY. JUST EARLIER YOU TOLD US THAT THIS LEAD TO CATASTROPHE IN THE USA BUT NOW IT WILL NOT HAPPEN HERE. PROBABLY THE MARSUPIAL SYNDROME AT WORK I GUESS. I HOPE YOU ARE GEARING UP INTO RESIDENTIAL PROPERTY MR RICHARDS. ACTUALLY 18 MONTHS AGO WOULD HAVE BEEN BETTER, IN FACT. WHAT WILL BE THE EFFECT ON THE FHO’S IF INTEREST RATES WERE TO RISE, SPECIALLY TO REFLECT THE RISK OF ALL THE DEFAULTING LOANS WE ARE GOING TO SEE SOON, WE KNOW THEY ARE ON THE RISE. AGENTS HAVE COMMENTED ON THE FHO’S GEARING UP TO THE HILT ON LOW INTEREST LOANS. EVEN THEY ARE CONCERNED, AND THAT DOES NOT HAPPEN OFTEN.

    Sec­ond, although home­build­ing is likely to remain weak in the near term (I AGREE), there are a num­ber of fac­tors which should sup­port activ­ity over the medium term, pro­vid­ing stim­u­lus to the broader econ­omy. YES PLEASE TELL US. MAYBE MORE DEBT FOR THE SOON TO BE UNEMPLOYED. OR MAYBE MASS MIGRATION. YOUR STRAIT LINE GRAPHS TELL YOU THIS DON’T THEY.

    Finally, when one looks at the behav­iour of the house­hold sec­tor
    over the past five years – in par­tic­u­lar the trends in hous­ing prices, and house­hold
    income, spend­ing and bor­row­ing – it is evi­dent that there has been a sig­nif­i­cant
    degree of con­sol­i­da­tion since the hous­ing boom slowed in 2003. This will reduce the
    vul­ner­a­bil­ity of the house­hold sec­tor in the cur­rent slow­down. REALLY. IN MELBOURNE PRICES ESCALATED WITH AROUND 50 — 75% SINCE MID 2003 FROM A ALREADY INFLATED SITUATION. WE ALL KNOW THAT WA, QUEENSLAND AND NT HAD EVEN GREATER RISES. DISPOSABLE INCOME HAS ONLY IMPROVED DUE TO THE STIMULUS PACKAGES (used to repay debt) AND DROPPING INTEREST RATES

    dearpru­dence
    Yes we do not live in the same world as the spin mer­chant. I sup­pose we live in the real world and he is with speed in a dif­fer­ent stratos­phere.
    As I said before, the next phase will tell us who is right.

  • home­s4aussies

    And now for the Finan­cial Sta­bil­ity Review also released yes­ter­day —

    house­hold income increased by almost 10 per cent, well above the
    his­tor­i­cal aver­age (Table 9). An impor­tant fac­tor under­pin­ning this out­come was a large increase
    in gov­ern­ment trans­fer pay­ments, which grew by nearly 40 per cent over the year, con­tribut­ing
    around 5 per­cent­age points to the increase in aggre­gate income over that period”

    And

    growth in employ­ment income
    slowed over the course of 2008”

    As I said, inter­est­ing to see Tony’s Graph 2 with­out the Decem­ber (and March 09) hand­outs.… A gen­uinely bal­anced cov­er­aged would have dis­counted these one offs!

  • Oct2009Mi­grant

    I was fas­ci­nated by this thread as I am cur­rently in the UK and embark­ing for Mel­bourne in Octo­ber with my fam­ily.

    rooivis repeat­edly stressed the greater impor­tance of land val­ues (which gyrate wildly) over house prices (which move more slowly). This point is absolutely cru­cial to under­stand­ing what is going on in all the Anglo-Saxon economies. 

    The best book on this sub­ject is “Boom Bust: House Prices, Bank­ing and the Depres­sion of 2010” by Fred Har­ri­son. There have been 4 edi­tions of this great book and the first one came out in Jan­u­ary 1999. Har­ri­son stud­ied British land prices over a period of sev­eral hun­dred years and shows quite clearly an 18-year cycle. British house prices may have dropped around 20% over the past 18 months but that is just the begin­ning. By 2010 they should be down by another 50% to bring them to a decline of around 60%

    I am sure some of the read­ers here visit the blog http://theautomaticearth.blogspot.com — it is a clas­sic and the opin­ions pre­sented have been spot on over the past 2–3 years. I think that any Aus­tralians who think that they are so far away that what hap­pens else­where is not so impor­tant are in for a rude awak­en­ing.
    I strongly sus­pect that Aus­tralia will have it even worse. I mean, even in the boom, the banks were hugely depen­dent of for­eign bor­row­ing to keep their mort­gage depart­ments busy.

  • rooivis

    Dear Oct2009Mi­grant,
    Lets hope you arrive here with things slightly bet­ter than you sug­gest, but alas I think you may be cor­rect.

  • Shadow

    Hi Steve, that data that you repro­duced from Stapledon’s work has been largely dis­cred­ited. Nobody was actu­ally col­lect­ing Aus­tralian median house price sta­tis­tics in the 1800s. What Sta­ple­don did is he looked up some old news­pa­pers from the 1800s and noted the adver­tised price of some prop­er­ties listed for sale on one day of one month of each year in Syd­ney. He then some­how extrap­o­lated this very small data set out to cre­ate an Aus­tralia-wide median house price index. Reli­able Aus­tralia median house price sta­tis­tics go back to the 1970s. Any­thing prior to that is mainly guess­work. I hope you’re not bas­ing too many of your pre­dic­tions on Stapledon’s dis­cred­ited data? Cheers, Shadow.

  • Hello Shadow,

    I know Nigel, and attended a sem­i­nar where he explained how that data was assem­bled. It was a fairly care­ful piece of data col­lec­tion and con­sis­tency check­ing, for which he received his PhD. While there is no such thing as a per­fect asset price index, his work cer­tainly has not been dis­cred­ited. In the absence of any other indices, it gives a pat­tern that should be con­sid­ered when dis­cussing the sus­tain­abil­ity of the cur­rent level of Aus­tralian house prices.

    The details of his data col­lec­tion process and the sam­ple size are avail­able in his the­sis, which is down­load­able here.

    I don’t base my con­clu­sions on Stapledon’s work alone–as I empha­sise on this blog, my main inter­est is in the macro­dy­nam­ics of debt, rather than on prop­erty prices. But since so much of Australia’s debt has been accu­mu­lated in financ­ing house price spec­u­la­tion, I can’t avoid being drawn into this area to some degree. A bub­ble is also evi­dent even in the ABS series alone, and it is clearly a big­ger bub­ble than in the USA on that basis. Stapledon’s work sim­ply gives a bet­ter base line from which to com­pare the Aus­tralian index with the Case-Shiller one in the USA.