“Lies, damned lies, and statistics” is part of a phrase attributed to Benjamin Disraeli and popularised in the United States by Mark Twain: “There are three kinds of lies: lies, damned lies, and statistics.” The statement refers to the persuasive power of numbers, the use of statistics to bolster weak arguments, and the tendency of people to disparage statistics that do not support their positions. (Wikipedia)
Two recent speeches by the RBA supported the contention that Australian house prices are no longer overvalued, that mortgage repayment costs have returned to historic averages, that Australia is suffering a housing shortage, and therefore that the Australian housing market should not experience the catastrophic falls that are now commonplace across the OECD–and especially in the USA.
Ric Battellino’s speech to the Urban Development Institute of Australia (An Update on the Economy and Financial Developments) gave no data, but was optimistic about the future prospects of the housing sector. The data supporting this optimism was supplied in a speech by Anthony Richards to the 4th Annual Housing Congress (Conditions and Prospects in the Housing Sector).
Though Richards acknowledged that prices had fallen somewhat in 2008, he emphasised that this was less than had been experienced overseas. He also hypothesised that our market would not suffer similar falls in the future:
there are a number of reasons to think that outcomes here might remain better than elsewhere. These relate both to the role of policy in responding to the downturn and the consolidation of household finances that has occurred in Australia since our housing boom slowed earlier in this decade, around the end of 2003.
Two key pieces of evidence Richards presented were the following graphs. The first compares current mortgage repayments to a “long run average” that was based on data from June 1986 until now.
On this indicator, a house purchase is currently about 15% more affordable than the long term average (the dot on the graph estimates current affordability after recent rate cuts).
The second graph shows the ratio of the median dwelling price to household disposable income, again with a comparison to the average (this time from 1993 till now).
From this perspective, housing was not quite as affordable when compared to historic averages as the above measure implies, (since the former includes the impact of today’s very low interest rates whereas the latter does not). But it was still only marginally above the historical average, and Richards surmised that the rising trend up till 2003 may have reflected the transition to a lower inflation environment:
In addition to mortgage rates, the second determinant of standard affordability measures is the ratio of housing prices to income. At present, this ratio remains slightly above its average over the low-inflation period (Graph 3). Of course, there may be good reasons for it to have experienced a trend increase over recent decades as the economy adjusted to a structural shift to lower inflation.
Richards’ overall conclusion was that, on the statistics, Australian house prices were not overvalued,
… it is noteworthy that the housing price to income ratio has declined significantly since its peak in late 2003. Over the period since end 2003, nationwide house prices have grown on average by 4 per cent per annum, versus annual growth of 14 per cent in the prior five-year period. And the growth rate of house prices in the past five years has been well below the 8 per cent average annual nominal growth in household disposable incomes.
So the price-income ratio, a frequently used – but crude – measure of housing price valuation suggests that any overvaluation of housing prices has eased significantly since the Australian housing boom slowed significantly in late 2003. Since then, households have had significant income growth, but that growth has flowed only to a modest extent into housing prices.
Richards expressed some reservations about the degree of undersupply of housing in the Australian market, but overall agreed with the common assessment that the relative shortage of housing supply would place a floor under the Australian market, in contrast to the oversupply situation in the USA:
“Whatever the true shortfall of dwellings, we can say with some confidence that our housing market is relatively tight. This can be contrasted with the US market which many observers characterise as having been subject to overbuilding during their housing boom. And the relative tightness of the Australian housing market is one factor that will support home-building in the period ahead.”
His conclusion supported the belief that, even though a recession will occur, the housing sector will not suffer price falls like those that are commonplace overseas, nor will problems with housing exacerbate the recession itself. If anything, the housing sector should boost the wider economy rather than drag it down:
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. Second, although home-building is likely to remain weak in the near term, there are a number of factors which should support activity over the medium term, providing stimulus to the broader economy. 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.
Richards analysis, along with Battellino’s implicit endorsement of its conclusions, was picked up by commentators like Alan Woods in “Housing damage won’t be drastic” (The Australian, April 03):
Now, of course, we have the worst global recession since the ’30s and an international credit crisis, but an authoritative analysis last week by Anthony Richards, the Reserve Bank of Australia’s resident housing expert, highlights several important reasons for expecting Australian housing prices to perform better than in many other countries.
Woods was reassured by the reported fall in “the ratio of housing prices to income, … Richards says this suggests any overvaluation of housing prices in the boom years also has eased significantly”, and his qualified endorsement of the argument that house prices will be buoyed here by “the gap between housing supply and demand as a result of a rapidly growing population.” However on the latter point, Woods noted that “a shortage of housing hasn’t stopped a crash in prices in Britain”.
Overall, while he emphasised that Richards’ speech provided “an impressive list of positives”, he felt that the recession would still come out trumps: “the most likely outcome is at best a period of stagnating house prices, with a real risk of a fall, albeit a far more modest one than in the US and Britain.”
Now, in the spirit of Benjamin Disraeli, let’s take a slightly more critical look at the numbers–starting with the comparison of the median house price to income.
House Prices to Income
The footnote to Richards’ Graph 3 states that the figure used for average household disposable income was “after tax and before the deduction of interest payments”. This is curious, since the RBA’s own measure of household disposable income is after the deduction of interest payments (see RBA Bulletin Table G12 and the Notes).
The average line Richards drew on Graph 3 is also curious, since it is an average since 1993. This may reflect how long a time series for the median house price that the RBA got from the Real Estate Institute of Australia, but it would not have taken much effort to combine this with the ABS’s median house price indices and provide a house price to disposable income calculation that went back to 1987. That is done in the next Figure–using index numbers since I don’t have access to the REIA’s median house price data.
This Figure paints a very different picture of the current house price to income ratio.
Firstly, there are now “twin peaks”: unlike the RBA’s modified house price to disposable income ratio that peaked in 2004 and clearly fell thereafter, the highest value of this ratio was in January 2008. So on this measure, Australia’s house price bubble did go off the boil a bit in 2004, but it went right back on again in 2006. Rather than our house price adjustment starting before America’s, on this price to income comparison our bubble continued well after the acknowledged bursting of the US bubble in mid-2006.
Secondly, rather than the current value being just a smidgin above the 93-09 average, it’s 27% above it–and it’s one third higher than the “long term average” from 1987 till now.
So which ratio is more valid here–one derived prior to the payment of interest (Richards), the other derived after it? A case could be made for either: if you’re contemplating buying a house, then you’re contemplating taking on a interest payment burden (and principal repayment burden) that you don’t currently have; but on the other hand, you might be substituting rental payments (out of disposable income) for interest+principal payments.
So it could be seen as a judgment call as to which to use–in which case, for objective presentation of the data, you should present both.
Or perhaps use a few more indicators to decide which one, on balance, gives the more accurate picture. For example, here’s the ratio of the median house price index to GDP per head. It is currently 25% above the 86-08 average, and the second peak in early 2008 is 1.65% higher than its 2004 predecessor.
It’s also no secret that income has been massively skewed in favour of profits rather than wages in the last few decades. So how about a comparison of the house price index to average weekly wages (ABS 630203, Column J), which is a fairer analysis of how expensive housing is for the average family of workers?. This is currently 43% above the 86-08 average:
There are those pesky Twin Peaks again, and once more the second (in March 2008) is higher than the 2004 one the RBA prefers to see as the peak of the housing bubble–this time a substantial 9% higher, reflecting the continuing erosion in workers’ incomes over the last decade.
Certainly, it’s not possible to make a conclusive statement that 2003-04 marked the peak of the Australian house price bubble, as RBA officials have done on many occasions, nor can it be said that household affordability is now back at the “long term average”.
Which raises the next question: just how “average” was the 1986-2009 period, in the long sweep of Australian history?
House Prices over the really long term
The ABS has only maintained a comprehensive index of Australian house prices since mid-1986–a time when the hills were alive to the sound of Alan Bond and Christopher Skase. House prices rose 60% in the first three years of the index, far above the rate of inflation at the time. They then stalled for the next few years before more than tripling over the next 17 years–again, a rate of growth that far exceeded the rate of inflation. This 30-year-plus experience of continuously rising prices has helped shape the belief that house prices “always” rise faster than consumer prices.
But “always” is a much longer time span than a mere 30 years–something Robert Shiller appreciated when he and Karl Case developed the index of US house prices now known as the Case-Shiller Index. The key comparison Shiller makes is between house prices and consumer prices; this is the premiere indicator of the American market, and there it’s clear that the bubble has popped.
If we take a 25 year view, like that which Richards used in his paper, it could be argued that the fall in the index has almost brought the real price of American housing back to the average. Having plateaued at a value of 217 between 2005 and 2007, it has now fallen to 138, which is just 11% above the 85-09 average.
But if we look at the really long term–over the whole data set from 1890 till now–it’s apparent that the American market has some way to fall before it hits the average: even though it has already fallen 30% from its peak, it still has another 46% to go, if the real price of housing is constant over the long term.
That’s an if to which Shiller gives an emphatic “yes” to, based partly on his own data–which shows no trend to rising real house prices prior to the current bubble that clearly began in 1997–and partly on a yet longer term series still: the “Herengracht Index” that shows the real price of housing on a famous canal in Amsterdam over the three and a half centuries from 1628 till 1970. This index has at times risen for extended periods–such as over the 7 decades between 1814 and 1887 when the real price of a house on the Herengracht Canal rose almost fourfold. Anyone born at the beginning of that period could have easily been persuaded that house prices “always” rise faster than consumer prices.
But over the long term, there is no trend. For the next 7 decades, house prices tended down in real terms: the index fell 55% from the 1887 peak to be 40% below the long term average of 198 in 1951, when yet another upward trend occurred.
Could a similar proposition apply to Australia? Dr Nigel Stapledon set out to answer this question in his PhD, where he observed that:
The period since the early 1970s has been one in which house prices have risen quite significantly by any measure with the median capital city house prices in Australia having risen on average 3% per annum in real terms in the period 1970-2006. While the rises in Australia have been above the average for developed countries, the picture is similar in most OECD economies and Australia is by no means unique.
The question that can be asked is whether this period is unique for housing? Eichholtz (1997) has constructed a long term series for Amsterdam in Holland which spans the period 1628-1973. The broad picture that his time series paints is one of prices essentially showing no trend for three centuries, with cycles related to the economic events. Against that long term perspective the post 1970 rise in house prices in Holland stands out. But one city is probably not convincing…” (Stapledon 2007, p. 1)
Stapledon’s key data table gave the median capital city house price in current dollars, 2005 dollars, and 2005 dollars deflated by 0.6% p.a. to reflect increasing house quality. In the following graph I take Stapledon’s CPI and quality deflated index, extended to today using the last 2 years of ABS data deflated by the CPI. I then set the value to 100 in 1890 to enable easy comparison with the Case-Shiller real house price index for the USA.
One inference from this graph is that the recent Australian house price bubble began earlier at much the same time as the USA’s (1997), but began from an already higher base that can be dated back to the 1987 Stock Market Crash.
At that time, the Australian index was only marginally higher than the USA’s–132 for Australia versus 120.5 for the USA, a 10% difference. But the 25% fall in the Australian stock market on Black Tuesday ended the Antipodean flirtation with stocks, and we piled right back into our favourite speculative play: bricks and mortar. Most of the money borrowed by Australian households for speculative purposes then drove up house prices, whereas Americans spread their leveraged dollars between stocks and houses.
As a result, Australian house prices absorbed most of the speculative excess of the last thirty years, driving them to 3.5 times the long term average versus “just” twice the average in the USA.
Of course, it could be true that, as the property lobby keeps asserting, Australia is “different”, and trends that don’t exist elsewhere in the world rule in the land of the marsupials. Especially since virtually everyone now describes this crisis as “the worst since the Great Depression, it would have helped if the RBA had referred to this publicly available data when preparing its own comparison of current house prices to “long term” trends.
The Never-Ending UnderSupply Story
Richards did express some scepticism here on behalf of the RBA that Australia’s undersupply of housing was as marked as some commentators claim, but he still came down on the side of this widely shared belief:
“Whatever the true shortfall of dwellings, we can say with some confidence that our housing market is relatively tight. This can be contrasted with the US market which many observers characterise as having been subject to overbuilding during their housing boom. And the relative tightness of the Australian housing market is one factor that will support home-building in the period ahead.”
Curiously, one group that does not share this belief is Hometrack, the local branch of the UK housing intelligence research group. Just days after Richards’ speech, it released a press release in which it stated that:
the widely quoted views of many property market commentators who believe that Australia’s current building levels are not enough to meet the future demand for housing, may be based on inaccurate data calculations.
“Our analysis indicates Australia may already have an excess of housing. We estimate there are at least 10 million dwellings in Australia compared with ABS data showing occupied dwellings of 8.3 million. The extra one to two million dwellings consists of a mixture of housing awaiting sale or development, vacant dwellings, second homes, and abandoned homes,” he said.
He went on to say that the ABS method for calculating the ratio of people per dwellings is based on ABS census data which in turn is based upon occupied dwellings. However, he said, Hometrack analysis which is based on postal address data indicates that Australia’s current level of housing relative to its population is in line with other Anglo economies.
Following on from this, Darcy said that when looked at in the context of population growth, total residential building approvals have been running above demand.
“This points to a build-up of excess stock of housing over the past six years, despite the gap between building approvals and demand narrowing over recent months,” he said.
“The concern is that business and government decisions regarding the residential housing market in Australia are being made based on demand assumptions that differ from the actual behavior of the housing market. There will always be examples of areas with an undersupply, but it’s not clear from the data that we have an overall shortage relative to future demand.”
Similar views have been expressed on contrarian blog sites like Bubblepedia, Homes4Aussies, etc.; this is the first time this claim has been made by a commercial property research group. The claim that there are up to 2 million unoccupied houses in Australia may appear extreme, but that is the size of the gap between the number of houses that the ABS says are occupied (8.3 million) and the 10,150,000 street addresses in Australia Post’s PAF database. However, many of these are business addresses, holiday homes and the like. On the other hand, the ABS found that 800,000 private dwellings were unoccupied on Census Night 2006–close to Hometrack’s bottom estimate of 1 million unoccupied dwellings in 2009.
So how valid is Hometrack’s claim? One way to assess this is to look at the growth of population in Australia, and compare it to the growth in the number of dwellings. If this ratio was substantially above the ABS estimate of the average number of persons per occupied dwelling, then the undersupply thesis would be confirmed and Hometrack would be off-track.
Whoops. Over the period 1985-2009, an average of 1 residential dwelling was built per 1.75 new Australians, and only in the last 3 months has the rate of new building fallen behind population growth. This build rate is well in excess of the current ABS ratio of 2.55 persons per occupied dwelling. Only if 30% of new dwellings involved the demolition of existing properties–an improbably high number–would the rate of supply of new dwellings be running behind the rate of growth of population.
Far from having an undersupply of housing, Australia may well have a substantial oversupply. It’s just that no-one is living in many of them.
So what could these unoccupied residences be? Holiday homes? Some, of course, but surely not all of them. It is far more likely that many of these include “housing awaiting sale or development,” and “vacant dwellings”, as Hometrack put it.
A very likely cause of this large stock of unoccupied homes is Australia’s system of negative gearing. Most “investors” build houses not for the rental income, but for capital gains, and rental returns in Australia are now so low that for many investors, the drawbacks of renting–damage to property, having to manage tenants, etc.–are not worth the rental income. Better to keep the property off the rental market, and claim the loss against tax. The under-supply of housing to the rental market, and the alleged shortage of properties for sale, could be a perverse result of Australia’s peculiar property development laws.
This implies that the market dynamics could turn out to be very different than those who believe there is an oversupply expect. If prices start to fall substantially, then many owners who have kept their properties off the market may be motivated to bring them out of mothballs. The “undersupply” of both rental properties and houses for sale could thus evaporate, and rather than supply issues putting a floor beneath house prices, they could well pull the rug out from underneath them instead.
A final issue considered only tangentially by Richards, but vital to the question of whether “the forces of supply and demand” will prop up Australian house prices, is leverage.
Exit, Stage Down
In defending the dominant view that Australian house prices are justified by supply and demand, Richards observed that:
“the relatively high level of housing prices in Australia is to a large extent a reflection of demand and the collective decisions of households. That is, housing prices have not been set at high levels by some external force. They are at their current levels because buyers in aggregate – with their incomes, preferences, access to finance, and other influences – have been willing to pay those prices.” (Richards; emphasis added)
This is a fairly typical piece of neoclassical economic thinking: prices reflect the interaction of supply and demand, and are therefore justified. In most markets, there’s not much wrong with this way of thinking; but there’s something unique about housing. You don’t take out a loan to buy the groceries, but you do to buy a house. What therefore will happen to demand if lenders become less willing to provide “access to finance”?
While the boom was on, loan to valuation ratios (LVRs) were rising; now they are falling as credit standards tighten. Though average LVRs are of the order of 50%, it’s the marginal LVR that matters, since that’s the source of leverage for new buyers. Accurate data on this isn’t easily available, but the impact of a drop in leverage can be dramatic. A fall from 95% to 90% in the maximum LVR a lender approves will halve the amount of money that a buyer can bid for a property.
Economists who apply a standard “supply and demand” mindset to analysing the property market seem to consider that demand can shift “left and right” as the volume of buyers falls and rises with time; but they seem to ignore that the “demand curve” for housing can shift up and down as well, in response to the willingness of lenders to increase or decrease their LVRs. A substantial fall in LVRs to new buyers could thus reduce the price that would-be buyers can offer, even if there was a physical shortage of properties.
Conclusion: Safe as Houses?
The data in support of the belief that Australian house prices will not suffer during the forthcoming recession is therefore nowhere near as conclusive as Richards’ speech implies. The price index might well be driven higher in coming months by the artificial stimulus imparted by the doubling of the First Home Buyers Grant (see FHB Boost is Australia’ s “ Sub-prime Lite”); but the downside risks to Australian house prices could be every bit as big as those that apply in other OECD nations.
Australia is not therefore justified in being “relaxed and comfortable” about house prices, despite the RBA’s assurances to the contrary.
This would not be an issue were the RBA simply another property market advocate: it’s common practice for both sides of the property market to quote data that supports one side and ignore the other. However, the RBA is not supposed to take sides in this debate, but instead to set monetary policy in the best interests of Australia as a whole.
I have argued consistently that, in common with Central Banks throughout the world, the RBA has failed in this task because it has followed an economic philosophy–known as “neoclassical economics”–that is fundamentally flawed. But this is something that, in some ways, the RBA can’t really be held accountable for: its economists are simply a product of academic economics departments around the world, and since these are dominated by neoclassical economists, most graduates are not going to know that there is any other way to think about the economy.
However when it comes to statistics, the RBA should play the role of honest broker rather than advocate. Its monthly Bulletin Statistical Tables provide a valuable resource. I believe its time would be better spent in developing robust, long term statistics on the housing market than in presenting selective data like that given in this speech.
END OF COMMENTARY
Comments on Data
The latest set of figures imply that the Great Deleveraging is well and truly underway. Aggregate private debt rose by a mere $326 million in the last month, with only mortgage debt turning in a positive–and were it not for the FHB Boost, the aggregate debt level would certainly have fallen.
Table One
Table Two
While debt levels have to fall, this process will necessarily cause a dramatic blowout in unemployment. Since our economy became so utterly debt-dependent, the contribution that rising debt makes to aggregate demand has come to dominate changes in economic activity and unemployment. The recent “larger than expected” increase in unemployment will become a recurrent phenomenon this year, as the change in debt starts to reduce aggregate demand rather than increase it.
In this respect, we are not so much different to the USA as merely running behind it in time. The explosion in unemployment that has virtually doubled unemployment there in the last two years will occur here, and possibly at an even faster rate.
As in the USA, what the authorities are interpreting as a liquidity crisis is actually a solvency crisis. Debt levels are now so high that the only way is down, and there are no other groups who can be encouraged to take on yet more debt and thus pull us out of this crisis as household borrowing did when it brought “the recession we had to have” to a close.
Now the only way forward is via deleveraging, and the great danger is that this will occur in a climate of falling prices–deflation–as well as falling output. This process could drive aggregate debt to GDP levels even higher–as it is now doing in the USA: there the ratio of debt to GDP is rising sharply, even though the rate of increase of debt has dropped. Fisher’s Paradox–that the attempt to reduce debt levels can actually cause debt levels to rise–is now with us once more. The world is paying a terrible price for listening to Milton Friedman and ignoring Irving Fisher and Hyman Minsky.
Steve
Yes, when amended like that, rate of new people to rate of new dwellings, the approach is correct, but people will take your text “read as written”.
Data specifically on “rate of new dwellings” and “rate of new people” probably needs to be extracted from whatever datasets you are using.
Anyway, as has been posted, this comparison does not necessarily lead to a dwelling surplus as household size can vary.
You need to label your graphs more rigorously.
Maybe it would be better if you did not lump together graphs of:
actual data,
averages,
ratios, and
averages of ratios,
as this makes it nigh-on impossible to have confidence in your conclusions.
You should always use the right and left axis when several items are tracked.
Also it is desirable that you cite your sources. This means that other people can do the same analysis and verify your conclusions.
People using different sources for apparently the same task, can come to different conclusions because of subtle differences. I have seen policy makers make grand judgements based on data only to see their claims dissolve once seasonal adjustment or a deflator is applied.
What is the meaning of comparing a time series index, with a constant average over time?
The average did not actually exist in real life (except for one instance), while the time series presumably did – continuously.
Always, for well behaved trends – early years are usually below average, and later years are usually above average (vice versa for a declining series).
Haven’t tried Philip. As I said earlier, I believe the most accurate measure is the premium to own over renting. If you happen to know of a long series of median rents – capital cities and/or weighted capital city measure – please let me know.
Good points Chris.
When I started this work–way back when doing an Expert Witness report for NSW Legal Aid over a predatory lender–I confronted the problem of having to be able to rapidly produce time series comparing data that had a quarterly frequency (such as GDP) with data that was monthly (Credit obviously, and many others); and where sometimes the data was stock (current debt levels), other times flows (GDP per quarter).
So I wrote a set of routines in Mathcad to produce a two column vector, one storing the date in numeric format and the other the data; and then a set of processing routines to compute moving averages, etc.
While this was all for my own use, the lack of documentation didn’t matter. But now that my perspective has become a significant component of current economic debate, I need to produce a data analysis and retrieval system that is publicly accessible.
I’m doing that now as I put together the materials for my book on the financial crisis, Finance and Economic Breakdown. In a couple of weeks that system should be robust enough to move over to, and then all reports will have self-documenting data sheets attached to them.
Agreed completely too re the impact of subtle differences. This was my point in the “Lies … and Housing Statistics” post–not to accuse the RBA of lying (which is how I saw my title interpreted by at least one poster on Business Spectator), but to point out that the data the RBA had used was selective, and a wider look at the data made their conclusions rather less robust.
Good comments are concise, to the point and don’t take for granted the time and patience of an established audience.
Anarcho,
Good points. Opposition to the state is a necessary but not sufficient condition to call oneself an anarchist or libertarian.
It’s interesting to hear some on the right-wing call themselves libertarians or anarchists when what they suggest is almost the opposite of libertarianism as traditionally known since the Enlightenment.
In our Western liberal democracies, the state is not just the only coercive and tyrannical institution. There happens to be a set of institutions within the economic sphere which are organizationally far more totalitarian than the democratic state: limited-liability, for-profit corporations.
From Wikileaks (of all websites!)
Considering the largest corporations as analogous to a nation state reveals the following properties:
1. The right to vote does not exist except for share holders (analogous to land owners) and even there voting power is in proportion to ownership.
2. All power issues from a central committee.
3. There is no balancing division of power. There is no fourth estate. There are no juries and innocence is not presumed.
4. Failure to submit to any order may result in instant exile.
5. There is no freedom of speech.
6. There is no right of association. Even romance between men and women is often forbidden without approval.
7. The economy is centrally planned.
8. There is pervasive surveillance of movement and electronic communication.
9. The society is heavily regulated, to the degree many employees are told when, where and how many times a day they can go to the toilet.
10. There is little transparency and something like the Freedom of Information Act is unimaginable.
11. Internal opposition groups, such as unions, are blackbanned, surveilled and/or marginalized whenever and wherever possible.
Corporations are the structures that most closely resemble the totalitarian ideal. If minimizing the state and giving more responsibility to these types of institutions to manage our economy and resources is called “liberty” or “freedom”, then the moon is made out of green cheese.
Noam Chomsky: “The most effective way to restrict democracy is to transfer decision-making from the public arena to unaccountable institutions: kings and princes, priestly castes, military juntas, party dictatorships, or modern corporations.”
John Dewey: “As long as politics is the shadow cast on society by big business, the attenuation of the shadow will not change the substance.”
One of the greatest fabrications ever created by economic and business intellectuals was to equate a corporate economy with a democratic market economy. Here is where I differ from you: I think that markets and private property are still workable (certainly not perfect) in order to have a decent society.
I recently read a fantastic journal article that explained how corporations have come to take on the mantle of being “pro-market” when they are in fact anathema to both economic markets and political democracy.
Olson, Paulette and Champlin, Dell. (1998). “Ending Corporate Welfare as We Know It – An Institutional Analysis of the Dual Structure of Welfare”, Journal of Economic Issues, Vol. 32, No. 3, pp. 759-771
Keep up the good work.
Hi Guys,
I have busy with work and hunting for a car for my sister.
Steve what if Chris is right that there is a shortage and your speculation is incorrect?
Would that change your take on the housing slump? What about the temporary relief for home owners who loose their jobs as planned by kevin rudd and the banks(a holiday on interest payments of 1 year)?
Also, for those advocating against negative gearing what do you have to say about when they did abolish in the late 80s and rents sky rocketed?
It seems our housing market is holding very well as pointed by Chris and now with the government/bank relief for 1 year for unemployed and possibly an extension of the FHB or probably an increase. Not to mention opening the property market for non residents to speculate.
Anarcho,
Austrians and the theory they peddle is certainly rife with holes. What they advocate is scientifically untenable and is socially the opposite of liberty.
What I find to be disappointing is their rigid attachment to the a priori axiomatic methodology rather than the usual falsifiable-empirical methodology one finds in other sciences. Neoclassicals are also guilty of this.
“The scope and influence of economic theory has expanded beyond the confines that the postulates of an axiomatic system ought to impose. Market fundamentalists have transformed an axiomatic, value-neutral theory into an ideology, which has influenced political and business behavior in a powerful and dangerous way.” (p. 43)
Soros, George. (1998). The Crisis of Global Capitalism: Open Society Endangered, Great Britain: Little, Brown and Company
BH,
Well said.
There are frequent links to Wikipedia on this site. Check out:
http://www.deepcapture.com/do-i-live-in-a-synthetic-reality-do-it-yourself-home-test/
The story relates to Wikipedia’s page on “naked short selling” and discusses how social media is being manipulated by vested interests.
The full story is on http://www.deepcapture.com. It requires a large investment of time to validate the story by checking all the links but it’s worth it. There is no other site in my opinion which clearly uncovers financial corruption and it’s nexus with government institions.
Hi Joshua,
Cutting to the chase, my primary interest is in the macrodynamics of the economy, and on that basis I have been expecting a Depression to result from the collapse of our debt-binged society. The rise in house prices was both an effect and a cause of that debt binge, and I expect house prices to collapse along with virtually everything else as the Depression sets in. The latest unemployment data from the ABS, which I’ve just published a post on, returns discussion to this core topic–for this blog–of the economy rather than just the housing market. But I hope the implications that a rapid rise in unemployment will have for the housing market are obvious–especially if that rate ends up exceeding 15 percent, as I fully expect it to do.
Its funny no one is interested in how tax drives consumer behaviour in the economy. But it wont be long before its on everyone’s mind…
Steve, one think tank reckons that the jobless rate is actually already 11.7pc. Not sure about their methodology though – one article mentioned something about including parents at home looking after the kids. However, unemployment is certainly understated.
I reckon it would be good to have stats on total hours paid and total amount paid per month. This way we could track those that don’t register for benefits and the scaling back of overtime and casual hours etc. Anyone know if this kind of data is available?
Steven Shaw if you find out please share.
Whatever model is used, to me it seems that just as important as the accuracy of the data inputs is the level of understanding of it.
In regards to tools like “housing statistics”, it seems to me that the data types are incomes, rents, ad prices. But noone’s allowed to understand it, because, protection of privacy gets you at every turn. To model/understand anything meaningful the identities of those that it applies to appear to be the crucial level of understanding to appreciate any predictive capacity. Who is getting what incomes ad who is buying what houses?
If policymakers (which is a pretty embarrassing term in this day and age) want to make decisions responding to evidence (ie meaningful decisions) then they really must be aware of the families/singles/married/males/females/educated/working/immigrant/foreign entities that are active in the system. Are predator-prey models up to this task?
Just as with the effects of debt. If I was to ever try to understand it and look seriously at the data, my first question would be who is carrying it.
Is there any statistical data gathering that can help with this question?
Hi Steve,
Have you studied the effect of marriage failure / single parents and so on, on demand for housing? Going back 15-20 years I suspect that this was quite an insignificant contributor to demand, but today it is very common to have very small households. Coupled to this is the skewed incomes of the households with single parents.
Unlike the older generation (especially public servants) todays generation have no job security and it is not uncommon to have 1 partner working interstate. All of this contributes to an abnormally high demand for accommodation. I know of several people who have worked very hard for years as casuals and treated like ****, and have now taken out massive loans which they will happily tell you they can’t afford. They say they are no different to the companies they work for and if they go bankrupt then so what! They never lied to the banks and we’re encouraged to borrow. (Better to go out big time! At least they too can benefit from the “goodtimes” )
Steve, you say “Most “investors” build houses not for the rental income, but for capital gains, and rental returns in Australia are now so low that for many investors, the drawbacks of renting–damage to property, having to manage tenants, etc.–are not worth the rental income. Better to keep the property off the rental market, and claim the loss against tax.”
I find this hard to believe. Quite apart from the fact that rental incomes exceed the costs of property management (you can outsource it after all), if you keep your property off the market, claiming a tax deduction is in fact illegal. According to the tax office you cannot claim deductions for “rental properties that are not genuinely available for rent”.
Hi StubbornMule,
I don’t claim to be an expert on the property market–and in many ways got dragged into this debate because of the ancillary role that asset markets have in my analysis of the economy. I’ve had a quick skim of your post on your blog http://www.stubbornmule.net/, and I appreciate what I have read (I’d read in more detail, but I’m on holidays right now).
That particular claim could be technically wrong, but there are aspects to the Australian data that are incongruent with the usual “undersupply” argument that is used to sustain the proposition that Australian house prices will always rise. The key one I see is the ratio of new population to new residences. If there was an oversupply, then this ratio would be running above the current people per residence ratio of about 2.8. In fact it was running well below at from memory 1.7 population increase per new residence.
This and other aspects of the data–including the consistently very high non-occupied residence ratio–deserves to be highlighted. As an amateur in property–but an expert in economics–I could well have made some false hypotheses as to why some discrepancies exist. But they are there nonetheless.
It could depend on how the loans are structured. If you had other assets, earning income, against which you could borrow, then you effectively charge the interest on the house against the income from other assets. The house could then be left vacant while still getting the benefit of the interest rate deduction. In a few years Capital gain of 10% per year pays a handsome, almost tax free, dividend.
I guess there are a few ways that could be constructed if one was a cunning accountant!!
I think a good number of property investors are claiming illegal – or at least very dubious – tax deductions. The ATO knows this, but it’s an area where enforcement is expensive (and the returns from catching someone may not be that high).
http://www.fahcsia.gov.au/sa/housing/pubs/housing/national_housing_supply/Documents/chap4.htm
Table 4.6: Occupied and unoccupied dwellings by dwelling structure, 2006
Hi folks,
Am trying to create a similar chart to Prof. Keen’s above for house prices to disposable income. I’ve got data covering the period 1959 – 2006:
* Total Disposable Income from the RBA’s G12 product (“GDP Income Components”)
* Dr. Stapledon’s median house price (extracted from his PhD thesis, Table 2.5, 2nd column)
* Population from the ABS’s 3105.0.65.001 product (“Australian Historical Population”)
In order to produce the chart I’m converting the RBA Total Disposable Income series to a Disposable Income per Capita series by dividing by the ABS total population series. Next I divide the Mendian House Price series by the Disposable Income per Capita to arrive at a “Years of disposable income to purchase median house” series.
However there is clearly something wrong as I am getting nonsene numbers. To explain [using ballpark figures]:
In 1959, Total Disposable Income was $3 trillion, which was spread across a population of 10 million, meaning Australians only had $300 per capita of disposable income. Dr. Stapledon thesis puts house prices at $83k, which results in it taking about 275 years of disposable income to purchace a house!
By contrast, in 2006, TDI was $158 trillion, population was 21 million => $7500 disposable income per capita. Houses were $357k, meaning 47 years to purchase a house.
What is the obvious factor I am missing? I suspect the TDI numbers are not inflation/CPI adjusted, but this notion seems too silly to seriously contemplate…
Thanks
Thanks again for the wonderful information. I often refer to some of your Debtwatch posts as references when I am confused about something.
Do you have any thoughts about he claims from RP Data-Rismark that price/income ratios are actually much lower than the bears claim?
For example, (http://christopherjoye.blogspot.com/2010/09/why-hedge-funds-will-get-it-wrong.html) claims that:
“Utilising the latest ABS National Accounts data combined with Australia’s most comprehensive residential sales database, which captures 100 per cent of all home sales executed across the country, Rismark finds that Australia’s home price-to-disposable income ratio is only 4.6 times as at June 2010 (ie, nearly 40 per cent less than Mr Grantham’s claim).”
I’m curious of your view of this disagreement on price/income ratios and would love to know which primary sources you recommend to properly compute this ratio.
Thanks,
-Inquisitive
Hi Inquisitive,
From what I understand, the figure Joye is citing involves comparing the median house price to the average household disposable income. Given that the average is a lot higher than the median, and the composition of household income has changed over time (more workers per household than in the 1960s for example), this would explain Joye’s low figure.
It’s interesting that the recent Commonwealth Bank roadshow document pulled a trick like this: it used Demographia for the rest of the world–which compares median house prices to median incomes (and makes an estimate of the latter since there is no June 2010 data, the latest data being from of June 2008 from August 2009–see ABS 6523.0 – Household Income and Income Distribution, Australia, 2007-08 )–but UBS’s very similar calculation to Joye’s for Australia. Kris Sayce did a lovely expose of this in Money Morning:
http://www.moneymorning.com.au/20100910/has-commonwealth-bank-deliberately-misled-investors.html