So I’m walking to Kosciusko–now that the ABS Established House Price Index has cracked its September 2008 peak of 131 to reach an all-time high of 134.4 (as of September one year later). This renewed bubble reversed the trend of falling nominal house prices that had dropped the index to a low of 123.8 in March 2009.
This level of price volatility–down 5.5% in 6 months, only to rise 8.5% in the subsequent six months–almost matches the stock market’s manic-depressive performance.
Though you’d see no mention of it if it you only read Chris Joye (“Keen concedes defeat“), the main factor behind the revival of the bubble is what is formally known as the First Home Owners Boost (FHOB), but what is more accurately described as the First Home Vendors Boost. As at the end of September–the date of the latest ABS house price data–171,000 applicants had received this $7,000 bribe. Since many are couples, more than 1 percent of Australia’s population has leapt into the property market pool at the behest of a government stimulus.
So how has a mere $1.2 billion injection of government money driven the average house price up by 8% in six months? By the “magic” of leverage: the typical First Home Buyer (FHB) took that $7,000 to the bank and leveraged it up to another $40-50,000, which then was handed over to the First Home Vendor (FHV) as cold, hard cash.
The FHV then took that extra $40-50,000 and leveraged it to an additional $200,000-$250,000, which meant that that new place which had been just out of reach prior to the FHOB was now well within range. Competing with other lucky recipients of government and bank largesse, he drove up the price of that middle to upper tier house by an additional $100,000 or more.
The aggregate impact of this government enticement into private debt was that Australian households reversed the deleveraging process that had begun in late 2008, and as a result the mortgage debt to GDP ratio, which had been falling, began to rise once more. The FHOB has led to Australians taking on an additional $50 billion of mortgage debt. That “demand” factor, far more than any other, is why I’ve lost the second half of Rory’s bet with me.
Normally I regard the “ceteris paribus” assumption of conventional economic theory as a copout–in a market economy everything is connected to everything else, and you can’t assume that, for example, a firm’s output can change without affecting the market price. But I think I’m entitled to ask the “ceteris paribus” question here: what would have happened to house prices had the government not spiked the market with the FHVB? I somehow doubt that Rory would be crowing today had that irresponsible policy move not been made.
In fact, there’s a good argument that we wouldn’t be having a property bubble here at all, were it not for the First Home Buyers policy. I’m not one for making arguments solely on statistical correlations–I’m only too aware of the “correlation isn’t causation” argument–but I think I can also spot a smoking gun when I see one.
Prior to the FHB, though real house prices were rising, so was real household disposable income. Then add two dollups of the FHB–one its introduction as a “temporary” measure to get us over the shock of the GST in 2000, the other its doubling to boost the economy during the brief 2001 recession–and off go real house prices relative to real household disposable income.
Last year, as the market starts to head back towards parity between house prices and incomes again, Rudd throws in another temporary doubling (of this temporary measure that is now almost a decade old), and off goes the house price bubble once more.
In the main, I’ve been a critic of banking practices as the underlying cause of the Global Financial Crisis. But I also believe that the crisis would have occurred long ago (in 1987) and been far less severe if governments and Central Banks hadn’t attempted to rescue the system from its own follies. The First Home Owners is a classic government folly, and its doubling last year is the main reason I’ll be walking to Kosciusko some time in April 2010.
Steve, you were very public with your predictions, appearing repeatedly in the mainstream media claiming that a massive collapse was imminent. Why didn’t you mention that it might not happen in an environment of fiscal and monetary stimulus? Low interest rates and government stimulus are standard practice when there is a risk of recession. Anyway, house prices are rising across the board, not just in the First Home Buyer market but also at the upper end of the market. To claim this is all the ‘fault’ of the FHOG boost is a bit silly. The reason why house prices in Australia are still rising is because we have an incredibly high population growth rate of 2.1% per annum, low interest rates (though rising, as during the 2002-2007 boom), a strong economy, relatively low unemployment levels, and a shortage of property in close proximity to infrastructure and employment hubs (due to government red tape and taxes on development). Do you regret selling your unit just before this new surge in prices? Cheers, Shadow.
Steve, perhaps you should put up those graphs and data that I sent you concerning the property bubble. It would be an effective answer to those who claim that the rapid increases in property prices are due to the ‘laws’ of supply and demand.
In response to Shadow, I would point out that none of the typical explanations can explain a real property price increase of 220% from 1996 to 2009 (Stapledon and ABS indices).
- Every year between 1956 and 2005, the year-on-year growth in private dwellings was greater than that of population growth.
- Since 1901, the average occupancy ratio has been steadily falling. In 1901, it was 5.2. In 2008 it was 2.7. Performing an extrapolation, Australia will have an average occupancy ratio of 1 in 2060. This means one private dwelling per person. If this sounds insane, it is but that is the way the trend is heading. However, it will never get like that once our massive property bubble bursts.
- Low interest rates can’t be considered a factor as the RBA did not lower rates to the levels in the US under Greenspan. Extremely low interest rates can be considered a factor, but not the primary one in the US. In Australia, interest rate changes doesn’t even seem to be a factor from 1996 onwards.
- Real construction costs have remained fairly constant from 1945 onwards. There are no colossal increases that could explain the jump in property prices since 1996.
- A shortage of housing near employment hubs is nonsense. The excellent investigative work of Earthsharing Australia clearly shows vacancy rates of 4-7% in and around Melbourne (other cities should be no exception), as opposed to the official vacancy rates of 1-2%. Speculators (‘property investors’) holding onto empty properties waiting for capital price appreciation is the answer here.
- Rising incomes certainly can’t explain it. It would take a massive jump in individual and household incomes to produce a 220% property price increase since 1996. Yet, clearly none occurred.
- Employment/unemployment: same as above.
The same nonsense reasons were given in the US before the bubble burst in 2006 Q2: population increases, government restrictions on land, taxes, rising incomes, etc.
Something is wrong when economists in the US from the IMF to the Treasury to the Fed to Harvard say there is no property bubble and yet looked what happened.
As J. K. Galbraith pointed out, approximately 10-12 out of 15,000 economists in the US saw it coming. Same goes for Australia, but it appears the number of economists equate to 1: Steve Keen. If there are others, I don’t know about them.
We in Australia are so lucky because it is different here as we have kangaroos…
Shadow,
Enjoy reading Garnaut’s new book? Got a little quip for him, too??
And why do you reckon house prices were tanking so fast back 18 months ago? Lehmans was still a “going concern”, and interest rates hardly peaked at a high historical level.
The Rudd/Stevens put has worked, thus far, but the jury is very shakey on how long you can count on that….
@Steve and others:
Ok, I’ve learned a bit of a lesson – I re-checked and I made a mistake about whether FHOB can be used as part of the 20% deposit. “Non genuine savings” is excluded from the banks’ calculation of loan servicability, however unless this is already maxxed out it is usable (in effect) as part of the deposit. That is partly because these servicability ceilings are very generous when interest rates are low.
My main point – that there are other factors at work (on the supply side as well) is still valid.
@Philip
The 200% increase you’re talking about is happening because Australians invest in their homes by about 2%-3% a year, that is above and beyond the cost of simple maintenance. We have got used to thinking in this way and to paying more for bigger and better houses every time we move. As long as it works, it works, but of course it is unsustainable. It will stop when the ready supply of new cash into housing stops – in other words when households realise they have maxxed out their housing spend.
It has been sustained by social factors – namely patterns of participation in the workforce – over the past egneration and a half. Moving from single to double income familites, we have been happy to spend most of that second household income on our housing.
The Chief Economist of the Bank of England presented recently in Exeter on “household balance sheets” in the UK.
(http://www.bankofengland.co.uk/publications/speeches/2009/speech403.pdf). Here’s what he said:
“But the largest asset owned by most people is not measured at all. It is the value of what they expect to earn in the future or, what economists refer to as ‘human capital’. Most estimates suggest the value of future earnings is significantly greater than the sum of net financial wealth and gross housing assets which typically forms the basis for balance sheet measures.”
Yeah but no but yeah but…
In his otherwise rosy view he completely missed the fact that it was household’s choosing to spend the discretionary component of this “greatest asset”, their second income, on houses which caused the balance sheet to become so lopsided in the first place. Consequently, the factors that he point to to restore baalnce – people working harder and cutting spending – will be completely inadequate to keep the ball rolling on indefinitely.
We could of course develop some unusual family structures in the next 30 years, otehrwise I would guess we have just about reached the end of this phenomenon with this rate rise cycle “maxxing out” many households in terms of repayments.
Hi Shadow and Home4Aussies
Believe we need to debate this more both make very good points.
First home buyers grant help to keep the market up,but the real kicker was interest rates below the real rate of inflation.
Inflation is happening please check your latest electricity,water,insurance and grocery bill.
Savers and prudent investors are bailing out speculate debt feul junkies through false low interest rates.
Government central planning to keep interest rates low is dangerous and if we had a real free market interest rates would be alot higher and home affordable would happen.
Quote Hayek
The only tastes which are satisfied are the taste for power as such, the pleasure of being part of a well-functioning and immensely powerful machine to which everything else must give away.
Government will try everything to keep the property market up,they want to win the next election.
Steve Keen underestimate that very powerful machine and now has to walk.
Shadow and Brett4Aussies… always you raising very good point. You shall consider debating it more on AP forum? On AP forum they debate this long time no resolve anything. They benefit with you both input.
http://z3.invisionfree.com/Australian_Property
Goto select Australia Property Forum link above! Thank you!
Hi guys,
Just read this article written by Alan Kohler. He recommends that people should be able to access their super in order to buy a house. I thought the whole point of super was to fund one’s retirement. How is this feasible for young Australians who don’t even have that much (if any) super?? It just seems that the very same people who say that our houses are expensive due to a lack of supply, are the ones who suggest additional financing options should be made available to enable people to buy a house. How does that address the lack of “supply”? What happens when houses keep going up due to all this freely available money? Is it going to get to the point where people end up spending their entire superannuation portfolio just to have a stupid house? Then what?
It seems to me that the spruikers keep looking for extra excuses.
‘lets have shared equity’…’must allow super to be used for mortgages’.. None of this will fix any of the problems.
I am really disappointed that Alan Kohler has jumped on the same bandwagon. But I guess I should not be surprised.
http://www.businessspectator.com.au/bs.nsf/Article/The-big-fours-fabulous-crisis-pd20091012-WQRRS?OpenDocument
Me too, Kat. His Business Spectator colleague Robert Gottliebsen also seems to have done a bit of an about face.
And watching CNBC today, Roger Montgomery was fairly quiet in his views – seemed perhaps a little embarassed to have been “wrong” on housing, thus far – while it’s clear he still thinks it’s a bubble, he’s not prepared to say much more on the issue.
I think it has a great deal to do with reputational risk at play.
As I said earlier, a useful derivation of Keynes would be the market can remain irration for longer than an analyst or commentator can maintain their repuation and/or job.
Moreover, I’ve heard Plibersek say a number of times words to the effect that “Australia’s prosperity depends on house prices remaining in a bubble” – of course she said “not falling”, but that just plays a bit better when they’re spending our $$$s to ensure that kids continue to pay the world’s highest multiple of their salary for a home. (And, afterall, Garnaut is highly respected by Labor – they wouldn’t have got him to take the running on climate change if not – and now he’s come out unequically calling it a massive bubble.)
So I also think that Government has put a lot of political capital into it, and they will be exerting as much pressure as they can possibly bring to bare behind the scenes to ensure that media outlets and channels carry the line that they want.
Kohler has changed his tune a lot in the last 6 months from someone who understood the GFC and its force to becoming more positive cheerleader of stimulus and its consequent panacea effects. Somehow all that insight was jettisoned. While conspiracy or organized PR seems the cause, the mainstream media work in a short time periods and know the public are switched off by endlessly cycled depressing stories.
Professional media people must move with the mood and use the topline numbers
(especially from authority – RBA, IMF – hence the issue with Steve’s status to undermine his arguments) to endorse the view that it only gets better.
Fairfax journalists resent the allegation of writing for a paymaster but the organization’s revenues are in part made from the property sector. Content creates advertising and users/readers.
Like politicians, they understood how they must butter the loaf.
In the UK -
The mystery of the rising house prices http://www.independent.co.uk/news/business/analysis-and-features/the-mystery-of-the-rising-house-prices-1817811.html
noah cross
A very good article and one that I suspect is true to what is really happening World wide-especially in Australia.
It also ties in with restraint and the denial factor. I find with a majority of peolpe that are in real financial and irreversible stife, denial is probably the biggest factor.
This can be demonstrated by their acceptance of more debt (credit cards or personal loans) entered into when they “know” that there is no hope of repayment. They borrow this money and take an expensive holiday 9often overseas) or buy a new car or wait, an investment property.
The reason and logic are not fathomable, nor probably is the amount of debt to equity nor income to expenses a ratio that a lot of people would deny was workable in the first place.
Whatever it is the Banks in new home lending are putting the new borrower at risk by allowing others leveraging on the results of the latest realised sale price.
I would think small business distrees will be in full flight by March next and full cognition(closer to every day people with every day debt)by a majority of citizens that the party is over and the REAL World is just beginning (for them anyway)
Hello all
Just a quick comment. I have to pack my house since I am being evicted. I wish I could follow this blog regularly.
I am always traveling around the local area (population of maybe 10,000 people) about once a week and over the last few months, I have seen an increase in properties going onto the market. Since the FHOG has finished, strangely this increase has jumped substantially. Some of the newly listed property that I seen (remembering I have been viewing each week) have already been sold.
I have not seen such condition since around 2003 or better put, I have never seen so many houses going up for sale in such a short period. I benefit by assets since people throw out valuable things when they move or are having moving sales. Seeing what Steve said above, when to many people enter the market at once, the general value of housing goes down. I presume that the lower priced housing, best housing, or best neighborhoods for housing is being sold quickly.
From my small view, half of the housing is sold within a week where at the other extreme, some housing have been listed for months on end. I am wondering if there is online statistics which shows such market conditions?
If one is going on a penitent walk, Kosciusko is a fine place to go.
However still, increased debt leads to increased prices and increased per capita debt is unsustainable.
But even though this is unsustainable, capitalist policy makers will do everything they can to protect capitalists including first home buyers schemes, astronomical economic stimulus, artificial population growth, minimum wage cuts, social wage cuts, introducing cheap-labour imports, and so on.
By focussing on debt (a symptom) Steve, like Aarons, has misunderstood the real contradiction within capitalists political economy. he should drag Aarons along with him.
He should realise that as he tramps up the side of Kosciusko, Karl Marx from his grave is laughing his head off.
Chris Warren
UNIVERSITY of Western Sydney academic Steve Keen made a name for himself with forecasts of economic doom, predicting a 40 per cent decline in Australian house prices. Keen put his money where his mouth is, selling his unit in Surry Hills in Sydney in October last year for $526,000.
However, as always, no comments allowed in The Oz? Scared that people may agree with Keen and not believe the myth, the spruiking and bull***t surrounding Oz property prices?
I still back Steven Keen, why?
There are many knowns which are unknown by the media, analysts etc. or simply ignored, e.g. bogus population growth figures.
Long post see http://aiecquest.blogspot.com/2009/11/australian-property-prices-robertson-vs.html
Enjoyed listening to you on the Green New Deal panel.
Sure, the FHOB was a nice kick in the pants.
However with immigration rates increasing
http://www.immi.gov.au/media/statistics/statistical-info/visa-grants/migrant.htm
and building approvals late 2008- early 2009 decreasing
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/8731.0Main%20Features2Sep%202009?opendocument&tabname=Summary&prodno=8731.0&issue=Sep%202009&num=&view=
+ ultra-low interest rates, house prices had to turn upwards at some stage
Hi Steve, I enjoy reading your blog.
There’s a PDF of a speech yesterday by Ric Battellino up at http://www.rba.gov.au/Speeches/2009/sp-dg-251109.pdf. He comments that lower health costs mean we can spend more of our income on housing than the Yanks. Also, that those under 35 years of age have experienced a noticeable decline in home ownership over the past 10-15 years and that this “may” (!) be “financially driven”. How ridiculous. What was the idea of this speech, is he trying to prop up the bubble?
There are some diagrams but nothing scary like the ones on your site, in fact his Graph 8, Housing Loan Repayments as a percentage of household income makes it look like things were much worse in 1989 than now. I’d be interested to see your response to this speech on this blog.
“Though a house, therefore, may yield a revenue to its proprietor, and thereby serve in the function of a capital to him, it cannot yield any to the public, nor serve in the function of a capital to it, and the revenue of the whole body of the people can never be in the smallest degree increased by it.” — Adam Smith