A Motley Crew interview on Australian House Prices
on February 10th, 2011 at 8:22 am
The Motley Fool‘s international investing team will be visiting Australia for a week starting on February 15th, meeting with more than a dozen domestic companies to get a feel for what the Australian stock market has to offer. If you’d like to get their impressions, sign up for their free dispatches here. Their overview piece on the trip itself is entitled “One Last Giant Property Bubble“.
I’m one of the people they’ll be interviewing, and as a prelude they posed 3 questions to me:
- Is Australia’s housing bubble bigger than the one in the US?
- What would trigger a correction?
- Who would get hurt the worst?
In my typical fashion I supplied a thesis when a crib sheet was required, so my answers had to be edited somewhat for their site:
The Next Bubble Coming From Down Under
Here’s the original full-length version (click here for PDF).
Is Australia’s housing bubble bigger than the one in the US?
The Australian housing bubble is categorically larger than the USA’s, though in standard bubblology talk, the main reason that it is—that it was far more a pure speculation on prices than the American bubble—is touted as one of the reasons that “Australia is different” and a crash won’t happen here.
Before I elaborate on that point, here’s the data. The raw data for the US is the Case-Shiller Index, while the recent raw data for Australia comes from the Australian Bureau of Statistics established house price index. This has two series—one using 2003-04 as a base year, and the other 1986-87. I combine the two to produce a composite index from then till now.
For pre-1986 data, I use the numbers derived by an Australian academic Nigel Stapledon in his PhD thesis, which used newspaper records to derive series for Sydney and Melbourne going back to 1860.
Figure 1 compares just the recent (post 1986 data), where Case-Shiller’s base year is 2000 and the ABS’s is 2003-04:
Figure 1
Figure 2 puts them to the same base year of 1986. It’s now obvious that nominal house prices in Australia have risen far more than in the US since 1986: a factor of six increase, versus a peak of about a 3.5 increase in the USA (which has now fallen to less than a 2.5 times increase after the US bubble burst in 2006).
Figure 2
I also mark on it the beginning and end of the Australian government’s contribution to this Ponzi Scheme, the most recent incarnation of its “First Home Owners Scheme”, which gives first home buyers a cash grant towards their first purchase that is then levered up by a bank loan when they go shopping. For this reason I call it the “First Home Vendors Scheme”, since the real recipients of the government largesse are the vendors who sell to these new entrants—and they get not merely the government money, but the levered amount that the banking sector throws on top of it.
When the “Global Financial Crisis” loomed (as the “Great Recession” is called DownUnder), the then Rudd Labor Government doubled this grant to $14,000 for an existing property and tripled it to $21,000 for a new one, in what they called the First Home Owners Boost, and which I nicknamed the First Home Vendors Boost (FHVB). The Scheme, which began in October 2008, was supposed to last 8 months but was extended to 14 months because it was “so successful”.
Back to the data. Consumer price inflation has run at different speeds in the two economies, so real prices are the best for comparisons; Figure 3 deflates the Case-Shiller 20 city index by the US CPI, and the Australian data by its CPI.
Figure 3
The intriguing aspect of this comparison is that the two bubbles tracked each other from 1997 till 2004 (with the Australian at a higher level since a mini-bubble back in 87-89 that I’ll return to later), and then diverged. The Australian trend broke first, but then restarted just before the US bubble finally burst. The Australian bubble then broke again in 2008, only to be restart shortly after by the FHVB. It has recently topped out, with one quarter of falling prices (with the nominal index dropping 0.3%), and the latest rising by 0.7% (bear in mind however that the 0.3% fall for the September quarter was first shown as a 0.1% increase, and both figures are still subject to revision).
A final long-term comparison to see just how Australian and US house prices really compare uses Stapledon’s data back to 1890, when the Case-Shiller Index began:
Figure 4
Whether this period marks the beginning of the end of the Australian house price bubble will only be clear in hindsight, but the volatility of the index is now extreme, and the impact of the FHVB on it is obvious in Figure 5.
Figure 5
This is not a new phenomenon: though I apportion most blame for the Australian house price bubble to the finance sector, there’s little doubt that the fuse itself was lit by the government’s interventions via the First Home Owners Scheme, which began in 1983.
‘This Government was elected . . . with a commitment to boost the nation’s economy . . . Our housing policies are an essential element of our national recovery strategy . . . Our program is designed to achieve the dual objectives of ensuring that housing plays a key role in our economic recovery and ensuring that Australian families can gain access to adequate housing at a price they can afford.
The main elements of our program are . . . a new more effective scheme to assist low income home buyers – the first home owners’ scheme . . . to get the housing industry moving without delay we removed the savings requirement from the existing home deposit assistance scheme . . .’ (from the Hansard record of the First Home Owners’ Bill 1983, which gave birth to the First Home Owners Assistance Scheme)
This scheme has always been used as a means to stimulate the economy, and it’s worked—but in much the same way that an anabolic steroid will help an athlete win a medal: it pumps up the performance at the event, only to leave the athlete with long term health problems in the future. From 1951 until the FHOS was introduced in 1983, the average quarterly increase in house prices was 0.07%—which is statistically indistinguishable from zero, given that the standard deviation was 1.73%.
Figure 6
After the Scheme was introduced, the average quarterly increase increased by more than a factor of ten to 0.94%, and the volatility rose as well. Since there have also been periods where the Scheme was removed and when it was doubled, it’s possible to drill down further on its impact—and it’s bleedingly obvious that it both increased house prices and their volatility.
Table 1
| Stats | Before FHOS | After FHOS | All Data | During FHOS | Between FHOS periods | When FHOS doubled |
| Mean | 0.07% | 0.94% | 0.47% | 2.17% | 0.25% | 3.10% |
| Min | -5.53% | -3.73% | -5.53% | -2.26% | -2.26% | -0.92% |
| Max | 3.91% | 7.86% | 7.86% | 7.86% | 2.95% | 4.93% |
| Std. Dev. | 1.73% | 2.17% | 1.99% | 2.71% | 1.26% | 1.83% |
| Count | 131 | 110 | 241 | 25 | 51 | 7 |
Government interventions in this asset market make it very hard to work out a decent base year from which to compare Australian house prices to those in America. Prior to 1949, the Australian government enforced a rental ceiling, which kept house prices artificially low. Since 1983, it has run the First Home Vendors Scheme, which (along with other interventions like negative gearing) kept prices artificially high. I take 1970 as the best date for a comparison of the Australian and US house price indices, since it’s halfway between when the price spurt caused by the abolition of the rental control scheme had petered out, and the new regime of keeping house prices high took over. So Figure 7 is my preferred series comparing Australian and US house prices (with the B marking the introduction of the First Home Vendors Scheme):
Figure 7
As tends to happen at the end of a bubble, when prices have been driven far higher than incomes, spruikers have claimed that Australian house prices are not really high when compared to incomes. The Demographia survey’s comparison of median house prices to median incomes has been disparaged by spruikers who happily compare median house prices to average incomes, where those average incomes include imputed rental returns from owner-occupied dwellings, superannuation entitlements that can’t be used to pay mortgage bills, etc.
This tends to be an interminable debate about what should and what shouldn’t be included, so I prefer to compare the house prices to the broadest possible measure of income: GDP per capita (which understates the problem because GDP includes imputed rental income from owner-occupied dwellings, which of course can’t be used to pay the mortgage!). Starting from the same date, this yields the comparison of Australian house prices to income shown in Figure 8, on which basis Australian house prices are at least 50% overvalued, with all of the rise above the long term average occurring since first the Howard and then the Rudd government doubled the FHVB in response to fears of a recession.
Figure 8
Another take on affordability and whether housing is overvalued is to consider income per household, since it could be argued that the increase in women’s participation in the workforce since 1970 has meant that two (or more) incomes are being earned per dwelling, making a higher price affordable. Figure 9 compares the house price index to household disposable income per dwelling (using the RBA table G12 for disposable income and ABS tables 4102 and 87520037 for the number of dwellings).
Figure 9
Spruikers claim that there have been significant demographic shifts, that houses now are bigger and better than those in 1970 and so on. However all of the increase in the house price to GDP per capita index above its average has occurred since 2001 (when Howard doubled the FHVB because of fear of a recession), and there has been no real change in Australian demographics since then, as Figure 10 and Figure 11 indicate.
Figure 10
Figure 11: The period 2006-10 is the only one where population growth exceeded growth in dwellings
This is a good point to consider the usual spruiker case that house prices have risen because demand—driven by rising population—has exceeded supply. One of the most regularly cited justifications for this is the National Housing Supply Council report, which estimates the gap between supply and “underlying demand”.
‘ . . . the Council estimated a gap of around 85,000 dwellings between underlying demand for and supply of housing at 30 June 2008. The Council developed a methodology for measuring the gap based on selected measures of homelessness, including the number of marginal residents of caravan parks and the undersupply of private rental dwellings indicated by the rental vacancy rate. The measures used in the 2008 report were:
2008 gap size = additional private rental dwellings required in 2008 to increase the number of vacant private rental dwellings to 3 per cent of the total private rental stock
+ dwellings required to accommodate people who are homeless and sleeping rough or staying with friends and relatives
+ dwellings required to house marginal residents of caravan parks.’ (National Housing Supply Council 2010, pages 65-66)
These are legitimate measures of a social need, but they’re not a measure of the market demand for housing! Figure 12 shows the correlation of changes in the number of Australians per house with changes in nominal house prices:
Figure 12
A falling ratio of people to houses—so that the housing stock was growing more rapidly than population—should have meant falling prices according to the standard “supply and demand” argument. But what about the one brief period where population was actually rising faster than the housing stock—between 2006 and 2010—and house prices also rose sharply?
Figure 13
Whoops! The correlation is actually strongly negative: minus 0.56. Population dynamics gave spruikers a good story, but it wasn’t what drove house prices up.
What did instead was debt. Demand for houses is not population increase: it’s people with new mortgage loans. When you look at the relationship between new lending and the change in house prices, you finally start to see some serious long run correlations (as long as the data makes possible, anyway).
Figure 14
The correlation coefficient here is 0.53—rather better than the minus 0.06 that applies between change in population per dwelling and change in price over 1975-2010—and it improves when the trend of rising mortgage new debt to GDP is removed. So we’ve had a debt-driven housing bubble, just as has the USA, and it’s the dynamics of debt that will determine when and how it bursts—not demographics.
What would trigger a correction?
Ponzi Schemes ultimately fail under their own weight, because they involve paying early entrants more than they put in, while producing no profits with high running expenses. A debt-financed Ponzi Scheme can however appear to work for a long time, because the price of the object of the Scheme—in this case house prices—can rise so long as debt levels per house rise faster still.
That was clearly the case in Australia. Property spruikers focus on the price increases and ignore the debt, but the latter has risen far more than the former: nominal house prices are up by a factor of 15 over 1976, but debt per house has risen by a factor of 55 (Figure 15).
Figure 15
The turning point in that process appears to be nearby: both debt per dwelling to price (Figure 16) and debt per dwelling to disposable income (Figure 17) appear to be topping out.
Figure 16
Figure 17
Figure 18
This underscores the fact that, just as in America, rising mortgage debt was the real fuel for rising house prices. Though Australia didn’t have as widespread a Subprime phenomenon as the USA, and many more mortgages are held on the books of the banks, the level of mortgage debt actually rose faster and higher in Australia than in the USA (The vertical lines on Figure 19 identify when the First Home Vendors Scheme first began—in 1983—and when the recent doubling of it ceased—in January 2010; there is however still a $7,000 grant for a first home buyer).
Figure 19
What will bring this bubble undone is its very success: having successfully driven house prices skywards, the cost of entry into the market is now prohibitive so that the flow of new entrants is drying up. Since the Scheme depends on a constant flow of new entrants, this alone will bring it unstuck. A gauge of just how difficult it is to get into the market is given by looking at the ratio of the average first home loan to the average income—when most first home buyers are going to have an income below the average.
The average first home loan has risen fourfold in the last 2 decades, from $75,000 to almost $300,000 (Figure 20).
Figure 20
This rise has far outstripped increases in all incomes, let alone wages, which have lagged increases inr productivity in Australia as they have in the USA. In 1992, the average first home loan was 2.5 times the average before tax yearly wage income. Now it is 5.5 times as much, and it briefly reached 6 times annual income during the frenzy caused by the Rudd Goverment’s doubling of the FHVG (Figure 21).
Figure 21
Spruikers also claim that this increased debt burden just reflects lower interest rates. Even the Governor of the Reserve Bank of Australia made such a claim:
The rough statistic that I have quoted many times was that the average rate of interest was about half; that meant you could service twice as big a debt. Guess what? That is exactly what occurred, and that had a very profound effect on asset values. (Glenn Stevens, remarks to the House of Representatives Standing Committee on Economics Finance and Public Administration, 2007, p. 26)
Let’s see how well this argument stacks up against reality by considering the servicing cost on a typical 25-year floating interest rate mortgage in Australia as a percentage of the pre-tax earnings of Australian workers.
Figure 22
The result is pretty stark: in 1992, servicing the average first home loan took under 20 percent of the pre-tax income of the average wage earner. Now it takes 60 percent. Since the average tax rate on workers is about 22%, and since payments on your own home can’t be written off against tax in Australia, this means that the average wage earner would have only 20% of his/her income left for all other expenses after paying the mortgage.
Clearly it’s no longer possible for a single wage earner to buy the median house in Australia—and even a 2 bedroom apartment is out of the question. But what about a couple—what have they got left for expenses after paying taxes and the mortgage?
Back in 1992, this was a doddle: paying the mortgage took just 12 percent of the family budget. Now it takes 37 percent. For those unfortunate couples who took out a home loan while the FHVB was in operation, it takes as much as 42 percent of their combined after tax income.
Figure 23
So the bubble will collapse because it has been too successful—and the government’s doubling of the FHVG has added to this because it encouraged new entrants who may have waited till 2011 to buy in during 2009 instead. There are less first home buyers entering at the bottom of the escalator (Figure 24), and they are taking out smaller loans, while the trend in other loans is also headed down (Figure 25).
Figure 24
Figure 25
So the volume of unsold properties is mounting and the time to sell is increasing. This normally precedes the beginning of a downturn in house prices—since most vendors initially refuse to accept offers below their reservation prices.
One reason that is often advanced as to why Australia won’t suffer a US-style housing price crash is that there hasn’t been a huge building boom here. The factoid is definitely true; but the obverse interpretation is that Australia’s housing finance has been even more speculative in nature than the USA’s. The fraction of total borrowing that has financed investment-oriented construction versus speculation-oriented purchases of existing properties by investors has fallen from almost 60 percent in the mid-80s to under 10 percent now. In fact, “investors” in the Australian market now invest less than owner-occupiers do—though the recent spurt in the fraction of owner-occupier loans supporting construction from the all-time low of under 8 percent to just over 11.5% was probably an artifact of the tripling of the First Home Owners Boost for those building their own home.
Figure 26
In the aggregate now, less than 10 cents in every borrowed dollar builds a new home. This does mean that there isn’t an overhang of newly completed properties on the Australian market. But conversely, the huge proportion of “investors” who have bought in solely to achieve capital gains means that the investor side of the market is very fragile”: any sustained pause in price increases means these investors face mounting losses.
Figure 27
The increase in the number of “investors” relative to owner-occupiers played a major role in driving up house prices. The rise in “Mum and Dad investors”, as they were termed, saw investor borrowing rise from about 15% of total mortgages in 1990 to over 30 percent since 2000.
Figure 28
Predictably, the rise in “investors” as a proportion of total borrowing saw rental income top out and begin to fall.
Figure 29
Most “investors” declare losses on their income tax (which is subsidised by the Australian scheme known as negative gearing, where property speculators can write off losses on servicing rental properties against all other income). However this ruse is only worthwhile if asset price inflation more than compensates for the taxpayre-subsidised losses made while owning a property. So the investor proportion of the market is likely to add to supply if there is a sustained period of flat prices, since their losses will mount in the meantime.
Figure 30
On top of this there are the usual “exogenous” factors: further increases in interest rates by the RBA, and the prospect of a slowdown in China.
The RBA is convinced, by the boom in China and its neoclassical models of the economy, that capacity constraints lie just ahead for Australia, and that therefore it has to increase interest rates to contain inflation. This is a classic application of the “Taylor Equation” approach to monetary policy that pretty accurately defined its behavior before and well into the GFC—taking September 2007 as the start of the global crisis (the US Fed began slashing its rate that month).
Figure 31
The recent floods and cyclones in Victoria and Queensland are wildcards that will drive up food prices, and the global bubble in commodity prices will also play through, but overall I expect that the RBA’s expectations of inflation caused by capacity constraints will not pan out—for reasons that I expand on below under the Credit Impulse. I think they may well put rates up once more, but will then be forced to start cutting them.
China is another wildcard for Australia. It is clearly the reason that our terms of trade, and especially the prices for (and volumes of) our exports of minerals, are the highest they have ever been.
Figure 32
I don’t know enough about China today to make an informed comment here, but my feeling is that China’s growth can’t be sustained, and that the Chinese authorities will do the best they can to secure other sources of minerals. Certainly I wouldn’t advise extrapolating the current incredible prices (or volumes) for our minerals forward, which does make Australia’s economic performance particularly susceptible to a change in our fortunes with China.
My focus is on the endogenous force: credit expanding faster than both incomes and asset prices is what drove asset prices up, and the failure of credit to continue growing faster than income is all that is needed to set the reverse process of declining asset prices in train—while leaving the debt in place.
The Credit Impulse
The key factor behind not just the property bubble, but Australia’s apparently outstanding performance during the Global Financial Crisis—is what Biggs, Meyer and Pick christened “The Credit Impulse”. In contrast to neoclassical economics, I have a credit-oriented analysis of capitalism in which aggregate demand is derived not merely from incomes but from the change in debt. On this basis, the change in aggregate demand will reflect both the change in incomes (GDP) and the change in the change in debt: so the acceleration or deceleration of debt levels adds or subtracts from the change in aggregate demand. This affects both economic performance and hence employment, and asset price change—since from this perspective, aggregate demand is spent purchasing both new goods and services and existing assets.
The collapse in the Credit Impulse was the factor that made the Great Recession great for the USA. The much smaller collapse in the Australian Credit Impulse—and that it turned positive again on a yearly basis n early 2010—is the primary reason why the downturn was so much milder in Australia.
Figure 33
The correlation of the Credit Impulse with change in employment over the long term is high:
Figure 34
Figure 35
It’s even more marked over the crisis itself, though clouded by the impact of massive government interventions via fiscal policy and, in the USA, quantitative easing. The severity of the downturn in the USA was directly attributable to how quickly accelerating debt gave way to decelerating debt, and the decline in the rate of deceleration has been a major factor in attenuating the crisis more recently. Though this sounds paradoxical and counter-intuitive, it follows from the logic that aggregate demand is the sum of GDP plus the change in debt: since the change in aggregate demand is the sum of the change in GDP plus the change in the change in debt, a slowdown in how fast debt is falling can actually boost aggregate demand. That is apparent in the US data from mid 2009—when the recession was officially regarded as having ended.
Figure 36
The same qualitative phenomenon applies in Australia, though with much different magnitudes. Firstly the deceleration in debt—the change in the Credit Impulse from positive to negative—was not nearly as large, and it was reversed more rapidly.
Figure 37
However the main mechanism for achieving that result—stopping the Credit Impulse turning extremely negative, and pushing it back into positive territory—was the First Home Vendors Scheme. As a result of that Scheme, households did not delever—instead they took on substantially more debt, with the mortgage debt to GDP level rising by 6 percent. This more than counterbalanced dramatic deleveraging by the private sector.
Figure 38
This can’t continue, because the household sector is already more indebted than its US counterpart, and the debt servicing costs in Australia are far higher courtesy of our much higher mortgage interest rates.
Figure 39
The quarterly data on the Credit Impulse implies that this is now turning negative again.
Figure 40
This trend is likely to continue. The artificial boost to the rate of growth of mortgage debt caused by the FHVB is gone, households are indebted beyond anything ever seen before, and high interest rates are killing consumer spending. This in turn will cause a fall in aggregate demand that has to be worn by both consumer and asset markets. The former effect will contribute to rising unemployment—countering the positive boost to employment from the China trade—while the latter will reduce debt-financed demand for housing.
Who would get hurt the worst?
The most obvious losers from a price downturn will be the buyers enticed into the market by the FHVB, many of whom began with 5% equity and who can therefore be easily thrown into negative equity territory by even a small price fall.
This won’t lead to “jingle mail” defaults in Australia because our housing loans are full recourse. But since a trigger for the downturn will be a decline in aggregate demand as the Credit Impulse turns negative, unemployment will rise—certainly in NSW and Victoria that don’t directly benefit from exports to China—and this will cause forced sales, though a lesser rise in bankruptcy sales than in the USA.
Figure 41
The second obvious group of losers will be the banks themselves, who have dramatically increased their share of profits via the huge increase in mortgage debt. A decline in mortgage originations will reduce their profitability, and their solvency since mortgages now constitute the more than a third of total bank assets and over half of all banks loans.
Figure 42
Figure 43
Australian banks assert that they are well capitalised and that a downturn in house prices would have little impact on their liquidity, let alone their solvency. That claim has proven false after the fact of a property price crash everywhere else on the planet, and I expect Australia to be no different.
Figure 44
I’ve been following the Roy Morgan figure for a while now too and whilst it is good for comparison purposes – the thing I’ve noticed with is it often jumps around – sometimes by 1 per cent or more. I’m not sure if that’s accurate of the market or perhaps it has a larger margin of error. Take the below for example:
Jan 2009: 6.9
Feb 2009: 8.0
Mar 2009: 7.0
Their explanation for this drop was as follows:
“Since then Roy Morgan unemployment estimates, which are not seasonally adjusted, have dropped each March as university and other students return to study. (This drop is similar to the ABS ‘Original’ unemployment estimates — see attached tables).
Personally, I’d wait a couple of months before saying we have a clear trend from the Roy Morgan research. We are likely to see another drop as students (and Steve!) return to to uni.
@ sirius
Obviously, my email that I did send to you, obviously went elsewhere, as I did respond almost immediately. please email me at the following side account:
Thank you.
You post today is most interesting and I would appreciate the opportunity in trying to wrap myself around your work. My apologies as my previous comments to you, were obviously arrogantly founded in poor assumption, on my part, which I have given considerable thought since.
The problem: Yes, I agree as I believe that humans are a force to be unleashed, however, like any force they should be subjected to subtle and intellectually sophisticated constraints so as to benefit humanity. My answer to this is that humans are easily and eagerly corruptible so political governance is no answer which means our whole system of society should be hard-wired – in an intellectually constructed algorithm based on cellular biology analogies or Yes, an anarchistic society where no predetermined forces have the rights of organized crime over humanity or full rights to determine future trends by force, stealth and deception.
A key, probably the key to this is the distribution of “credit” or “money” (for a want of better terms – so I am now keen ( that’s an unintended pun:) to hear your points of view on this matter) – but I don’t see this money, as we have it today. The values of human endeavours, impact all others and this should be enough as long as “resources” are distributed on some form of equitable system that cannot be harvested by politco / banker arrangements. I have no problems with greed, wealth and such activities as long as they are they result of honest toil and do not granulate, are not stolen and do not become attractors of resources or power. Ideological? Yes, but I am not naive and I truly understand what men “good” men do – which is far, far worse than what “bad” men do or even consider doing.
So we get back to “risk” and the most powerful force of all – finding the right “paradigm”.
Enough for the moment while I walk the dog and think more about your post. Perhaps we could discuss this privately as it is more philosophically of natural physics than technical “economics”. Mind, Steve may be just the person to crack the egg – and when he does, we need to prepared so as not to leave opportunity for those “leaders” of today to morph into new promoted identities.
Look forward to hearing from you – you could alternatively also comment on my blog and I will get it immediately,
kindest
the email address didn’t show? Please click on my name and go to my Blog and do a post?
Off topic.
Can anyone point me in the direction where I can find the amounts annually the Australian Government and Banks increase the money supply?
Also,
Has anyone found an actual Banker that’s corroborated the notion that they create debt by double entry accountancy? On the record that is.
Thanks.
Steve,
Interesting article. As usual, I find many problems with your analysis.
Chart 1 & 2. I know these are some of your favourite charts but there is something the rarely mentioned when these are published. Since 1974 Australian real wages have increased by 70%, while US real wages have declined by 17%. See links below.
http://thedepression.org.au/?p=1802
What does this mean? If measure purely by income, Australian House prices should have grown by 2x the rate of US houses (because real Australian wages grew 2x faster).
According to chart 7, since 1974 real Aust house prices are up by 2.3x while the US is up 1.7x. Since 1970, Aust up 2.9x, US up 1.7x. Given what has happened to real incomes over the same timeframe, either the US has further to fall or Aust house prices have further top rise.
WRT to figure 6 and Table 1, your analysis of the impact of FHBS is interesting but somwhat one dimensional. In every instance of the FHBS (1984, 1988, 2001, and 2008), mortgage rates fell. Although mildly in 1984 and 1988 (around 0.5% on each occasion) but quite significantly in 2001 and 2008. Clearly lower rates helps house prices too – and ignoring his fact erodes the credibility of the analysis.
Further, the US also has incentives to buy homes – incentive which failed. I would be interested to understand why FHBS has such an impact in Australia, but very little O/s. Are we just different here?
I’m really confused by charts 22, 21 and 22. How is it that Average first home loan to wage has increased by a factor of 2, (Chart 21), and payments on average home as percentage of income has increased by a factor of 3 (chart 22). We know mortgage rates were higher in 1992 versus today. See below
http://www.loansense.com.au/historical-rates.html
My calcs show a very minor increase in ratio of incomes to serviceability.
Finally, I have posted this table below and would love your comment. Since all of you analysis point to higher levels of stress in the housing market (affordability / servicing etc), why is it that the ABS shoes mortgage payments as a % of income are no different in 2008 versus 1994. See below.
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/72A5703726A305B8CA25773700169C7C?opendocument
Heaps more questions to ask (especially re chart 29 which proves undersupply) but have run out of time.
Cheers
bb
Seeing the changes around 1983, it struck me that this was about the time that I remember more and more families becoming two income, as wives went out to work. Is there a good discussion anywhere specifically addressing the impact of this on house prices?
I don’t have time for a detailed answer bb, but on the serviceability issue the confusion is arising from comparing the average to the marginal. My calculation in those charts is of the average first home loan size at a given date to average incomes at the same date. This in effect represents the marginal entrant: the person who is entering the market now. The calculations you are referring to are the burden on the entire society of debt servicing now versus incomes now. The marginal will be under much more stress than the average, AND it’s the marginal buyer that determines whether the level of demand for housing, since he/she is the one actually taking out a new mortgage.
@ Steve Keen
” I do expect the RBA to reverse direction this year and reduce rates, once both the bubble bursts and the impact of a negative Credit Impulse starts to push up unemployment.”
Comments:
NBA stated recently (under question time) that it expects to lead the other banks in being independent of RBA rate sets and in future will sets its own rates.
Today; CBA suggest a new push into mortgage finance growth and expects competition from the other banks and mortgage lenders. It is implied that 2010 brought it losses which I have “assumed” that these losses were derived in other than housing business, and so, the main push was again housing.
Banks deposit interest rates yesterday were ~6.1% +/- including hot money / foreign investment deposit accounts. No explicit Government Guarantees anymore. Loan creations by Banks leveraging these deposits (Oz savings are on the increase) obviously a major source of loan funding – plus RMBS buying by Oz govt. and foreign short term funding.
Considering OZ bank residential mortgage lending is almost a zero risk affair with full recourse and ARM (or ultra high interest fixed mortgage) returns /daily adjustments) and Total Government Backing ( by Policy) and bailouts when requested…
The only real reason I see for RBA to reduce interest rates (hoping to reduce mortgage rates) is a political Public Relations statement – as the whole Oz economic Policy is about housing – let’s not consider mining which effectively keeps some employment up and some taxation inputs, but generally speaking, amounts to profits mainly for foreign shareholders (tax free I believe?)
As regards a new rent tax on mining – we must consider when things hit the fan, exports of dirt will slow dramatically and then the miners will cry poor on most attentive shoulders (as usual) and the tax focus will go back to OZ disasters, GST and Income.
Personally, I think – whatever RBA decisions are made will be founded in bank driven requirements and screw the rest. Or, business as usual but no crocodile tears at this time. It is all unwinding and options are decreasing.
All comments appreciated.
As regards the image below – the bee is vital to future food production where at present, its future appears to be threatened with either by fertilizers and or fungus. OZ bees are OK but… please spare a thought for bees by doing a bit of research and consideration as a socio-economic gesture.
Steve,
I sent these yesterday to your UWS email address. I thought I saw another address on this site somewhere but it’s not jumping out at me now. Since you haven’t replied I wonder whether the UWS email system has held the onions due to the attachment.
What email address should I send it to?
Sorry Muzz, I got them, I’ve just been flat chat. I’ll check them on the weekend and get back to you.
Steve,
Love your work.
I may have a possible long term solution.
Negative gearing and the FHOG are the two major factors behind this bubble. The FHOG has been reduced, so what to do about negative gearing?
I may have an answer, but I’d love if you could model it.
NG is there because there is a belief that rental prices increase when it’s removed. The problem with NG is it can be a never ending free ride that results in massive housing empires, robbing the rest of us of the chance to live in homes.
It’s stated that new homes are desirable to keep prices and rents down.
So how do we encourage new home building without encouraging a never ending free ride?
Simple. Announce the removal of NG in 5 years.
Then, have the ATO changes the depreciation schedule for houses. Instead of 40 years, for a 2.5% deduction yearly, change it to 15-20 years. This will not affect land values, nor will it encourage portfolios of established houses. It will however encourage the supply side.
To prevent this being abused, and a glut of empty houses, there must be evidence provided via the relevant tenant board of a bond being lodged against that property for at least 9 months of the year. Only in years where it is occupied can the deduction be claimed.
The effects I would expect:
Current owner occupiers wouldn’t be affected.
Some investors would start to offload their older stock.
Some investors would demolish and redevelop their older stock.
Some investors would start to build new houses.
Rents might decline somewhat.
The bubble would deflate. Some would be left under water. Though if they had newer houses, they may be able to take advantage of the change by renting it out and claiming the deduction. Since their rent might be lower, it might offset the impact of the bubble bursting.
Older houses would lose value to investors almost entirely. First home owners would be faced with a market where the older homes are on par with the price of a new one.
Do you have any thoughts on this?
All the data is here:
http://www.rba.gov.au/statistics/tables/index.html
“Money and Credit Statistics” – “Monetary Aggregates”
But other tables are also interesting.
Hi pacham12,
Heading into Australia’s “mini bubble” of ’87-’89 mortgage interest rates were around 11%. The bubble started at this rate. People were still diving into the real estate market when rates were 17% or more.
So apparently the interest rate alone can’t tell you all that much about housing demand.
Perhaps it’s a bit like determining the speed of a car by looking at the tachometer – you also need to know what gear it’s in (and whether there’s traction of course).
Muzz (Punter)
Hi Muzz, Just had time to download the documents and check them out. Thanks for sending them–they improve my documentation of this ultimately catastrophic attempt at do-gooding by the government.
Hi myne,
I’m all for abolishing NG, but I expect this will be easier at the end of the bubble than it is now. I would rather change the way debt can be levered against a property than attempt to manipulate the market by depreciation changes–as you note there are prospects for “investors” to game the rules if the latter approach is undertaken with no change to debt rules.
Steve,
Are you sure Figure 30 (or the caption) is correct? If rental income exceeds interest payment by 5% housing looks like a good investment. If it is correct perhaps a bit more explanation is needed.
Steve,
I think you’ve made a good case why house prices will not continue to rise. but not such a good case that they will fall rather than plateau.
Have you looked into the problem of basing your analysis on averages? If a household with mortgage paid off and a household income of say $200k buys an investment property for $800k then with rental income and negative gearing it is hard to see how they can get into much financial difficulty. In a downturn they can simply sit it all out, with no strong need to sell. True, without a capital gain they will find they have on their hands a pretty poor investment. But it could well look a bit better than alternatives, such as selling and crystalising a 20-30% loss. So it’s still a Ponzi scheme but when the whistle blows you still end up with a house, just one worth a lot less than you hoped.
But if the $200k household is averaged with a $50k household to give “$125k” household with no rental income the “average” household looks vulnerable while the individual households are not (the $50k household is not because they can’t afford to buy at all).
Thanks again Steve,
I wonder if you could include more demographic data in your housing analysis.
In addition to Harry Dent which I know you have looked at, we have this paper by the Deputy Governor of the BOJ in 2011 http://www.bis.org/review/r110112a.pdf
It shows the clear correlation between the inverse dependency ratio (working age to dependants ratio ie (15-64)/((0-15) +(65-100+)) and house prices country by country. GUESS WHAT. In Australia our peak IDR occured in 2010.
I have verified this myself via an ABS population data download into excel. It not only peaks in 2010 but drops very sharply away – even with best case scenario projections – high immigration etc (which looks to be under political pressure now to be reduced).
Previous mild peaks in the IFT in Aust certainly seem correlated on my graph with mild drops in Aust RE in 1990.
Best regards, Robert
Steve, watched the interview with you and CJ through the website… as usual, I found him to be very arrogant, shaking his head and carrying on while you were talking…. the slight common ground at the end was interesting, though I find it difficult to believe he was not aware of St George’s loosening of credit standards by accepting rental payments in lieu of proof of savings….
The figure you were searching for is that the ABS shows that the 8 capital city weighted index increased 18.8% in the year to March 2010.
The 2009/10 financial year the increase was 16%
Perhaps if you were in a similar situation again, and he wanted to promote his index above others, you could bone up about their introduction of “seasonal adjustment” in April 2010 where it signficantly reduced the price increases for March (when Glenn Stevens had appeared on television just a few days earlier warning investors from gearing up to buy property) and where it is now making the data appear much stronger than the “raw” data (it turned a -0.8% national fall into a 0.4% rise in the latest release)….
keep up the good work, Steve
@ Steve
I refer to your “The Roving Cavaliers of Credit”, merely as a point of reference here and note the vast difference in the front-lines of your “economic-theory” and that of the “neoclassical” boys and girls aka heroes.
I cannot help notice that Alex Weber has resigned and effectively taken himself out of the lineup for Jean Claude Trichet’s job as ECB President coming vacant later this year.
It would appear that Weber does not relish facing off those forces (there’s that word again:) that support the ‘bureaucratics’ of the EU Cave. I can’t say that I blame him at all, but it emphasizes the aforesaid gap as a “Moral Hazard” dilemma, that equally matches the “technical” gap in the apposing theories… but I believe these differences are far bigger, and mush greater that mentioned here.
Getting the scientific fundamentals so wrong is one thing but power hitting is another but which is why the hacks, who have refused to confront, by intellectual endeavours, no philosophic justifications at all, in terms of natural physics for their inspirations aka ideologies, that are driving the World into a ‘barking-mad’ global disaster. They refused to consider learned arguments regarding the highly probable failure of the Euro Monetary Union.
Just on the foundation that the media releases and Public Relations are designed in pure sophistry so as to crudely bias the beliefs of the public into favourable opines that all is economically well, under current stewardship and the recovery is well under way, when it damned well is not, and by a very far distant margin, the market manipulations are so huge and ill-founded and contorted, that there is absolutely no possibility that any theory can be relied upon, for any event horizon, and that in itself points to utter chaos (phase-transition).
When an ideology needs to utilize such ill founded and utterly false information, discordant means, and contorted energies to prop up their ‘glass castles’, it is clear that something is wrong. In effect it is now all about “looting” and “denial” where the latter feeds the former.
I’ll even bet that Glen Stevens does not lower interest rates in 2011 as his current rate is “the” major attractor for foreign “hot-money” deposits (sans exit constraints), which are in implied guarantee of deposit protection by the government (for want of a better term) which, in turn, keeps the strongest and best managed banks in the World, er, propped up, along with their house prices.
great link robert,
barring a major war or some kind or envioronmental disaster( we are still working on that),
the future is deflationary in the short to medium term,
its a pity the americans or more specifically congress didnt look more closely at what went on at the BOJ
(bank of japan) in the nineties or naughties, to realise what a total failure QE was in japan as it will be in the US
anyway in both countries it was more about protecting banking assetts , and the yield curve adjustments for indebted corporates and households came in second or was a side benefit.
the authors conlusions point out the fact ,how powerless central banks are to prevent long term balance sheet adjustments.
congress should take note,
so should our polies, and their insane ideas about budget surpluses into the future.
right now they can barely get away with it, due to the build up of local currency denominated private savings in our banking system, care of the resources boom.
but this wont last , and governments will have no choice but to counteract the deflationary forces created by an ageing population, by running much larger budget deficits,
unless we also want a trans atlantic style economic disaster the likes of which we are now witnessing
having said that , i totally dissagree with the authors conclusions about the japanese government debt. given the level of delflation in the japanese economy over the last two decades, debt monetisation is the least of their worries, and you could argue their hasnt been enough monetisation.
An interesting article by Gary North:
http://www.lewrockwell.com/north/north944.html
Lot’s of contexts in the entanglement of the FedRes and Congress.
Thanks H4A,
I’ll post it to the blog in the next few days. I did make a stuff up on that point–I meant 20% over the life of the FHVB–but that’s the sort of thing one does in a live interview.
My money is on an unexpected decline in growth and rise in unemployment forcing him to lower rates later this year Peter.
I’ve just browsed this paper so far Robert, but it does look interesting. I’ll check it out and see if I can add that issue to my analysis. I expect it will be a factor in why the debt ride appeared smoother than it should have been though, rather than a totally independent causal factor.