Keen & Joye on House Prices

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Whit­ney Fitzsim­mons’ inter­viewed Chris Joye and myself on house prices for the ABC’s Busi­ness Today last week, and the 11 minute seg­ment ran last Fri­day. The Busi­ness Today site doesn’t allow you to embed a given inter­view, so I’ve saved it onto my blog for view­ing here.

I made one stuff-up, as can hap­pen in an interview—I said that house prices had risen 20 per­cent “last year” when I meant “under the influ­ence of the First Home Ven­dors Boost”. The actual period of the rise was from March 2009 till March 2010 (and it was an 18.8% rise in nom­i­nal terms and a 15.5% rise in real terms).

Whit­ney also got one datum wrong in her questions—that a fore­caster had pre­dicted a 0.5% fall in house prices—which I dis­missed; in fact he had pre­dicted a 5% fall in prices, which is more in the ball park of what I expect. Whit­ney cor­rected this in her intro, which was recorded after the inter­view.

Chris and I didn’t have one debate I expected, on whether house prices are expen­sive when com­pared to incomes. We’ve since had that at a debate today at the Port­fo­lio Con­struc­tionBub­ble, Bub­ble, Toil and Trou­ble Sum­mit”. Chris trot­ted out his com­par­i­son of house prices to incomes which asserts that the house price to income ratio in Aus­tralia is only about 4.4 to one (ver­sus the Demographia esti­mate of 7.1), and that the ratio hasn’t changed all that much in recent years.

I dis­pute Chris’s cal­cu­la­tions, and I was asked by The Age to do longer range com­par­isons of house prices to dis­pos­able incomes, which gave me the impe­tus to see what the long range data shows (most of Chris’s sta­tis­tics go back no ear­lier than 1982, the year before the First Home Ven­dors Grant was intro­duced and began to dis­tort the mar­ket).

My chart com­pares the median house prices in Syd­ney and Mel­bourne to aver­age house­hold dis­pos­able income per house. This com­par­i­son there­fore includes the impact of chang­ing demographics—the trend from one to two income families–and it records house prices against the income actu­ally avail­able on aver­age to pay the mort­gage. It also avoids the fal­lacy of com­par­ing house prices to forms of “income” that sim­ply can’t be used to pay the mortgage—such as the imputed rental “earned” by owner-occu­piers by liv­ing in their own home rather than rent­ing.

The inputs to this cal­cu­la­tion are:

The results are stark. The median house price in Mel­bourne was less than 2 years aver­age dis­pos­able income per house in the 1960s, and between 1.5 and 3 times that in Syd­ney. The ratio in both cities then took off under the influ­ence of the prop­erty bub­ble inspired by the sec­ond incar­na­tion of the House Price Ven­dors Grant in 1988, to reach a level of 2.5 in Melbourne—still not par­tic­u­larly high—but 4.5 in Syd­ney.

Prices then went side­ways com­pared to incomes until 1997, when the level of lend­ing for hous­ing finally kicked in and started house prices ris­ing again—so it is clear that ris­ing debt played the major role in set­ting off the bub­ble.

Then the Howard Gov­ern­ment first rein­tro­duced the First Home Ven­dors Boost (as a tem­po­rary mea­sure to get the hous­ing indus­try over the impact of intro­duc­ing the GST) and dou­bled it in 2001 (to ward off a feared reces­sion), and the price took off even more—reaching an all-time high of 8 in Syd­ney and hit­ting the 4.5 range in Mel­bourne.

A cor­rec­tion began in Syd­ney in 2004—more by dis­pos­able income ris­ing than by nom­i­nal house prices falling—with the ratio falling to 5.5. The ratio instead flat­lined at the 4.5 level in Mel­bourne.

The final stage to date in this act was Rudd’s dou­bling of the First Home Ven­dors Grant, which turned around the trend for the ratio to fall with yet another mini-bub­ble. The ratio rose again to 6.5 in Syd­ney, and hit the all-time record of 5.7 in Melbourne—thanks to the Vic­to­rian Government’s tur­bocharg­ing of the Fed­eral grant with its own give­aways.

Is that a bub­ble? Is the Pope a Catholic?

Over to Whitney’s inter­view of Chris and me.

Steve Keen’s Debt­watch Pod­cast 

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About Steve Keen

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

    As an indi­vid­ual, with­out the FHOG I would never have bought my first home. So on an indi­vid­ual level the com­ment that the FHOG is erro­neous. It may be cor­rect on the macro level. Over­all the FHOG by any def­i­n­i­tion barely pays for the con­veyanc­ing fee.

    I do believe there is a hous­ing bub­ble in the met­ro­pol­i­tan cen­tres.

    How­ever, there is no short­age of hous­ing or hous­ing cri­sis. There is only such a short­age where peo­ple want them which is pre­dom­i­nantly the met­ro­pol­i­tan cen­tres.

    The solu­tion — “move” fur­ther out. Get out to the regions, not the West­ern sub­urbs, fur­ther out.

  • Vin­cent

    http://www.youtube.com/watch?v=cxtkjZFfuZI&NR=1 watch this for the Irish steve Keen. Peo­ple who talk about a house mar­ket crash here were told to kill them­selves by our PM. SELL SELL SELL

  • home­s4aussies

    In his com­ment below Steve’s Busi­ness Spec­ta­tor arti­cle, Mr Joye con­cedes that he and his col­leges have quan­ti­fied the impact of imputed rents in the cal­cu­la­tion of this ratio. 

    Then one has to won­der why he chooses to con­tinue to use the less mean­ing­ful (and lower) fig­ure, for exam­ple in this quote taken from the RP data press dated 31 Jan­u­ary 2011?

    Rismark’s national dwelling price-to-income ratio has already fallen from 4.7 to 4.4 times”

    And accord­ing to Steve (above) Mr Joye con­tin­ued to quote the house price to income ratio as being 4.4% at a debate over recent days. 

    In his com­ment, Mr Joye describes as “mar­ginal” the increase in the house price to income ratio from 4.4 to 4.8 when imputed rents are removed from the income cal­cu­la­tion.

    I, per­son­ally, would not call an effect of close to 10% “mar­ginal”. But the effect is even greater when you give some thought to it. That ratio will never be zero or even close to it because the Gov­ern­ment is not going to give houses away for free to every home or prop­erty buyer. 

    So the com­par­i­son must be to a “rule of thumb” base­line for what is afford­able, and the most fre­quently quoted that I have seen is that hous­ing is trad­ing above “fair value” when the ratio is above 3x.

    Using this rule of thumb, a ratio of 4.4x means that Aus­tralian hous­ing is 47% above fair value whereas at a ratio of 4.8x it is 60% above fair value. By this rule of thumb, and using the much more mean­ing­ful income data, that Aus­tralian hous­ing (across the entire nation) is almost 30% more over­val­ued than when imputed rents are included in income.

    I would not call that a mar­ginal effect!

  • bret­t123

    The good news is that the ratio is down from 7.5 to 5.5 with­out one job or house being lost!

  • Joye’s fol­low up his per­sonal blog leaves lit­tle doubt about the man

    http://christopherjoye.blogspot.com/2011/02/once-again-steve-keen-gets-it-wrong.html

  • eri­copoly

    You men­tion Thomas Jef­fer­son… he actu­ally died broke (per­sonal debts exceeded his assets).

  • eri­copoly

    Hello Steve,
    First of all, thank you for your excel­lent research. Despite liv­ing in Seat­tle you have made it easy for me to find a high level view of the sit­u­a­tion very eas­ily.

    One thing I would like to con­tribute is to inform Aus­tralians that your full recourse loans do not offer your coun­try quite the level of com­fort that you may col­lec­tively believe.

    Please take note that it’s only about 18 states in the USA that have non-recourse loans. Here is a list: http://wiki.answers.com/Q/Which_states_are_non-recourse_states_for_mortgage_debt

    You won’t find Florida in that list. The real estate col­lapse in Florida is a dis­as­ter, and Florida is a full recourse state.

    In fact, Florida makes the top three states in terms of default­ing loans:
    http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-federal-national-mortgage-association-fannie-mae-freddie-mac-terence-edwards-bank-foreclosures-strategic-mortgage-defaults-delinquent-home-loans-2800.php

    Best regards,
    Eric

  • Thanks for that Eric,

    I was aware that not all States allowed “jin­gle mail”, but I didn’t realise that Florida was full recourse.

    And I agree it gives a false sense of safety–to both bor­row­ers and banks. Full recourse can mean that a bor­rower who goes under cuts con­sump­tion far more than some­one with a jin­gle mail option–so the econ­omy can suf­fer more rather than less. And banks who try to pur­sue some­one who has failed and owes them money after a forced or mort­gagee sale find it isn’t worth their while. One hedge fund told me of talk­ing with a dis­tressed loan buyer who paid an Aus­tralian bank a cent in the dol­lar to buy the right to sue this part of their port­fo­lio, and said that it was a loss-mak­ing exer­cise which he wouldn’t repeat.

  • A good inter­view — thanks for post­ing it, and for putting your­self out there so that eco­nomic bom­basts every­where can take pot-shots at you for describ­ing a real­ity that’s not so good for their busi­nesses!

    A quick ques­tion — Chris men­tions in this inter­view that the data for “hous­ing short­fall” has come out of sev­eral dif­fer­ent places using dif­fer­ent meth­ods, but all com­ing to the same con­clu­sion about how many houses we need. He quotes a few sources but doesn’t describe the dif­fer­ent method­olo­gies. Are you aware of the meth­ods and results com­ing from these other sources?

  • Hi CrnoS­rce,

    I have seen them some time ago but can’t recall the exact method­olo­gies. They were how­ever of the same class: pro­jec­tions of pop­u­la­tion ver­sus pro­jec­tions of dwelling con­struc­tion. None of them were “num­ber of buy­ers” (ie those with mort­gages) ver­sus “num­ber of sell­ers”, which is what they would need to be to even come close to a proper “sup­ply and demand” analy­sis of sales vol­ume and price for­ma­tion in the hous­ing mar­ket.

  • Thanks for the reply.

    So basi­cally, like a lot of things in eco­nom­ics, peo­ple find a method­ol­ogy that gives them the answer they want in each spe­cific sit­u­a­tion, rather than find a method­ol­ogy that matches what actu­ally hap­pens.

    It’s a shame about your minor slip-up in the inter­view — it was the only time Chris was actu­ally able to say you were wrong in any mean­ing­ful way.

    Keep fight­ing the good fight, Steve!

  • eri­copoly

    The other part of that arti­cle worth point­ing out is that jin­gle mail is only 12% of the prob­lem — by impli­ca­tion we would still have 88% of the default­ers if all states were full recourse:

    A Mor­gan Stan­ley report esti­mates that around 12% of all mort­gage defaults in Feb­ru­ary were ‘strate­gic’, mean­ing home­own­ers were finan­cially able to pay on the loan but chose not to do so.”

  • eri­copoly

    Cor­rec­tion to my last post… 

    We’d still have *more than* 88%, as some of those strate­gic default­ers are in full recourse states (like Florida).

  • CashIsK­ing

    Pre­sume this is sar­casm, but you should have put a wink to be sure since some spruik­ers out there might actu­ally try to source this com­ment and real-estate fact! For the record the ratio is more like 9 in Syd­ney and 8 in Mel­bourne.