House Prices outlook for 2012

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The ABS house price data for Decem­ber 2011 has just been released, and it shows that house prices fell 4.8% in nom­i­nal terms between Decem­ber 2010 and Decem­ber 2011. The usu­al sus­pects are already try­ing to see this as mark­ing the bot­tom, while “just the facts, ma’am” report­ing sim­ply empha­sis­es the scale of the down­turn. A cou­ple of media out­lets have asked my views on the next cal­en­dar year, so here they are–along with some his­tor­i­cal per­spec­tive on the house price bub­ble.

Fig­ure 1 deflates the ABS series by the CPI, and sets the real price index at 100 in mid-1986, when the ABS Data began. The peak was 261 (which means that real house prices were 2.6 times as high in 2010 as they were in 1986), the Decem­ber 2011 val­ue was 237, a fall of 9.3%. That’s in the ball­park of the fig­ure I antic­i­pat­ed at the begin­ning of 2011 for the fall from the peak; over the cal­en­dar year of 2011, real house prices fell 7.7% (from 256 to 237), which is still in the range of 10 per­cent (see Fig­ure 1; the ver­ti­cal blue lines on this chart mark the begin­ning of 4 of the 5 incar­na­tions of the First Home Own­ers Scheme [ its intro­duc­tion was under Hawke in 1983; its last spin was the dou­bling and tre­bling of it by Rudd in 2008-10]).

Fig­ure 1

I expect this rate of decline to keep up for 2012, so I’d expect prices to be of up to 10 per­cent low­er than they are now by the end of 2012, in infla­tion-adjust­ed terms.

The force dri­ving prices down is the same one that drove them up. Hous­es are over­whelm­ing­ly bought with bor­rowed mon­ey, so keep­ing house prices where they are requires a con­stant sup­ply of new mort­gages at the same lev­el (rel­a­tive to GDP per house­hold) as now; ris­ing house prices require new mort­gages to be grow­ing com­pared to income; and house prices fall if mort­gages grow more slow­ly than income. That we’re now in a peri­od of mort­gage debt falling rel­a­tive to income is final­ly obvi­ous; only the FHVB delayed this hap­pen­ing.

Fig­ure 2

The key indi­ca­tor of the direc­tion in which house prices are like­ly to move is the Mort­gage Accel­er­a­tor, which is the change in the change in mort­gage debt (scaled by GDP). The log­ic is that since the rate of change of mort­gages deter­mines the demand for houses—and hence the price level—the accel­er­a­tion of mort­gages deter­mines the change in the demand for housing—and hence the change in the price lev­el.

Mort­gage debt is now decel­er­at­ing almost as much as it was pri­or to the intro­duc­tion of the First Home Ven­dors Boost—the rate of accel­er­a­tion is now about minus 1.5% of GDP, ver­sus ‑2% before the Rudd Gov­ern­ment med­dled with house prices in its attempt to side­step the GFC. The annu­al rate of decline of house prices is also of much the same rate as it was before that inter­ven­tion: they are now falling at a rate of about 8 per­cent per annum in real terms. So a fall of that magnitude—somewhere between 6 and 10 per­cent over 2012—is quite like­ly.

Fig­ure 3

The gov­ern­ment might well attempt to inter­vene again as it has in the past, but I don’t think it will and I doubt that inter­ven­tion would work any­way.

The 2008 squeeze of the First Home Ven­dors Sauce Bot­tle was very suc­cess­ful, which makes anoth­er squeeze much less like­ly to work: poten­tial buy­ers from 2011 and beyond were already dragged for­ward into 2009-10 by the last squeeze, and house prices rose so much—by over 18% in real terms from the ear­ly 2009 trough to the peak ear­ly 2010 peak—that anoth­er Scheme would be hard pressed to entice new buy­ers in.

The pre­vi­ous NSW State gov­ern­ment did its bit for the bub­ble by abol­ish­ing Stamp Duty for First Home Buy­ers (and the O’Far­rell Gov­ern­men­t’s lim­it­ing of the exemp­tion to prop­er­ties below $500K with an expiry in Decem­ber 2011 caused a rush of NSW buy­ers late last year), but that’s so expen­sive for the bot­tom line of State bud­gets that I doubt that State Gov­ern­ments any­where will con­tem­plate a repeat.

So over­all, the like­ly out­come is a fall of 6–10% in real terms over cal­en­dar year 2012.

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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.