Australian House Prices down 10% from Peak

May01
by Steve Keen on May 1, 2012 at 2:04 pm

flattr this!

There are several providers of statistics on Australian house prices, but only one that doesn't have a vested interest in the direction house prices actually move in: the Australian Bureau of Statistics. So despite the criticisms of this series—that it's based on detached dwellings only, based on median sales data, too infrequent, not adjusted for "hedonic" differences between houses, etc., it's the only one I trust.

Click here for data in Excel: Debtwatch; CfESI
Click here for more data in Excel: Debtwatch; CfESI
Click here for this post in PDF: Debtwatch; CfESI

Chris Vedelago had a very nice piece about how confusing the various commercial house price statistics are:

The Real Estate Institute of Victoria said the city's median house price rose 0.9 per cent in the March quarter. Except that, according to RP Data-Rismark, it fell 1 per cent. Australian Property Monitors, which is owned by Fairfax, believes prices rose 1.6 per cent in the three-month period. Residex, on the other hand, estimates values fell 1.9 per cent… ("Con­fused about the mar­ket? We all are“, The Age April 29)

I’m happy to ignore these numbers—and even more so the spin doc­tor­ing that goes with them. The ABS num­bers are in, and they show a 1.1% national fall over the March quar­ter. Syd­ney house prices fell 1.8% accord­ing to the ABS, whereas Aus­tralian Prop­erty Mon­i­tor alleged they rose 1.4%—the lat­ter being the basis for Andrew “Always Look On the Bright Side” Wilson’s lat­est piece “Con­fi­dence rises as prices bounce back” (SMH April 28). Yeah, right.

Aus­tralian House prices have now fallen 6.1% from their peak, and have been falling for 21 months, which is the longest down­turn in nom­i­nal prices ever recorded by the ABS—the pre­vi­ous longest being the 12 months from the begin­ning of the GFC (which was ter­mi­nated by my favourite gov­ern­ment pol­icy of all time, the First Home Ven­dors Boost).

Fig­ure 1: Nom­i­nal house prices have fallen 6.1% since June 2010

I’m sure the usual spruik­ers will come out with why this is now the bot­tom, and it’s a good time to buy, and there wasn’t an Aus­tralian house price bub­ble, and the short­age will drive up prices, and… So let’s put the cur­rent data in the con­text of the burst­ing of acknowl­edged over­seas house price bubbles.

Firstly the infla­tion adjusted data: in real terms, house prices have now fallen 10% from their June 2010 peak, and are back to a level they first reached in late 2007.

Fig­ure 2: Real house prices have fallen 10% since June 2010

Now let’s com­pare the Aus­tralian expe­ri­ence to date with the Japan­ese and US experiences—where no-one, not even Alan Greenspan, denies that there was a hous­ing bub­ble. The Japan­ese bub­ble peaked in June 1991; the US bub­ble peaked in in May 2006; and Aus­tralian house prices peaked in June 2010. Fig­ure 3 shows the three declines from the peak, and while the Aus­tralian expe­ri­ence so far is clearly bet­ter than the USA’s, it’s only a whisker bet­ter than the Japan­ese expe­ri­ence to the same date after the peak.

Fig­ure 3: Com­par­ing Japan­ese, US and Aus­tralian house prices from their peaks

Any­one who takes com­fort from that should also con­sider the longer term perspective—see Fig­ure 4.

Fig­ure 4: The long term pic­ture for Japan and the USA

The motive force behind Australia’s bub­ble was the same as in the USA and Japan: accel­er­at­ing debt drove ris­ing house prices dur­ing the boom. Now in both those coun­tries, decel­er­at­ing debt is dri­ving house prices down. The same pat­tern applies in Australia—see Fig­ure 5 .

Fig­ure 5: Mort­gage accel­er­a­tion dri­ves change in house prices

Don’t take heart from the uptick in accel­er­a­tion at the end of the series there: for that to be sus­tained into the future, ulti­mately Aus­tralian mort­gage debt would need to start ris­ing (com­pared to GDP). But mort­gage debt grew more rapidly here and reached a higher peak than in the USA (see Fig­ure 6); the odds that it will rise again are slim.

Fig­ure 6: Aus­tralian mort­gage debt exceeded the USA’s

And even though the actual level of mort­gage debt is still ris­ing, it’s doing so at the slow­est rate ever recorded by the RBA (see Fig­ure 7).

Fig­ure 7: Annual growth in mort­gage debt (with series break in 1991)

The odds are that the rate of decline will accel­er­ate in the next year—since as Leith van Onse­len pointed out yes­ter­day, many Baby Boomers are rely­ing on ris­ing house prices to secure their retire­ments. Now that house prices are falling, and have been doing so for almost 2 years, many of these Boomers—74% of whom earn less than $80,000 a year, with the aver­age investor los­ing over $9,000 a year on these “investments”—could decide to get out rather than con­tinue to absorb losses. The unwind­ing of their lever­aged posi­tions could push mort­gage growth below zero, and of course accel­er­ate the house price fall.