Correction to “What House Price Falls Really Look Like”

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Who says Twit­ter is just fluff? Well, I did before Max Keis­er and Sta­cy Her­bert per­suad­ed me to sign up. I’ve since real­ized that it’s rather like a mod­ern ver­sion of the old-fash­ioned news wire ser­vices for the pub­lic. Choose who to fol­low, and they’ll keep you updat­ed on things that inter­est you. If that hap­pens to be Kylie’s waist­line or Kurt’s fideli­ty, that’s your prob­lem, not Twit­ter’s.

One Tweet that I received told me some­thing that did­n’t seem right from my own data: that CPI-deflat­ed US house prices were now with­in reach of their long-term aver­age (i.e., 1890 till now). From my figures—which I had cob­bled togeth­er from Robert Shiller’s first edi­tion “Irra­tional Exu­ber­ance” data sup­ple­ment­ed by the S&P Case-Shiller Index, adjust­ed for inflation—prices had fall­en a lot, but still had a long way to go.

So I went back to Robert Shiller’s home page, checked his updat­ed data, and sure enough—real US house prices were now “only” 15% over their long term aver­age.

Though this cer­tain­ly does­n’t mean that house price falls in the US are almost over—having over­shot by so much, there is every prospect of them going well below the long term aver­age before they stop falling, espe­cial­ly giv­en the unprece­dent­ed mort­gage debt from which house­holds are still delever­ag­ing. But it means the day that real US house prices stop falling is clos­er than I thought before Twit­ter alert­ed me to this prob­lem with my data.

The chart below shows the dif­fer­ence between my old series and the new one—which is tak­en with­out mod­i­fi­ca­tion from Robert Shiller’s data page.

Fig­ure 1: Shiller USA Real House Price Data

There revi­sion has intrigu­ing con­se­quences for the Aus­tralian mar­ket. My Aus­tralian data comes from cob­bling togeth­er Nigel Sta­ple­don’s PhD research into long term real house prices from the late 1800s to the ABS data which began in 1986—and it too is hard­ly data of the stan­dard that the phys­i­cal sci­ences expect. But that said, the Aus­tralian house price bub­ble appears even more extreme: 3 times the long term aver­age, ver­sus “only” twice the long term aver­age when Greenspan told Con­gress that there was no bub­ble in US house prices.

And of course, the dom­i­nant view in Aus­tralia is that there is no house price bub­ble here. Yeah, right.

Fig­ure 2: Long term real house prices

Even when you con­sid­er just the very brief time series that the ABS has assem­bled, Aus­trali­a’s bub­ble dwarfs the Amer­i­can one. Real house prices peaked at 2.6 times the lev­el of 1986, where­as the US mar­ket peaked at 1.7 times the 1986 lev­el.

Fig­ure 3: Real House Price Indices from 1986-Now

Though US house prices have now returned to their 1986 lev­el, mort­gage debt has not. All the “froth” pumped into the mar­ket by 30 years of ris­ing mort­gage debt has now gone, but the lev­el of mort­gage debt is far high­er.

Fig­ure 4: Mort­gage debt lev­els

This is why house prices could fall a lot fur­ther in the USA—even though they’re now a rel­a­tive hair’s breadth from the long term aver­age. As I’ve argued reg­u­lar­ly here, the real dri­ver of change in asset prices is the accel­er­a­tion of debt. I won’t go into the details here—I’m rush­ing to get this post up before I am on a pan­el today at the Aus­tralian Prop­er­ty Coun­cil’s annu­al gabfest—but I’ll let the next two charts speak for them­selves.

Fig­ure 5: Cor­re­la­tion of mort­gage accel­er­a­tion and house price changes, USA

Fig­ure 6: Cor­re­la­tion of mort­gage accel­er­a­tion and house price changes, Aus­tralia

Final­ly, the chart I pub­lished some weeks back com­par­ing house price falls from the peaks in the USA, Japan and Aus­tralia used the old data, and made Aus­trali­a’s rate of decline from its June 2010 peak appear com­pa­ra­ble to the slow pace of Japan­ese decline. This revised data indi­cates that our rate of price fall is more com­pa­ra­ble to the US pat­tern.

Fig­ure 7: House price falls from peak–the ear­ly years

How far could Aus­tralian house prices go down? Giv­en what has hap­pened to US and Japan­ese prices, the sim­plest answer is “a lot more than most of the peo­ple in the audi­ence here seem to expect”.

Fig­ure 8: House price falls from peak–the mid­dle years

Fig­ure 9: House price falls from peak–the long term

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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.