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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.
