Australian House Prices Update June 2012

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Accord­ing to the ABS series, house prices rose 0.5% in nom­i­nal terms in the June quar­ter, and were flat in real terms.

Rel­a­tive to the peak val­ue of the index (in June 2010), the index is now 4.7% down in nom­i­nal terms, and just over 9% down in real terms. The ABS revised the date for sev­er­al of the ear­li­er quar­ters, with the result that what appeared to have been a 7‑quar­ter-long fall in real house prices from the June 2010 peak now includes one quar­ter of ris­ing prices—the Decem­ber 2010 quar­ter.

Before this quar­ter’s data came out, Aus­trali­a’s rate of price decline from its peak lay between the US and Japan­ese expe­ri­ences; now it is smack in line with the slow bleed of Japan­ese prices, but nowhere near the decline expe­ri­enced in the USA.

By this point—two years after house prices peaked—US prices were down by just over 20 per cent. Instead, Aus­tralian prices are down by just over 9 per cent, which is indis­tin­guish­able from the Japan­ese fall of just under 8.9 per cent at the same point in its house price defla­tion.

So does this increase mean that the trend of falling prices in is now over, and house price growth will resume? No, no more than did the slight increase in real prices back in Decem­ber 2010 (which we are now only aware of cour­tesy of a revi­sion of ABS data). What it means is that the trend for decel­er­at­ing mort­gage debt has tem­porar­i­ly reversed.

I’ve con­sis­tent­ly argued that what real­ly dri­ves change in house prices is accel­er­at­ing mort­gage debt, and though this uptick in prices did sur­prise me, it was dri­ven by that same fac­tor: mort­gage debt accel­er­at­ed over the most recent months, even though the rate of growth of mort­gage debt con­tin­ued to decline.

First, let’s put Aus­trali­a’s mort­gage debt in con­text by com­par­ing it to the USA’s. The growth in mort­gage debt was much faster here than in the USA, even while the media focus was on the “Sub­prime Bub­ble” in the USA. When that bub­ble burst, both Amer­i­can house prices and mort­gage debt went into reverse. In Aus­tralia, mort­gage debt peaked below the USA’s lev­el in mid-2008, but then it took off again in response to the First Home Ven­dors Boost, and final­ly reached 87% of GDP—exceeding the US max­i­mum of 86%.

Since then it has fall­en, but much more grad­u­al­ly than has the USA’s. Aus­trali­a’s mort­gage debt to GDP ratio is now 85% of GDP—versus the US lev­el of 71%. And with the most recent data, that ratio has actu­al­ly risen very slight­ly.

There are many rea­sons for that—plenty of which are asso­ci­at­ed with State gov­ern­ments try­ing to revive the prop­er­ty market—but what­ev­er the caus­es, the result is that mort­gage debt has tem­porar­i­ly reversed its falling trend. Even though mort­gage growth in CPI-deflat­ed terms is at his­toric lows, it is grow­ing more quick­ly now than it was at the end of 2012. It has picked up from 2% p.a. at the end of 2012 to almost 4% p.a. now (though this is par­tial­ly a side-effect of recent defla­tion).

Mort­gage accel­er­a­tion has thus risen, and though my mea­sure of this is still negative—the change in the change in mort­gage debt over a year, divid­ed by GDP at the mid­point of that year—it has start­ed to rise. This ris­ing accel­er­a­tion in turn has fed through to ris­ing prices over the last few months—though prices are still falling over an annu­al time frame.

The cor­re­la­tion of mort­gage debt accel­er­a­tion and house price change isn’t as strong—or as uni-directional—as the US data, which I expect in part reflects the extend to which the prop­er­ty mar­ket has been a play­ground of gov­ern­ment pol­i­cy over here—First Home Ven­dors Boosts, Neg­a­tive Gear­ing, cuts to Cap­i­tal Gains Tax that favour spec­u­la­tion over work, etc.—compared to the USA.

But the rela­tion­ship has strength­ened in Aus­tralia as mort­gage debt has become larg­er rel­a­tive to GDP, and the cor­re­la­tion in Aus­tralia is par­tic­u­lar­ly marked since the GFC began. The uptick in the mort­gage accel­er­a­tor since the begin­ning of 2012 is matched by the turn­around in the rate of fall of real house prices (on an annu­al basis) and the flat­line in the most recent quar­ter­ly data.

As I’ve argued else­where, this cor­re­la­tion is based on a causal link: in a cred­it-dri­ven econ­o­my, aggre­gate demand is income plus the change in debt, and this is expend­ed on both goods and ser­vices and assets. The change in aggre­gate demand is thus the change in income plus the accel­er­a­tion of debt, and this then is the main fac­tor dri­ving change in asset prices (I’ve explained this in more detail in oth­er posts—see here and here—and I’ll pro­vide an empir­i­cal and ana­lyt­ic proof of this argu­ment in anoth­er post soon—this is a gen­er­al issue of eco­nom­ics and belongs in a post on that top­ic, rather than buried in one on Aus­tralian house prices).

So the bot­tom line is that Aus­tralian house prices are falling more slow­ly than Amer­i­ca’s because Aus­tralian con­sumers are delever­ag­ing much more slow­ly than their US coun­ter­parts.

There are sev­er­al obvi­ous fac­tors that could explain why:

• Aus­tralian mort­gages are main­ly float­ing rate, so rate cuts by the RBA very rapid­ly reduce the debt ser­vic­ing bur­den. In the USA on the oth­er hand, mort­gages are fixed rate;

• Gov­ern­ment efforts to keep the prop­er­ty Aspidis­tra fly­ing—rang­ing from the hardy peren­ni­als of the Fed­er­al First Home Ven­dor Grant, Neg­a­tive Gear­ing, set­ting Cap­i­tal Gains Tax at half the Income Tax rate and exempt­ing the fam­i­ly home, to State-based sales tax exemp­tions and First Home Ven­dor Schemes—have suc­ceed­ed to some degree in entic­ing new entrants; and (irony alert)

• There is no Aus­tralian house price bub­ble.

Can Aus­tralian house­holds be expect­ed to not mere­ly con­tin­ue not delever­ag­ing, but actu­al­ly start to lever up again (because accel­er­at­ing mort­gage debt is need­ed for house prices to actu­al­ly rise faster than con­sumer prices) from cur­rent debt lev­els?

The “good news” is that it’s pos­si­ble to car­ry more debt than Aus­tralian house­holds cur­rent­ly do, as the Brits have shown (and to go side­ways with debt for some years, as the Cana­di­ans have shown). The bad news is that the Brits have already delev­ered to the Aus­tralian house­hold debt to GDP ratio, and this delever­ag­ing is hav­ing the same effect on the UK econ­o­my that we’ve seen in the USA.

The bad news is that this requires Aus­tralians to con­tin­ue putting up with very high debt ser­vic­ing costs rel­a­tive to the rest of the world.

Of course, even after recent cuts to inter­est rates, the RBA has plen­ty of room to cut rates further—and this could act to encour­age Aus­tralians to con­tin­ue not lever­ag­ing.

But to cause a sus­tained rise in house prices, Aus­tralians would need to not mere­ly not delever, but to lever up from the cur­rent his­tor­i­cal­ly high debt levels—since it takes accel­er­at­ing mort­gage debt to cause house prices to rise. For per­son­al rea­sons today (I’m hav­ing an arthro­scop­ic knee oper­a­tion in 2 hours’ time) I’ll have to leave the detail about why I just don’t see that hap­pen­ing for anoth­er post.