Wading through the housing furphies
Even among the accepted data there is much smoke and mirrors in the property game. Figuring out what figures to trust is the key to understanding Australia's housing bubble.
Chris Vedelago wrote 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 per cent national fall over the March quarter. Sydney house prices fell 1.8 per cent according to the ABS, whereas Australian Property Monitor alleged they rose 1.4 per cent – the latter being the basis for Andrew "Always Look On the Bright Side” Wilson’s latest piece "Confidence rises as prices bounce back” (The Sydney Morning Herald, April 28). Yeah, right.
Australian house prices have now fallen 6.1 per cent 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 per cent 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 per cent 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 per cent 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 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 US’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 US 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 US (see figure 6); the odds that it will rise again are slim.
Figure 6: Australian mortgage debt exceeded the US’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 two years, many of these boomers – 74 per cent of whom earn less than $80,000 a year, with the average investor losing over $9000 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.
Steve Keen is a professor of economics and finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.