The future of Australian property prices

[wayneL]

hello,

why not get rid of them both? $0 grant $0 stamp duty

let everyone pay tax for any short fall, thats the socialist model everyone wants here,

Errrr... 0% grant and 0% stamp duty would be Austrian School laissez faire economic policy, not Socialism. I support that wholeheartedly. Just cut a bit of the huge amount of unnecessary spending to plug the hole.

...lower prices on RE so all can enjoy, let the bludger at your office get a free ride, the guy always hiding in the toilet or the one on 10 smoke breaks (+lunch and morning tea),

its like public(free) housing, you have to contribute

thankyou
professor robots

Ahhh here the non-sequitur rant starts. Correct valuation of property has nothing to do with smokos etc. It is simply about value.

 

[robots]

hello,
Just joining in with everybody else WayneL, its all rant too from the gloom groupies

Most will take the rant and the increasing property prices and rents

Me and a few others are like watching a DrDoom interview, plenty of rant but gets it right
Thankyou
Robots

 

[sinner]

Interesting that the ratio of household income to interest payments is missing from that analysis.

http://www.rba.gov.au/publications/fsr/2010/mar/graphs/graph-61.html

Reduced debt servicing costs my foot.

Yeah thanks Dr Smith.

Property bulls are going to be quoting the DepGov of the RBA for years to come "but Battellino said we are all good!". Why didn't they listen to the RBA Gov who said it's ridiculous to expect capital gains like we have seen for essentially no productive input (sic)?

I mean, come on property bulls, do you really believe your "50% gain since the crisis started" to be based on any sort of fundamental factor other than a huge expansion in household debt which was funded only by the ability of our banks to fund debt on the foreign money markets - an ability that has increased severalfold since the 2008 Treasury guarantee of this debt.

The numbers flat out disagree with the DepGov. All he has proven really is that those earning more are taking on more debt than everyone else. Supposed to be comforting? Even worse is that it all hinges on this assumption that China will just keep our standard of living up forever.

Good luck with that.

 

[CamKawa]

Building Approvals, Australia, May 2010

These figures have just been released by the ABS. Here you can see graphically how house prices are dying.

 

[Beej]

Yeah thanks Dr Smith.

Property bulls are going to be quoting the DepGov of the RBA for years to come "but Battellino said we are all good!". Why didn't they listen to the RBA Gov who said it's ridiculous to expect capital gains like we have seen for essentially no productive input (sic)?

I mean, come on property bulls, do you really believe your "50% gain since the crisis started" to be based on any sort of fundamental factor other than a huge expansion in household debt which was funded only by the ability of our banks to fund debt on the foreign money markets - an ability that has increased severalfold since the 2008 Treasury guarantee of this debt.

You never ask yourself "why has household debt expanded"?? Housing market bears typically have a view that fundamentally there is some easy to calculate, deterministic intrinsic value to housing across the board, like "prices should always be 3 x average income" etc. And that if prices in some areas go up it must be because of some artificial debt/monetary based inflation. But you never think that people are actually borrowing that money to get something they want (demand) that has limited supply!

No-one holds a gun to peoples heads and makes them go to the bank and borrow to the max to buy a house they like! Or to decide to leverage into a property investment for their long term future retirement? Houses are important to most people, they represent the centre of their lifestyle and standard of living (in the OO case), so they pay what they need to in the market to get what they want, or what they can afford. If this underlying demand was removed then prices would fall, regardless of the availability of credit. Likewise if demand remains strong and supply remains limited/constrained then prices will rise up to the limit of local/demographic affordability in every given area that is subject to that high demand/limited supply. At this point prices are sustained/driven by growth in household income, as we have been seeing in Sydney for the past 5-6 years.

And of course disposable income growth is typically ignored by housing bears. As pointed out in an above post, since 2003 the ratio of the national city median house price to disposable household income has remained pretty much constant, meaning that the bulk of price rises we have seen since then have been driven primarily by household income growth being used to satisfy the above mentioned demand.

Sinner, all this is why posters with view like yours and CamKawas (and many others, some still here, some long gone) etc etc, who have been saying the same things for the 3+ years I have been a member of these boards, seem to mostly get it wrong when it comes to calling the direction of the housing market. You mis-understand and mis-interpret the fundamentals at play, just like Prof Steve Keen famously did as well in 2008, and had to walk to the top of Mt Kosciusko as a result!

I know I'm not going to change your mind on this or your views, but I've put it out there anyway!

The numbers flat out disagree with the DepGov. All he has proven really is that those earning more are taking on more debt than everyone else. Supposed to be comforting? Even worse is that it all hinges on this assumption that China will just keep our standard of living up forever.

No, what he has shown is that the there is no great sub-prime style systemic risk ala the US with Australia's household debt structure. Ie the bulk of the growth in debt has been taken on by high income earning households in line with the real growth in their incomes (which have exceeded CPI by a large margin for the past decade).

Yes the AU economy is currently experiencing some good conditions in part due to the ongoing rapid growth of China, but we have done Ok in the past without that as well, plus there is India yet to move into high gear on that front - over-all much more upside risk than downside in terms of our dependence on the large developing economies IMO.

These figures have just been released by the ABS. Here you can see graphically how house prices are dying.

What do the rate of new housing starts have to do with house prices do you thnik? Hint - less new houses being built (due to systemic/artificial constraints on land release and new developments) + high demand for housing = a greater demand/supply imbalance = upwards pressure on prices. So I'm not really sure what point you are trying to make with that indicator?

Also RBA released finance data yesterday which showed that private housing finance grew in April and May, after it had been falling for a few months prior to that. Couple this with reasonable auction clearance rates and a fairly constant numbers of properties for sale (indicated by RP-Data stats posted above), and conditions are still set for steady to slightly rising prices in most areas. I think Melbourne has to cool some more, Perth is already falling a bit and may have more to go, so Brisbane, Sydney, Adelaide etc will see that moderate growth going forward from here IMO. The risk is some major shock resulting in rapidly rising unemployment, defaults etc.

Cheers,

Beej

 

[drsmith]

You never ask yourself "why has household debt expanded"??

Household debt has expanded due to the availability of cheap credit and a false sense of security that comes with a long period or relatively stable economic expansion.

More to the point, household debt has actually increased beyond the availability of cheap credit as noted by the long term upward trend in interest payments relative to household income.

The fallout from a shock to household income and/or credit costs would therefore be significantly amplified.

 

[sinner]

You never ask yourself "why has household debt expanded"?? Housing market bears typically have a view that fundamentally there is some easy to calculate, deterministic intrinsic value to housing across the board, like "prices should always be 3 x average income" etc. And that if prices in some areas go up it must be because of some artificial debt/monetary based inflation. But you never think that people are actually borrowing that money to get something they want (demand) that has limited supply!

I think you've got it all backwards mate.

1. I am not a property bear, to me this is not an issue of saying "ha ha housing is going down I was right", to me this is a fundamental issue of our economy. If anything I am a "reckless debt" bear.
2. Easy to calculate, deterministic intrinsic value equations show that we are historically overvalued, that is to say, we can quantify house prices as overvalued in relation to previous housing cycle price rules that have held true for extremely long durations of time. If you believe I said that house prices should be 3x average income simply because they were then you are just not listening.
3. Re: "must be because of some artificial debt inflation" I actually already addressed this issue in a previous post which quantifies the factors influencing housing prices. So no, you are wrong, I did factor demand, and no, it doesn't fit. What does happen to fit however, is increasing house prices based on increasing availability of "cheap credit".

No-one holds a gun to peoples heads and makes them go to the bank and borrow to the max to buy a house they like! Or to decide to leverage into a property investment for their long term future retirement? Houses are important to most people, they represent the centre of their lifestyle and standard of living (in the OO case), so they pay what they need to in the market to get what they want, or what they can afford.

Look mate, again, don't get me wrong. I am not a property bear. My issue is that rampant speculation in property as well as intervention by the Government into property markets has removed the ability of a large chunk of society to obtain something "important to most people" or "what they need" for anything resembling a historically reasonable price. Our definition of "historically reasonable" floats using measures such as the one you disparaged above so as to take into account the difference between contemporary and historically factors of influence on housing prices.

I take issue here as both someone to whom owner occupied housing of the majority of citizens of this country is important, and as a tax paying citizen who is being butt-raped to support these huge and most likely to b proved completely ineffectual distortions in normal supply and demand by the Government such as: 50% CGT, negative gearing, FHOG, state discounts on stamp duty, etc.

If this underlying demand was removed then prices would fall, regardless of the availability of credit. Likewise if demand remains strong and supply remains limited/constrained then prices will rise up to the limit of local/demographic affordability in every given area that is subject to that high demand/limited supply.

Thanks for the lesson mate, I had no idea about fundamental supply and demand ...but I do find it ironic you accuse "property bears" of not looking at the whole picture but you seem to ignore the availability of credit as a factor which influences demand and supply itself here. Certainly you aren't claiming everyone is buying their house in cash now? You must acknowledge credit, the cost and availability thereof are major if not the most major factors affecting supply and demand in housing.

At this point prices are sustained/driven by growth in household income, as we have been seeing in Sydney for the past 5-6 years.

Usually when someone makes a claim like this, it is a good idea to take them with a grain of salt unless they provide a reference.

In fact, I have actually shown in previous posts that the rise in house prices has not been correlated to a rise in household income but rather a rise in household debt. Yes, there has been a rise in household income, but certainly not enough to justify the increases in house prices without a large amount of leverage applied by the average household! Just look at the chart, you will see what I mean.

And of course disposable income growth is typically ignored by housing bears. As pointed out in an above post, since 2003 the ratio of the national city median house price to disposable household income has remained pretty much constant, meaning that the bulk of price rises we have seen since then have been driven primarily by household income growth being used to satisfy the above mentioned demand.

Surely you jest? Any housing bear or bull worth their salt would of course ignore the ratio "house price to disposable household income" because that sort of ratio is logically incorrect. Disposable income does not have a causal and quantifiable effect on house prices. However, property bulls and bears worth their salt do not ignore the ratio "debt servicing to disposable income", which in fact drsmith posted a good chart of within the last 48 hours:
http://www.rba.gov.au/publications/fsr/2010/mar/graphs/graph-61.html

Because guess what, disposable income does have a causal and quantifiable effect on ability to service debt.

As you can plainly see, the story told by that chart is quite different.

Sinner, all this is why posters with view like yours and CamKawas (and many others, some still here, some long gone) etc etc, who have been saying the same things for the 3+ years I have been a member of these boards, seem to mostly get it wrong when it comes to calling the direction of the housing market. You mis-understand and mis-interpret the fundamentals at play, just like Prof Steve Keen famously did as well in 2008, and had to walk to the top of Mt Kosciusko as a result!

You are the one who gets it wrong Beej. I am not salivating over the idea of a property market crash. However I also don't share your "everything is just fine here, nothing to see, move along" type view. My concern on this topic is with the welfare of a country as a whole. If a crash came I would say "good, it is the one we had to have, now maybe we can go about things in a sustainable way".

If you can prove that Steve Keen lost his bet for any other reason than a huge Government intervention into the property market then I will probably offer to do the walk myself! As it stands, me and you, the Australian taxpayer who now (involuntarily, in my case) guarantees debt on the foreign money markets who have caused Steve Keen to lose his bet. Certainly not any misunderstanding or misinterpreting of fundamentals on his part.

If you believe the guarantee is just a small inconsequential thing, you can look at say how much funding the Big 4 banks were able to churn out post Sep08 but pre guarantee and other countries like Ireland who experienced huge capital inflows the day they instituted guarantees. I am making the argument here that it is the Australian taxpayer guarantee which has allowed banks to continue funding debt at levels even exceeding the financial crisis which has allowed property prices to remain inflated against historical measures. Otherwise we would be in the same funding ****hole as all those European banks right now.

I know I'm not going to change your mind on this or your views, but I've put it out there anyway!

It's obvious to me that your views on what my views are will be the thing that remains unchanged. You believe I am a rabid property bear, simply because I don't hold your view that all is well or will be well on the Australian economic landscape.

No, what he has shown is that the there is no great sub-prime style systemic risk ala the US with Australia's household debt structure. Ie the bulk of the growth in debt has been taken on by high income earning households in line with the real growth in their incomes (which have exceeded CPI by a large margin for the past decade).

Funny, I sort of remember Greenspan and Bernanke showing Congress there was no great sub-prime style systemic risk in 2007. They said, we have high demand and low supply, growth in debt will be fine, bla bla bla.

All that **** is fine, I mean, fine in the sense that it will continue working until it doesn't. Even if all is good here, Australia should still be looking at the US, UK and hell even NZ as an example of what occurs when politicians kick their cans down the road. But that is a huge if.

PS: Again please provide a reference for real growth in incomes exceeding CPI for the last say, 5 years.

Yes the AU economy is currently experiencing some good conditions in part due to the ongoing rapid growth of China, but we have done Ok in the past without that as well, plus there is India yet to move into high gear on that front - over-all much more upside risk than downside in terms of our dependence on the large developing economies IMO.

Historically it is easy to quantify that when we are in the periods of "in the past without that" housing prices have been constrained by normal supply/demand effects on the market. Please view previous posts where I have shown this. If you are arguing for a return to that, then hey buddy, join the club! But that also means a return to 3-4 median multiple housing OR a proportional decrease in our standard of living.

 

[robots]

hello,

what a top post Beej,just superb man

i wish i could present the data and situation in the line you do, Beej is a true master of the written word

Could all the property bears please stop pulling up S.Keen as a reference. All predictions/revelations/prophecies have proven false (and its not because of the government).

Banks loan money just like they have always done, they take deposits write loans.

And plenty of houses 3-4x average income for sale but most want to ignore those.

Thankyou
Associate Professor Robots

 

[sinner]

h
Banks loan money just like they have always done

Your statement intrigued me so I hit up the RBA website to see if banks were loaning "just like always"...this chart is generated using data from
http://www.rba.gov.au/statistics/tables/index.html
current till May.

 

[robots]

hello,

thats right, they writing loans from deposits they take, same as always

beautiful graph, nothing right or anything wrong with it, just a graph

thankyou
associate professor robots

 

[wayneL]

Meanwhile across the dutch, rare honesty from a gu'mint minister:



http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10655715

New Zealand's housing market is "still way overpriced" by international measures and is likely to struggle for some time, says Finance Minister Bill English...

...And New Zealand's housing market, along with Australia's, was overpriced by international measures, higher than China's, and would likely be "damp" for some time, he said....

 

[sinner]

hello,

thats right, they writing loans from deposits they take, same as always

beautiful graph, nothing right or anything wrong with it, just a graph

thankyou
associate professor robots

It is pretty beautiful, does it look familiar to you? To me it looks like the exponential equation y = e^x

 

[robots]

Your statement intrigued me so I hit up the RBA website to see if banks were loaning "just like always"...this chart is generated using data from
http://www.rba.gov.au/statistics/tables/index.html
current till May.

hello,

went to the link and yes a whole range of info, then i noticed above "this chart is made up using data from:"

i bet you pulled it from "bubblepedia" or "demographia" or "i'm a failed economist.com.au"

amazing

thankyou
associate professor robots

 

[Uncle Festivus]

It is pretty beautiful, does it look familiar to you? To me it looks like the exponential equation y = e^x

Or in simple terms - unsustainable?

Ditto to what Sinner has stated.

The 'Big 4' banks are now 'too big to fail' with their overexposure to domestic RE as per post several months ago. The only problem is that there is zip all the Oz gov can do about it when the crunch time arrives ie the undeliverable deposit insurance farce.

And arrive it will as we are a one horse country, putting all our eggs in the commodities basket, and then double up on our reliance on China (who's bubble is about to pop loudly).

An immigration policy shift from the new PM, consumers maxed out on debt etc

The signs that the peak in property prices has passed are there, only the timeline to a meaningful correction is in doubt because of continual artificial stimulus from the government from direct grants & subsidies to inequitable favourable property investing policies.

Stress is evident now, so what happens when interest rates get back to 'normal'? My view is that global events will dictate where IR go so the bias will be down, if only because things will deteriorate faster than expected?

RE might be seen as the last bastion of safe investing for growth but the forces at play globally will ensure that Oz RE will not escape from the coming turmoil. Ignore at your peril......

 

[sinner]

hello,

went to the link and yes a whole range of info, then i noticed above "this chart is made up using data from:"

i bet you pulled it from "bubblepedia" or "demographia" or "i'm a failed economist.com.au"

amazing

thankyou
associate professor robots

Surely the mods are recognising this as a troll?

As stated in the original post: I generated the chart from the RBA provided spreadsheet "Bank lending classified by sector" columns E and F, data current till May-10 using OpenOffice 3.0 anyone can generate the same chart using any spreadsheet program.

If it looks like a goddamn y=e^x that isn't my fault is it!

 

[Uncle Festivus]

Surely the mods are recognising this as a troll?

As stated in the original post: I generated the chart from the RBA provided spreadsheet "Bank lending classified by sector" columns E and F, data current till May-10 using OpenOffice 3.0 anyone can generate the same chart using any spreadsheet program.

If it looks like a goddamn y=e^x that isn't my fault is it!

He's an associate professor - when the formula doesn't work, diffuse and distract with sunshine & lollipops waffle? Must have regretted buying the last property at the peak though Robbie?

 

[drsmith]

I think it might be y = (2**(x+1))/2.

Whether it's assets or income, their increase is a power function but what is not sustainable in the long term is one increasing out of proportion with the other.

 

[robots]

hello,
No, i bought a home to live in with my rents covering the mortgage

A 210k joint to kick back at and grow vegetables, plant trees to attract the birds&possums

Could Bill M please post that article from when the last top was called
Thankyou
Professor robots

 

[Buckfont]

hello,
No, i bought a home to live in with my rents covering the mortgage

A 210k joint to kick back at and grow vegetables, plant trees to attract the birds&possums

Could Bill M please post that article from when the last top was called
Thankyou
Professor robots

robots, if you want to grow vegetables, attracting possums is the last thing you need. I have some here that you`re most welcome to.

Any fruit and vege grower will tell you the are the scourge.

A few mixed messages here.

 

[trainspotter]

Possum seen heading to robots house.

Still waiting for this earth shattering 20% plus similar to the Japanese and USA freefall in housing industry that the naysayers are predicting. Meanwhile speculation RBA tipped to drop rates as economy shows signs of weakening and rental income increasing in certain areas. GOSH ... all doom and gloom ! LOLOLOL.