Australian House Prices down 10% from Peak

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There are sev­er­al providers of sta­tis­tics on Aus­tralian house prices, but only one that does­n’t have a vest­ed inter­est in the direc­tion house prices actu­al­ly move in: the Aus­tralian Bureau of Sta­tis­tics. So despite the crit­i­cisms of this series—that it’s based on detached dwellings only, based on medi­an sales data, too infre­quent, not adjust­ed for “hedo­nic” dif­fer­ences between hous­es, etc., it’s the only one I trust.

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Chris Vede­la­go had 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% nation­al fall over the March quar­ter. Syd­ney house prices fell 1.8% accord­ing to the ABS, where­as Aus­tralian Prop­er­ty Mon­i­tor alleged they rose 1.4%—the lat­ter being the basis for Andrew “Always Look On the Bright Side” Wilson’s lat­est piece “Con­fi­dence ris­es as prices bounce back” (SMH April 28). Yeah, right.

Aus­tralian House prices have now fall­en 6.1% 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% 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% 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% 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 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 USA’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 USA 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 USA (see Fig­ure 6); the odds that it will rise again are slim.

Fig­ure 6: Aus­tralian mort­gage debt exceed­ed the USA’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 2 years, many of these Boomers—74% of whom earn less than $80,000 a year, with the aver­age investor los­ing over $9,000 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.