If anyone is misreading the article Mr Schwab is referring to, it is Mr Gans. From the article

For a change, the winners in the Melbourne market were in the outer suburbs. The median price of suburbs such as Broadmeadows and Narre Warren shot up by more than a fifth while blue-chip areas such as Armadale, Canterbury and Malvern were walloped, dropping by more than a third in some cases.

Now if it were a true median house price that was being measured then fair enough. But of traded houses? This is misleading.

But I could be wrong. A median decline means that half of ALL OF THE HOUSES in Malvern have decline by MORE THAN 32.5%. So, could someone please name the address of just one of these? (Oh and while you are at it, find ONE in St Kilda that increased by over 40% in the last year).

You are missing something. Let us rewind the clock back to early to mid-2008 when RBA rates had hit their peak.

1. Interest rates were at benign levels. The OCR was 7.25%, and mortgage rates had not hit double digits;
2. Unemployment was at or around generational lows; and
3. Inflation was a problem, but wages were rising as well.

Compared to the early 90s recession, that seems like a recipe for a boom. Yet default rates reached highs last seen in the 90s recession.

What is missing? The level of debt.

Specifically, the level of debt held by households is significantly higher than it was in 1990-1992. This makes households more sensitive to minor macroeconomic changes than they were during any previous modern downturn.

Therefore, you cannot compare like with like. If unemployment rises to the same degree it did in the 90s, the magnitude of the effect will be greater. The cash rate won’t matter. Government stimulatory attempts won’t matter. Not until the debt burden is reduced.

Further to that, those made unemployed, but eventually rehired, will not be the same economic agents they were when they had job security. So you will not see major economic purchases, financed by credit, made in great number. Financial decisions will have changed.

The prospect for deleveraging is still quite high, even with the RBA and governments actions.

While this can be managed by lower interest rates - and the RBA certainly makes this case - this transfers an extraordinarily large risk and debt burden to the household sector. A sector that recent evidence demonstrates is perhaps not as well-equipped to deal with the risk as many thought. A macroeconomic shock - such as an oil spike - leaves the household unable to deal with the risks, and it may default.

This is why we saw a substantial rise in default rates earlier this year to near record levels, despite interest rates being relatively benign (as compared to the IRs in the late 80s) and unemployment being at generational lows. Therefore you cannot compare the unemployment shock of the early 90s with one that occurs today, precisely because the levels of household debt and burden of servicing it is that much higher today.

Furthermore, the effect of defaults is more pronounced in a highly leveraged economy. As reported on Crikey by Michael Pascoe in 2007, the subprime crisis was nothing to worry about, as default rates on mortgages were around the long-term average. Nothing special or scary about them.

But I think there is a stronger point that median house prices are not really something that can be used to established a claim that there is a Ponzi scheme at work. According to the same data, St Kilda achieve a 40% median price increase in the same period. So the scheme was fooling Malvern buyers but not yet St Kilda ones? There is no evidence of a Ponzi scheme at work and no evidence of a house bubble.

On my interests, I have no financial interest in higher house prices and am an advisor to Rismark only. What interest is there to be declared? I own a house. Did anyone else declare whether they did or did not.

Your analysis might be fine other than the claim about default rates being wrong.

If you refer to this recent speech by the RBA you will see that as at August 2008 90 day default rates on Australian home loans were still lower than they were in the mid 1990s:

http://www.rba.gov.au/Speeches/2008/sp_dg_301008.html

One would be hard pressed to identify a more dire historical precedent for rising levels of unemployment. Schwab ignores both this empirical evidence and my discussion of it.

Macquarie Bank’s Rory Robertson has also commented, “Average home prices in Australia remained remarkably stable in the early 1990s - actually rising modestly in nominal terms - in the face of huge job losses, and unemployment rising from 6% to 11%. Then as now, the prices of many multi-million-dollar homes in flash suburbs fell sharply relative to average prices.”

Also, there is a * on the data cautioning its unreliability on the basis of the low number of sales. Malvern’s problem is not a ton of speculative trading but too few trades.

I am talking about broad medians. The median Australian house costs eight average wage years. It was not like this in generations previously. This is not the case in most other countries.

http://data1.reiv.com.au/trendchart/default.aspx

Mr Schwab is also correct with his figure for Armadale.

I would suppose that the article as it appeared in The Age (also known as the REIV’s mouthpiece) had an accompanying table based on data provided by the REIV, which is not reproduced online.

Care to withdraw your statement and apologise, Mr Gans?

To quote Chris Joye “Australian house prices actually appreciated during this three year period by a compound annual growth rate of 2% per annum (ie, over 1990, 1991 and 1992).”

Who are we supposed to believe? Are you both right? Was inflation really high enough in the early 90’s to make both of you right?

In my recent article published by Business Spectator, I explicitly state that “there has been much talk of late about the impact of rising levels of unemployment on house prices. With Australian dwelling prices off only 1-2 percent in the first 10-11 months of 2008 the doomsday scenarios have not materialised.”

“It is sometimes forgotten that just like all other asset prices, house prices are determined by the intersection between demand and supply…The supply-side is pretty easy to deal with. We know with certainty that current Australian housing starts are near historic lows of around 140,000 properties per annum. Indeed, housing starts in NSW, which is Australia’s biggest housing market, are now at their lowest level since 1958…Consensus estimates of housing demand sit around 180,000 to 190,000 properties per annum (with the Commonwealth Treasury on the high-side). There is, therefore, a significant disconnect between the demand for, and supply of, housing that is growing at around 40-50,000 homes per annum.

“Macquarie Bank’s Rory Robertson and I have both previously noted that the most powerful historical precedent that we have for examining the influence on house prices of dramatic increases in unemployment is the 1991 recession.” [Mr Schwab completely ignores this analysis.]

Continued…