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Keen on Keane: the great population overhang story
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On Monday, Bernard Keane took me to task over my call that property prices will fall next year on the basis of the “we’re not building enough dwellings” argument, and uses ABS data comparing net immigration to total dwellings to support his case. If immigration was the sole cause of the need for new houses, and if we housed one immigrant per house, his chart might have some significance. But we have a bit of local population growth to account for as well, and of course the ratio of people per house is a bit lower than one. So a better comparison can be made by comparing the flow of new Australians to the flow of new dwellings, and seeing how that ratio rates against the ABS data that tells us that the average home has 2.54 occupants (the relevant ABS files are ABS8752 for dwellings and ABS310101). That comparison shows that we between 1985 and 2009, we constructed an average of 1 dwelling per 1.79 new Australians — well below the current average occupancy rate. On that data, we weren’t building too few dwellings for the past 25 years — we were building too many. Only since the financial crisis began has the rate of construction fallen below the level needed to maintain our current population to housing ratio.
If the “house prices are all driven by population” argument were correct, then we would have had falling house prices for the last 25 years — but we haven’t of course. Instead we’ve had rising house prices, and to explain it, we need to find a related factor that has been rising. That factor is gearing: the level of debt taken on by Australians to finance house purchases, and the ratio of borrowed money to house purchase prices. Rising leverage drove prices up in a Ponzi bubble, and falling leverage will drive them down again too. And that bet: I have probably lost the second half of it, when my interest was always in the first. I wasn’t trying to call the peak in housing — if Rory had suggested a bet on that front, that 131 on the ABS House Price Index was the peak, I would have refused it. Instead the bet was about how far house prices would fall from their peak, whatever that might be — in which case I said I expected a fall like Japan’s over a similar time frame: 40% over 10-15 years. For the sake of closure however, in late last year (2008) I said that I expected prices to be falling by late 2009, and if they weren’t — if in particular they broke the September 2008 peak of 131 — then I would walk, on condition that Rory also had to don his joggers if over the long term, my primary call was proved right. The Statute of Limitations on that is 2025 — 15 years from now. If we hadn’t had the First Home Vendors Boost (let’s call it what it is), then I very much doubt that I’d be facing a jog in the Snowy this year. But the Boost happened, it renewed the dying bubble, and I’ll probably have to walk next year. But before 2025 I expect a somewhat older Rory to also have to burn some foot leather on the Snowy track. |
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14 Comments
In 15 years nobody will care.
Adam, it would be amusing if Rudd and Swan had been reading your commentaries all along, with the result that they became self-preventing prophecies. I think it’s fairly clear that the rise and rise of speculation was neither accidental nor inevitable.
“That factor is gearing: the level of debt taken on by Australians to finance house purchases, and the ratio of borrowed money to house purchase prices. Rising leverage drove prices up in a Ponzi bubble, and falling leverage will drive them down again too. “
At the extreme of this, see the investment models pushed hard by property gurus like Ed Chan and Tony Melvin (described in their book “How to Legally Reduce Your Tax Without Losing Your Money”). Basically you get a second mortgage against the increased value of the ones you already own. You increase your property portfolio exponentially over time. You never sell a property. Since you’re negative gearing, you get to a point where the cost-yield gap is too much for your income to cover, so you just get another low-doc loan to cover your other loans. You get more low-doc loans to fund your lifestyle. You retire and buy a yacht or whatever using low-doc loans. This has become a very popular investment model. And it results in a reduced pool of properties ever being released back onto the market.
It’s that reduction of the turnover pool, not the reduction of total dwelling numbers, that brings about the undersupply. (Why else did Melvin and Chan write the book?). An increase in total dwellings could offset it, but governments ensure that doesn’t happen.
That does sound a little bit ‘Eddy Groves’ James, and most certainly not sustainable. I agree there are people out there who have made a ‘fortune’ by borrowing big, but it’s just that - borrowings. It’s not sutainable wealth, nor is it sound from a cashflow perspective.
I doubt many banks would be interested in funding such a model right now. Maybe a few years ago when the lenders were all in the same mind.
I think the most valid point you make is the reduction in turnover. If prices start to slide people will simply take their houses off the market and hold them (unless they are facing financial ruin). They will simply stop the turnover and halt the fall in prices. Not good news for the real estate agents and conveyancors but this will provide some support and stability.
It’s a prisoners’ dilemma. The first ones to sell will make an absolute bundle, even after CGT costs, at the expense of those who hold.
Adam is right about turnover. If prices fall, those that can afford to wait to sell their place will do just that. And with mortgage default rates at 0.6%, that’s the vast majority.
Maybe. But the property-investment clubs and communities spend a lot of money and time holding seminars to reassure investors that everything is OK and teach them how to manage the risks. Why?
I don’t know why Steve Keen bothers - his predictions about changes in the Oz housing market are about as accurate as Malcolm Mackerras’ election predictions. I don’t know why all this analysis of the housing market goes on. Australia has a growing population, growing economy, an increasing standard of living, home ownership is highly regarded in our society and investing in a rental property (with negative gearing) is seen as a good way to build assets. We are more highly geared because we want bigger, flashier homes and we can afford the repayments. Some people who over extend financially will get burned at times but the price of houses will keep trending upward and housing will always be a good long term investment. PS - no, I’m not in the real estate business. Alex
Bakerboy, prices would not have risen to current levels if it weren’t for “all this analysis”. They don’t just follow some law of physics. As John Howard said in his last election campaign, “It [the economy] doesn’t run on auto-pilot, you know”.
As for the economic benefits of upward trending far beyond inflation, see this abstract Future generations will pay the price
Steve Keen says: between 1985 and 2009, we constructed an average of 1 dwelling per 1.79 new Australians — well below the current average occupancy rate.
As we all know, the MARGINAL occupation rate of a house is well below the average of 2.54.
That is, the new houses being built are not aiming at the average number of people, but at a lower number bought about by changes in the demographics - more single occupancies etc. At least that’s my view, and probably the view of the developers who either respond to what the current (not the average) market wants, or sink.
The gradual reduction in number of persons per house is somewhat masked by the large existing pool of houses - it takes a lot to change the average.
Kris Sayce of the Daily Reckoning has pointed out recently that Tanya Plibersek’s ‘National Supply Council’ did another 3rd grader job estimating the size of the shortage — by adding up the homeless population, not people known for bidding on houses, and adding a couple of percent to the rental vacancy figure to make a comfortable allowance. Quite an astonishing methodology, and yet another demonstration that the Labor Party (the one that’s been betraying its origins and constituency since the 1980s) is simply not taking housing affordability or supply and demand figures seriously.
The reason housing is unaffordable and new building work has slowed down is essentially twofold: liberalised credit from the banks globally, finally culminating in the GFC, has caused people to bid up housing prices exorbitantly — it’s basically land value speculation, nothing to do with the cost of construction or the historical value of housing or even longterm ability to retire the debt. Inheritances are keeping the Ponzi scheme going a bit longer, then after that wages and salaries of the next generation simply aren’t going to cover the asking prices. The second reason is that neoliberal state governments, utilities and councils have taken the opportunity over the last decade of increasingly shifting new infrastructure costs directly to developers and therefore home buyers in new subdivisions, costs once borne by the entire community through taxation.
For accurate and comprehensive analysis of Australian housing news and all related national and international feeders into house prices, visit Global House Price Crash, Australian forum.
Is Steve saying a crash from peak to trough will occur somewhere between now and 2025 or not until 2025? That’s a long way off considering the initial prediction was 2009, and we know that the First Home Vendors Grant stopped the crash in it’s tracks, however, surely not for 15+ years?
Steve (if you’re reading the comments),
A query about the “dwelling construction” statistics… do these show the gross addition to the dwelling stock, or the net addition after subtracting demolitions?
My suspicion is that it’s the latter. I had a quick look at ABS8752.0 which is titled “construction activity”, and I couldn’t find anything about demolition, so I’m guessing your “new dwelling” statistics are not an exact measure of growth in the housing stock, since there will be some demolition activity simultaneously reducing the stock.
Is this likely to have much of an impact on trends you highlighted in your graph? Or is it the case that demolition activity is negligible…?
I couldn’t find any stats on the ABS site about either the total number of dwellings, or about the number of demolitions, to verify…
Thanks.
Hi StrangeJuice, if the inflation rate over the next 15 years is 3.5 per cent, and if property prices have flat nominal growth over that period, that will be a 40 per cent drop in real values.
For a change someone should acknowledge that the IPA has got one important thing right which doesn’t rate a mention from Steve Keen or the bloggers with one possible exception. The price and availablility of land has to be a big reason why all the money flowing into housing hasn’t resulted in greater supply and therefore lower house prices. The increase by the Victorian government in the urban growth zones may do something to counter this part of the problem. Government spending on the housing of the homeless (how much for each house for Aborigines in the outback which has a median life of about 8 years? Say $700,000) hasn’t got a great record and that is not likely to be a big contributor to stabilising the housing market.