Wall St was down 94 overnight, its biggest fall in a month, while the local market is down 66.
It’s the leverage, stupid
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So I’m walking to Kosciusko — now that the ABS Established House Price Index has cracked its September 2008 peak of 131 to reach an all-time high of 134.4 (as of September one year later). This renewed bubble reversed the trend of falling nominal house prices that had dropped the index to a low of 123.8 in March 2009. This level of price volatility — down 5.5% in six months, only to rise 8.5% in the subsequent six months — almost matches the stockmarket’s manic-depressive performance.
Though you’d see no mention of it if you only read Chris Joye (“Keen concedes defeat”), the main factor behind the revival of the bubble is what is formally known as the First-Home Owners Boost (FHOB), but what is more accurately described as the First-Home Vendors Boost. As at the end of September — the date of the latest ABS house price data — 171,000 applicants had received this $7000 bribe. Since many are couples, more than 1% of Australia’s population has leapt into the property market pool at the behest of a government stimulus. So how has a mere $1.2 billion injection of government money driven the average house price up by 8% in six months? By the “magic” of leverage: the typical First-Home Buyer (FHB) took that $7000 to the bank and leveraged it up to another $40,000-$50,000, which then was handed over to the First-Home Vendor (FHV) as cold, hard cash. The FHV then took that extra $40,000-$50,000 and leveraged it to an additional $200,000-$250,000, which meant that that new place that had been just out of reach before the FHOB, was now well within range. Competing with other lucky recipients of government and bank largesse, he drove up the price of that middle-to-upper tier house by an additional $100,000 or more. The aggregate impact of this government enticement into private debt was that Australian households reversed the deleveraging process that had begun in late 2008, and as a result the mortgage debt to GDP ratio, which had been falling, began to rise once more. The FHOB has led to Australians taking on an additional $50 billion of mortgage debt. That “demand” factor, far more than any other, is why I’ve lost the second half of Rory’s bet with me.
Normally I regard the ceteris paribus assumption of conventional economic theory as a cop-out — in a market economy everything is connected to everything else, and you can’t assume that, for example, a firm’s output can change without affecting the market price. But I think I’m entitled to ask the ceteris paribus question here: what would have happened to house prices had the government not spiked the market with the FHVB? I somehow doubt that Rory would be crowing today had that irresponsible policy move not been made.
In fact, there’s a good argument that we wouldn’t be having a property bubble here at all, were it not for the First-Home Buyers policy. I’m not one for making arguments solely on statistical correlations — I’m only too aware of the “correlation isn’t causation” argument — but I think I can also spot a smoking gun when I see one.
Before the FHB, though real house prices were rising, so was real household disposable income. Then add two dollops of the FHB — one its introduction as a “temporary” measure to get us over the shock of the GST in 2000, the other its doubling to boost the economy during the brief 2001 recession — and off go real house prices relative to real household disposable income. Last year, as the market starts to head back towards parity between house prices and incomes again, Rudd throws in another temporary doubling (of this temporary measure that is now almost a decade old), and off goes the house price bubble once more. In the main, I’ve been a critic of banking practices as the underlying cause of the global financial crisis. But I also believe that the crisis would have occurred long ago (in 1987) and been far less severe if governments and central banks hadn’t attempted to rescue the system from its own follies. The First-Home Owners is a classic government folly, and its doubling last year is the main reason I’ll be walking to Kosciusko some time in April 2010. |
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9 Comments
Never mind Steven, look at it this way.
Within 12 months (at the outside) I figure your predictions will be proved sadly true.
But at least you’ll get out of the office and enjoy a great walk.
Steve, you will be proved right…..
At the moment homebuyers (and vendors) are still being supported by the FHOG, sadly I am one of those statistics I took the grant at its full rate.
Soon, when the grant is removed completely things will change…but the effects won’t be noted untill at least the first quarter of 2010.
Steve, just admit it, when it comes to lobbying the government on home ownership policy and having the bigger voting sector and the banks on your side, you were outclassed from the start.
Steve Keen - just remember economics is not a science, more of a black art. You have been soooo wrong in your predictions of doom for the Oz housing market may be it’s time to take up a new cause. Remember, in the real estate investment game it’s location, location, location for the best return. Well, it’s also demand,demand, demand when it comes to price movement. Simple, really.. Alex
Steven once again you miss the point. An extra 7,000 does not leverage to an extra 140,000 at a 95% LVR. There are things like transaction costs and fees involved which remove this 7,000 and then some when buying a property IN THE REAL WORLD.
Please forget this efficient market hypothesis crap (I told my lecturer this while at Uni) and try to see what’s happening in the real world - we don’t have enough houses to cater for people, especially where they want to live.
Couple this with rising interest rates and the fact developers won’t be able to get finance, or simply won’t make any money from building and trying to sell to those who can no longer afford, means no new dwellings, which means house prices will remain robust and will probably in all likelihood increase further.
It has never been easy to buy a house. Ever. It requires sacrifice and hard work. Deal with it. Those who are praying for a 40% collapse in prices are dreaming if they think they will get their bargain home, because the banks simply won’t lend anything to anyone, and if the house prices did fall by this, well, the value of your home would be a distant second to how secure and defendable it is.
No Adam, you missed the point.
GST in 2000 made it uneconomic to build a new home. The Howard government pretended to address this with the FHOG but as a sort of joke applied it equally to new (GST-affected) and existing (GST-free) homes while barely putting a dent in the $30,000+ GST charge for the former. D’oh!
Federal and state policies of turning the home market into a scalpers’ market once again motivated Rudd to boost the FHOG, with a very slight $7000 premium on the grant for new homes, to maintain the pretence of helping home ownership. To more than counter that, he increased immigration, and last Christmas he repealed the restrictions on foreign ownership, so that Chinese buyers are now driving the latest scalping boom.
The point, is that this was never a question of passive predictions isolated from influencing events, like weather forecasts. The forecast from Keen and others was no doubt noted by Rudd as a dire warning and played a part in his policy making. Keen, ironically, may have helped Rudd head off the very price collapse that he was predicting.
Nevertheless, the bubble Glen Stevens warned of continues to grow — almost the last one in the world still standing — so if the latest ascent of the scalpers’ boom has made you rich, you might want to learn from the experience of stock holders who thought in the 3rd quarter of 2007 that they had beaten the crisis, and consider a stop-loss sale of some of your assets. Or the last laugh might yet be on you.
Y’know I have to wonder why this is a ‘bubble’ - yes prices have risen dramatically but it’s not like there are no good reasons for this. There is a limited supply, there is strong demand, there is insufficient amounts of new stock being brought into the market - Because something rises dramatically, is that a bubble? It’s a scare tactic made to make people think when it pops everything comes undone.
Homes are not like this. Not in Australia anyway. The US is so, so, so different to the Australian banking and housing market I could go on for ages. Japan before their economy collapsed is no comparison either - apparently property was out of the market for 80% of the population to begin, with, and I believe I’m correct in saying at one stage the Imperial Palace (if I have that right) was ‘worth’ the entire state of California.
Worth is a funny concept. Homes are worth what people will pay for them, just like anything else in the world. First home owners only make up a certain percentage of all loans (I believe around 20 - 25%) so this FHOG is not an issue for other buyers in the 75 - 80% of the market.
I don’t believe a faberge egg is worth the price people charge, but there are people who seem to pay it, and so the price remains. It’s not the best example I know but it’s the same principle. How do you decide if something is ‘worth’ what the asking price is? You look around at what other people are paying, you look at what the market tells you, and ultimately, you decide for yourself.
Home ownership is a privilege, not a right. There are a myriad of reasons that some homes are ‘out of reach’ for younger buyers or the lower end of the market, but it is not impossible to buy a home if you save hard and apply yourself. If you decide a house is not ‘worth’ what someone is asking, don’t pay it - rent and save and invest the difference.
And yes JMac I could be wrong - house prices could collapse. They could fall in a giant heap but the fact is, that won’t be good for anyone. I’d rather see a change in policy and a moderation in prices, regional centres being used to decentralise the population, and better urban planning than have house prices rise 100% in the next 5 years, but if history is any indicator, that won’t happen.
Well, if you buy up all the available tickets for an upcoming U2 concert, you distort the scarcity value and change the price. If you start on-selling batches of tickets to other scalpers who think the price will go higher, that’s a bubble. A successful bubble for the investor, provided he sells all the ticket’s he’s holding before the concert date. Event tickets have an expiry date of course, that’s a short-tail scalpers’ market where houses are long-tail.
Gangs do something similar with food supplies in a war zone. Of course you have to sell the product after you’ve squeezed its price up, or else your market dies, and their funds are limited anyway.
Houses have (in general) no expiry date and without them your market will rent, not die, so there’s no practical ceiling on prices. Since they’re bought with leverage, you can actually price most of the population out of the market, and still make money just by gaining access to further leverage, based on what another investor would now pay for the house you’ve got, and you can do this without even selling it.
(The CGT actually helps you convince other investors to do the same, and this is clearly explained in the many investor seminars, websites and other support resources which aim to get as many existing properties as possible bought by investors and unavailable to would-be owner occupiers.)
All well and good until a great deleveraging becomes a necessity, and then the market reveals itself as a house of cards. This does not require any increase the number of houses on the ground or the population in the cities. All it requires is for a significant number of the “scalped” stock (that is, houses owned by investors so not available for sale) to suddenly become available and the bubble pops.
Also Adam you mentioned Japan. A real estate market dominated by a geographical moat — the world’s second biggest economy squeezed into a tiny archipelago.
Australia’s moats are nothing like Japan’s, they are all artificial. I’ve already mentioned the moats at a federal level, dug by Howard and lovingly maintained by Rudd. At the state and local levels, moats include zoning and land release policies, up-front infrastructure charges, poor transport availability away from CBDs, and a widespread practice of shaking down developers for bribes, which adds to the cost of new homes while detracting from their quality and attractiveness. It’s not a mistake that the NSW government has cancelled most of the outer Sydney rail projects while planning to duplicate inner-west transport with the Metro Rail.
Discussions of regionalisation in other threads will have to take this into account: the property-owning lobby will not take kindly to policies that threaten those moats. And that’s an immense lobby.
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