Steve Keen yesterday criticises Ric Battellino for suggesting that the Australian housing market was at its “hottest” in 2003. He bases this critique on the fact Australian house prices, after a dip in 2004, continued to rise through to the present. It is not stretching the imagination to suggest that a normal interpretation of “hottest” would refer to the period at which house prices were rising at their quickest rate. To this end here are some annual % changes in weighted average capital city house prices as calculated by the ABS:

(12 months to:)

  • June 2003 18.1%
  • Dec 2003 18.9%
  • June 2004 10.9%
  • Dec 2004 2.7%
  • June 2005 0.1%
  • Dec 2005 2.3%
  • June 2006 6.4%
  • Dec 2006 8.3%
  • June 2007 9.2%
  • Dec 2007 12.3%
  • June 2008 8.2%

I can’t find the figures pre-2003 although from other sources it appears the percent increase figures in 2002 were also higher than anything in recent times. Therefore not only is the suggestion by Battellino not “Orwellian” as suggested by Keen — it is correct.

Keen hails the 1.8% quarterly decline in house prices last quarter as somehow supporting his argument. How is this figure inconsistent with Battellino’s general theme — as stated by Keen himself — that he sees “no reason to expect them to fall that much”? Such a modest decrease coming as it did on the back of a long series of interest rate rises over the preceding year which were designed to, among other things, cool the housing market.

He suggests the RBA ignores other relevent statistics and refers to the higher ratio of mortgage levels to disposable income in Australia than in the US. As disposable income is a function of mortgage levels (i.e. it takes into account mortgage repayments) it is inappropriate to compare ratios between countries — as obviously any difference is going to be exaggerated.

Keen implies that Battellino is not being “objective” because he has not focussed on other factors Keen holds in such high esteem, yet there is no focus by Keen, for instance, on rent yields — which of course are always one of the basic measures of an asset’s worth. These remain strong notwithstanding the increase in house prices and is a factor supporting a view that house prices are not as overvalued as Keen purports.

Further, Keen states, when presuming incorrectly that Battellino was referring merely to a peak in prices rather than a peak in acceleration of prices, that “we indeed live in a Lucky Country, if house prices rise when the market cools”. Wouldn’t that be indicative of stagflation and, thus, rather concerning?

Peter Fray

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