The crystal ball gazing over house prices continues to twist and turn with another prominent article today suggesting that investors will emerge to fill the gap posed by the demise of First Home Owners Grant.
Rismark managing director Christopher Joye agrees, saying refusenik commentators are only looking at one side of the coin:
One of the reasons Schwab and Co. got it so wrong is because they ignored the fact that house prices are determined by demand and supply. They focused purely on demand-side factors like affordability (which has now turned against them), and neglected the fact that Australia is currently suffering the biggest housing shortage on record. On the demand-side, Australia is also benefiting from the strongest population growth since 1971. When demand exceeds supply, asset prices rise. Housing is no different.
Crikey‘s Adam Schwab says it’s the FHOG that is the real factor artificially boosting demand:
While Joye and the RBA claim that property prices are rising across-the-board, it has been first home buyers which have led the recent growth, evidenced by the “first-home buyer” share of finance commitments have increased from around 10 per cent to almost 30 per cent of mortgages issued (in addition, first home buyers would be acquiring less costly properties, so the rise is especially telling in nominal terms). Further, mid-range properties have also benefited from the flow-on effect from the grant — for example, many of those selling inflated homes to first-home buyers will then have more to spend on their next purchase.
Christopher Joye writes:
Do you remember back in school when you confidently blurted out a big declaration only to discover that you were completely wrong? That burning sense of embarrassment as you were humiliated in front of your colleagues? Well, that is how Adam Schwab, Steve Keen, Gerard Minack and Shane Oliver feel right now. These guys were part of a small but highly visible minority who relentlessly told Australians on radio, TV and in print/online that the value of their homes would fall by 10-15 per cent (Oliver), 20-30 per cent (Minack), and 40 per cent (Keen) last year.
Rismark repeatedly responded that the analysis underpinning these claims was deeply flawed and would lead to a reputational day of reckoning. And so it has. Poor old Steve Keen is about to lose his bet with Macquarie Bank’s Rory Robertson that will see Steve hike all the way from Canberra to Mount Kosciuszko wearing a t-shirt emblazoned with the message, ” I was wrong about house prices. ” Recall that Steve’s “best case” outcome for Australia was 15 per cent unemployment — amazingly, his more likely scenario was 30 per cent (today it is just 5.9 per cent).
Australian dwelling values fell by a modest 2.6 per cent in 2008 and have risen by more than 4 per cent in 2009. We expect to see the June data, which is due by the end of this week, to show continued growth. These results are based on the RP Data-Rismark Hedonic Index, which is used by the RBA and many leading economists, and, unlike the simpler ABS index, includes all dwelling sales (the ABS excludes apartments, semis and terraces, and only includes free-standing houses, thereby missing up to 30 per cent of sales). They are also consistent with the findings of other index providers, such as APM and Residex.
Importantly, dwelling prices are now rising across all suburbs, not just the cheap ones. While in 2008 the most expensive suburbs bore the brunt of the losses, these areas are rising in value again (see chart below). This eviscerates the notion that the recovery has been limited only to first time buyers. We are also starting to see the return of investors who after being hit by 50 per cent plus falls in shares and 10-20 per cent falls in the value of their super are opting for the safety of bricks and mortar.
The tiny losses in 2008 had little to do with the GFC and were brought about by the gut-wrenching 9.6 per cent mortgage rates that the RBA imposed on borrowers. The subsequent recovery has been underpinned by a 40 per cent decline in lending rates and an improvement in affordability to near record levels.
One of the reasons Schwab & Co. got it so wrong is because they ignored the fact that house prices are determined by demand and supply. They focused purely on demand-side factors like affordability (which has now turned against them), and neglected the fact that Australia is currently suffering the biggest housing shortage on record. On the demand-side, Australia is also benefiting from the strongest population growth since 1971. When demand exceeds supply, asset prices rise. Housing is no different.
The doomsayers also chose to overlook the lessons of history. In the last recession, when unemployment rose from 5.6 per cent to 10.9 per cent overall house prices did not fall at all — they actually increased slowly. In 2009, history repeated itself.
Don’t expect any mea culpas though. The protagonists will whine about the first time buyers’ grant (blind freddy could have anticipated this counter-cyclical measure), or try to rehash their original predictions by switching from “nominal” (the house prices we see) to “real” (house prices less inflation) terms. It’s a pity, because people should hold them to account. The unfounded claims they made in 2008, which were taken at face value by a naïve media, scared the daylights out of millions of unassuming households.
*Christopher Joye is CEO of the research group Rismark International, which developed the patented RP Data-Rismark hedonic index methodology. Rismark also produces products that allow investors to go “short” (bears) or “long” (bulls) housing.
Adam Schwab writes:
In the acclaimed documentary The Ascent of Money , Professor Niall Ferguson noted “real estate is fundamentally no different to any other asset…its price can go down as well as up. It turns out that no amount of financial alchemy can turn little suburban boxes into treasure chests with roofs. Which raises the question — is property really as safe as houses? Or could it be that we have let our love affair with real estate get completely out of proportion?”
However, for Australians, especially younger ones, the love affair with real estate has so far, shown little sign of dissipating. In fact, according to the recent property data, things are getting even steamier. Notwithstanding despite real estate in other countries, including Western democracies like the United States, United Kingdom and continental Europe witnessing property prices drop by upwards of forty percent, Australian property is not far off record levels, with the exception of top-end blocks, which have suffered from lowers bonuses and bankers foibles.
The recent price recovery has led property bulls to claim victory over the forces of property deflation. In a typically self-congratulatory post, Business Spectator’s Chris Joye pointed to an offhand comment by the RBA that “members also noted that, according to a range of private-sector measures monitored by the staff, house prices had increased in almost all areas over recent months.” Aside from the somewhat unscientific methodology adopted, the RBA observations (and Joye) are reasonably correct — property prices, led by low-end housing, has remained remarkably buoyant, despite world economic conditions at their lowest ebb since the Great Depression.
However, before the celebrations begin, it is worth remembering that the property market is still being spurred by the boosted first home owner’s grant and Australian banks’ remarkably lax lending policies. While Joye and the RBA claim that property prices are rising across-the-board, it has been first home buyers which have led the recent growth, evidenced by the ‘first-home buyer’ share of finance commitments have increased from around 10 per cent to almost 30 per cent of mortgages issued (in addition, first home buyers would be acquiring less costly properties, so the rise is especially telling in nominal terms). Further, mid-range properties have also benefited from the flow-on effect from the grant – for example, many of those selling inflated homes to first-home buyers will then have more to spend on their next purchase.
Leaving aside the reasons for Australia’s continuing property boom (of which, bulls would inevitably claim that it is Australia’s limited supply of homes and continued immigration which has maintained higher prices), what property optimists have never been able to explain is why Australian property is far more expensive than property in the US.
The median price of an existing US home is US$181,500 — in Australia, the most recent reported median is AUD$405,000 (the figures in Sydney and Melbourne are far higher). Median US income levels are around US$50,300, which means that median property prices are approximately 3.6 times income. In Australia (as at 2006), with a median income of $53,404, property prices are 7.6 times income. Ignoring all the hyperbole sprouted by property bulls or real estate agents — Australian property is more than double the price (relative to income) than US property.
How long will banks continue to lend home buyers upwards of 90% of the value of a property? If interest rates increase (which appears inevitable given the widespread fiscal stimulus and massive expansion of the global monetary base), local unemployment rises or banks turn off the flow of easy money, it would be difficult to envisage Australian property prices not following the trajectory of the US, UK, Ireland, Germany, Spain and most of Eastern Europe. Putting it another way — after two decades of growth and the simultaneous bursting of credit and equity bubbles, how is it possible for residential property to remain at record levels? For how long will investors tolerate net negative real yields, relying on a Ponzi-esque scenario of promised capital gains from their outlay?
As Niall Ferguson noted and millions of Americans have experienced first hand — asset classes, even property, do not rise indefinitely. Every bubble eventually pops. (And a bit like a dream, one rarely realises they are in a bubble existed until it ends). Despite the bulls’ claims, the price of an asset will ultimately return to its intrinsic value, even one as cherished and misunderstood as residential property.