The usual suspects are talking up the prospects for Australian property prices as the New Year approaches, with permabull and Australian Property Monitors senior economist Andrew Wilson forecasting 3-5 per cent growth nationally, and BIS Shrapnel managing director Robert Mellor calling for between 2 and 8 per cent growth for Sydney.
Such calls range from just equal to, to well above, the expected rate of consumer price inflation. So they’re a return to the usual property mantra that house prices always rise faster than consumer prices because of the "fundamentals” of (a) a rising population and (b) tight supply.
Unfortunately, that once popular rap is out of tune with the actual performance of the market for the last two and a half years. House prices peaked in June 2010, and have fallen 4.1 per cent in nominal terms and 9.8 per cent in real terms between then and September 2012 (the most recent date for the ABS existing dwelling price index).
There was a slight uptick in nominal prices in the last two quarters, but the first of these was equal to the rate of consumer price inflation, and the second was slightly below it – so that real prices at best flatlined, and then fell, as figure 1 shows.
Figure 1: Australian house prices since US house prices peaked in January 2006
For the permabulls’ dreams about 2013 to come true, the slight uptick in nominal prices over the last six months would need to accelerate (though it’s currently decelerating). What are the odds? Call me a permabear, but I’d say, not good.
Firstly, the "this place is different” argument that says we can ignore what has happened overseas is not holding up so well after just over two years since its peak. While Australia’s house price fall post its bubble peak is clearly different to America’s crash, it’s on par with that experienced in Japan’s long slow melt (see figure 2). That was the basis of the comment that dragged me into the property debate back in 2008, that Japan had experienced a 40 per cent fall from its bubble peak over 10-15 years, and I saw no reason for Australia to be different. So that call is looking healthy.
But Australia clearly hasn’t had a crash like America’s. Does this hold any hope for Australian property speculators (sorry, investors) that prices might resume their pre-2010 rise in 2013?
The bulls would say yes, on the basis that the key difference between Australia and the US was that there was massive over-supply there, while there has been none here (except in Victoria). While the over-supply difference between the two countries is real, as Macrobusiness regularly observes, that cuts both ways: a rigid supply of housing would amplify downward movements when there were downward shifts in demand. So it alone can’t explain the difference between the two countries.
On the other hand, the demand side factors that I emphasise – the level, rate of change and rate of acceleration of mortgage debt – show huge differences between the US and Australia that can account for their very different post-bubble paths.
Firstly, Australians have not delevered, whereas American households have done so massively. American mortgage debt peaked at 86 per cent of GDP and has since plunged to 68 per cent. Australian debt peaked at 87 per cent, fell to 84 per cent, and has since risen to 85 per cent (mainly because nominal GDP is growing even more slowly than mortgage debt now is).
The fact that mortgage debt in Australia is growing more slowly now than at any time since records began is well known. But a slowdown in the rate of growth is one thing, an outright fall in mortgage debt is quite another. A slow growth rate aside, mortgage debt is still growing in Australia, whereas it has been falling in the US since 2009, and is still falling now (see figure 4).
So far it’s 'vive la difference'. But differences disappear with my primary riposte to the bulls' "population growth drives house prices” argument, that it isn’t people who buy houses – it’s people with mortgages who do. For prices to rise, the flow of new mortgages has to exceed the flow of properties onto the market, and that requires mortgage debt to not merely rise, but do so at an accelerating pace (there’s a lot more technical detail to this general economic argument about the role of private debt in effective demand, which I cover here). The very different paths of Australian and US house prices were driven by the same dynamic of accelerating and decelerating mortgage debt (see figure 5 and figure 6).
And therein lies the rub for the Australian housing market. To get sustained house price rises above the rate of inflation, accelerating mortgage debt has to be maintained for some time. But just as it’s hardest to make a car accelerate when it is close to its maximum speed, it’s hardest to maintain accelerating mortgage debt when the debt burden is already immense. Australia, with a mortgage debt to income ratio that has barely budged from its 87 per cent of GDP peak, has precious little room to maintain accelerating mortgage debt. America, on the other hand, has some headroom because of the fall in mortgage debt from 86 per cent to to 68 per cent of GDP.
These differences are now apparent in the data. Even though US mortgage debt is still falling, it is falling more slowly and therefore accelerating – see figure 5 – and has been doing so for some time. The rising demand has pushed up house prices, which are now rising in real terms.
The recent tiny uptick in nominal house prices in Australia was driven by an acceleration in mortgage debt too – even as the rate of change of mortgage debt was falling – but it wasn’t enough to reverse the trend for inflation-adjusted prices to fall (see figure 6). It already appears that this acceleration is petering out, and the rate of growth of nominal house prices is falling further below the rate of inflation as a result.
So American property bulls have some prospects of a rosy 2013 – though that is not guaranteed, since the rate of acceleration of mortgage debt there declined in the most recent flow of funds data (see figure 5). But Australian property bulls are likely to be disappointed. Insert crocodile tears here.
Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.