Where to for house prices in 2013?

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.

Figure 2


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).

Figure 3


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).

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).

Figure 5


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.

Figure 7


Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.

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It all comes down to simple market dynamics (Where to for house prices in 2013? December 17). Property prices are ultimatly reflected by the income capacity of the population verses the availability of suitable accommodation. so long as the employment rate stays steady and building approvals stay in step with population growth property prices must remain stable.
Sorry Steve, the graphs do lie (Where to for house prices in 2013? December 17).
It's not graphs that people look to when making the decision to buy.
They look to see if they can afford it, and usually first home buyers, double income no kids, can easily afford a mortgage of $400k.
So unless we somehow leverage down wages drastically, home purchasing will continue in this current price bracket.
Once they have had the kids and he has been promoted, wife still working also on better money time to trade up to something a bit closer to the city, more expensive and so it goes.Your arguments are just out of touch with real Australia.
This is a can of worms that needs opening further. Politically a decline in house prices is unacceptable (Where to for house prices in 2013? December 17). This leaves only two possibilities to make housing affordable. One is massive inflation of wages - in a city like Sydney you would need to almost triple wages after tax.
The other is affordable decent rental housing. However so long as rental housing is regarded purely as a form of Capital investment, with rental levels decided by market forces, the private sector has no hope of increasing the supply of affordable accommodation, nor would it choose to.
Which leaves - as I have said - a vast increase in public housing as the only viable solution - and in order to provide accessible and affordable labour sources, such housing would need to be distributed throughout all suburbs, both rich and poor.
Alternatively - should you prefer - there is always the economic and possibly political collapse that staggering inflation would cause - the loss in internal value of current stocks and shares. The flow on into other economic areas would be catastrophic.
The Conservative right and the Right wing media have spent a fortune undermining the only force that could keep this tsunami in check - a centrist ALP Government. As events follow their inevitable course one can only say "they did it to themselves"
Quo Vadis - it isn't too late. Renters and mortgage payers need rescuing. The building industry needs stimulus. The dollar is high enough to print the necessary currency. Bring the three together.
In 1968 I bought my first house for $14,100.00. It's value was 235 weeks of my then salary.Based on my current salary and if the same terms applied I could today by a home for $203,365.00. Anyone tell me where I can buy a 3 bedroom brick veneer house with lock up garage for that in Sydney (Where to for house prices in 2013?, December 18)??
Values are way out of wack and a correction is long overdue and would be most welcome. I am sure other businesses would welcome the freeing up of discretionary spending that would occur if we paid more sensible prices for our housing.
Here we go again (Where to for house prices in 2013?, December 17).
Who remembers what happened to house prices in the decade after the 1991 recession?
Flat - negative overall return for nearly 10 years with the exception of a few hot spot suburbs. (Where to for house prices in 2013?, December 17).
donald+j.coleman (December 17, 1:34 PM) does not remember paul keatings attempt to abolish negative gearing which helped create a rental shortage. (government)taxpayer funded rental is not the answer.Personally I don`t think those who haved risked their hard earned capital should have meddling socialists take it from them by stealth.I think that solution is much worse than the problem? Perhaps the government should slow down its massive immigration and foreign ownership policies. I expect that would make housing more affordable (Where to for house prices in 2013?, December 17)?
Remember that the Mayan Apocalypse is Friday Steve, which should really make your day (Where to for house prices in 2013?, December 17)!
Peter Blatch, you are not keeping up with research. It is an urban myth that rents rose due to the Quarantining of negative gearing from 1985 to 87 (Where to for house prices in 2013? December 17).
Philip Soos (Dump negative gearing and let property prosper 2/10/12)said
"Rents rose in Perth and Sydney only, remained steady in Melbourne and Canberra, and fell in Brisbane, Adelaide, Hobart and Darwin. If the lobby was correct, quarantining should have adversely affected all capital city rental markets equally, not just two out of eight (even when factoring in a lagged response). There were confounding factors at work: rising interest rates, introduction of capital gains tax and a stock market bubble."
92% of negatively geared investment went into existing housing so there was little or no increase in rental stock.
It has been a 34 billion tax give-away to those who already own a home. It drew "mum and dad" investors into the market to bid up the price of homes in competition with their own children's generation.
Really , some of you quixotic chicken little landlords need to stop tilting at imaginary windmills in order to justify negatively gearing yourself to a capital losing asset for the last 2 years (Where to for house prices in 2013? December 17).
Steve Keen NEVER predicted a 40% crash to occur in 5 years.. He gave it 15 years and that quote is on the record. Do you want to listen to the audio recording again?
So to misrepresent this call and then claim that he is wrong is just deliberate obfuscation or plain old neurosis.
"Michael Jones wrote: Who remembers what happened to house prices in the decade after the 1991 recession?" (Where to for house prices in 2013? December 17.)
We don't need to remember. We have the Stapledon data which shows that cap city house prices rose 62% from 1991 to 2001 whilst CPI rose only 24% over the same period. It was, like most times, a very good time for property price rises.
My guess would be to stop people from wanting to invest in residential properties, affectively relieving the upwards pressure on prices which would benefit everybody including their own family members (Where to for house prices in 2013? December 18).
People should invest in other things that don't disadvantage those who also need to buy their first necessity in life, their homes. This would surely keep homes at a fairer true value for everyone unlike the extremely overvalued bubble we currently have now?
Just a thought for what it's worth to you all?
One of the main problems with this housing bubble in Australia is the length of the time it has been going as well as the heights that these prices have reached (Where to for house prices in 2013? December 18). People now seem to accept ridiculous prices as the norm, and there are too many home-owners who have seen the cost of their properties rise exponentially who don't want to see these prices fall.
I would love to see house prices fall to what they are really worth but unfortunately there are far too many factors propping up this Ponzi scheme like negative gearing and now a rush to fill Australian cities with as many people as possible. Both sides of government are committed to a "Big Australia" in order to maintain the high cost of housing.
The other thing is that a lot of baby boomers got rich on the artificial escalation of property prices, so if they bought several investment properties when they were going cheap, they have plenty to help out their children with, and to leave their children when they pass on.
Eventually, all bubbles burst and prices revert to their mean, but government policies put in place to maintain the bubble will just mean everything takes longer. That's why Steve's predictions didn't eventuate straight away.
I certainly hope Australia's house prices fall to the same extent as Japan, but there is one difference. Japan is not importing people at breakneck speed to buy their properties (Where to for house prices in 2013? December 19).
Some very valid points. I think one of the least discussed issues when talking about predictions of house falls is the human and government factor (Where to for house prices in 2013? December 16).
After the GFC, the government increases in FHBG, mining money pouring in and the vast sentiment "that we are the lucky country and this will not happen to us" have propped prices up. Moreover this has translated into good economic numbers.
Now that this is wearing off, the future (or truth?) is far uglier. We are one of the most uncompetitive countries in the world. The increased labour costs (as well as fat margins) are keeping new building prices up not the materials.
As for investment decisions, most have bought for capital gains and negative gearing. When is paying less tax but losing more money a good investment decision? I am thankful for this though as it means I can rent something for half the cost of the interest repayments to buy it.
While the double income theory is true, I think prices are inflated even when you take that into account. > 1m for a (nice??) house in Melb? Really? who wants to be paying it off till 60,70 or 80? If we are already so uncompetitive, where will the wage increases come from?
While the immigration angle is sound to a certain extent, I don't think it as big of an issue as people make it. For one most immigrants are not cashed up. Secondly the ones that are are only buying because they see the market has produced large capital gains. This was happening from before.
I think the current generation (X& Y) are beginning to resist the fever of you must own a house. While I can afford a house and a mortgage, I choose not to because to me it simply does not compute.
If the peak highs for US & Aust are four years apart then the peak low for the USAs peak low was 2009 means Aust was behind for different reasons (Where to for house prices in 2013?, December 17).
The USA had poor lending criteria.
Australia has urban property constraint so its underpinned but under stress as rents skyrockets taking expendable income from people with ling term repercussions for retail the second highest employer in the country.
Wages cannot inflate as the low USD has left the AUD uncompetitive in manufacturing, tourism etc.
Stagflation with no room to move on interest rates.
The RBA needs to do several things or we will be a plane wreck.
Relying on a construction boom is a stupid one by the RBA.
The RBA is just trying not to scare everyone.
The downturn is coming and with it house prices, even the HeraldSun article says in the last 2 years hous prices have dropped average 5%p.a. at that rate Steve Keen statements looking on track for 2013 and beyond (Where to for house prices in 2013? December 30).
A bit of news from the real economy. ( Where to for house prices in 2013?, December 17) The last 2 quarters of 2012 saw the manufacturing in Qld decline sharply, died in the arse, so to speak. My married daughter and her husband live with me again after a stint in Paris.Don't know how this will affect the FIRE part of the economy, and it is only anecdotal, however I personally do not think we shall be in for an easy ride in the coming years.Then again, I notice a lot of new BMWs and VWs driving 'round, so somebody is obviously doing ok. Even if it is the German auto industry. Let me finish by wishing Steve and all contributors and commenters a prosperous new year and a heartfelt thank you for this website.
This is a terrific piece of painstaking analysis, it could apply to some extent to the situation in England a few years ago. (Where to for house prices in 2013?, December 17) The Uk has a limited stock of properties, and a growing population,just like Australia. Mortgages were in short supply .Since then,house prices have fallen,but not at US levels. Here in the Uk, we've had a double dip recession. Hopefully Australia will avoid an economic downturn. The RBA will be emboldened to cut rates if Steve Keen's forecast proves to be right ,so good news for exporters with a likely lid on the AUD.
Interesting article. I think you do have a point on mortgage debt growth rate (Where to for house prices in 2013? December 13). But a comparison to Japanese market revealed in 2013 for the basis of a statement in 2008? Is that a bit stretch? We are basically staring into abyss if that occurs. You are basically saying that we are facing two lost decades. Anyway, if property prices can be so easily predicted, I suppose we are all millionaires now. I would bet my last penny that factors affecting property price are more than 2 factors. Btw, I suppose since GFC, a claim that you have worked in the industry doesn't help. Also, new car sales just hit record high, I don't think everyone buy it on cash.
Wow, there sure is something 'psychological' going on with the whole house price 'debate'! Such passion, such animosity, such vitriol. Calm down people, some of you are starting to sound like loony Tea Party Republicans (Where to for house prices in 2013? December 17). Oh, and just because there hasn't been a crash yet doesn't mean there won't be one. That would have to be the weakest, most pathetic 'argument' there is.
Steve correctly predicted turn around in US housing market in 2011, after so many years as housing bear, I was doubtful, but he was right.
BTW, all you Aussies trying to tease out how your housing crash will be different might want to look at how individual states inUS price decline rates have varied, lasted. I live in a middle/average state, but our house prices seem to be going down quicker than other states, where I thought the prices had gotten much more out of line. I guessed this was because in my state, the foreclosure process was very quick but some big bubble states, it took banks much more court processes to seize back house. Sure enough my state MN bottomed out sooner, and now rebounding while states with slow foreclosure process dropped prices more slowly intitially but still declining, haven't bottomed yet. Steve's generalredictionof upward prices was right on average, in most states but in states where people still squatting in houses they no longer make payments on, Steve's prediction early for them. So mortgage debt matters and if we could separate per state maybe accurate within statesby rte of learning properties, realizing new lower prices varies based on foreclosure rate. Now in Australia, you can't walk away from debt correct? Can't hand over keys and have tax man ignore debt forgiveness, correct? And you have bonus of mortgage payments instantly going down with lower interest rates, while Us you must get whole new loan to getting lower rates, that costs money process, and if underwater on loam, no re-Fil allowed. All this means you all will stay in house much longer than in US even as their value drops, still can afford payments, can't walk away from debt etc...so I suspect you all will have even slower decline in prices than US states with slow foreclosure process, but the price decline will last much much longer than in US (Where to for house prices in 2013?, January 8).
Substantiates my observations in NZ too - people will pay what they can borrow! I missed the boom thinking folks might consider intrinsic (fundamental) value - clearly not. Meanwhile mortgage lending exploded (and so did house prices).
Any thoughts on PERTH?? Employment and immigration is holding up suggesting to me, mortgage lending should grow. (Where to for house prices in 2013?, January 11).
Steve, the housing sector is listening too much to the RBA. The RBA has overated GDP, 7 quarters in a row.
That's why the housing sector has got it wrong 7 quarters in a row. (Where to for house prices in 2013?, December 17)
Steve is right but 'trigger' needed to start drop in ausi h.price. Possible triggers can be: 1) baby boomers mass retirement 2) huge job losses (accelerating) 3) problems in economies here and in globe 4) more educated younger generation 5) property speculators loose patience having price up move less then real inflation and/or better returns in other assets (i.e. stocks, gold, etc.). Looks like not long to wait to see.