Letting the Bear have his say

The latest lack of updates on this blog is not due to my usual distracted state, but instead due to the lack of an update of material substance from my two key sources Christopher Joye and Steve Keen. So, I was extremely happy to discover yesterday, that both sides have new articles on www.businessspectator.com.au.

As I attempted to disect Christopher's work last time, in this post I will focus on Steve and his article "Wading through the housing furphies". 

There are at least five residential price indexes.  Steve's view is that only the index by the ABS counts, because they are the only group producing an index without any interest in what the index states.  It's a plausible argument, although a somewhat damning inditment on the Real Estate Institute of Victoria, RP Data-Rismark, Australian Property Monitors, and Residex.  

The ABS numbers show a 1.1 per cent fall in the median price for Australia over the March quarter. Steve writes "Australian house prices have now fallen 6.1 per cent from their peak, and have been falling for 21 months, which is the longest downturn in nominal prices ever recorded by the ABS – the previous longest being the 12 months from the beginning of the GFC (which was terminated by my favourite government policy of all time, the First Home Vendors Boost)." In real terms, over the period the drop is not 6.1% but 10%.  

Steve then compares the Australian market to the bubbles in Japan, which peaked in 1991, and in the USA, which peaked in 2006.  The decline in Australian prices is tracking along a similar path to Japan's, while the USA decline was much worse.  The Japanese decline however, has continued for the subsequent 18 years, with prices now less than 40% of what they were at their peak. Before finding a window ledge to jump from however, consider a comment below the article by a fellow called Graham Jacob, who writes that Japan has a falling population with no end in sight to this trend.

Steve's argument is that Japan and the USA are relevant, because in all three cases (Japan, the USA and Australia), prices were driven upwards by accelerating debt (63% correlation in Australia).  Steve doesn't define debt acceleration, but I'm guessing it means the percentage change in the dollar value of mortgage debt from one quarter to another.  (Note, 63% correlation in lay man's terms, mean that 63% of the change in house prices is due to the change in mortgage debt levels, ie I as purchaser can afford to pay more for the house I want because the bank agrees to lend me more money and I agree to borrow more money.)   This raises the question, what is causing the other 37% of the change.  I also have issues with seeing debt acceleration as a root cause.  Debt acceleration doesn't just happen, people decide to borrow more and banks decide to lend more - the question is why?

Steve goes onto explain that at present, the ratio of mortgage debt to GDP in Australia remains higher (or close enough to it) than it has been since 1990, when the graph starts.  So, in essence, [my interpretation] debt accelaration has done all it can do to push prices as high as they can go and a likely fall in debt accelaration will cause prices to fall.  

Steve's view is that the housing market will continue to decline and it will decline faster.  His reasoning for this is that baby boomers have invested in residential property to fund their retirements.  As the market is dropping, they will look to get out, causing further falls.  He references this article "Australia's loss-making landlords" for his evidence of this.  However, I note that "Australia's loss-making landlords" does not mention baby-boomers at all.  Instead is says that 63% of property investors are negatively geared (ie rent is not covering their expenses).  I would have thought that if you are near retirement, you would be in the 37% of investors who are not negatively geared because you have held the property long enough to reduce / repay the mortgage.  If you are instead getting an income from your investment, I doubt you would sell. I would like to know what percentage of properties are held by negatively geared baby-boomer investors before I'll accept this issue will make a significant impact on the housing market.  

This article has not done a lot to improve my understanding of the residential property market or to assist in taking a view on which way prices are going.  I accept that a drop in debt acceleration will reduce prices, but what is causing the drop in debt acceleration?     

New Topic - House Prices

They say necessity is the mother of invention. I find it necessary to find larger accommodation and my preferred form of that accommodation is a house - specifically one with three bedrooms, a laundry, a place to dry clothes undercover, a linen cupboard, a two car garage and lastly, the real icing of the cake, a study.

As such, I am switching the topic of this long neglected blog from the share market to the housing market and the question of whether it is a good time to buy or sell?

My main source of information on this topic will be that venerable institution www.businessspectator.com.au, where in a war seems to be being waged between Christopher Joye (on the buy side) and Steve Keen (on the sell side).


So first I will look at Chris's article "Housing affordability returns, but for how long?" in which he presents his company's approach to measuring house affordability.  The article doesn't draw many conclusions other than to say that the house price to income ratio peaked (bad) at what seems to be about a year ago and has since fallen back (good).

However, when I look at the last graph,  I can't help but think that from March 1993 to about March 2001, a fairly decent period and who knows how long before that, the ratio was between 2.5 times and 3.0 times. I am old enough to remember those years and I know people didn't spend much time worrying about house prices back then.

Then there is a steady rise until about March 2004 (I purchased my apartment in April 2004). During these years I remember people just holding out waiting for prices to drop at any moment, because the prices seemed absurd.  I took the view that house prices don't come down in absolute terms and I needed somewhere to live, hence I dived in. I'm glad I did, because house prices just kept going up.

From about March 2004 until now, the trend in the affordabilty ratio has been fairly flat and people have spent a lot of time complaining about house prices being too high.  I can't help but think that something's got to give and at some point we will see a return back to the 2.5 - 3.0 times band. When and how? Well that's the $64,000 question.