By Steve Keen, DebtWatch
According to the ABS series, house prices rose 0.5% in nominal terms in the June quarter, and were flat in real terms.
|Change in ABS Index|
|Date||Nominal House Price||Real House Price|
Relative to the peak value of the index (in June 2010), the index is now 4.7% down in nominal terms, and just over 9% down in real terms. The ABS revised the date for several of the earlier quarters, with the result that what appeared to have been a 7-quarter-long fall in real house prices from the June 2010 peak now includes one quarter of rising prices-the December 2010 quarter.
|ABS Index||Relative to Peak (June 2010)|
|Date||Nominal House Price||Real House Price||Nominal House Price||Real House Price|
Before this quarter’s data came out, Australia’s rate of price decline from its peak lay between the US and Japanese experiences; now it is smack in line with the slow bleed of Japanese prices, but nowhere near the decline experienced in the USA.
By this point-two years after house prices peaked-US prices were down by just over 20 per cent. Instead, Australian prices are down by just over 9 per cent, which is indistinguishable from the Japanese fall of just under 8.9 per cent at the same point in its house price deflation.
So does this increase mean that the trend of falling prices in is now over, and house price growth will resume? No, no more than did the slight increase in real prices back in December 2010 (which we are now only aware of courtesy of a revision of ABS data). What it means is that the trend for decelerating mortgage debt has temporarily reversed.
I’ve consistently argued that what really drives change in house prices is accelerating mortgage debt, and though this uptick in prices did surprise me, it was driven by that same factor: mortgage debt accelerated over the most recent months, even though the rate of growth of mortgage debt continued to decline.
First, let’s put Australia’s mortgage debt in context by comparing it to the USA’s. The growth in mortgage debt was much faster here than in the USA, even while the media focus was on the “Subprime Bubble” in the USA. When that bubble burst, both American house prices and mortgage debt went into reverse. In Australia, mortgage debt peaked below the USA’s level in mid-2008, but then it took off again in response to the First Home Vendors Boost, and finally reached 87% of GDP-exceeding the US maximum of 86%.
Since then it has fallen, but much more gradually than has the USA’s. Australia’s mortgage debt to GDP ratio is now 85% of GDP-versus the US level of 71%. And with the most recent data, that ratio has actually risen very slightly.
There are many reasons for that-plenty of which are associated with State governments trying to revive the property market-but whatever the causes, the result is that mortgage debt has temporarily reversed its falling trend. Even though mortgage growth in CPI-deflated terms is at historic lows, it is growing more quickly now than it was at the end of 2012. It has picked up from 2% p.a. at the end of 2012 to almost 4% p.a. now (though this is partially a side-effect of recent deflation).
Mortgage acceleration has thus risen, and though my measure of this is still negative-the change in the change in mortgage debt over a year, divided by GDP at the midpoint of that year-it has started to rise. This rising acceleration in turn has fed through to rising prices over the last few months-though prices are still falling over an annual time frame.
The correlation of mortgage debt acceleration and house price change isn’t as strong-or as uni-directional-as the US data, which I expect in part reflects the extend to which the property market has been a playground of government policy over here-First Home Vendors Boosts, Negative Gearing, cuts to Capital Gains Tax that favour speculation over work, etc.-compared to the USA.
But the relationship has strengthened in Australia as mortgage debt has become larger relative to GDP, and the correlation in Australia is particularly marked since the GFC began. The uptick in the mortgage accelerator since the beginning of 2012 is matched by the turnaround in the rate of fall of real house prices (on an annual basis) and the flatline in the most recent quarterly data.
As I’ve argued elsewhere, this correlation is based on a causal link: in a credit-driven economy, aggregate demand is income plus the change in debt, and this is expended on both goods and services and assets. The change in aggregate demand is thus the change in income plus the acceleration of debt, and this then is the main factor driving change in asset prices (I’ve explained this in more detail in other posts-see here and here-and I’ll provide an empirical and analytic proof of this argument in another post soon-this is a general issue of economics and belongs in a post on that topic, rather than buried in one on Australian house prices).
So the bottom line is that Australian house prices are falling more slowly than America’s because Australian consumers are deleveraging much more slowly than their US counterparts.
There are several obvious factors that could explain why:
Australian mortgages are mainly floating rate, so rate cuts by the RBA very rapidly reduce the debt servicing burden. In the USA on the other hand, mortgages are fixed rate;
Government efforts to keep the property Aspidistra flying-ranging from the hardy perennials of the Federal First Home Vendor Grant, Negative Gearing, setting Capital Gains Tax at half the Income Tax rate and exempting the family home, to State-based sales tax exemptions and First Home Vendor Schemes-have succeeded to some degree in enticing new entrants; and (irony alert)
There is no Australian house price bubble.
Can Australian households be expected to not merely continue not deleveraging, but actually start to lever up again (because accelerating mortgage debt is needed for house prices to actually rise faster than consumer prices) from current debt levels?
The “good news” is that it’s possible to carry more debt than Australian households currently do, as the Brits have shown (and to go sideways with debt for some years, as the Canadians have shown). The bad news is that the Brits have already delevered to the Australian household debt to GDP ratio, and this deleveraging is having the same effect on the UK economy that we’ve seen in the USA.
The bad news is that this requires Australians to continue putting up with very high debt servicing costs relative to the rest of the world.
Of course, even after recent cuts to interest rates, the RBA has plenty of room to cut rates further-and this could act to encourage Australians to continue not leveraging.
But to cause a sustained rise in house prices, Australians would need to not merely not delever, but to lever up from the current historically high debt levels-since it takes accelerating mortgage debt to cause house prices to rise. For personal reasons today (I’m having an arthroscopic knee operation in 2 hours’ time) I’ll have to leave the detail about why I just don’t see that happening for another post.
Steve Keen is an economist and author. For more commentary on Australia’s debt crisis read DebtWatch