House prices only go up? Well, nothing to worry about, obviously!

Boy, we’ve tapped a rich vein of material in this Saturday’s Weekend Oz!

On the front page, you’ll find an article titled ‘House price data bursts alarmists’ bubble’. Here’s the reassuring findings that reporters Kylar Loussikian and Turi Condon regale us with:

Australian property prices are not in danger of crashing despite record low interest rates spurring sustained price growth in the key Sydney and Melbourne markets, with a gradual slowdown more likely as additional supply enters the market over the next 12 months.

Great! Crash avoided. Nothin’ to see here. Now, on what evidence do they base their conclusion?

House price figures compiled for The Weekend Australian show there has been no major crash in values since data began to be collected in 1965. The most significant correction is a 9 per cent dip in Sydney prices between March 2004 and December 2005.

Hmmm.

Anything with a bit more substance?

Scott Haslem, chief economist at investment bank UBS, said while prices would be pushed down as strong construction activity fed more housing into the market, a price crash was unlikely.

“While there’s a fair amount of hytsteria around Sydney house prices, the trend elsewhere, including Melbourne, is clearly moderating,” Mr Haslem said.

McGrath Estate Agents chief executive John McGrath described Sydney’s housing market “as strong [sic] as any market I’ve seen in my career”, but expects price growth to wind back from the 15 per cent per annum of the past two years to 5 to 8 per cent, rather than prices crashing.

Nothing there, either. We have people’s expectations, but nothing which tells us why there won’t be a crash in prices. Nor do we have a definition of a price crash, beyond ‘something worse than what we expect to happen’.

Hang on. Here’s Angie Zigomanis, from BIS Shrapnel:

Angie Zigomanis, a BIS Shrapnel analyst, told The Weekend Australian there was not yet a housing bubble, although there could be one in Sydney if high price growth continued for the year, with the risk of a 10 per cent correction once interest rates returned to “normal”.

There wouldn’t be the sort of correction seen in the US following the global financial crisis., when prices fell by 20 per cent, unadjusted for inflation, within two years, he said.

“It’ll be a slowdown as supply keeps coming though, although Sydney is close to fully priced at these low rates, and we expect to see a correction in prices depending on where interest rates go – 5 per cent or potentially more,” he said. “If you take a period just under five years form the March 2004 high to the end of 2008, prices were still 7 per cent down, and if you take inflation into account, that would be about 20 per cent lower.”

OK, so no-one’s talking about a ‘crash’ there. But, again, Zigomanis has not said why a crash, however defined, can’t happen. While the central case of a slowdown in price growth, and possibly a fall in prices, has the highest probability attached to it, are we being asked to conclude that, because of this, the scenario of a stronger fall in prices, such as a ‘crash’, therefore has a zero probability? Why can’t the two co-exist?

Are, here we are. First, Scott Haslem:

Mr Haslem said the likelihood of a crash in housing prices was limited in Australia compared to the US, with Reserve Bank statistics showing householders were on average more than 12 months ahead of mortgage repayments. “The national turnover in sales transactions has turned negative, the rental return on properties has moderated, making it less attractive for investors, and macroprudential rules should increasingly lean on investor activity,” he said.

“There’s also the nature of lending in Australia, which if full-recourse lending, which means people don’t typically walk away from their properties (as they can in the US), and it’s unlikely in our view that unemployment is going to rise high enough or fast enough for it to be a problem.”

And then John McGrath again:

“I don’t think we’re in a bubble situation because the cost of money is so cheap and it’s important to note that the first year of growth was really catching up on the previous few years of no growth. But I wouldn’t like to see growth much above 8 per cent in 2015 in Sydney, or we may be in for a correction.”

OK, so the logic for there being no danger of a ‘crash’, however defined, in housing prices is:

  1. Householders are, on average, more than 12 months ahead in their mortgage payments;
  2. Activity in the market is moderating;
  3. The regulators are beginning to ‘lean’ on investor purchases;
  4. Mortgages in Australia are ‘full recourse’, which discourages people from walking away from their homes as they did in the US;
  5. The cost of money is ‘so cheap’;
  6. Recent growth was merely ‘catch up’ after a few years of subdued price growth.

Seriously??

  1. is irrelevant: prices depend on demand and supply in the market, not on what people who have already bought their homes are doing with their mortgages;
  2. is irrelevant;
  3. will, ceteris paribus, take demand out of the property market, so increasing the likelihood and intensity of any fall in prices that might occur;
  4. is irrelevant to a house price crash – non-recourse mortgages are what caused problems for financial institutions and investors in the US after the property market began crashing;
  5. is irrelevant: cheap money in the US and the UK didn’t prevent those countries’ housing markets from experiencing significant corrections (although it might have moderated the corrections) – if anything, cheap money is encouraging the recent increases in prices, so increasing the likelihood of an eventual ‘crash’, however defined;
  6. is irrelevant.

So all the reasons given for us not to fear a ‘crash’. however defined, in house prices are either irrelevant, or actually support the case for a ‘crash’.

But that’s not all. In text which can safely be filed under the heading ‘You’ve got to be joking’, the reporters insult their readership with these paragraphs:

Regulators have already moved to ensure the stability of mortgage markets, and to rein in housing risks.

The Australian Prudential Regulatory Authority has asked the largest banks to limit investor lending, but it would not disclose correspondence with individual financial institutions. Banks also have to impose affordability tests on borrowers to ensure they can cope with an interest rate rise of 2 per cent.

This comes several years after new regulations were put in place to ensure responsible lending, which reduced the proportion of “no doc” loans from 6.4 per cent in 2010 to less than 1 per cent today.

Here’s something you won’t read from the regulators, nor in the mainstream press: the Reserve Bank, the Treasury, and the Australian Prudential Regulatory Authority, have completely lost control of the housing market in this country. Their regulations carry little weight. As in the US in the years leading to the crash of 2007-2009, the market is beyond the control of the regulators, the regulators aren’t interested in doing anything more than the ‘littlest little’ to control it anyway, and the Reserve Bank keeps feeding the speculative mania by lowering interest rates.

Bank of America Merrill Lynch chief economist, Saul Eslake, was quoted in this weekend’s Australian Financial Review hinting that the Reserve Bank would be nuts to cut interest rates again, given the feverish atmosphere in the housing market:

“Albert Einstein is supposed to have said the definition of insanity is doing the same thing over and over again and expecting a different result,” Saul Eslake, Bank of America Merrill Lynch chief economist, said.

“I’m not accusing the RBA of being insane, but I wonder what they think they can achieve by cutting rates again.” …

“I hope they’re not being unwittingly drawn into it,” Mr Eslake said. “One of the causes of the Japanese [property] bubble of the late 1980s was that the Bank of Japan drove interest rates down and held them down at inappropriate levels to pursue a currency objective. I don’t want to overdraw that parallel, but it’s something that shouldn’t be forgotten.”

Another surge in house price activity will also worsen the combination of declining income growth and higher borrowing, which has pushed the ration of household debt to income above 154 per cent in the March quarter, Reserve Bank data shows.

Mr Eslake noted that 68 per cent of the rise in household debt to income, as measured by the Reserve Bank, since roughing three years ago had been because of rising property investment debt. “Since that is serving only to inflate the stock of existing [housing] stock, you’ve got to wonder what good that is doing.

“The more housing stock that is owned by investors, the more volatile house prices could become, in both directions.”

And in the same article, JP Morgan Chase economist Stephen Walters commented on the rather subdued behaviour of the regulators:

JP Morgan Chase economist Stephen Walters said further pumping up the property market was clearly a risk the Reserve Bank was willing to take. “Debt is going up and income is pretty compressed, which is why that [debt] ratio is going up,” he said.

Mr Walters said the bank was relying on the safety net of regulatory constraints on bank lending to avoid a build-up of risky loans, but expressed surprise at the Australian Prudential Regulation Authority’s suggestion last month that such measures would be done in secret. “I’d have thought they’d want to get out there and be very visible, waving arms around and putting up billboards sating there are new measures in place.”

Indeed!

Please find at the links some further reading for you, should you doubt me:

Here.

Here.

And here.

That’s just to start.

OK, what about the other side of the argument – do the ‘crashniks’ have better reasoning in the Oz article to support their conclusions?

Concerns about a market bubble and subsequent crash have often been made. At least one overseas analyst, Jeremy Lawson, the chief economist at British fund management giant Standard Life, has warned Australian property is up to 30 per cent overvalued …

Yet some commentators, including the Australian Financial Review’s Christopher Joye, have consistently warned of a pending crisis. “The RBA is blowing the mother of all housing bubbles to deflate an overvalued exchange rate,” he wrote last week. “It is replacing one asset pricing conundrum with another, arguably more dangerous, one.”

Joye had argued as far back as September 2013 that Reserve Bank rate cuts had “gone too far”, warning he was concerned about what lay “around the corner – and here, I am talking months, not years”.

At that time, the official cash rate was 2.5 per cent. It is now 2.25 per cent, with financial markets tipping another later in the year.

Early last year, widely cited US economic forecaster Harry Dent suggested Australian property prices were on the verge of the most violent collapse in generations, forecasting a 50 per cent decline in prices.

Nothing there either, sadly. The only tidbit we are given is from Jeremy Lawson, who tells us that Australian property is ‘up to 30 per cent overvalued’.

We can’t really blame the ‘crashniks’ for their lack of arguments: the excerpts from them are from things they have written previously, not from interviews with the reporters, as is the case with Haslem, McGrath and Zigomanis.

I find this article highly irresponsible. On the strength of fifty years of data, which show house prices always increasing, the reporters have drawn the conclusion that there is no cause for alarm – a conclusion entirely unwarranted by the evidence given in the article. The events of the last fifty years are no sound basis for forecasting developments. Were any person to conclude from this reporting that it was a good time to invest in the Australian property market, I think they would be exposing themselves to the great risk that they will do their money.

I’ll leave you with my favourite graph, from the Who Crashed the Economy? website. Have a look at the ‘Real Home Price Index’ (100=1890) and draw your own conclusions about whether we are in a house price bubble, and the likelihood of a strong and sustained fall in house prices – what I would call a ‘crash’.

UPDATE: In his column in the Australian Financial Review of Wednesday April 8, Chris Joye refers to the Oz article:

There is a misconception that the jobless rate has to jump for house prices to fall sharply. Yet there is nothing preventing buyers and vendors quickly downgrading their views on the value of these assets by 10 per cent to 20 per cent.

Rapid price changes of this magnitude were seen across all asset classes, including residential real estate, during the GFC.

The proposition peddled in one newspaper at the weekend that it cannot happen here because there has been no correction of that size in the last 30 years is asinine in the extreme. 

Well said. I couldn’t agree more.

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About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
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