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Australian home prices, spending trends and statistics.

June 8th, 2009 · Greg Atkinson · 15 Comments

The debate about where Australian home prices are heading appears to be getting more intense these days. Commentators who have been predicting home prices will crash have seized on falls seen so far as proof they are right, whereas those who believe prices will not crash pounce on the same data and says it supports their view. Confusing isn’t it?

One major problem that I see with a lot of the housing prices number crunching that is going on is that it is done by people who have good intentions, but seem to have forgotten that at the end of the day a property transaction is between a buyer and a seller, not between economic models.

In other words home price graphs and statistics are great to look at and can tell us much about the state of the real estate market, but there are plenty of home buyers who will not be influenced by this data at all. I wonder for example how many people looked at a home prices versus disposable income graph when they purchased their first home?

One of the more well known property bears is Steve Keen who is an Associate Professor of Economics & Finance at the University of Western Sydney. His website (Steve Keen’s Debtwatch) contains a lot of very useful data regarding home prices and he makes some very valid points regarding the dangers posed by high levels of household debt.

His view is that property prices are set for a major correction (in the vicinity of 40%) is pretty extreme and is not a view held by economists at the Reserve Bank of Australia. (who I suspect are equally as smart as Professor Keen)

For example back in April this year Dr Luci Ellis from the RBA outlined a number of reasons why home prices had not collapsed in Australia (see
Wage growth averted house price collapse
) and other prominent figures from the RBA have also been out and about basically pushing the view that Australian prices will not fall as much as they did in the U.S and U.K.

The economists on both sides of the debate roll out charts, statistics graphs etc., while in the real world the daily business of buying and selling property goes on. Sometime in the future we will find out who was right although there is plenty of room for both sides to claim victory in a few years time! At this stage there is no clear winner.

The problem with much of the debate about home pries is that sometimes prices and demand are driven by changing preferences in the market, not by purely economic reasons alone. For example there does not have to be a sound economic reason why a person decides to buy a new sports car instead of opening a term deposit account at the bank If that persons decides they want the car and can afford it, then they will probably buy the car. They may have to give up a few nights out but that is a sacrifice they are willing to make so they can cruise around with the car roof down on a sunny day.

Have a look around the next time you are on the road and see how many large “people mover” type vehicles you see with just 1 or 2 people in them. Is there a real need for so many 6 seater vehicles in Australia? No. Is there a market demand or preference for these vehicles? Obviously yes. When I was a young nipper our family of five squeezed into a small Holden Torana! (2 door model) How times have changed.

Of course buying a home involves a lot more money, but we are still motivated to buy a home more because of our preferences rather than the basic need for shelter. How many people for example buy a home simply because it has four walls, a roof and doesn’t leak?

Spending trends can be very misleading. A simple example is the amount of money we spend on communications i.e. phone, mobile and internet connections. If you looked at the ratio of household disposal income versus spending on home communications over the last 10 years you would see that this spending has greatly increased. Does this indicate we are entering a home communications spending bubble? No of course not, we are simply spending more in that area as opposed to playing video games at the arcade or using public phones.

When it comes to housing people seem willing to hand over more money because they are prepared to sacrifice more of their income to pay for that preference. You or I may not feel the same way perhaps, but the one thing that the housing price data does show us is that in general, Australians are willing to spend more on homes. Steve Keen may have decided to sell his home and rent because he thought property prices were too high and about to crash, but his personal preference and number crunching does not mean others will feel the same.

Could a change in housing preferences result in less disposable income being spent on homes? The simple answer to this question is yes..it could happen. There is no law of economics that says people cannot decide to spend less on housing. A new trend towards smaller, more affordable housing could develop and this could push average prices down over the longer term. Will it happen..who knows?

Can anyone really speak for future home buyers some of whom are not even born or may be currently digging in the sandpit? Can we even speak for those people who may be looking to buy a home in the few next years?

I have no idea which way property prices will move in the future because I am unable to probe the minds of millions of Australians to find out what their intentions are. The simple truth is that nobody involved in the home prices debate has mind probes either, so past data is being analysed in an attempt to model what might happen.

If economic models actually worked reliably we would not be in this mess now and the world’s richest people would be the economists who created them. My apologies to all the hard working economists out there I mean no disrespect, but sometimes the profession needs to be whacked around the head with a cold fish.

I am not taking up or down property. I have posted on this blog before both sides of the argument but what I always question is extremes. If someone was to suggest that home prices will rise 40% in the next five years I would be just as sceptical of that prediction as I am of Steve Keen’s one, simply because it appears a little extreme. Could prices fall 40% in some areas? Of course they could and probably have already, but a 40% fall in average home prices across the nation….that is quite a fall!

However as I mentioned earlier I am unable to probe the minds of others, so maybe people reading this blog can help me out. Are people looking to spend less on housing in the future or are they willing to keep making sacrifices to get the home they want? Would you sell your home because prices fell say 20% or would you hold onto your home no matter what?

Is home ownership still preferable to renting or do people feel that renting offers much more freedom and is a better choice? What other factors (not statistics) motivate home buyers and sellers? Please let me know your views….


15 responses so far ↓

  • 1 8020 Financial // Jun 8, 2009 at 10:15 pm

    Hi Greg,

    I’m a renter, and plan to remain one for the forseeable future. Houses in Australia are just too expensive. I tend to take a Warren Buffett style view when it comes to real estate; buy when there blood in the streets, which is certainly not the case at the moment.

    I don’t know if Steve Keen’s prediction is correct; it does seem possible; certainly a 40% fall seems more likely than a 40% rise; but I’ve been expecting the property market to collapse since 2004 and it hasn’t happened.

    Agree though that when it comes to housing (and sports cars) people are not very ‘rational’ in the neoclassical economic sense. I have many friends on good incomes living like paupers because of the size of their mortgages. Home ownership, in spite of the cost, seems to be very seductive for many (perhaps most) Australians.

  • 2 Ned S // Jun 9, 2009 at 1:55 am

    All good points Greg – I also think that what happens to asset prices in apparent “bubble” conditions depends on whether one is expecting the general economic environment to be inflationary or deflationary.

    The other thing that seems to play a role is just how essential the asset involved is. For example, all other things being equal, it seems reasonable to expect a “bubble” in tulip bulbs to crash harder than one in gold, and for one in gold to crash harder than one in stocks and commercial RE, and for one in stocks and commercial RE to crash harder than one in residential RE, and for one in residential RE to crash harder then one in food staples.

    While I’m throwing around wild ideas, is it just possible that one of the things that has got our lords and masters cranked up this time, is that the real bubble was in credit, which a lot of people don’t really see as essential, but which our betters do???

  • 3 Greg Atkinson // Jun 9, 2009 at 9:15 am

    Hi 8020 & Ned S – I have been a renter many times simply because of the flexibility it offers, especially if you need to move for work. I have never really been a property investor and when I have purchased a home I did not worry if the price would go down 10% or so at some point, because I figured at some point it would also be up 10% over the longer term. I doubt back my parents day if they even worried about a capital gain..it was simply a home. But of course these days we have a lot of people playing mini-property tycoon so that puts a twist on things.

    The curious thing about this how mess is that politicians say it was driven by cheap debt and greed and their solution is to borrow and spend big. Isn’t that much the same as trying to get a smoker to quit smoking by making them smoke all the time? “Here you go, smoke this extra packet, that will help you quit!”

  • 4 Senator13 // Jun 10, 2009 at 5:10 pm

    Throwing cheap money around must be the Housing Ministers idea of a solution to the housing affordability situation. I noticed there were lots of promotions in Rudd’s reshuffle but I did not see anybody get the tap on the shoulder for poor performance.

    I do think Australian house prices will always have a fair level of support just because Australians in general like to own their own home and it is the ambition of most people to own a home rather then rent. Many residents of different countries around the world are content to rent and have no aspiration for home ownership but I think the Australian mentality is different when it comes to houses and there will always be a level of support for prices to a fair extent.

  • 5 Ned S // Jun 11, 2009 at 4:09 am

    Senator – A few years back a bloke I know with a lot better knowledge of Europe than me, passed the comment that it was very much his impression they were more accepting of renting as a lifestyle. He reckoned it had its upside in that having no mortgage principal to repay gave them more disposable income and they tended to enjoy a better overall lifestyle because of it. As opposed to Australia where I get the impression people are/were (?) a bit more inclined to say they were “only” renting – A bit apologetically even; But with the implication being they had plans for “better” things. The recent FHO buy up could reflect that thinking – They got an opportunity to buy and did.

    Also, if one is thinking about retirement in this country, it is difficult to discard historical impressions that if one has their house paid off, and is otherwise debt free as well, the pension plus perks have been adequate to get by on. But it can be much more difficult for a retired renter.

    Impressions like that don’t vanish from the culture unless something really happens to change them I imagine. Super has/had (?) probably made some inroads into that thinking. But by the same token I also felt a lot of people saw at least some of it being used to pay off their mortgage on retirement. The government may fiddle and try to work things so super gets locked up to pay an annuity on retirement where possible. But one would have to assume they’d need to leave open the option of using it to pay off the mortgage – For a good while anyway – A lot of people are relying on it I suspect.

  • 6 Senator13 // Jun 20, 2009 at 11:02 am

    Hi Ned, yes I would agree with a lot of what you have said.

    It is interesting comparing the different mentalities in relation to houses.

    Does anybody have any information as to if elderly people, such as pensioners, in Europe struggle with living expenses as much as those in Australia who do not own their own home and are forced to pay large amounts of their pension to rental expenses? Maybe the Governments in Europe have some form of rental assistance to overcome this? Maybe they choose to buy a lot later in life? If so, are they better at saving?

    I think with the way things are in Australia currently it would always be best for the majority of people to own your own place going into retirement. I think once you have retired and paid off your house it does not matter if prices go down because you are not looking to sell. As to what you do between the ages of 20-60 is another matter. Is rising unemployment and the possibility of rising interest rates enough to push prices over the edge of the next few years? Maybe, but maybe not to the extent as some have predicted. From an investment perspective, I still think that in some markets you will always be able to find somewhere that defies the trend.

  • 7 billy // Jun 23, 2009 at 1:24 am

    Hi, this is so interesting -up- down or neither.

    Well I have rentals in the UK and have seen prices drop as an average in the past 18-24 months from being offered 94k to 67k for a rental. around a 29% drop on the value plus whatever the difference would be in the past 2 years taking inflation etc into account(although the UK is now experiencing deflation).

    I know they say that UK and Oz are different ,true interest rates got as low as 3.25% mainstream in 2003 in UK .And maybe lots of buy to let investors went in too deep.
    But just as many people wanted their own house in UK as do Oz and when the prices were surging in UK they were matching the prices here in Oz.
    I compare the house I left in 1997 in UK with the house we bought in Oz in 1997 excluding the exchange rate it makes very interesting reading.
    The UK house in 1997 was 65k (130k dollars) @2dollars -1pound then in 2007 the UK house became 150k (300k dollars) @ 2-1 in 2009 the UK house is 110k (220k dollars) @2-1.
    However the Oz house now sits at around 320k dollars.
    A 32.5% drop in the Oz price will set them back to the 1997 level.

    So is the Uk price below par or the Oz price above the mark?

    In late 1988 the Uk house in question was being offered for sale at 60k in 1993 it valued in at 35k that was a 41% drop which took 5 years to happen. 20%in the first year and 20% over the next 4 years.

    Having seen how it can happen twice in the UK in my short lifetime I see no reason why it cant happen here in Oz. After all people are people and thats what caused the bubbles to start with.

    The big drop in 1988-89 seemed to be precipitated by a government policy change that affected couples getting tax relief when buying a house, it effectively caused a bubble up to the day it was pulled.Then interest rates blew up to 16%. So there was a double whammy happening to drive prices down in Uk.

    Now where am I seeing this happen again? FHB grant causing a bubble in the cheap housing.
    Unemployment on the increase. And this is across the boards.
    Yes im aware that Oz is big on mining especially here in the Hunter but hey doesnt that make it even more precarious with many 10s of thousands workers reliant upon one type of industry.

    The only difference I can see is that although in the 1980s we had the yuppees with all their money nowadays more people seem to be wealthier,even those on welfare.
    Just look at the cars in the shopping mall parks very few rust buckets so maybe if people do it hard in the coming years they still wont be as effected as previouls y. But maybe they will because they will feel poorer as they have less discretionary spending?

    Still house prices in UK are edging for the average family towards that 3 multiple for house cost against wage.
    Here in the hunter it is still over 5. nearer 5.5.
    Should that get to 3 then Dr steve keens prediction of 40% drop is spot on.

    One problem is that there are too many conflicting reports up- down whatever.
    This keeps the buyers still buying and the FHB are being conned into rushing in with interest rates at historical Lows. Only one way to go- maybe not 16% but even 10% from 6% is a big chunk out of the budget.

    When people see the trend down which is what is happening at present in Hunter then they may think twice and offer less , and if they hold out it will be even less etc etc remember this drop can take 5 years.
    Forget increasing population to push prices higher-the valuation lenders wouldnt let it happen. And rents always have a ceiling-when they hit the top fewer people look for rentals and guess what the price falls.

    My prediction is around a 40% drop from the highest value your house was worth whenever that may have been with maybe a few exceptions for exceptional houses.

    Oz hasnt yet seen the blood in the streets but worry not it is coming we are slowly moving towards it -green shoots probably weeds , the slowing economy is not wanted byanyone especially the big banks but it is coming. Foreclosures drive prices down. Unemployment makes for forclosures.
    Underemployment makes for hard times.
    Clear all your debts, downsize batten down the hatches.
    Those living on savings -retirees are doing it tough maybe they can get by at present but they will soon need to sell up -at a loss even.
    The house price reduction has many facets.

    Cheers
    billy

  • 8 Greg Atkinson // Jun 23, 2009 at 9:33 am

    Billy – thanks for some great input. There are a lot comparisons made to U.K home prices in Oz so it is good to get some facts from the coalface as they say.

    I am just wondering if you could comment on a few points:

    1. Is the “average” home in the U.K and Australia equal in terms of size, quality etc? For example is the average U.K house sitting on as much land as the average Oz house?

    2. Can you sell the family home in the U.K and not pay tax on any capital gain?

    I agree with your comments about the FHBG and this is starting to worry me. The government seems to be enticing people to take on debt in the middle of a economic slowdown and credit crisis…seems to be a pretty confused policy to me.

    Cheers!

  • 9 Ned S // Jun 23, 2009 at 10:50 am

    Senator – I saw a recent MSN (US) article that gave figures on what percentage of their incomes American retirees spend on different things. I don’t recall the specifics but travel/transport(?) was high at about 16%. Housing was the highest at maybe $12,400. (I’ve forgotten what percentage that was.) I guess one of the ways pensioner home owners get hurt by house price drops is if they need to sell to fund a place in some sort of supported living retirement environment.

    Billy – Thanks – It’s good to hear the thoughts of someone who has some history and a bit of skin in the game in the UK market. I also got the impression that the Poles packing up and going home when the Brit economy turned took some pressure off UK house prices? Although it may not have been a big factor. I’ve got a bit of skin in the game re Oz housing. (Brisbane region specifically.) I’m punting on a stagflation scenario rather than deflation, so believe the inflation side of that will work against price drops as great as 40%. Was talking to a local hardware store bloke about it yesterday and he could tell me some of his product lines are up by as much as 50%. A pot of paint I asked about was up by about 10% for the year. It will be interesting to see just what lengths the Oz government is prepared/able to go to to protect the housing market. They’ll be fairly motivated I suspect as Oz doesn’t have a very diversified economy. Housing and the banks that supply the finance for it are two of the big three I think?

  • 10 Pete // Jun 24, 2009 at 12:42 am

    billy: Great comments, thank you! 🙂

  • 11 Greg Atkinson // Jul 7, 2009 at 3:04 pm

    I see the RBA have left interest rates steady today and feel house prices are tipped to rise. So I guess either the RBA has lost the plot or Steve Keen has?

  • 12 Ned S // Jul 8, 2009 at 7:54 am

    Greg – The RBA decision is based in part on its perception China is doing pretty well. That is very debatable I’d say – Certainly both UBS and Deutsche Bank have a different view. But why prattle on about China when as you’ve pointed out previously, Japan is still actually more important to Oz anyway – Some jawboning that fits with the public’s perception of what might be good for Oz perhaps?

    And the RBA reckons inflation is very low – I have a few issues with that assessment too?

    House prices are tending to rise – Yes, there is some truth in that, but what Stevens did not draw attention to is why this happened or any of the things that could happen very soon to reverse it. Or just how worried they must be that house prices could drop – The fact that he even felt to comment on it is a very obvious case of jawboning.

  • 13 Greg Atkinson // Jul 8, 2009 at 9:04 am

    Ned – I sense the RBA’s comments are being more politicised these days, they appear to sometimes just echo the views of the Government. I wish the RBA would stick the facts…if we want forecasts we can get those from the Treasury.

    Personally I do not get why the RBA and Treasury are so bullish about China. Japan is a lot more linked into China then Australia are the forecasters in Japan are far more cautious.

  • 14 Ned S // Jul 8, 2009 at 11:02 am

    Greg, I don’t think the RBA or Treasury can make any forecasts that they can have any faith in. Much of it still comes back to the US. And there are plenty of indications that the health of that economy is being presented as better than it is – Mark to market? Is it really foreigners buying their bonds? A savings rate of 6% – That does sound quite incredible surely??? Even the unemployment rate is questionable.

    I’ve heard a lot of talk about green shoots – But I can’t actually name one? Progressively less bad does not equate to good as the wits delight in reminding us. Exactly what US industries are the green shoots in again???

    Can’t blame the US in many ways – They are in a hell of a hole – And trying to flog off huge amounts of bonds to parties who really don’t want them – And at best just might be buying them because they have vested interests in seeing them not crash.

    Look at California – 12% of the US population and 12% of its GDP and not much chance of a boom in anything that I can see coming along to dig them out of the hole.

    And if one can’t place any faith in how the US is going, then anyone else’s forecasts have a huge question mark hanging over them. Unfortunately, if we are honest, the real big picture stuff tells us that the US is doing badly. Three examples:

    1) The amount of money they are borrowing tells us things were very bad to start with.
    2) Various parties (including poor stupid Kevin Rudd) want to know how the stimulus will be stopped – No answer is the stern reply – Interpretation: The US has no need for a planned way to stop the stimulus at this time as it has no intention of stopping the stimulus at this time.
    3) Indeed, the US pollies and public are being softened up for the fact that another round of stimulus will be required.

  • 15 Greg Atkinson // Jul 8, 2009 at 1:41 pm

    I wonder if Steve Keen is getting ready for a long walk? He must be getting a little nervous see: Keen sticks to housing doomsday call

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