David Uren takes aim at the housing market

David Uren has been on fire recently, publishing top notch articles in the Australian on conficts of interest within the RBA and Dutch Disease hitting the budget.  Today he followed up with a cracking piece on how RBA and government incentives have hurt the Australian housing market. Below is an extract of the best parts, with some charts added for extra context:

The efforts by the government and the Reserve Bank to prop up the housing market during the global financial crisis are largely to blame for its sick state now.

The boosts to the first-home buyers grant and the slashing of interest rates brought forward demand and left a hole once the stimulus disappeared… Add in the pro-cyclical influences of the tax system, and there are the ingredients for a housing slump…

The Australian housing market is in a worse state than is widely understood. Demand is falling, supply is rising and the monthly turnover is drifting lower.

Prices have gone nowhere for the past year, but market dynamics suggest the scattered falls will become more widespread.

The best measure of demand is housing loan approvals.

A big fall in January, revised up last week to 6.3 per cent, was mainly sheeted home to floods in Queensland and Victoria. But the subsequent 5.6 per cent fall in February hit all states, with a 10 per cent drop in NSW one of the biggest. Looked at over a longer scale, new home loan approvals are down by 30 per cent from the peak reached in September 2009.

The best measure of supply is the property listings. RP Data’s assessment of online and newspaper listings shows there were a record 260,000 properties advertised for sale over the four weeks to April 3. That is 24.1 per cent more than a year ago, when the market was booming. While the properties on the market are rising, the number actually being sold is falling.

RP Data senior research analyst Cameron Kusher says that monthly sales stood at 37,500 in May last year, which was when prices peaked. By December, they were down to 27,500. So there is now 9 1/2 months’ supply of houses on the market, up from 5 1/2 months’ a year ago

When the global financial crisis struck in September 2008, the big worry was that rising unemployment would result in a wave of forced housing sales and defaults…

With Australians carrying more housing debt than almost any other nation, and Australian housing prices having risen further, Treasury, the Reserve Bank and the Australian Prudential Regulation Authority feared a housing slump would have catastrophic consequences.

Treasury chief at the time Ken Henry said Treasury had always hated the first-home buyers grant, believing it simply resulted in prices being bid higher. But on the edge of the precipice, that seemed like a good idea. The $7000 grant was doubled for buyers of established homes and tripled for buyers of new homes.

The Reserve Bank swiftly slashed its cash rate from 7.25 per cent when the crisis broke to 3 per cent by April 2009. Standard mortgage rates dropped from just under 10 per cent to 5.8 per cent…

From April 2009 until March last year, the combined effect of demand from first-home buyers and low interest rates was pushing house prices up at a rate of 1 per cent a month, leading the Reserve Bank to fret about a new housing bubble. That was then. The number of first-home buyers has dwindled from a peak of about 18,000 a month to an average of about 6000 this year. The stimulus incentives did not increase the pool of first-home buyers — they simply encouraged people to bring forward the purchase.

Here are some some RP Data charts on first home buyer activity that support Uren’s point:

Back to the article:

Most market economists argue Australia cannot suffer a housing market slump, because there has been under-building for years despite strong population growth, generating a shortage. But the suppressed level of first-home buyers shows that the barrier to new household formation is high…

The reversal of the Reserve Bank’s stimulus has drained both first-home buyers and prospective traders from the market… With the increasing weakness in the capital gain outlook, investors are [also] deserting the market…

This is all consistent with the research reported in the IMF’s latest report: “Subsidies to first-time buyers are shown to both amplify house price swings in the up turn and lead to deeper subsequent busts”… A further finding is that variable rate mortgages destabilise housing markets, as people are encouraged to enter the market during periods of low interest rates without fully appreciating the interest rate risk they are taking on.

Global investors have long prophesied that Australia’s housing market would inevitably suffer a steep fall, pointing to the fact that its prices have risen higher in the past five years than any other advanced country.

Below is a chart for a comparison of house price growth in Anglosphere countries:

Back to the article:

That view has been discounted by all but the most apocalyptic Australian economists. The level of population growth, the strength of household income and low unemployment suggest nothing should go too seriously wrong.

But the IMF says the leverage of the housing market generates feedback loops — rapid housing credit growth pushes prices higher, which encourages further credit growth and, as Australia may be finding, vice-versa.

In my opinion, Uren neatly captures the current state of play in the Australian housing market. In a nutshell, first home buyers (FHBs) are deserting the housing market which, in turn, is preventing buying from people wanting to trade-up, since they need to sell to FHBs first. And with the lack of demand from owner-occupiers causing sluggish house price growth, investors appear to also be losing interest, since they are driven predominantly by capital gain not by rental yield.

Further, Australia’s housing market has been made inherently volatile by: 1) Australia’s generous negative gearing and capital gains tax provisions, which encourages investors to pile into the market and chase capital growth on the way up only to desert the market as prices stagnate or fall; and 2) FHB subsidies, which amplifies house price swings in the up turn as demand is pulled forward and leads to deeper subsequent busts as demand later evaporates.

One additional layer of potential price volatility not discussed by Uren relates to Australia’s unresponsive housing supply, which causes swings in housing demand to flow directly into prices rather than changes in the level of construction (see here for an explanation).

Another point not raised by Uren is that the gradual retirement of the Baby Boomer generation is likely to act as a significant drag on Australian house prices and the economy going forward (see here and here for details).

All in all, it is gratifying to see mainstream commentators like David Uren writing such well researched and reasoned analysis (MacroBusiness is clearly amongst his sources), rather than acting as just another mouthpiece for industry vested interests.

Indeed, the tide of public opinion appears to be turning judging by the recent change in rhetoric within the mainstream media.

Cheers Leith

[email protected]


Unconventional Economist


  1. Yes, this was a goody. I suppose the MSM couldn’t ignore the train smash forever, as if it wasn’t happening.

  2. So house’s float overseas on a ‘Pacific Princess …to find Captain Stubings
    been borrowing fuel ,in all with,
    Doc Bricker ,gofer and crew ,Having other motives seems,apart Piloting ,for their
    occupants ,well being
    The seas in stomach-hung motion,they rise,
    too maybe uncharted depths,..With sounder readings manual-functioning …Decks-baron tied and soaked aside n,Isaac’s gives less at the hotels bars-empty ,while the casinos cards,
    say losses are slotted..So in a fading is
    The “Love Boat” theme..back-grounding like..”Survivor” too wishing you we’re ‘Doctor Who…seems a modern-day Blues Box..theme apparent.
    Thanks-for.. grab a free EPIRB ,hope you do get lost….cheers JR

  3. Australia’s generous negative gearing and capital gains tax provisions, which encourages investors to pile into the market and chase capital growth on the way up only to desert the market as prices stagnate or fall

    The investors certainly aren’t buying, but they’re not selling either. I think Glenn has the market where he wants it — stagnant. If the downturn accelerates, or turns into some kind of panic, he has plenty of ammunition to fire it up again.

  4. The only problem with that article is that Uren still calls it a housing “market”. After three decades of first home buyer grants and tax concessions that make housing a more attractive investment class from a tax perspective the housing rort bears little resemblance to a real market.

    Uren has always been good. Megalogenis is the other Oz jorno who tended to stick his neck out and show some truly indpendent thought.

  5. 10 out of 10. You get rather tired explaining to your “house prices always go up” friends that:
    “If real estate always goes up in price in real terms, allowing for inflation & taxes, and if you accept that real estate investment is as old as China, then it must be obvious that all housing would long ago have become beyond the means of any ‘normal’ person to afford due to the ever increasing debt IN REAL TERMS required”. Once you see this, it is easy to see what is happening now is a contraction due to
    1) Demand brought forward;
    2) Slowing of the economy (despite mining) due to debt crushing discretionary spending.
    All other factors are are merely those that will have accelerated the rise (cheap credit & the Minsky euphoria effect) and will accelerate the fall (diminishing rate of return and fear) to reach the long term value of property. Long term real estate prices rise almost exactly in line with long term inflation. No other formula is possible.

    • The tune has changed recently – it goes like this – “prices are not going up , they will stay flat for a while and then rise”

      Almost sounds plausible.

      • This is perfectly possible. You just have to ask them how much money they are making when they’re paying 7-8% per year (interest only) for an asset that isn’t increasing in value..

    • House prices can go up in “real terms” for ever. Especially if those real terms are calculated using the artificially constructed CPI. Income keeps rising in real terms. Houses prices can follow.

      • True, but the house price to income ratio can’t go up forever unless:

        – Interest rates move to a permanently lower level (many have argued this has already happened)
        – We devote a much larger share of our income to housing

        Of course, interest rates can’t go negative, and we can’t devote 100% of our income to housing, so ultimately there is a limit to how high the price-to-income ratio can go.

        • Frustrated Economist

          Interesting comments regarding the construction of the CPI and permanently lower interest rates.

          Lower interest rates of the past 20 years have been identified as a by-product of dis-inflationary forces released after the fall of Communism in 1989 which increased the accessible global labor pool from a few hundred million to close to 2 billion. This of course has a depressing effect on real wages in most developed countries (which interestingly helped fuel the rise of consumer credit).

          So… this dis-inflationary tendency allowed central banks to run a looser monetary policy than they otherwise would have been able too. It should be noted that these dis-inflationary pressures have now revered (as all these new workers can afford a better lifestyle and thus pushing up commodity prices).

          Additionally when one uses CPI calculation methodology pre 1992 (before the advent of hedonomics and substitution rendered the CPI a cost of survival index rather than a measure for the decline in the purchasing power of money) it is evident that real rates are much lower than it would appear, thus more simulating than it would appear as well.

          So long story short after a 28 year bear markets in bonds ( and the resulting fall in yields) is about over. Rates will rise as bond prices fall, credit creation will slow and will the creation of new money needed to keep asset prices increasing at current rates.

      • I would probably add to Lorax’s point that:
        yes there is of course a finite limit, but

        the nature of that limit is not fixed but varies in a long term sine wave with an average gradient of inflation (be it allowing for 1.5 earners in a family or whatever) whose nature I hinted at earlier. To understand why that is a (somewhat)sine wave I leave to far more educated minds such as professor Steve Keen. However, even If I don’t try to follow the integral maths, I do understand some of the psychological drivers such as Hyman Minsky’s stuff. This alone dictates boom/bust not steady state.

  6. I am wondering out loud, if there is a large stock market correction, will this push people into the housing sector?

    • There is a case for that waz – given that the consensus view still remains that the housing sector is at the bottom of the cycle (particularly Brisbane), so cashed up Bogans, I mean boomers, could use their equity in their super to purchase “cheap” property.

      This theory is making the rounds, AFAIK, in financial planning circles as a “floor to the market” paradigm.

      Given that the drivers of the stock market – large super contributions and allocations from the Baby Boomer sector – can convert to cash very quickly and have been burnt before (GFC Episode 1: Attack of the Credit), the behavioural anchors are in place for this likelihood….

  7. Lorax

    The RBA’s only ammunition is interest rates. Given that the strong A$ relies heavily (but not only)on money flows related to interest rates a fall in interest rates is likely to see a significant fall in the A$.
    Even if the A$ stays stable somewhere above parity we are looking at maybe 5 to 7 or 8% inflation sometime in the next year or two. A fall in the dollar back to the area of say mid 80’s would be disastrous from an inflationary viewpoint taking inflation probably into double figures.
    I pose the question often. What would the RBA then do? Ignore inflation or raise interest rates.
    This is a series of thoughts not an infallible papal encyclical!

    As Minack said “The outlook is dark and gloomy because the sky is full of chickens coming home to roost”

    • The AUD is well supported as long as the commodities/China story keeps going gangbusters.

      If we saw panic in the real estate market (unlikely IMO because people can’t sell anyway) Glenn could send the market a strong signal with a ‘surprise’ 50bps cut. I reckon that would put a floor under the property market with minimal impact on inflation and the AUD.

  8. Malcolm Martin

    The Australian version of The Daily Reckoning and Money Morning have been forecasting this crash in the housing market for months. Only goes to show that if you want to know what’s really happening you have to avoid the mainstream media.

    • I think the surprise for me is how much Fairfax is ‘owned’ by various commercial interests, and how biased they are by that. But there are some good non-MSM outlets now like this one and it doesn’t matter very much. The Oz and Fairfax are still useful for their newswires.

    • Rubbish. The evidence of overbuilding will be low rents and eventually low prices.
      Numbers on a spreadsheet or numbers on a census cannot be lived in by young families who need a decent home a reasonable commute from their job.
      Look harder in the “data” provided by shortage-deniers and you can find their mistake. (A common mistake is to exclude the victims in the calculation)
      There is no need to look further than high rents. Yes there is a shortage wherever there is high rents and no alternative.

      • DavidV, you often note just how high rents are to proclaim a housing shortage, but which data are you looking at, and what meaning can we draw from divergent changes in rents and home prices?

        For example, if rent rise 10% in real terms over a decade, and prices rise 50% in real terms, does that mean there is a shortage? Or if rents rise 5% in real terms and house prices decline 25% in real terms, is that a shortage?

        • Rents rising in real terms is an indication that the supply of good stuff is being outstripped by the demand or need for it. A few percent is neither here nor there, but young Sydney people are being forced to pay much much more than their parents, or put up with a home that is grossly inferior to that their parents started with.
          It is easy to see that supply has fallen far short of demand. Government has invited in many many immigrants. Whether our young are being outbid by rich Chinese or poor Indians at 20 to a house, it makes no difference – they still missout.
          Government has doubled our population and built next to no new railway. The physical outstripping is clear to see. The high rent is an obvious symptom.

          It would take a miracle to double the population, build no railway, and have supply not outstrip demand. It would take the world’s best town planners to achieve that. You might think Sydney has superb town planning. I disagree. Of course rents have risen and choice fallen.
          The situation facing renters is worse as a result.

          You ask about price falls in real terms and what that would prove. The key is the actual level of prices, not the direction, or how much it moved compared to some cherrypicked time. Price should fall to historical norms and overseas norms in order to indicate the shortage is gone. I’d say 3x-5x of an ordinary salary for a good house would indicate no shortage.

  9. Problem is, Lorax, this is a losing game over the longer term. For investors, they’re sitting on overvalued assets that can’t go up and may well go down, if inhibited by the odd rescue. That’s hardly a recipe for sound investment…I’m still on board with the flattened market thesis but only so long as investors’ time frames for return are in decades…that is why the recent policy shift to stick property in super was a clever move.

    • I agree its a losing game long term, but its looking like a long, slow grind rather than a crash. In that case investors are likely to hang on (grimly) and just take the hit. They can’t sell anyway, there’s already too much stock on the market and demand is weak.

      What did happen to that shortage?

      • Regarding investors, most have negative cash flow. There is a limit to how long you can keep this up financially without capital gain. So prices plateauing will not stop investment properties coming to the market.

        • While they’ve got jobs they’ll hang on, its only when they can’t service the debt that they’ll sell up.

          Besides, the market will turn around eventually. Its positively un-Australian to believe otherwise.

    • I would be tempted to refine that view a little. Within the mantle of Super you can keep cash at the right time (the downswing period) and property at the right time. The trick is recognizing the start of the upswing. This isn’t a smug observation, in 2000 in the UK even blind Joe could see that property prices were about to rise after a period of stagnation & wage catchup. Conversely, now would require extremely unusual circumstances to buy property rather than a more cash oriented approach.

  10. The FHBG, is showing a worrying tendency to mirror perfectly the role of MIRAS (tax relief) in the disastrous 1989 UK house price crash.

    Bringing demand forward in an ungainly rush, then the tide goes out, leaving the most vulnerable exposed.

    But they only have themselves to blame hey?

    • I know. I look at the value of my own house and wonder whether I could sell it for what I paid for it 5 years ago. I suspect not, and it would take a loooong time to sell.

      Thank Christ I haven’t put all my eggs in the property basket.

    • Unlike this “poor” couple:


      Q Continuum sent me this this morning: here are his thoughts:

      Something is amiss when you read something like this:

      “Don Singe and his partner Leanne Cooper fear they will be forced to delay plans to renovate their house in North Curl Curl, on Sydney’s northern beaches.

      “Our one and only financial investment is this house. It’s our children’s future fund,” Mr Singe said of their home of 2 1/2 years, where they hope to raise Sam, 4, and Zach, 8. “People forget how much kids cost.”

      Mr Singe, a rugby league strength and conditioning coach, and Ms Cooper, a nutritionist who works from home, have a combined income of about $190,000 a year and feel they are lucky. Nevertheless, they still struggle at times.

      “We live on our pay, all our living is allocated from our pays and that’s why we have planned so carefully to make the best of our home,” Mr Singe said.

      The couple have private health insurance and one child in daycare, and fear a harsh budget could push their renovation plans over the edge.”

      There are so many core problems with Australia unwhittenly mentioned in those few sentences. House as their sole investment, “only” $190,000 household, worried about their renovation like it’s non-discretioanry.

      This country has some serious entitlement culture issues.

      Prince: I call it the “put your chicken and your eggs in the basket” Australian method of investing (sic).

      • I remember watching one of those panel documentaries like Insight a couple of years back when GFC hit. And there was a couple telling their story. They leveraged into a couple of investment properties and a coffee shop and number of customers was dropping and they were doing it tough?? If this is the idea of ‘doing it tough’ then it is completely out of whack.

      • Reads like a standard fix ‘n flip to me. Not only do they expect the tax free capital gain they expect their renovation to be indirectly subsidised with taxpayers money as well.

      • Nice example of a shamelessly provocative article by the MSM designed to generate maximum vitriol in the comments section.

        Having said that (and at the expense of indulging in a bit of mild vitriol myself), where do they find these people? Both couples come off as being fairly short in the self-awareness department.

        Ok, so rant over. I feel better now.

  11. Speaking of thinking out loud – There was a lot of talk in recent years about foreign investors buying into our housing and driving up prices – even to the extent that Real Estate agencies put on foreign language speaking sales staff. So what happens when those foreign investors are faced with the risk of both a stagnating or falling (clearly overvalued) property price along with a drop in the (conceivably overvalued) Aussie dollar? I suspect they won’t wait for the whiff of a downturn but would sell while things are high (ie now), further accelerating the supply on the market and the fall in prices.

  12. Lorax,

    A 50 point cut to rates would smash the dollar.

    And your point is a bit of a false premisss. As you’ve argued yourself, the RBA has us where it wants us, so to cut rates 50 points could only result from a housing market that is crashing, in which case it wouldn’t stop at 50.

    • Smash it to what? 95c? No disaster there.

      The RBA has us where it wants us now, and they’d only need to pull out the big cuts if there was a whiff of panic in the market.

      I have no doubt 50bps would put a floor under the Aussie housing market. Our love of housing is very deeply ingrained.

      • But aren’t our banks dependent to a large extent on foreign borrowing? Glen Stevens admitted that it was no surprise that the banks waited only for a nominal increase in interest rates from the RBA before they charged in with rates designed to maintain their margins. If you have to roll over large amounts of debt using foreign borrowers, the RBA becomes marginalised in it’s ability to dictate rates.

  13. On a lighter note
    I live in Brisbane but often travel to small coastal towns in Northern NSW & SE QLD for a few days break. I’m trying to put together a theory that relates the number of new real estate agent’s offices opening up in these small towns with the size of the impending property price crash. For example, in Yamba the other day I found it difficult to find a shop that wasn’t an REA.What does this portend? Any information would be welcome.

    • I live in Northern NSW. I’ve always wondered how small towns in my region can support so many real estate agents, especially when volumes are so low. In many ways it doesn’t matter to REAs if the market is going up or down, as long as its moving. I reckon there are agents up here only selling 3 or 4 houses a year. That doesn’t sound like much of an income.

    • Rob and Lorax – there are more real estate offices on the Promenade here in Hervey Bay than there are cafe’s and restaurants.

      HB is a classic study of house price bubble and the unresponsive supply thereof: there’s now a massive glut of properties and lots of starving RE agents as a result.

      • I haven’t been to visit the rellies in HB for about two years but I know what you mean. Very few new cafes, restaurants or recreational businesses have started there in the past decade in spite of the population boom and influx of cashed up retirees.

        In 2006 my Uncle said they’d have a median house price of $1 million by 2009 because every rich retiree in Australia was moving there. I guess these rich retirees don’t eat out much or engage in any recreational activities. Must just sit in their mcmansions watching daytime TV on the 70″ plasma.

        • Wife and I lived in HB for a couple of years till 2003, when we sold out and hit the road. When we bought in up there in 2000, you could buy a 4X2X2 brick veneer for around $150k. Same thing now costs (well, they’re asking) around $400k. The place has absolutely boomed since we first moved there, but I’d have to disagree with your Uncles’ assessment of the new arrivals. Rather than “rich retirees”, HB tended to attract those who could sell up in a more expensive location, buy cheaper in HB, and bank and live off the difference. I have a number of friends and acquaintances up there who rely on some form of business cash flow for a living, and without exception the story from them is “there ain’t no money up here”.
          I recall an article some years back about real estate, and the places to which retirement “money” was moving. A bloke from Ray White was quoted as saying of Hervey Bay “Poverty is much more bearable when you’re warm”. Said it all, I thought.
          Incidentally, they have a supply of new apartments in HB that makes the Gold Coast look deprived.

    • Rob,
      In Hervey Bay, there are two pests which have now reached plague proportions – flying foxes, and real estate agents. I think I know which one of them will be eliminated first 🙂

    • Wow, there’s no attitude in Rory Robertson’s reply at all there… Plenty of slogans and chest beating, but little merit, thought or any response to Dr Keen’s post. Just an attempt at discrediting him.

    • Wow is right Matt. Wow.

      You see it was people like Robertson who lambasted those like Schiff in 2006 (Laffer rings a bell – or a penny), Doug Noland throughout the early noughties, Jim Chanos with Enron etc…

      Those who are bearish on China have been so for a couple years now (Hugh Hendry my anti-hero in particular) and are still “wrong”.

      But what Robertson – and others who don’t understand that prediction does not mean precision – doesn’t grasp is it does not matter if you are right or wrong: its how much you don’t lose when you are wrong, and how much you profit when you are right.

      I seem to remember a certain $100 million wager is at least $3million in the hole at the moment. And like Keen, others have profited handsomely from renting and saving/investing the surplus in other asset classes (stocks, gold, bonds) that have almost always outperformed property…..

  14. I just received this email from my local real estate agent, I live in area that approx 7 years ago was approx 50% property investors, and has had stellar gains, although prices have been flat overall for the last 5 years.

    Reports from SQM Research this week show that the number of residential properties advertised in Australia rose by 13,100 or 3.8% for the month of March. Coupled with the fact that there is now a total of 356,600 residential properties being advertised online, up from 241,700 last year – a 47.5% increase over 12 months, vendors should be prepared to take seriously any offers put to them.

    Best regards Michele & the team at Ray White

    What happens next ?

  15. Nice article, but did you spot the mistake?

    It’s the bit where Australia is described as being “an advanced country”.

    Keep up the good work.