Crash testing

As mentioned by Delusional Economics yesterday, the bastion of the Aussie punter, David Koch, has issued a warning that Australian home values are on the slide.

The question now is how far will prices fall and over what time period? SQM Research’s Louis Christopher recently issued a newsletter predicting falls of 5-10%, whereas many bank economists still expect prices to plateau.

For the sake of comparison, I thought I’d take readers through the housing corrections/crashes recently experienced by other developed countries, namely: New Zealand, the United Kingdom, the United States and Ireland.

Scenario 1: New Zealand slow melt

New Zealand’s housing correction has, to date, been relatively mild owing to its close linkages to China via Australia [Australia is New Zealand’s largest export market]. In nominal terms, New Zealand home prices fell by 9% peak-to-trough between September 2007 and December 2008. Prices have since recovered somewhat to be down 5% since their peak. However, in real (inflation-adjusted) terms, prices are down by 15% from their peak.

New Zealand home prices have shown little prospect of recovery as the economy slowly deleverages following a decade of credit-fuelled consumption. In the absence of another external shock, prices are likely to continue stagnating, declining in real terms as incomes catch-up.

Scenario 2: United Kingdom mini crash

The UK housing market experienced a mini crash over the period September 2007 until June 2009, whereby home prices fell by 21% in nominal terms peak-to-trough. Prices have since recovered slightly to be down 18% since the peak. In real terms, however, UK home prices have fallen 28% (see below chart).

Like New Zealand, the UK housing market is showing little signs of recovery, with the economy in a deleveraging funk compounded by the government imposing austerity measures on households. In the absence of another external shock, prices are likely to continue stagnating, declining in real terms as incomes catch-up.

Scenario 3: United States crash

The US housing crash is interesting because there are two main indices commonly used to measure national home prices: the narrower 20-city Case-Shiller house price index and the broader 50-state FHFA national index. As explained previously, nominal home prices have been more volatile in the narrower Case-Shiller index because it comprises more housing markets where land/housing supply has been restricted (click to view comparison chart).

I have chosen to use the Case-Shiller index in this case study since it more accurately corresponds with Australia’s restrictive urban planning system. According to the Case-Shiller index, US home prices have fallen 31% in nominal terms since their peak in June 2006. In real terms, however, home values are down a whopping 36% (see below chart).

The US housing market, too, is struggling to recover as it is marred by negative rates of household formation, a large stock of unsold homes, restrictive credit conditions, and household sector deleveraging (see here for details). As such, home prices are still falling and are likely to remain subdued for an extended period of time.

Scenario 4: Ireland crash

Like the US, Ireland has experienced a nasty housing crash, with nominal prices falling 37% peak-to-trough between September 2006 and December 2009. Home prices have since recovered somewhat to be down 28% in nominal terms and 29% in real terms (see below chart).

The Irish economy is cactus. Official unemployment is 15%, Irish citizens are in debt to the tune of 170,000 euros per head due to the government bailout of Ireland’s banks, the economy is surviving on hand-outs from the EU and emigration is at levels not seen for decades.

Combined with the Irish Government taking an axe to spending and increasing taxes, thereby further exacerbating the economic malaise, as well as the large stock of unsold homes, the Irish housing market will remain in poor shape for years to come.

What’s next for Australia?

If commodity prices can remain near record highs and international capital markets remain willing and able to fund our banks,  then a New Zealand-style slow melt is probably on the cards for the Australian housing market.

If, however, the Chinese economy slows sharply, causing commodity prices to fall back to their long-run average, then a UK-style mini crash is likely.

A full-scale housing crash would probably require a hard landing in China and another GFC, causing: (i) a complete collapse of Australia’s terms-of-trade; (ii) a severe worsening of the Budget bottom-line; (iii) credit rationing and severe bank stress; and (iv) increased unemployment and a deep recession.

Which scenario (if any) do you think is most likely for Australia?

Cheers Leith

[email protected]

Unconventional Economist


  1. (In NZ)..”as income catch up..”. I doubt they will. We have > 6.6% unemployment ~ 27% in the 15-19 y.o. age group, and those figures have excluded Christchurch ( that would make the figures look really bad!). So I’ll go for NZ actually ‘doing a UK’, cutting out Australia’s ‘best’ comparative option! And let’s not forget, ‘our banks are your banks’.

    • The_Mainlander

      Hey Janet, and I think the NZ government wrote into law that the Aussie banks which are your banks will own the debt if they fail not the NZ people!


      Oh dear maybe if there is a large term drop in house value in NZ this could also hit the Aussie economy as yet another factor?

      Or do you think the Kiwi’s will work your way out of it with improved productivity and reducing debt?

  2. IMHO retail spending will be the ‘canary’ in our economy. When punters shut their wallets – unemployment will rise and all else will follow accelerating downhill.

    The retail sector is the largest employer in our economy.

    • Indeed, and the recent budget was yet another shot across the bow of the consumer household sector who are already highly anxious about interest rates.

      I think this budget may dent spending and at least give ‘your’ canary the wobbles.

    • The_Mainlander

      I want my money back from my Super Now! Not only that but how will we fund all these damn boomers as they tap the funds and we hit the wall with housing values.

      I feel very ripped off by the Boomers… maybe we should eat the rich as the 1980’s film showed in such bad but funny taste!

      Or we could just tax the wealthy boomers (not all boomers are cashed up and greedy).

  3. Oz housing will crash 80-90pc. As will the US, the UK and Europe.

    The great delveraging has barely begun.
    Europe has Greece, Ireland and Portugal dying at it’s door and when the bondholder write offs come, it’ll crash Germany very, very hard.

    The US has not created any jobs for a decade while it’s population has risen by 28 Million and it’s total debt load has doubled to about 54 Trillion. How are they going to pay that back?

    China’s economy is a derivative of the US and Europe and Australia’s economy is a derivative of China’s.

    Every dollar of GDP growth in China now takes $4.3 in credit, up from 1.1 – 1.3 pre GFC.

    The world is still in a crisis, all this debt has been papered over for the time being but when the bubble bursts it will be monumental.

    Homes are meant for people to live in, not for speculative purposes. Would you rather have high interest rates and homes you can purchase for a few thousand dollars in the space of a few years or be in debt servitude for 20-30 years of your life?

    Bubbles everywhere – housing, stocks, commodities, education costs and in healthcare in the US.

    • I hope you are right VK as I can not afford anything in Sydney at the moment and am getting sick of moving from rental to rental. It would also be nice to be able to afford a place with a back yard so the children could learn what grass is. Still if it did crash by that much I would probably be out of work and wouldn’t be able to afford anything anyway.

    • The_Mainlander

      Yep, the re-structuring of the Greek debt yesterday is a guise for default. They are so sh*t at managing an economy when the don’t want to work, pay tax or give a sh*t about their ‘common good’ as a country.

      The great Greek philosophers must be spinning in their graves (poor Epicurus) – so sad.

  4. I think Australia is heading for a far worse crash than Ireland and the US. This will happen when China bust causing another GFC around the globe. I just wonder when it will happen.

      • The_Mainlander

        I think it will be China… we can’t be far away from hyperinflation in China. Remember they run on wafer thin margins in there Massive Factories and the Chinese population generally rely on cheap foods (dire quality unfortunately).

        All the overbuilding is out of control… I think they will be left with Detroit USA style steel recession in the future millions and millions of square feet of capacity for ‘stuff’ but no buyers and no maintenance on the factories.

        It will be a very interesting decade this!

  5. I’m not sure to what extent the commodity boom can cushion us. Mining is only a fairly small part of the overall economy – less than 2% of total employment. Only around 5%-6% of GDP last I heard and that doesn’t take into account that our most lucrative mining – iron ore and coal and to a lesser extent bauxite and aluminium – are heavily foreign owned and return a great deal of the lucre generated to overseas shareholders.

    One thing I note is that mining in general is running so hard and fast that it’s practically glowing white-hot, yet the premier mining state – Western Australia – is in recession last I looked.

    The state’s fortunes seem to have followed the state of their housing sector (the first place in Australia to fall into the housing slump) rather than their booming mining sector. It could just be coincidence but again it makes me ponder which is the bigger economic driver. If it can’t offset a housing slump in the states with most of the resources than it seems unlikely to be able to do so for the country as a whole.

    Seems to look more like long, slow melt at this stage but that could easily change.

    • Agreed. If everything stays orderly, then a long-slow melt is on the cards. But if not, then a mini crash or worse is possible.

      The bottom line is that there is minimal upside potential for house prices but lots of downside risks.

      • Howdy UE
        With large mortgage debt (and cautious consumers) on one side and a mining boom on the other, Australia is in a classic “meta-stable” state at the moment. All that’s required is a push and I think things will change quickly – US or UK style.
        The mounting cost of living pressures (power, petrol and water bills) may provide a low-rising push. China falling over will be the quick push.

        • The_Mainlander

          Leith, great post as always, has the RE market just brought forward 40 years of property growth. Is it not true that property to be sustainable should grow by about 2% a year?

          If this is the case then how ca there be housing growth?

          I worked for 2 very-very large .coms OS that went bust in the dot com bubble I have seen this all before.

          In the end all bubbles correct – this bubble looks to large to slowly deflate IMHO.

    • Perhaps the ‘booms’ impact on the Aussie Dollar is why it appears to be having a disproportionate (compared with % of GDP) positive effect.

      It is perhaps a sheild to some inflation of fuel and food.

      Appears a safer destination to park capital easing the banks refinanceing headache

    • Interesting to maybe see WA from thoughtful other eyes. We are just bulk marginal farmers here with the populations shrinking. The mining sector is the big money, to the shareholders. Trying to see where the money flows. The miners mine and export. Their shareholders make money to spend. The workers make money to spend half of it on houses?? and the rest on imported toys ?? or offshore holidays? and the Government gets some royalties. But a large part of the Government’s money comes from share of income tax and GST from Canberra AND stamp duty on property sales, meanwhile it is stuck with all the health and education and infrastructure costs of a big growing state with miners flying in and flying out of over 1000 remote mines operating out of over 600 base camps, issues about harbours and security and training the workforce and so on. Previous governments used utilities as largesse and undercharged and allowed railways and power poles to deteriorate, with the latter leading to bushfires etc.
      So, depending on the timing of things, and who pays for what, a “boom” can actually cost a government and its taxpayers a lot of money before any of it trickles back down. I would be interested if anyone has any neat summaries of how the numbers crunch.

  6. Sandgroper Sceptic

    US crash coming. At first it will feel like the NZ situation, a nice slow melt but as punters reassess and our China boom wobbles it will accelerate to the downside. Any 2008 liquidity exit event in stockmarkets will simply sharpen the downwards descent – house prices related to underlying incomes are way above normal/sustainable levels in the lucky country.

  7. How about option 5, the Spain Pain!
    Considering the amount of stress small business is under and the people who had to use their home as collateral for business.
    Thats another nasty feedback loop to think about.

  8. I don’t think one can properly compare all these house price crashes, expect in hindsight. THe US looks to be double dipping. UK house prices are dipping again too. Japan took quite a long time, and is still deflating.

    Personally, I’m thinking that the crash will start slowly and accelerate later. I think the housing religion will keep them from crashing too hard at the start. It will take a while, if ever, for people to truly stop believing, especially after such a great long run with our economy and house prices. And don’t think that RE spruiking will stop at any point in this downturn. It will ALWAYS be a great time to buy.

    However, in time, as unemployment catches up to housing falls, reality will force these zealots to convert.

    The fact though is, the long it takes the worse it will be. As house prices stay high for longer, it means more and more Australians will set themselves up with crushing 20-30 mortgages, more and more of which will go into negative equity. Bank losses and bankruptcies will then be magnified when it all gets too much. After all, not everyone can live on a sustenance budget in order to repay their house.

  9. It would be also interesting to compare level of leveraging into investment properties. We are probably at the top of the list, compared to other countries, when it comes to middle class investing into property due to incentives like negative gearing.

  10. I think we will experience a mini crash in the following sequence.

    -All those poor people in 1-30days arrears at ANZ move to 90+ come full year result.
    – Credit is restricted as a result
    – Rating agencies downgrade banks credit increasing credit squeeze
    – Negative geared investors bail out en masse.
    – RBA remains in denial. “Probelms in housing market will be contained”
    – Unempployment rises. RBA unable to cut due to QE3 and oil price at $150 again.
    (great blog on krugmans site about impossible trinity worth reading
    – Desperate govt tries intervention more grants AOFM free money.
    – AUD tanks Bank shares get killed.
    Then slow deflation year after year as people lose appetite for leverage and foregin investors refuse to fund our ponzi scheme.

    I think all this can happen with a booming terms of trade. Inflation is really hurting people atm and looks like getting worse. Unless Stevens can channell Paul Volker I cant see it getting any better and even if he does have the courage to act it will kill the economy.



    • Armand Tamzarian

      The RBA seems to be parroting/channeling the Bernanke line from 2005 through 2007, i.e. everything is fine here folks, nothing to see here, move along. Sad thing is it wouldn’t surprise me if it is genuine and they actually believe it. Slaves to failed economic theories.

    • Armand, That was my thought too. I think the exact phrase they used at the time was “contained” (as per the quote above).

      The US Feds were over confident it was only a sub prime issue that would be ‘contained’. Well, we all know how that turned out…

      I can’t see how it is going to be any better here. Again the US started slow with prices flat lining for a while. And that was the begining of the end. The RE prices had to rise continually to prevent defaults and keep the pyramid growing. So soon as they tapered off the game was up.

  11. Any chart of the Aussie residential property market for the past 20 years shows it up as the scene of a financial mania, akin to any of the pre-crash financial mania markets of the past (eg. Dutch tulip mania, the South Sea Bubble, Japanese stocks in the late 1980s, Nasdaq up to the year 2000 etc).

    History has shown that when a financial mania ends, prices trend back toward where they were when the mania started.

    When did the housing mania start? If you can answer that, you’ll know what prices to expect some time in the future. I’d say we’ll see prices back to early 2000s levels, or lower.

  12. Lighter Fluid

    CBA’s quarterly update is out. My favorite line from Norris:

    “Notwithstanding present challenges, we continue to expect a gradual improvement in operating conditions through calendar 2011, as the economic recovery strengthens and system credit growth continues.”

    In the mean time, residential mortgage loan arrears due past 90 days increased 11% for the quarter…

    • CBA: 90-days arrears up 11%, BankWest: up 10%. My favourite line is the bankspeak (very much like winespeak)

      “a modest uptick in home loan arrears, reflecting … the seasoning of 2008 vintage loans”.

      (with a rotting fruit aroma on the palate)

      • Given that CBA own Bankwest, that is going to start to hurt at some point….

      • I can relate to that comment, as I have at times tried to fein modesty, when in fact I was ashamed.

    • My update is up – summary only as CBA did not publish any financials, except the Basel capital ratio/risk disclosures (the readings on loans arrears is interesting – business and retail are up 20% q-o-q…..)

      If CBA doesn’t slow down mortgage arrears, it will be over $4 billion 90 days past due by end of calendar year.

      Interest rates going up? Yeah, that’ll be great for the banks.

  13. Please explain how this will affect public servants. With permanent employment, and more perks and lurks than private. Vastly superior superannuation. Pay increase rates vastly exceeding private. Early retirement/redundancy packages that are obscene. Salary sacrifice, novated leases, cars supplied, fuel supplied, car parking supplied, more holidays, flexi time.

    Goldman Sacs and Australian public servants front running entire economies.

    For protected fat arsed wombat species the only losses will be paper losses.

    Real losses will be borne by the tax payer and his family. Kleptocratic statists.

    Personally, I know of one public servant who has had numerous redundancy packages, drove a phantom desk on full pay for more than a year, works in the CBD, yet is supplied with car, fuel, parking (lives less than 5km from CBD).

    Public service Wages in 2010/11 QLD budget of $16.221B (no “benefits” included). Employment- 230,000 (does not include outsourcing).

    It’s time to throw a sacred cow on the barbie.

    • States that depend on GST revenues and stamp duty for any substantial share of the revenue will start hurting soon I imagine.

    • All I can say is “Greece” is the word.

      Like Greece the only thing keeping this country alive is the pay packets of zombie public servants.

  14. FWIW, I think the property downturn will be very uneven, with certain markets experiencing falls of more than 10% (even without a China slowdown) while other markets will be relatively unscathed.

    If we the RBA hikes by 100bps by this time next year (as suggested here by CJ’s mate “Blocko”) then the tourism centres in Queensland will be in huge trouble, as will Melbourne, Brisbane and possibly Perth. Sydney will probably escape the worst of it, because its the one city in Australia where there are genuine supply restrictions, and well, because its Sydney.

    If China over does the tightening, or the Chinese property market experiences a serious correction, then all bets are off, and the dynamics of the Australian economy (and the Australian property market) change completely. All of a sudden you’d be looking at depressed mining regions, a weak currency, and a rebound in the tourism and manufacturing areas.

    • Sandgroper Sceptic

      Perth property is already off 10% and the amount of stock coming onto the market is growing ever larger. Starting to see some local sellers ($1m+ props) cut and cut their prices again with no interest. The BBQ mood regarding property has had a sea change here.


    Many parts of Assie have already crashed by more than the nominal amount of Ireland or the U.S.,i.e; Gold Coast, Noosa , Mandurah and many, many other regions and prestige places with thousands of listings and virtually no buyers. Unfortunately, this is just the beginning of the slippery slope as in the countries we’ve mentioned.

    • Wasted Opportunities

      That is an amazing tool for comparing renting/buying that I have recommended to several friends. There are some minor differences, but it can still be used for Australia. The main differences to note are:

      Capital gains tax (US has an exemption up to $250k for singles or $500k for couples, but in Oz all capital gains on family home are exempt)

      Marginal tax rate – The only thing this setting affects for the calculations are tax deductions of interest repayments. You can’t deduct interest payments on the family home in Oz, so this need to be zero.

      There are some other minor things like renters insurance that also don’t apply here.

      If you can find a single location in Australia where buying is better than renting within a 10-year time frame without relying on continuing house price growth of over 5%, and reasonable historical values for all other variables, I’d be interested to know.

    • It is not quite good for our market because it includes interest tax deductions

      • Wasted Opportunities

        john, you can set the marginal tax rate to 0 in the “advanced” tab to remove this from the calcs.

    • I’ve been playing with it for a few days and am hardly able to get a result where buying is in front of renting over 30yrs, let alone 10.

      Thanks for the info re. capital gains.

      • Wasted Opportunities

        No worries, you can adjust the calculations fairly easily for this as it tells you the calculated CGT on the sale (if any) near the very bottom. If there is a non-zero number for tax-payable, just set it to zero and adjust the bottom line accordingly (it will improve the buying scenario slightly).

  16. adayinthelife

    I just read this property advice question on domain in the age.

    Q. I’m 48 and my husband is 55. As a result of renovations blowing out to $300,000, our mortgage is $690,000.

    Our home is worth $1.1 million. We have two positively geared investment properties, owing $280,000 and $525,000, with about $100,000 equity in each.

    Our incomes are $95,000 and $76,000 and we have $200,000 each in super. Should we sell one rental property and pay some off our mortgage or buy another investment property to minimise tax?

    • I have no idea how people handle this sort of debt. My wife and I earn more than this couple, we bought a place in late 2008 and have $350k debt (taking the extra in the FHOG + the ability to fix our interest rate for 5 years @ a little over 5%). It was a lifestyle decision and due to the cheap interest rates on offer meant owning was going to cost little more than renting at least until our fixed rate ends(incidentally, not long after buying we ended up moving cities and now rent again! another story).

      We are by no means struggling but the thought of an extra few hundred thousand debt over this makes me feel sick.

      No doubt this couple will buy another investment property to minimise their tax, never mind getting the money into super where it is TAX FREE (for the 55 year old anyway)!!

      • Sandgroper Sceptic

        So they have $1.5m in debt are in 50ish and have a combined income of $170,000? If that is typical then we are in for a world of hurt. Any drop in property values and their LVR will look shocking. If someone loses their job then you are looking at a total wipeout of their property money.

        Good news is that they have some super as a backstop reserve for later on.

    • Wasted Opportunities

      That is sickening. The interest burden alone is over 60% of their gross income.

      The fact that these people could even consider another leveraged property might be a reasonable option is all the evidence you need of the misguided housing “investment” cancer that has slowly eaten our economy for the last 15 years.

    • Their debt is $1.5 m, current assets worth $2.1 m (I doubt they could get what they think it is worth so it is probably less than $2m) + 0.2m in super

      If prices fall 20-25% (not so unlikely under any scenario) they will be left with only $200k in super (and only if invested in cash – otherwise it will fall as well),
      After 20-25 years of hard work and “saving” they will be penniless. Who took all that money they earned and “saved” ?

  17. Very interesting reading this. I’m from Ireland, but haven’t lived there for a while. Did keep up to date with the Irish property market over the past decade though. The main property cheerleaders were the bank’s “chief economists”, and it appears to be the same in Oz currently. A big big decline is on the way in Australia I’d say. Chinese credit growth since 2008 is an utter joke – it can’t last and it won’t. So, China’s boom will slow down very substantially and that will no be good for Australia. It’s a “when” rather than an “if” question.

    Some of you may be interested in this:

    Btw I love Australia – travelled around most of the country a few years ago and all I can say is it’s a fantastic place. Life may well be better too when all this property craziness ends – people start to realise again that there’s more to life than the price of houses

  18. “So they have $1.5m in debt are in 50ish and have a combined income of $170,000? If that is typical then we are in for a world of hurt. Any drop in property values and their LVR will look shocking. If someone loses their job then you are looking at a total wipeout of their property money. ”

    Relatives of ours have an income like this. Around 6-8 months ago, they purchased an investment property. The total debt owing on the investment and the PPOR together was around $750 000. We were always sceptical that despite their income, they would find it managable. A week or so ago, they informed us that they were selling the investment property because the financial burden was too great. I was gobsmacked to learn that despite earning so very much more than we do, their disposable income after paying their debts was less than ours, forcing them to sell the 4WD a while ago because it was “too expensive on fuel”

  19. ..and, with all the references to mechanics, we have to keep in mind that they are only very imperfect descriptions of what is actually a moral/psychological system.

    Hence, the onset of a deflationary mindset makes mechanics-based projections virtually useless (read: more economists “surprise” statements….eg. “why were are boom-relevant descriptive models (that we mistook for prescriptive) not working?!?!?!”)

    Deflationary Mindset is what makes bubbles crash, ultimately – ie. a change in mindset makes people “stop” buying, simply because they think prices are going to get cheaper…so why buy now, unless you really, really want to, or need to?!

    When economists can descriptively model, mechanically, how deflationary mindset will or won’t happen, and what effect it will have on such a complex feed-back AND feed-forward system (psychological!), then i might believe a little more of what is proposed.

    My call is this:

    20% drop nominal drop in prices nationally (on average) in the first ~ 18 months; then big govt IR and stimulus programs to then approx. flatline nominal decline for around 10 years.

    Much larger real losses (context of “high” price inflation, on items people actually need to live).

    My 2c

    • “20% drop nominal drop in prices nationally (on average) in the first ~ 18 months; then big govt IR and stimulus programs to then approx. flatline nominal decline for around 10 years.
      Much larger real losses (context of “high” price inflation, on items people actually need to live).”

      The situation that you have described sounds just like the UK experience.

  20. As the Annual Demographia Surveys clearly illustrate, Australia has the most expensive housing in the Anglo world.

    The Median Multiples are just so elevated, it would seem that a hard landing is more likely. Sydney and Melbourne at 9 Median Multiple or more are where California overall was before it tipped, triggering the GFC. Los Angeles was higher however at an 11.4 Median Multiple, fueled by even more liberal lending than Australia.

    Researchers would be well advised to focus their attention on the performance of the normal affordable housing markets of Texas, and comparing the structural performances of both markets (e.g. build / consent rates etc) over the past decade. The Houston Association of Realtors website is a good place to start. Access their monthly reports by clicking “Homes for Sale” and going down the right side of the page for the monthly report.

    Bear in mind Houstons population is about 5.8 million.

    My sense is that the Australian housing market is going to be a bloodbath that will happen sooner than most realize.

    They cant say they were not informed though. There have been seven annual Demographia Surveys for them to ponder these issues and take the appropriate action.

    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    New Zealand

  21. What a sensible and realistic thread. I won’t try and throw in responses now, to the comments that really took my fancy.

    It is incredible how the mainstream econ profession and government advisers etc, all seem to be a bunch of dead-headed optimists.

    Way back in June 2005, Fred Harrison published “The Mystery of Britain’s Missing Recession”, which is STILL a far more enlightening essay than anything that thousands of mainstream economists have been able to say even AFTER all the crashes have happened. But even Harrison doesn’t point to the role of urban planning in Britain, in causing far greater volatility of property price cycles.

    What Harrison does point out, is that “equity withdrawal” consumer spending artificially stimulates economies and leads to massive malinvestment, and leads to inflated taxation receipts that irresponsible politicians assume will last forever. Meanwhile, the household debt that the whole thing is based on, has to max out at some point.

    Remember Asian tiger economies and their property bubbles in the 1980’s? The question is “when” China goes the same way, not “if”. The cause is the same in every case – a lack of free market competition in development of new homes and buildings; i.e. inelastic “supply”. In Korea, this was the clear result of “Green Belts” being imposed for the first time.

    Inflated urban land prices eat into an economy at both ends and the middle. British governments at least since the mid 1990’s have KNOWN that their “Town and Country Planning” System is THE major reason for their loss of international competitiveness and loss of industry. Margaret Thatcher completely failed to address the LOCAL prescriptive, illiberal, anti free market policies, hence the reforms she DID enact were doomed to “not rescue” the British economy. But constituencies against reform are so strong, that the British are doomed to a continuing slide into international poverty.

    Luckily for them, many other nations, including Aussie, seem to be determined to “level the playing field” with high-urban-land-cost nations by similarly disadvantaging their own enterprises and people. High land prices are only “wealth” to a NON productive class, to the PRODUCTIVE part of the economy, they represent a COST.

    High land prices also favour incumbent wealth, restrict social mobility, and steadily add to the numbers of “have nots” in society. I suggest that China’s failure to continue to share the benefits of their economic progress throughout society since about 1990, is linked closely to their “land racket”. Britain’s position near the bottom of the inequality table in “The Spirit Level” is a result of THEIR land racket – not that the authors of “The Spirit Level” have a clue about that.

    The economic standouts for the next few decades, will be those nations, and States of the USA, that have maintained elastic urban “supply”, did not have a housing bubble, and continue to avoid having one. Germany, Switzerland, Austria, the Czech Republic, Texas, Tennessee, Georgia, “heartland USA”. Now, I must check my latest Green Card Lottery entry.

  22. It says much about the leanings and narrowness of this blog when we are asked to choose between 3 falling price alternatives.
    The responses to this thread amply illustrate the narrowness of the views. Anyone who even hints about future price rises gets regularly mocked but post a 80%-90% crash prediction (ie the median Ozzie house to be $45k-$90k) and there’s not a murmur of ridiculing – it all gets taken seriously.

    • Are you preparing us for your aussie house price predictions?

      There seem to be many readers who subscribe to the slow melt/fizzle option of declining real prices but flat or rising nominal prices.

      It’s pretty hard to argue for better than that, but am interested to hear your thoughts.

      My gut feeling is that we will have a >30% decline in prices in real terms over the next 6 years – and it might be a bumpy ride.

        • That’ts just my gut feeling going on rough readings of past property cycles, experience in the US, a comparison of rents to prices in Brisbane etc. Definitely madness over method.

          Also my rule of thumb is that the price of housing in thousands should be about 70% of the rent per week under reasonable assumptions of capital growth. eg. a place that rents for $400/wk should be worth about $280,000 (less for an apartment with costly body corp). This value assumes that prices and rents will rise at the same pace over time and has allowances for ownership costs (maintenance etc).

          Also, given that some outer areas of Brisbane are already down about 20% from their peak and falling, it’s not such a great leap to get to 30%.

          • Thanks for your thoughts. I see you are using the rents to price issue re Brisbane.
            According to the ABS, Brisbane house prices have risen 36.5% over the 5 years from March 2006 to March 2007 (index has gone from 108.6 to 148.3).
            According to Queensland housing, Brisbane rents for, say, a 3 bedroom house have risen by 39.3% (from $280 to $390).


            So, over the last 5 years, rents in Brisbane have risen faster than house prices. So 5 years ago the rental yield was less than it is now.
            Using your argument of rents to prices, you had a greater reason to expect price falls 5 years ago than you do now. Yet prices boomed in the two years following March 2006.

          • Your right Sarah. I’ve been expecting prices to return to ‘normality’ since about 2006. The boom here was from 2001-2004. Seriously, it was out of control – if you want some interesting data look at prices of land on Russell Island during that time – from $2,000 per lot to $30,000 in about one year – I know a guy who bought 20 blocks and gradually sold them off over the next few years.

            I was lucky and bought properties prior and during this boom and have been selling since 2006. There was so much easy money floating around I just had a gut feeling it couldn’t last.

            But since then prices and rents have moved together somewhat. I believe this has provided the illusion of stability – a permanently high plateau as some might say. Prices should have crashed two years ago but were saved by stimulus measures and the RBA’s dramatic action on interest rates.

            So what is your forecast for aussie home prices?

          • Sarah, you have simply proven that rental returns have been largely irrelevant to pricing for as long as anyone can remember. Which makes sense, given how crapola they are, and because 66% of investors are negatively geared anyway, rather obviously playing capital growth. You are right. Rental returns are irrelevant.

    • The three alternatives all have realistic chances for some reason or other. Any price rise, on the other hand, is simply unrealistic.

      Get real. If you present a convincing argument backed by facts, I am sure people will take you seriously, myself including.

    • “Gut feeling” – you don’t calculate those.

      I don’t think anyone here would claim this blog is without bias Sarah. But that’s the nature of blogs – like-minded individuals discussing ideas. As I’ve said before, I like non-conforming viewpoints like yours as it helps prevent group-think. But you’ll need thick skin unfortunately, just like H&H would if he were to post on a bulls blog. Ce la vie.

      • She (He/It) might have a masculine delivery, but the dummy-spit and spectacular exit stage-right is 100% pure female 🙂

    • “It says much about the leanings and narrowness of this blog when we are asked to choose between 3 falling price alternatives”

      As opposed to some bulls I might mention for whom the current housing market woes cannot possibly be anything other than a temporary breather before prices resume their trajectory to the moon.

      And for the record, no I don’t expect prices to crash by 80%-90% – even 50% would be truly spectacular.

      Is a 30% decline over the next 5 years a more ridiculous proposition than a further doubling by 2020?

    • Sarah Now is your chance to contribute a counter view. I am listening and waiting, this blog is not intolerant of ‘grounded’ alternative argument.

      • I’m curious why people are expecting a crash now when the various measures are not worse than they have been in the past.
        – national price income ratios are about where they were 8 years ago
        – yields in Sydney and Brisbane (and perhaps elsewhere) are now higher than 5 years ago
        – repayments as a percentage of average income are now less than around 2007/8 and around 1989/90
        – rents have risen strongly over the last 5 years indicating a shortage
        – the rental vacancy rate is currently falling
        – the economy is strong
        – incomes are growing strongly
        – unemployment is low
        – defaults at still at historic lows.
        I was expecting a crash in 2003. I got it wrong. The various measures are not worse now than they were then.
        This doesn’t mean there’ll not be price falls. Normal healthy market forces result in prices going up and down from time to time. But crashes require something exceptionally bad to happen.
        A crash has been predicted since at least 2001 (by Neil Jenman). Jenman repeated his warning in 2003. In early 2004, Kohler reported on ABC news that the crash was on. Its now three years since Keen predicted a 40% crash. One whole year since Grantham predicted a crash.
        I had initially thought that this blog, though acceptably bearish, would have more balance. In fact it has recently become almost totally doom-ridden with all posters supporting each other. It’s not an environment which results in enlightenment.

        • “It’s not an environment which results in enlightenment.”

          If you don’t like MB and feel that we are wasting your time, there’s an easy solution for you…don’t read us. Maybe Somersoft would better suit your needs.

          • Thank you for the clarity. I’m certainly not going to post where I’m not welcome. Goodbye.

          • Sarah… whoever you are – don’t go. I’ve enjoyed your questioning and provocation. God knows, there’s enough boring “aren’t we great – we all think the same – and of course, we’re right” blogs out there. Give it a go. Your comments have successfully generated responses they may have otherwise been lazy generalisations. Don’t go!

            Instead, Go For It Girl. Mix it up and make them work for their money! (if there is any…)

          • Hi Sarah,

            I would rather you stay too. However, I can see why UE doesn’t care if you don’t. You just make stuff up to support your cause.

            The views the bloggers have here on housing are not at all the same. I can summarize them as follows:

            UE – thinks housing has limited upside and large downside risk. This is clear throughout his posting, including this one, in which he predicts a slow melt for house prices.

            I have consistently predicted a flatlined market and real losses over time based on the irrationality of investors.

            Only DE has argued the likelihood of a crash. Deep T. is bearish but his focus is very much on the financial system.

            The one thing we all agree on is the existence of the bubble, which frankly, only proves we’re sane.

            It’s pretty straight forward why you get blogflamed. As I’ve said before, you blow smoke at everyone then jump up and down about the fog.

            It is you that brings the bias, Sarah. You seem desperate to couch anyone who thinks housing is overpriced and a lousy investment as a doomsday bear. Just as Chris Joye did on his blog recently, you rudely mischaracterise the bloggers here then get all sensitive when there’s a response.

            That is hardly enlightened.

        • Keen’s actual prediction was “that house prices would fall by 40% over 10-15 years” and the compromise bet with Rory was 20% over 5 years (2013) so don’t hold your breath on these!

  23. Here is another interesting one, from a Property Valuer no less! I’d love to spend the time picking it to bits but as I have no experience of the Sydney rental market I’ll leave that to others.

    Expect to hear lots of commentary about “rising yields” in the next little bit. Yes, yields are rising – not because of any significant rental growth – but because property values are stagnating (or falling).

    Also, the “gross yield” of a property can be easily impacted by annual changes in landlord costs such as Council Rates, Land Tax, fixed water supply charges and so on. Not to mention any increase in interest rates…

  24. ok ill go with sarah, house $ to 10 million or more, 20 a litre petrol, 100 steaks hyperinflation i guess, time to buy houses on the credit card….they will be free in 5 years after the dollar is crushed.
    lets go sarah join me honey.

  25. Bubble dynamics and the end of the credit supercycle.

    The history of all bubbles tells us that ALL bubbles give up ALL gains.

    The credit cycle in debt markets ended in 2007. The actions taken in 2008, both political and financial combined with derivatives almost guarantees no way back.

    I believe we may see a deadcat bounce circa 2013-2015 and then roll over completely owing to massive sovereign debt both locally and globally.

    Remember, the 30 year mortgage was brought in after property crashed very hard in the Great Deppression.

    US housing did not rebound until 1955.
    Aussie housing did not rebound until 1955.

    26 years in duration for both. Japanese real estate is still underwater in 2011 after the 1989 peak.

    The mills of the gods grind exceedingly slow but also exceedingly fine.

    • Exactly – thanks for some more sense again after Cameron M and Sarah P used the thread for a bit of navel-gazing.

      Hardly anyone has got it yet, that inflated land prices kill an economy at both ends and the middle, they are the CAUSE of economic reversal. They are only “wealth” to the NON productive part of the economy, to the PRODUCTIVE part of the economy, inflated land prices represent killing COSTS.

  26. I reckon somewhere between UK & USA depending on how the China syndrome plays out.

  27. Mainstream economists forecasting a return to 3% growth anywhere soon after these bubbles have topped, are just a joke. They do not understand the massive paradigm shift that urban growth constraints have brought about. The future, if the first world has one, belongs to heartland USA, if the coastal States do not drag them down, and if they do not succumb to the constraint unreason; because the cities of heartland USA are still under the “growth paradigm” of low cost land and “automobility”. MOST of the employment being created in the USA economy since their crash, is in Texas, and MOST of the rest of it is in the other heartland States. California and Oregon are basket cases. Even Detroit will rebound if the Unions have learned their lesson now – low cost land is a massive lever to economic recovery. Contrast this with the cleft stick “economic stagnation + ever-inflating land prices” visible in Britain.
    The Green Card lottery is the only hope now for decent, willing-to-try NZ citizens. The same local, Green-driven politics is in the process of wrecking Australia; and the same urban constraints, for different political reasons, are about to make China’s economy blow up so big time, that the famous Asian crises of the 1980′s and 90′s will look like a Sunday School picnic. We live in interesting times.

    • Phil, this may be why housing is so cheap in your beloved Texas:

      The collapses of Texas’ illusory prosperity. The end of “Texas can serve as a pro-business, anti-waste model that could be replicated across the country,” – Newt Gingrich.

      “We’re already as a state fiftieth in per capita spending,” said another young San Antonio Democrat, Representative Joaquin Castro.

      Spending cuts to public schools, already among the nation’s most poorly funded, could mean some 100,000 teacher layoffs, pre-K programs decimated and schools closed. Huge cuts to Medicaid could push an estimated 60,000 senior citizens out of their nursing homes.

      Why shoot – housing may get even cheaper.
      Detroit style.

      • Oh, and there are no problems in California, Oregon, Washington State, etc etc, with funding of Schools? THIS along with still ridiculously high land prices.

        I stand by what I said. Long term, low land prices mean “economic growth”; inflated land prices mean “economic stagnation” – regardless of which incumbents benefit from temporary wealth transfers via capital gains. THAT “gain” is ongoing COST to the productive part of any economy.

        Texas long term prospects are still bright, and those of the basket case economies with ridiculously high land prices, are grim. Look at Northern England – it is “Detroit with unaffordable housing”.

        And where did Boeing just decide to locate their new factory…..? NOT in Washington State any more – surprise, surprise…….

        • Thanks. But perhaps tide is turning – as The Nation article points out – Texas prosperity appears an illusion. Small government rhetoric and practice has resulted in Texas being the 50th state in per capita spending. Social services are often non-existent in comparison with say, California. Education on the decline. Perhaps Texas is a harbinger of times ahead for States like California – when the extension of basic services and decencies to fellow citizens is retracted, can work for a while, but when times are tough quickly descends into a hellish reality.

          Mark Hemingway appears to be a typical tough-guy rightish-conservative writer, anti-government, anti-union, anti-taxes and so on – he is currently writing a book (probably no more than a novella based on the length of his WE articles) on the anti-war and anti-globalisation movements.

          His claim of net migration to Texas in the period 2000-2009 is countered by this:

          I wouldn’t be inclined to cite this fellow too often.

          • Texas’ performance speaks for itself. It has outperformed California in both employment growth and income growth since 1970, as this article shows:


            Moreover, Texas has been ranked highly in Forbes’ Best Cities For Jobs report, beating California hands down:

            “no place displayed more vibrancy than Texas. The Lone Star State dominated the three size categories, with the No. 1 mid-sized city, El Paso (No. 3 overall, up 22 places from last year) and No.1 large metropolitan area Austin (No. 6 overall), joining Killeen-Temple-Fort Hood (the No. 1 small city) atop their respective lists.

            Texas also produced three other of the top 10 smallest regions, including energy-dominated No. 4 Midland, which gained 41 places overall, and No. 10 Odessa, whose economy jumped a remarkable 57 places. It also added two other mid-size cities to its belt: No. 2 Corpus Christi and No. 4 McAllen-Edinburgh-Mission.

            Whatever they are drinking in Texas, other states may want to imbibe. California–which boasted zero regions in the top 150–is a prime example. Indeed, a group of California officials, led by Lt. Gov. Gavin Newsom, recently trekked to the Lone Star State to learn possible lessons about what drives job creation.”


            Finally, the WSJ has run a great Op Ed on Californian jobs moving to Texas:

            “You can’t build in California, you can’t manage in California and you have to pay a big tax,” Mr. Puzder told the legislators. “In Texas, it’s the opposite—which is why we’re building 300 new stores there this year”…

            One speaker from California shook his head in wonder: “You can have the most liberated lifestyle on the planet, but if you can’t afford to put gas in your car or a roof over your head it’s somewhat limited.”


    • Australia is among the 10 best countries in the world for economic freedom according to the libertarian Fraser Institute of Canada and (org?).

      Where is the evidence that Australia is deteriorating as a business environment?

  28. I just read about this site in The Monthly.
    1)Pity it’s home to lurking misogyny (to Julius and Holes re yr comments on Sarah P delivery and exit).
    2)I get that building controls restrict supply and are so frustrating to deal with, but they also affect the desirability and therefore value of cities. If you get rid of the quality control – flawed as it may be – what happens to the product? Can we really trust “the market” to deliver good places to live? I go for always trying to improve the control mechanisms rather than having none – true market freedom.
    3)Also, sorry UE, “the market” can never be truly free ‘cos it’s an abstract dream that’s going to run into

    • Richard,

      Give us a break on the mysogyny bit will you. Sarah P is a bloke. Throwing insults without any history or argument is the very thing we oppose in the comments. Hope you stay but please remember that.

    • Houstonites vote in a referendum every few years, whether to adopt zoning or stay without. The lowest income groups are the biggest supporters of “no zoning”.

      It is one of the biggest hypocrisies in politics today, that “care for the poor” is alleged, and the cost of houses driven up by concerns that are essentially elitist.

  29. Seems Texas has a rapidly growing population – no doubt entwined with its economic growth, and the usa’s 6th highest rate of poverty. (It is surpassed by 5 predominantly rural states – for rural poverty in the us, check out danish vagabond Holdt’s American Pictures.) for stats on Texas poverty.
    Great place to be if you’re white.

  30. I think that the percentage decline is related to the size of the bubble rather than to external factors, such as China situation, etc. In my opinion, although a gradual melt like NZ’s is the scenario that intuitively appeals, the size of the NZ bubble was not as big as Australia’s and/or US. I believe that NZ drop is likely to be the lower end of the Australia’s drop. In all likelihood, the burst will see price reductions between NZ and the US.

  31. Why not take readers through the house price booms of most of north and western europe?

    The low interest rates in the mercantilist & manufacturing economies of Europe have sparked housing boom 2.0.

    France, Switzerland, Austria, Sweden, Norway and Finland all have higher prices now than at any time near the GFC. Source:

    Australia, Belgium, Canada, China, France Germany, Hong Kong, Singapore, South Africa, Sweden, Switzerland have higher house prices now than at Q1 2008. Source:

  32. An alternate view of Texas:

    “Poverty. Not even one liberal state has over 18% poverty rate – 6 GOP states including Texas do.
    Labor Abuse. Not even one liberal state has over 8% of its population being abused through earning lower than minimum wage, but 9 GOP states do including Texas.
    Food Insecurity. Not even one liberal state has over 17% of its population living “food insecure”. 4 conservative states do, including Texas.
    Healthcare Access. Not even one liberal state has over 20% of population living without health insurance but 4 GOP states do, again, including Texas.”