Stagnation nation

The claim that Australian home prices will stagnate whilst incomes catch-up is a prediction commonly made by housing commentators.

And this view is not without precedent. Between 2004 and 2009, Sydney home prices remained relatively flat, meaning that prices fell in both inflation-adjusted and income-adjusted terms (see below chart).

It behooves us then to assess the prospects of this happening a second time around. If we assume that Australian home prices will stagnate rather than fall, then how long would it take before valuations are restored to their pre-bubble level?

In order to answer this question, we first need a robust metric that measures the change in housing valuations over time. A simple but effective measure is to chart the total value of residential housing against GDP, whereby a low ratio implies possible undervaluation and a high ratio suggests overvaluation.

In order to get a sense of how valuations in Australia compare internationally, I have charted below the total value of residential housing assets against nominal GDP in Australia, Canada, New Zealand, the United Kingdom, and the United States.

As you can see, Australia’s ratio of housing assets to GDP – currently around 300% – is amongst the highest in the Anglosphere.

Next I have used quarterly data instead of annual data, and charted the ratio for Australia only:

As you can see, Australia’s ratio of housing assets to GDP was relatively steady, hovering at around 200% between 1988 and 1997. From this point onwards, the ratio escalated to around 280% in 2004 before levelling off. After a brief decline in the wake of the global financial crisis, the ratio then surged again reaching a peak of around 320% in March 2010. With home prices stagnating over the past year,  the ratio has settled back to around 300% as at December 2010.

A quick examination of Australia’s GDP data shows that nominal GDP has grown by just under 1.5% per quarter since March 1990. If we hold the level of housing assets constant (just over $4 trillion as at December 2010), and extrapolate quarterly nominal GDP forward by the average rate of growth since 1990, then we get the below chart showing the amount of time that it would take for Australia’s housing assets to GDP to deflate back to pre-bubble levels (i.e. the “slow melt” thesis).

Under these assumptions, it would take around 3 years for Australia’s ratio to return to 250% of GDP; around 5 years to return to 225% of GDP, and around 7 years to return to 200% – the valuation level prevailing prior to 1998.

Obviously, Australia’s actual GDP growth over the coming decade may very well exceed or under perform the average growth rate experienced since 1990. And any deviation would impact the timing of when those various thresholds (250%, 225%, or 200%) are reached under the stagnation scenario.

However, what should be clear is that for home valuations to drift back to their pre-bubble level, prices would need to stagnate for a very long time, or at least grow at a slower rate than nominal GDP.

The question is: in the stagnation scenario, would Australia’s 1.2 million negatively geared investors – many of whom are baby boomers approaching retirement – be willing to hold-on to their loss making investments? Or are they more likely to cut their losses and sell en masse, thereby accelerating any adjustment?

Food for thought.

Cheers Leith

[email protected]

Leith van Onselen
Latest posts by Leith van Onselen (see all)


  1. The question is: would Australia’s 1.2 million negatively geared investors – many of whom are baby boomers approaching retirement – be willing to hold-on to their loss making investments? Or are they more likely to cut their losses and sell en masse, thereby accelerating the adjustment?

    I vote for selling en masse. Once the wildebeest start to stampede, they all join in.

    • I disagree – investors have anchored their expectations on property – they think this is just a temporary sideways movement, and couldn’t bare to be seen to be wrong.

      The rational investor would have sold last year. The irrational will hold on until its too late.

      • Torchwood1979

        The RE investors I talk to generally laugh at the suggestion that this is anything more than a temporary sideways movement. The idea that residential property is a one way bet to a happy retirement is very entrenched. Most won’t realise until it’s too late, then it will be the government’s fault of course. Everything always is.

  2. Most of the baby boomers probably bought at realistic prices though. So they wont have as big a need to sell, as say investors who purchased in the last couple of years.

    • That is the situation my parents are in. They have an IP that was purchased in the mid 90’s. They have absolutely no need to sell it now or in the near future, especially as they have been taking advantage of the tax concessions on super for the last few years and pouring as much money into that as possible.

    • Marcelo Camelo

      Quite on the contrary. Because they bought at realistic prices they will be less emotionally attached from selling at a discount from peak prices, since they can still make a (nominal) profit.

    • The Real Dank Castle

      Except for the fact that they have banked their retirements, and their previous spending patterns, on their house prices going to the moon. Whoops!

    • Fabian Aldersey

      So they’ll be sitting on all these (unrealised) capital gains, and be content to see them disappearing?

    • The “last couple of years” is meaningless..
      You should be looking at anybody who bought in the last 8 or 9 years. First home owners, investors, whatever.
      Those are the people who will jump at a 10% drop in prices and accelerate the trend.

    • Actually, add myself to that list.

      I had a townhouse purchased in 1992 for one fifth of the price I sold it for in April 2010.

      I had no debt on it either.. just wanted to bail out and become a renter before prices fell.

    • Oh thank god , the masses have finally woken up

      As DE and The Prince pointed out this week this isnt some choice these people have. If they want to retire they have to sell their houses. Yes there are some boomer couples who have enough super to retire, but that is not the norm. That is the reason the government created the “housing dream”, to drag the boomers into investment so the government didn’t have to take responsibility for the millions of people they couldn’t possibly fund

      It is a private sector problem now, suck it up boomers welcome to supply and demand, or should I say supply and no demand

    • even if they want to sell, there will be no buyers
      why would prospective FHB or PI buy any property while prices stagnate (fall in real terms)? They can save a lot money and buy in cash or low LVR in 10 years period and save fortune on interest.

  3. Marcelo Camelo

    Leith, there is one bit missing from your analysis: inflation. Holding your property for seven years, even at stagnant valuations, represent a significant loss in real terms (19% assuming inflation at 2.5%). Being irrational isn’t enough. You’d have to be stupid to do it.

    • I think he was right to leave it out. The great majority of MSM readership have no idea of Inflation’s effects on wealth destruction.

    • The premise was how long would it take for nominal house prices to reach the “right/appropriate” ratio to nominal GDP. Inflation is taken into account by the fact that the GDP figure is the nominal and not real.

      So it is taken into account and in fact it is a case in point of how destructive inflation is to wealth creation.


  4. Marcelo Camelo

    A lack of a mass selloff won’t be enough to hold prices. If the demand isn’t there, prices will fall regardless of what sellers do.

  5. What is everyones thoughts on a housing crash here and the impact it would have on the AUD?

    • If housing crahses and the economy follows, the RBA may lower rates. Which will lower the AUD. But if inflation stays high depsite the crash, this may not happen.

    • Deus Forex Machina

      A housing crash, if it happened, would reinforce the feeling that pretty much everyone offshore has about Australian Housing.I know that is a gross oversimplification but it is impossible to have a converstaion with a group of offshore investors without the topic coming up.

      So initally AUD would get sold but it depends on the transmission mechanism of the “crash” into the real economy here at home. If it was accompanied by falling employment, rising unemployment and falling GDP growth then AUD would get sold heavily.

      BUT then the way this plays with the external drivers of the currency such as USD, Commodities, Techincals, Risk appetite and so on would also need to be factored into the equation.

  6. Let’s not forget prices are set at the margin, so a “mass sell-off” isn’t required to tank prices. It only requires a small increase in sellers to start affecting headline prices and thus price expectations of the broader market.

    That’s why the graphs showing an increase in homes for sale coupled with softening finance demand are so ominous.

    • innocent bystander

      and you can’t have a “mass sell-off” without a corresponding “mass buy-up”
      what you get is a “mass wishing to sell” – are we there yet?

      • So, at the risk of repeating an issue raised before, what do people think now…

        Will Joe Bloggs be drawn back into the market if house prices “just stagnate” (rather than completely tank) should there be some intervening encouragment (a repeat (God forbid) of the FHOG, or Interest rates falling)?

        Or has there been sufficent mainstream attention now (Bubble, China, Resources boom, inflation, etc, etc) that even those inducements won’t suffice?

        I have been waiting many years for the right time to buy, and thought in the last few years I had really lost my chance.

        Now the possibility is dangled again I have a real concern the Govt will do its best to avert any ‘hard landing’, and may well be successful (major shocks excluded).

        The only thing preventing this (IMO) will be sentiment, and I’m desperate to know what it is out there.

        Some of my frinds have jumped in (to buy) now, after falls of only 2/3/4% in my area (blue chip), and are telling me I’m crazy not to go ahead too..

        I work from home and read many blogs, but don’t rub shoulders with too many “Joe Bloggs”…


        • Thats a very good point to consider. It comes down to free cashflow.

          How many cashed up people are there out there waiting?

          How keen are they to jump in at this level?

          Or will they simply sit o n the sidelines and look for bargains?

    • All it takes is for a seller to be happy with less – that immediately lowers all prices due to comps. Add a couple more and voila! Prices down 5%

    • Marcelo Camelo

      No, that’s just an arbitrary measure of valuation chosen by Leith. He could just as well have chosen rent and calculated the time it would take for the valuation (the prices/rent ratio) to come down given the historic rent inflation.

    • No, but it can be useful in measuring the over exubrance in property values. Land Valuation Research Group uses property turnover vs GDP as a bubble measure, arguing when turnover exceeds 19% of GDP property is in a bubble. In 2010 property turnover was 25% of GDP according to LVRG, which is consistent with Leith’s findings in the article that the peak was March 2010.

      “After a brief decline in the wake of the global financial crisis, the ratio then surged again reaching a peak of around 320% in March 2010.”

  7. NZ Economist Rodney Dickens uses an amusing term; “washing away our housing bubble sins in a tide of inflation”.

    I don’t know if this actually makes anything WORSE than just letting the bubble burst in nominal terms as well as “real” ones. But governments desperately need good advice, and to heed that advice, regarding the role of urban growth constraints in all this. It was one thing to have regular cycles in share markets; no economy can stand the same phenomenon in its housing stock and indeed, in urban land per se.

    What we NEED, is wealth from PRODUCTION. “Wealth” that actually represents a COST to producers (it is only “wealth” to the non-producer part of the economy) is like an economic honey trap.

  8. Can you take the figures back to before banking deregulation, from memory there was a spike in house prices in 1987?

    • 1901 back far enough? Here it is:

      It begs the question why Leith has chosen the level of the ratio of 1988-97 as being that to which the ratio will return. Why not 1:1 which it hovered around for a least half a century as opposed to the few years it hovered around 2:1? It has now been around 3:1 (8 years) for about as long as it was around 2:1. Seems stable to me. Why will it fall to 2:1?

      • I chose 2:1 as interest rates and credit availability were similar in the mid 1990s as they are now. 1:1 is clearly unrealistic as credit was rationed prior to the mid-1980s, which ensured that asset values were constrained. Supply-side constraints were also less prevalent back then.

        The RBA data does not go back beyond 1988, hence that start date.

        I was not aware that the ratio was so low in the distant past, so thanks for the link.

        As for reasons why the ratio would fall back to 2:1, you can read my (or Delusional’s) past articles on the Oz housing bubble.

      • Because I financially and economically illiterate (although trying to improve this) I use anecdotal evidence for my indicators. When i see young people despair at the fact that reasonable housing is so far out of their reach, and when I see rent figures that make even me choke I just know something has to give. I just don’t know what will be the trigger.
        I am just smart enough to know and appreciate the fact that easy money will result in mis-allocation (eg to housing). This is a given. I use an extreme example to prove the point which is “what would you expect the price of housing to be if no credit was extended to buyers?” Bugger all would be the answer.
        All we are debating here is how is the seesaw balanced?

  9. It is frightening how resilient house prices in Los Angeles and San Francisco have been; California can still lose trillions of fools gold capital gains yet. This is related to the fact that they now have an actual serious undersupply of houses, which is what happens once you have had multiple cycles of volatile house prices related to supply side obstacles and inelasticity. The “first cycle” does not involve such a clearly definable shortage, as the bubble mania sets in in the first instance, in “zoned” fringe land. This provides comforting assurances (for some) that “supply” is adequate and therefore cannot be responsible for the bubble.

    You actually need “too much” land zoned, to make it IMPOSSIBLE to finance land banks and beat out competitors and still make money.

    • Oh No! Zoning more land for housing would cause more Urban Sprawl. What about preserving farmland? How will our cities feed themselves if all the paddocks are concreted over?
      We need government planners to force us all to live on top of each other to save the planet and ourselves.

  10. Sandgroper Sceptic

    At first it will be a slow drip feed of boomer IPs into the market, as they need the money they will start to crystalize their disappearing gains. However, at some point (dare I say it the tipping point) the herd will realise what is happening and the rush for exits will ensue.

    Other investors should be getting out now before the boomer wave crests and dumps onto the beach.

  11. Great analysis Leith – concise and illustrative.

    I’m slowly digesting Steve Keen’s Credit Impulse theory on changing/stagnating house prices. Interesting concept to say the least.

    I thought it was 1.7 million property investors, not 1.2?

      • Is that correct?? “Only” 1.2 out of 1.7 million are negatively geared. Wow.

        When 70% of a market’s investors are pursuing capital growth only, they stop being investors and start being speculators. For a prediction on asset classes driven by speculation, please wiki-search “dotcom crash”.

        Leith – do you have any historical info on the total investor:negatively geared investor ratio?

        • That’s what makes me wonder, the numbers are so big. There are 1.2 million investors losing money every pay packet, we can only assume on the hope of big capital gains. If these capital gains don’t look like materialising It would only take a few percent of them wanting to sell to make a big difference.

          Although I’m sure I saw somewhere there is actually quite a high turnover of IPs, so maybe what it will take is a shortage of new ivestors to crash the market, rather than an increase in sellers.

  12. When tragedy strikes , like the sinking of a ferry or air crash very few people survive. Experts have studied that those survivors had higher alert and reaction levels and were able to save themselves and in some cases others close by.
    The majority of people freeze up and are unable to move. When the housing market crashes most people will be found stuck to their couches.

  13. ceteris paribus

    Fascinating commentary in your articles Leith. And quite persuasive.

    Why do I have the nagging feeling, though, that the other commentary on this site (about the inevitability of a massive crash) is a little too presumptive, in a group think sense?

    The RBA says data shows that the big mortgage debt is with people with big equity. And owner occupiers will hold onto their homes at any cost- making prices in that segment of the market very sticky on the way down.

    New supply will drop off very quickly if the unsold housing glut continues, keeping supply and demand in relative balance.

    The government lacks the fortitude to strip housing investors of their tax perks and will rush to intervene if a major price fall becomes apparent.

    I agree that house prices are in trouble right now- but I doubt that an uncontrollable crash is on the cards- unless there is an exogenous mega-shock, from either China or the US falling right over.

    Surely, we are talking the probability of medium-term house price stagnation/softness rather than US/Ireland/Spanish style “crashes”.

    Please feel free to point out to me the errors of my ways.

    • Dropping off of new supply is exactly the reason the market will crash. 30% of the economy is based around construction and when construction stops the economy pops!

    • CP. When have we at MacroBusiness predicted that there would be a “massive crash”? My view has always been that Australian home values are severely overvalued and that the downside risks far outweight any upside. But I have never predicted a “massive crash” unless the Chinese economy crashes and commodity prices plummet. More likely we will experience a New Zealand-style melt or a UK correction. The same goes for Houses and Holes, who is even less bearish than me (he thinks prices will more likely stagnate).

  14. Leith – many thanks.

    I have some difficulty with the $A4.1 trillion of total residential stock figure. May I suggest you and readers dont just take this as a “given”, but go back to the actual numbers of residential units and multiply this by the average (not median) price. I suspect it is well above the $A4.1 trillion figure.

    The total residential stock value should pretty much “marry up” with the Median Multiples of the Demographia Surveys – which would indicate that Australia should have a higher housing stock total value / GDP figure.

    Planning began disrupting supply going back to the early 1980’s in NZ and Aust as well.

    I like to use Texas as a base, where the Median Multiple overall is about 2.5 and total residential stock value is about $US1.8 trillion in a $US1.2 trillion economy with 25 million people.

    Texas could be described as the “holy grail” on the housing front, with its open land policies, Municiple Utility District bond financed infrastructure model and its sensible Mortgage Consumer Protection legislation. Why the hell the dopes in Aust and NZ are STILL not learning from Texas after 7 Annual Demographia Surveys, could be described in the most diplomatic terms as…..infuriating.

    How much new residential stock has gone in to both Aust and Texas these past 10 years and adjusted for population growth needs to be explained as well. I hope you are able to do this in a future article Leith.

    I am sure this will blow the Australian supply myth out of the water.

    The “churn rates” of Texas and Australia over the past 10 years also need to be closely examined. Bubble values (in the case of Australia) inject enormous excess liquidity in to an economy.

    It is so easy to get distracted with “statistical noise” when discussing housing markets. The key numbers to watch going forward are sales inventory, sales and months of supply. 6 months of supply is considered equilibrium.

    Its the rapid general inflation (triggered by the housing inflation) putting excess pressure on household budgets, thats going to bust the Australian bubble. I am of the view thats happening already – big time (refer recent SMH articles) – and that the deflating bubble will gain greater momentum going forward.

    Australia I think is pretty much a replay of California.

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

  15. Hi Leith. Hugh’s note made me think about this. Where is the $4 trillion figure coming from? Is it Average price x Number of units. If so, the source would have been the ABS, not the RBA (?)

    Or, did you arrive to it by looking at loan figures and LVRs?



  16. Raveswei,

    I hope you notice this.

    I have read some of your previous blog postings with interest.

    I think you are doing a very good job, but I think you need to take account of what Hugh Pavletich talks about; the need for “churn” of old housing stock, or the replacement of old, low quality housing.

    “Build rates” need to be high enough to allow for this, as well as to allow for population growth. So California might have built more houses per population increase, but they also probably had more old houses needing to be replaced. I do not know where such statistics are available.

    • BUT, when the prices are inflated, the older houses probably are kept in use, which means the oversupply is probably even worse than you thought compared to where the land prices are lower (and old houses probably DO get replaced).

  17. So is house price stagnation the latest term for house prices plateauing? Never fear, according to APM’s Andrew Wilson, ‘Sydney’s chronic underlying shortage of accommodation and strong economic growth will re-energise the housing market, with a modest recovery becoming apparent throughout this year and next.’

  18. Yes excellent analysis mr unconventional economist but with so many folk in this enlightened constituency talking “crash”.

    I’m a stockmarket professional ..where ‘crash’ is a regular event . The October 1987 event wiped me out financially and professionally …My wife owns the house ie no debt that we live in and we have 6 Generation Y children who individually despair of owning their own home so a housing crash would suit me/them fine.

    However I believe that the Australian housing market is a special case..for all of the reasons enumerated and that as one observer said earlier :: “…we are talking the probability of medium-term house price stagnation/softness”

    keep up the good work people

  19. Congratulations UE you made it into the MSM. Do you think you get a hold on the comments?

  20. Assuming your $4 trillion figure is correct, then it costs approx $176,000 to house each man, women and child in the country.

    Do we have figures of other comparable nations to work against per head of population, to see if we are in fact over valued?