BIS chief pushes the housing envelope

Earlier this month, the Chief of BIS Shrapnel, Dr Frank Gelber, gave an interesting interview on Switzer on the outlook for the housing market (click to watch video). The key discussion on the housing market starts from 5.15, where Dr Gelber says the following (paraphrased):

  • The doomsdayers are “discredited”. “That was crazy stuff… they have frightened a lot of people and that’s caused people from hanging off from making investment decisions”.
  • Australia has a “deficiency of housing stock”, we’ve got a “solid but not spectacular economy that will be picking up pace”, and “rents are rising quite aggressively because of the shortage of stock and rental yields are going up”. Therefore, “people will start to invest in property again slowly”.
  • States where the deficiency of stock are the greatest – namely New South Wales, Queensland and Western Australia – will experience 15% to 20% price growth over the next three years… “slow at first and then picking up pace”.
  • “We haven’t actually seen a huge decline or anything… the market has really stalled – a little bit up, a little bit down, bit by bit. There will be differences between suburbs and values of housing”.
  • “This is not a bad time to buy. But there are better investment options”.

I have a number of issues with Dr Gelber’s arguments.

First, it’s a little bit rich of Dr Gelber to lambast the “doomsdayers” for making hysterical predictions when he himself has made equally outlandish forecasts of house price growth. For example, in July last year, near the peak of the last housing cycle, Dr Gelber made the following bold prediction on the future direction of house prices in Australia [my emphasis]:

Frank Gelber gave members at a Real Estate Institute of Victoria lunch a very optimistic forecast for house prices, as reported in the Sydney Morning Herald.

“At the end of the day, we haven’t got a bubble in our residential market. We’re undersupplied, not oversupplied … [House] prices will go up another 30 per cent over the next three years”…

We’re not over-geared, we’re not overvalued and we’re not oversupplied,” he said. ”I can’t remember in the last 30 years a time when I have been more comfortable and optimistic about investment in the market”.

Australia’s recovery would not be affected by global economic uncertainty, he added.

While there are still two years to go, Dr Gelber’s prediction is looking shaky to say the least, as evidenced by the below RP Data chart:

Second, Dr Gelber wrongly claims that “rents are rising quite aggressively because of the shortgage of stock and rental yields are going up”. I don’t know what data Dr Gelber uses, but it obviously is not RP Data’s which shows the following:

From the first RP Data chart, median capital city rents and national rents have risen only $20 per week since March 2009, which represents growth of only 5.5% and 5.9% respectively over the past nine quarters. When this anemic rental growth is compared against the growth in the consumer price index (CPI), which has risen by 7.3% over the same period, it is evident that rents have been falling in real terms.

With rents more or less stagnating, the improvement in rental yields has occurred because housing values have fallen across the nation, with the exception of Sydney (see first chart).

These realities then bring into question Dr Gelber’s assertion that “people will start to invest in property again…”. With gross capital city rental yields – 4.2% for houses and 5.0% for units – still well below discount mortgage interest rates (currently 7.05%), and capital growth muted, where is the incentive for investors to flock back to the housing market?

Third, Dr Gelber’s claim that “we haven’t actually seen a huge decline or anything… the market has really stalled – a little bit up, a little bit down, bit by bit” is spurious. Sure, on a national basis, annual capital city home prices are down ‘only’ 2.3% (first chart). However, Perth (-7.5%) and Brisbane (-5.9%) are down sharply. And that’s before adjust for 3.6% inflation over he past year.

Finally, Dr Gelber’s suggestion that it is “not a bad time to buy…” seems a little bizarre given: the obvious overvaluation in the housing market; the very poor yields on offer; overall cautiousness about the strength of the economy; the heavy debt loads already carried by households; as well as rising inflationary pressures and the expected increases in mortgage interest rates (which BIS forecasts will reach 9.4% by the end of 2013).

And if mortgage interest rates do manage to reach 9.4% as forecast by BIS, there is little likelihood that BIS’ predictions of 15% to 20% growth in Sydney, Brisbane and Perth home prices in three years would be achieved – maintaining their current valuations in real terms will be hard enough.

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Unconventional Economist


  1. Rent is such dead money! Why give it to a landlord, when you can give so very much more to your friendly bank as interest payments, instead?

  2. Yet why doesnt Switzer hit him up about his shocking predictions from a year ago?

    Good article UE! You demolish the bulls with clear graphs that tell the story with evidence and reason…how is this kind of work not lapped up by the mainstream media that isnt heavily invested in property advertising? IT makes compelling reading and is a little combatitive (which is what they love!)

      • Oh, I’m very aware of that, which is why I was surprised at the headline (before reading the text)

        • The BIS (Bank of International Settlements) has a lot of Austrian economists in their ranks…that is why they talk sense…

          • Austrian Economists have a point, and are good doomsayers on economic cycles, but I do not know of one single Austrian economist who has the foggiest idea about the role that restrictions of urban land supply play in the formation of bubbles in urban property markets. Their answer to everything is a gold standard, as if a gold standard will prevent a bubble in something where supply has been “cartelised”.
            Maybe a gold standard would force the economy to rebalance painfully, a bit sooner than it otherwise does with central bankers playing God.

  3. How do companies like BIS actually make money? Who buys the research? Banks? Real estate agents?

    • Not sure about the RE side, but it could be cross subsidised by other industry research they conduct. I recall the State Government (Vic) buying numerous copies of research at $30K a copy. Sheer waste from the Government as you’d expect.

      • Yeah, never looked at it that way! We’re supporting the mass spruik in so many other ways, what’s a few hundred grand more from each state?

  4. This quote from their ‘about’ page is hard to believe: “We are a completely independent firm with no vested interests of any kind in any of the industry sectors and markets which we research and forecast.”

  5. once again, you neglect to quote what was *really* said and understand context, and instead you build your case against someone based on what was written about them in the paper..

    hopefully i don’t need to quote the bible to make you realise the (repeated) error of your ways!

    • Turn it up Dan. BIS has been making outlandish forecasts for years, so much so that even members of the real estate industry have begun slamming their forecasts:

      WA property experts have rubbished a forecast that Perth house prices will increase 19 per cent over three years…

      Real Estate Institute of WA president Alan Bourke said the 19 per cent prediction was “way too high” and based on incorrect interpretations of population data…

      “Mr Bourke said BIS Shrapnel had been incorrect in the past.

      “They had exactly the same prediction two years ago … and we saw really no movement at all in the past two years,” he said.

      “They certainly haven’t been accurate, far from it”…

      “BIS Shrapnel has a habit of pushing the envelope on either the upside or downside, depending on what they’re talking about”…

      Conduct a Google search for yourself if you need further confirmation. Furthermore, please provide evidence from the video where I have mis-quoted Dr Gelber rather than make incorrect assertions aimed at tarnishing the credibility of my reporting.

    • Dan, do you work for BIS Shrapnel? If so, can you answer my question as to who are the people who actually buy your research reports?

  6. 1. Create official sounding company name & website to create brand recognition
    2. Release report(s) predicting long term exponential property growth i.e. tell punters what they want to hear
    3. Distribute media release to media outlets happy to cut & paste soundbites and catchphrases into articles.
    4. Repeat

    You got to hand it to BIS Shrapnel for turning a bunch of spreadsheets with exponential trend lines into a thriving business. But while their “research” fits in with the prevalent housing market stance they can keep cashing their cheques.

  7. Poor ol’ Frank Gelber has been taking too many nonsense tablets since his correct call (with me) of the early ’90s recession.

    I attended a recent REIV conference where Frank suggested commercial rents are about to rocket skyward. Really? While retailers go out backwards as customers pay down their credit cards and mortgages?

    When challenged, he didn’t get one person in the room at Crown Casino to put up their hand in agreement with him!

  8. Latest news from the Gold Coast is the City Council is going to offer an $8000 grant if people purchase or build a new property….which will add to the newly announced $10,000 from QLD Gov, plus the $7000 from the feds. So FHB will potentially have an additional $25,000 in their pocket to go shopping for shiny new property.

    Another great scheme to keep it all alive.

    It will be interesting to see how this fits in with the potential pile of investor stock from baby boomers moving into retirement (as mentioned here on MB numerous times)

    Also I will be interested to see how this works if credit issuance is still low…how many people this will draw in as interest rates potentially creep up to 8% plus?

    I guess we will find out soon enough!!

    • Wishful thinking on your part.
      Are you proposing that the govt seize and sell any property with low water usage?

      • He’s not saying that is he?

        Perhaps some recognition by the powers that be that Australia-wide shortage claims may be suspect and being used by parties to gain financial advantage. There’s actually a law against that, except if you’ve done a 3 week real estate course evidently.

      • No I’m not saying that you are.

        You’ll find if you deficate it will clear that facial expression of yours up.

      • The Claw, I have frequently spotted a few of your comments on the SMH website, here and elsewhere.
        is it your sole mission in your life to pounce on random people on the internets, when they even remotely suggest there isn’t a shortage of houses in Sydney?

  9. So a “deficiency of tulips” would have sustained the price of tulips indefinitely?