Data redux – House prices and finance

Today’s piece is inspired by the comment flow that was associated with yesterday’s piece on the RP Data – Rismark release. Specifically a little bit of apparent angst about a claim we made that,

we have modelled the relationship between the quarterly moves in the ABS house price data series and the total monthly value of housing finance ex-refinancing and we see a 0.97 correlation since the mid 1980’s

Now DFM and I have been doing this for a long time and as he said in response to a question the first rule you learn from the Professor in Stats 101 is that others must be able to rely on your work. We hold that near and dear and while no one is infallible we also seek to make statements that underpinned by the data.

Which brings me to the next point I wanted to make. At Lighthouse we say “Information is a commodity. It is the interpretation that counts” and in terms of the reaction to our comment I’d have to say that the level of debate comes from the second part of our strap line. The interpretation of data is what has allowed us, and my fellow bloggers here at MacroBusiness, to be consistently ahead of the MSM Punditariat and the Bank economists on what is really happening in the economy and what is in prospect.

So because something is new to someone does not mean that it is not true. Just they haven’t seen it before or thought about it that way.

While last night’s debate is welcome I’d say the tone was little vitriolic for our liking, on BOTH sides.

But I do wonder how anyone wouldn’t think that there was a strong relationship between the move in house prices and demand for finance. Isn’t that how supply and demand work in a market where leverage is how you finance your position?

Anyway onto the quote and the data/stats that support it.

First thing to note is that we built the house price series by using the weighted average of the 8 capital cities and then building a bridge of the average between the new and old series so we can extend our analysis back into the 1980’s.

The second series is the housing finance numbers (we prefer trend but the raw isn’t much different) and simply use the average of each quarters total housing finance commitment values ex-refinancing.

We used both the correlation function in Excel firstly and the regression available in the analysis toolpack.

Now here is the chart that says it all – at least we think it does (note this is the quarter end not the moving average).

Please note however that this is not to say that myself or DFM necessarily think house prices will crash, even though thats what the stats suggest.

Because unless or until unemployment rises substantially (this could be a reverse causality however – as I think others have pointed out on MacroBusiness previously)  and or investors start to liquidate we think the dynamics of the housing market makes prices stickier and more resistant to falls than rises. At least in the short term.

But what this does tell us is that house prices in Australia are under pressure. As are the business models of the Banks who service the demand for credit and ultimately, and unfortunately, the Australian economy is also under pressure.

The RBA is right to be on hold – we think they’ll be there for some time.

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  1. get the popcorn out, this is about to go tits up big time! Its been a nice gentle decline in prices until now but this is where the price collapse accelerates. Just like what happened in the US. house prices fall while unemployment is strong and then the weakening housing market slams the brakes on the economy and unemployment starts to rise. Sound familiar?

    The slightest tick up in unemployment will crash the market. And unemployment is about to start rising fast and Wayne Swan and Glenn Stevens dont have the faintest clue.

    • Dave From Pakenham

      a lot of rhetoric, would be nice to back up adjective and verbs such as “fast’ ‘crash’ ‘collapse’ with at least some anecdotes, if nothing else…

      • We are in the comments section Dave so feel free to either agree or disagree and i would look forward to the debate. Here is the defintion of anectdote: A short account of an interesting or humorous incident.

        here is some humour for you.

        “the property market only ever goes up”
        “there is a property shortage”
        “property doubles every 7-10 years”

  2. i believe both the RBA and Treasury have a very good idea, and we will see further attempts to increase credit issuance including cutting rates

    • the RBA doesnt have a clue Jack. Stevens is still talking about putting rates up and Luci Ellis has mentioned many times they dont see a problem with the property market. The RBA just announced this week they were going to do some detailed analysis into the state of the property market as they are concerned about the record amount of delinquent loans. talk about shutting the gate after the horse has bolted. dont you think they should already have detailed analysis of the property market? this anouncement confirms that they dont. They are flying blind on the property bubble as they have been looking the other way focusing on terms of trade, capex and a resources boom.

      once a bubble busrts cutting interest rates wont help. Just like it hasnt helped the US property market that continues to fall 5 years after the bubble burst.

  3. Thanks for doing this.

    It seems obvious that there would be a strong relationship and the graph shows there is one, but to be honestI am surprised that it gives 0.97 given that graph.

    If you look at the early part of the graph, issuance fell around 1990 and then again around 94 but house prices just flat lined rather than fell then.

    I assume you have done % change in both variables – does that make the lines track closer together?

    • I’ve come across something similar in my line of work, where two values that are steadily rising are highly correlated, even if unrelated. So if 90% of the time they are both going up anyway, that accounts for most of the correlation.

      Having said that, I think the relationship is obvious, so the 0.97 correlation is more because they are describing similar things, rather than one influencing the other. i.e. if gearing ratios remain constant, then an increase in house prices must lead to a corresponding increase in debt issuance. This is something the property spuikers don’t (want to) see.

      If anything, I think the chart shows that gearing ratios have increased since the ’80s – but I wouldn’t know.

  4. I think it would be useful to see a % change comparison between the two values instead than the absolute number.

    From the chart now, I can see credit demand going up and house prices going up. However there are no long periods of credit demand declining, so I do not think there is a precedent for that.

    I mean you can say “credit demand goes up = house prices go up”. But not yet “credit demand goes down = house prices go down”. It does not look to me there is enough history of that.

    • Prices are only half of the equation. The other half is volumes of sales.

      Clearly, you can’t have falling credit issuance while prices and volumes both continue to increase. Not unless the financing is somehow coming from somewhere else.

      • Yes, I agree. But I think it’s a question of duration of the downtrend. There is very strong resilience in vendors and only a persisting fall in demand / volume of sales will impact pricing.

        Looking at the graph a persisting fall in demand has never happened since ’87 and we are currently experiencing a more extended period.

        However, suppose the volume of sales stabilize at this level for the next 12 months… from the graph there is no way to predict what prices will do, since there is no such previous event history. Most probably not go up, but they could plateau waiting for the next leg up.

        Basically: how resilient will house prices be to the current lack of demand? And, are we still in a ‘I can’t afford it’ phase or is it a ‘I do not want it’ cycle?

        • I agree, it’s impossible to know for certain what will eventually transpire.

          I would note though that prices certainly appear to be falling in most places at the current level of demand.

          • Yes, but the fall compared to the rise, so far, is very small.

            However, this is a price index of property sold, not of property unsold. If we could include in the index the unsold property (those houses that go to the market and remain unsold) we could be back to 2007 levels.

            For now, those vendors are holding on… waiting and hoping for better times. That’s where the length of the demand downturn is key IMO, much more than the depth.

          • A question for Data Sword – why does the chart you’ve plotted show house prices increasing constantly from January 89 through to the GFC without any noticable falls?

            This Australian treasury document appears to show different results.

            From the document: “Despite the general perception that house prices can only go up, Australia has actually experienced falls in house prices, especially in real terms. Between March 1989 and December 1990, real house prices fell by 8 per cent and did not recover to the same levels until a decade later. Some individual markets in Australian cities recorded greater falls in the early 1990s. Dwelling prices in Melbourne fell by 22 per cent in real terms between March 1989 and March 1996. This is similar to international experience. In the late 1980s and early 1990s, the United Kingdom, Finland, Norway, and Sweden experienced peak to trough falls in prices of greater than 25 per cent.6 Sharper falls have been observed in some South and East Asian economies over the 1990s, particularly in Hong Kong and Japan.”

            Looking at the period in question, the RBA statistical tables, money and credit statistics (I seem unable to post a link) appears to show a sharp decelleration in housing credit growth in the 21 month period that the treasury document says that prices fell, as compared to the preceding 21 month in which the document states that prices ran up significantly – in terms of $billions, credit issued for housing appeared to grow at nearly twice that rate from June 87 to March 89 as it did from March 89 to December 90.

            I have no formal economic, financial or statistical training of any kind, I am merely an interested layman. So my interpretation could easily be miles off. If you could give me an answer that would would help expand my understanding I would be very appreciative.


          • Looking at the RBA statistical tables again, the decelleration of housing finance growth in terms of billions of dollars that has occured in the past 12 months appears to be of roughly the same proportion as the decelleration that occured over the 21 months from March 89 to December 90 compared to the 21 months that preceeded that.

            The treasury document states that house prices fell an average of 8% over that time and much more in some parts of the country, and did not regain all the value they lost for a decade. We appear to have slowed down by about the same ratio in only a little over half the time it took last time and we’re still pointing down. Interesting.

            The treasury document and the RBA statisitcal tables both seem to suggest that in fact, there IS a precedent for what we’re seeing currently and if the effects last time are anything to go on, the effects this time round could very possibly be larger.

            But again, I have no formal training in this area so I might well be wrong.

          • Deus Forex Machina

            From Data sword for Lefty

            “The chart above contains the ABS house price index which is based on nominal prices not real prices (adjusted for inflation). The chart you are referring to from the Treasury document provided in your link shows that the growth rate of house prices both in nominal terms and real terms and the nominal rate of house price growth has never fallen substantially below 0%. The chart above also uses the housing finance data from the ABS which is the flow of credit where as the RBA’s credit aggregates which I think you are referring to from their statistical tables are the stock of outstanding debt. The flow is an indication of demand while the stock is the difference between the flow of new commitments and the repayment of existing debt. The ABS data is the dollar value of housing commitments ex-refinancing.”

  5. Prices at ‘the margin’ at not sticky. 0.66% of the population dies each year and most have a Will & Probate. So unless everyone can avoid Death Illness Divorce etc some people ‘have to sell’

    • …agreed.

      And to a fair extent, it’s the “need to” sellers that determine the ceiling on the market.

      It’s interesting, isn’t with RE agents telling people to take their properties off the market…and in effect increase the proportion of “need to” sellers?!?! … which will drag the price down even faster…

      Interesting dynamics, yes?

      • Yep- I have been getting an interesting view of the “need to sell” side, thanks to some I know ( trying to be careful as someone may read this and put together who).
        A grandparent died 2+ years ago and the kids (dad plus various aunts and uncles) all had a stake in the house and 2 blocks. They tried to sell as a development option, turned down 1.3 million in favour of trying for 1.4. Didn’t get it, 2 years on are finally settling at around 800k and now have CGT on their shares.
        On the other side the in-laws are desperately trying to sell their house (mortgage still very much an issue) to obtain a retirement unit. They have had to reduce, and are facing much lower offers than ones rejected early in the process. Compounding factor of credit card debt to the tune of $25k +
        It will be sold, just a factor of whether the bank makes the sale, or they do. Most boomers do not have much in the way of super (i work in super- i have run the numbers) unless they are lifetime public servants or in the right industry. How houses are used to fund retirement could produce some very interesting shifts

  6. If I die, my executors have no choice but to sell… A Good price or poor price is irrelevent.

    I have no choice over the timing of my own demise and my neighbours have no control over my executors legal obligations.

    Sellers beware, we have an aging population with ~1 million individuals in 4 – 5 bedroom homes.

    Rental vacancy will skyrocket when the demography makes a transition.

  7. BurbWatcher

    There is a minimum turnover rate/churn rate in dwellings.

    These dwellings in aggregate have some credit/mortgage outstanding.

    The transaction price on these ‘must sell’ dwellings will be determined by the net NEW credit created.

    The transaction price will be determined by the net NEW credit created. This is the difference between the existing debt outstanding and the quantity of new debt created.

    Credit creates deposits

    A deposit comes into existance because somone created a debt.

    The title/asset is only the security for the debt at a bank.

    The price of the security is determined by the quantity of creation of new credit.

    That sounds circular but Banks (including the RBA) control the price of the asset that is held as security via the quantity of the credit they create which is a function of the cost of credit.

  8. How about the UBS downgrading the banks yesterday? That was interesting. All these other agencies are downgrading them and seems the media is jumping on the band wagon as well. A few more months of unemployment going up, housing prices going down and other bad news will ruin the confidence of investors. Read something today about China’s manufacturing declining more than expected to 50.4% if it goes under 50% next month then it will be considered a decline. They talked all the hype in the US, Ireland etc as well before evertyhing came crashing down then switched to the other way. My belief the RBA will decrease rates by the end of the year not raise them.

  9. Debt Saturation

    Its economics 101. Far far more simple than the new Hockeynomics actually. Ill explain it to you all. Its called “Supply and Demand”. Yep its that easy!! Forget all that in depth analysis and think of those two important words. Remember how they work together?

  10. nominal flows in credit (loan approvals). nominal housing prices. both in levels.

    I think they even teach that example under spurious correlation at university. That level of analysis would get a fail in an undergraduate econometrics course.

    • so in a market where you cant buy a house without raising debt, ie credit, from a bank there should be no relationship between prices and credit availability???

      so if banks stop lending in australia for house prices or the lvr drops from 95% to 80% house prices won’t fall???

      seems like there might be some causal relationship here somewhere