June house price analysis

As Data sword stated earlier today the latest RPData media release is out today. As per usual I like to look beyond the headlines.

Across the combined capital city housing markets, the rate of home value declines continued to moderate with values in June falling 0.2% in seasonally adjusted (s.a.) terms. The relatively flat June result follows month-on-month drops of 0.3% in May, 0.4% in April and 0.5% in March (s.a.).

Based on almost 150,000 home sales nationally over 2011, the market-leading RP Data-Rismark Hedonic Home Value Indices showed a seasonally-adjusted fall of -0.2 per cent in capital city home values over the month of June (-0.6 per cent in raw terms)

While the June result was technically the sixth straight monthly correction in capital city home values, the rate of decline has been moderating since January when capital city values fell by 1.2 per cent (s.a.) over that month alone due to the natural disasters along the east coast of Australia.

Over the June quarter capital city home values were down by 0.9 per cent on a seasonally-adjusted basis (-1.5 per cent raw). The year-on-year results show capital city home values off 2.0 per cent, which is a slight improvement on the 2.2 per cent fall last month based on revised figures (was -2.3 per cent).

The modest overall decline in national dwelling values conceals considerable variation across the capital cities. For example, whereas Brisbane and Perth home values are down 6.3 per cent and 4.7 per cent, respectively, over the last twelve months, property values in Sydney are up 0.5 per cent.


It looks as though my complaining has paid off because I am happy to report that the long term chart has made a reappearance giving us better view of where we are in terms of trend.

 And now the annual change chart for June with a couple of previous versions for your reference:

I think the data speaks for itself. The market continues to slide slowly downwards due to the low rate of new credit being issued by the banking sector. If that rate does not change then it is to be expected that the slide in houses will continue. I think the rate of that slide is likely to continue to be slow, but at the back of my mind I do worry about some sort of Minsky moment when vendors suddenly capitulate en masse. My post on Brisbane this morning shows that some vendors are taking significant losses on recent sales and the longer the slide continues the worse sentiment will become. I am concerned that there will come a time when the market will suddenly shoot downwards, but obviously that is an opinion based on my own experiences of human nature and not something empirical.

In my mind the big question is what do RPData expect to happen to credit issuance in the near future, given that it is the primary driver for housing prices and the only thing apart from as sudden surge in foreign property investment that will arrest the fall in prices. The two RPData commentators had this to say.

“Market conditions are clearly being dampened by low levels of consumer confidence fuelled by interest rate speculation and global economic jitters. The higher-than-expected CPI figures earlier this week are likely to reignite the interest rate debate which is not going to assist with an improvement in consumer sentiment,” Mr Lawless said.

Rismark’s economist, Joye, added, “I think the RBA is likely to raise rates at least once or twice more to address Australia’s burgeoning inflation problem, which means dwelling values will probably soften a bit further. This should open up attractive investment opportunities.”

Those statements certainly suggest to me that both Mr Joye and Mr Lawless expect credit issuance to slow further, even if Mr Joye is still trying to put a bullish slant on that fact. Mr Lawless actually went even further today on the RPData blog.

With Australian consumers focusing on saving and paying down debt, the prospect of higher interest rates isn’t likely to see any marked improvement in transaction volumes until we start to see a material improvement in levels of consumer confidence.  Of course, the housing market is no longer high on the RBA’s list of priorities like it was back in 2009.

Inflation is firmly in the cross hairs and interest rates are likely to rise to the detriment of key sectors across the economy including retail markets, lifestyle and tourism and of course housing and finance.

That certainly reads to me like an admission that we are not going to see a sudden re-surgence in credit issuance because  the RBA will not support a re-stimulation of the market as they did in 2008. This is an extremely bearish statement from Mr Lawless and quite a surprise to this blogger. One of the cornerstones of many bullish housing investors arguments is that “the government will save them if they get into trouble”. Mr Lawless seems to be suggesting that this time that will not be occurring.

Whether that is true or not is yet to be seen. Today’s credit aggregates are very worrying. As I mentioned in the comments in that post a quick analysis of monthly credit (Column L in this RBA spreadsheet) should have you concerned if you remember what happenned in both 2008 and 1991 in Australia.

The credit data suggests that the economy is about to stall into recession and if that does happen it is difficult to determine what the RBA’s or the government’s response will be…. and even harder to determine exactly what that will mean for credit issuance rates.

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  1. Without seasonal adjustment it is a massive shift, especially for Sydney who seem to have finally decided to join the party and join the rest of us on the slide.

    DE, can you explain why the year on year is seasonally adjusted? I would have thought that seasonal adjustment should only occur for less than 12 mth periods. And if it’s seasonally adjusted, what does that represent and what is thee raw figure? Thanks

      • > can you explain why the year on year is seasonally adjusted?

        This must be an adjustment from a bubble to a bust year 🙂 i.e. the bust is something extremely unusual and has to be softened by manipulating the data :-). Kind of sounds like the US BLS Birth and Death model that is pretty inaccurate when the market dynamics changes.

    • Torchwood1979

      The esteemed Dr Christopher Joye posted a concise and clear answer to this on his blog (Aussie Macro Moments) several months ago. See if a search of that blog brings the answer up. I’d search but I’m on my little Nokia, not a great display and all.

    • I remember his blog on seasonally adjusting house price data which came as a response to a competitor questionning the value of seasonally adjusting the house prices data at all (http://christopherjoye.blogspot.com/2011/05/silly-housing-data-debates-mk-v.html). I can support seasonally adjusting the monthly or quarterly index, but I cannot see any reason for it over a 12 month period. Comparing the raw to s.a. year-on-year figures it only has a tiny difference on two capital cities, but it is a concerning data manipulation none the less, hopefully they’re not altering the data in any other way.

  2. Chris Joye is wrong. The inflation ‘problem’ was comprehensively debunked by Peter Martin today, and yet Joye is screaming from the rooftops for two, possibly three, rate hikes by Christmas.

    If such a course of action were followed by the RBA, confidence would be absolutely trashed, and we’d have a US-style housing crash on our hands, which no-one wants.

    Lets hope Stevens and Ric “Boom Boom” Battellino are out-voted on Tuesday.

  3. ” Today’s credit aggregates are very worrying.”
    I think your Minsky moment is right there. Waiting for Steve Keen to churn out some nice graphs and confirm this.
    With that, I would like to backflip on my rate hike call :). RBA would not want to turn on the screws when the credit engine in sputtering.

    • I agree Mav..well I did, but if the spruikers want to make out house prices only went down 2% in the last year and the inflation figures are as worrying as they are, then I acutallyt think the RBA would have a hard time justifying why they didnt raise rates

      This is a total flip from my earlier position…but I just think the house price falls are not enough to justify the RBA holding now

  4. If buyer activity remains subdued into spring when peak activity kicks in, and we get a rate hike along with growing listings and falling sales, we may just have our “Minsky moment”.

    But I’ve had a sinking feeling for some time now that 2012 will be the year the first card is pulled from the proverbial house of cards.

  5. Personally, I don’t agree that the slight slide in prices should be welcomed. It may protect those that have over reached themselves with debt, but in my view unless there is a sharp and substantial correction, no one will consider it necessary to change any of the policy settings and cultural attitudes that got us into this mess in the first place. Our attitudes to property and the encouragement to speculate in housing have produced a bubble that has soaked up substantial amounts of capital that could have been better employed elsewhere in our economy. It’s unbelievable to me that few think its a problem that most of that capital sunk into houses was borrowed from foreigners? I still don’t understand how anyone can believe we are all richer, if in the midst of greatest resources boom in our history, the level of household debt remains in the stratosphere?? Why have we as individuals needed to borrow from our future earnings at all given the level of employment, our wages, and the value of our dollar? To me the level of household debt is a clear and enduring signal we have stuffed up the boom….and it wouldn’t be the first time. Unless enough of us pay dearly for that folly, there will be no incentive to change or lessons learned.

  6. Here’s a famous quotation from Ludwig von Mises:

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

    I see absolutely no point in playing the extend and pretend game by artificially slowing down the bursting housing bubble. It was done once by kRudd and RBA only to result in an even bigger bubble. The only way to prevent deflation is by racking up more debt which will lead to an even bigger problem in the future.

  7. MontagueCapulet

    June quarter retail sales figures were very subdued at the discount department stores (BigW, Kmart, Target). And Easter was late this year which made the figures look better than they really were. Adjust for this and combined sales for the three and the figure was less than the same period in 2010.

    This is partly due to Kmart initiating a price war – moving to a higher volume low price model. Or is Kmart just adjusting to the times? Anyway, flat sales at Kmart disguise the fact that prices are way down and volumes way up, which must be taking a lot of business from other retailers.

    It’s certainly starting to feel like a recession at the lower end of retail. And I believe DJ and Myers are reporting flat sales as well. The specialiist retail press is full of insider reports about how tough the environment is.

    This is consistent with non-housing lending contracting.

    Once sentiment turns it is likely to be self-reinforcing – if consumers are spending less and shifting to cheaper alternatives, then retailers are going to be cutting hours for casual staff, which will make them less inclined to borrow and spend, etc etc.

    Likewise once constuction activity slows we’ll see tradies spending and investing less.

  8. It’s interesting to observe how much of the economy is psychology… there seems to be a real lack of confidence due to this US debt issue coming to a head which is in turn worrying the crap out of the Chinese. I really doubt that it will be the end of the world this weekend (as news.com.au seemed to be saying tonight). The US has had multiple problems with Federal debt for many years now and this is just the latest episode…

    • > It’s interesting to observe how much of the economy is psychology…

      It’s the fear stage now and there is a reason for it. The fear is caused by a real stimulus and this stimulus comes from the realisation that our economy and global economy for that matter are burdened with debt which can’t be repaid. It’s a vicious cycle of positive feedback between real economy and how people feel about it which feeds back to the real economy. This is the opposite to the greed stage when people fearlessly load up with debt which pumps up the real economy. The feedback loops are the main reason why systems can become unstable quite quickly.

        • …Really just a graphical depiction of how psychological bubbles form and pop 9and all bubbles are psychological…all economics is psycholohical, really…) 😉

          • While I’m pretty certain there is an element of fear and uncertainty in what we’re seeing, how much of it is due to this and how much might be due to the fact that households are now swamped in so much debt that they just can’t take on any more?

            As Bill Mitchell would say: “households need to repair their balance sheets. Economic growth must now be lead by income growth, not credit growth”.

  9. LOL. Well Australia is going to go down the drain. Most expensive housing in the Western World?!

    The bastion of Western Civilization, the US is committing suicide and that other bastion of Europe is going to implode and explode. You think that when China’s biggest customers blow up, Australia’s economy might comprehensively tank.

    US GDP will contract by atleast 40pc from here on in, Australia will be damn lucky if they can maintain 1980’s living standards let alone the faux debt fueled living standards they have today.

    US goes, Australia goes. PERIOD. Living standards collapse, China takes over. Oz is a long term Chinese colony and I see a lot of Aussies moving back to Europe once that becomes a reality.

    • I’ve been thinking about the US a lot lately, and I doubt we will see a meek acceptance of these systemic problems. Sure the financial industry and it’s cronies have the country by the short and curlies, and the debt fuelled binge has brought the middle class to its knees, but never underestimate the power of the people…their capacity for innovation and hard work is outstanding. There is increasing anger in the US that the banksters not only escaped punishment, but are now sitting on the sidelines and harping about the need for ‘fiscal responsibility’ while many ordinary folk lost their jobs. I expect there will be a lot more interest of the revolutionary kind in US politics from here on in, that will drive reform, and with it a rejuvenation of the US economy.
      In the longer term, China has many more problems in my view….it’s a totalitarian state for starters and I cannot see that prevailing given the pressures already emerging.

    • > China takes over. Oz is a long term
      > Chinese colony and I see a lot of Aussies
      > moving back to Europe once that becomes a
      > reality.

      It will be a corporate style takeover akin to a large corporation swallowing a much smaller one. When our economy hits a rough patch whoever is in power will be tempted to relax foreign ownership rules to attract investment. Companies, farms and real estate will be up for sale and guess who has the money to buy it. Even if we crash as a result of the Chinese slowdown it does not mean that their investment here will stop. Unlike most western businesses the Chinese think long term and if they can snatch a few bargains they will.

      Earlier today we popped in to the sales office of Realm Camberwell which is marketed as a designer RE development. There was a group of excited Chinese buyers speaking loudly in Mandarin to a Chinese sales agents who was ignoring everyone else. We waited there for about 15 minutes and at the end just picked up a brochure and left the place. I also spoke to a Mount Waverley Hocking Stuart RE agent today who said that the most active buyers are Chinese who unlike the locals are cashed up. Property developers such as Harry Triguboff call on the RBA to lower interest rates and thus crash the AUD so the Chinese can buy more apartments in Australia http://www.macrobusiness.com.au/2011/04/triguboff-sounds-the-alarm/

      This is an accelerating diffusion process and unless China crashes and burns like Japan did we will become a defacto Chinese colony.

  10. If the US goes to balanced budgets right away the regeneration of the US wouldn’t be too far off.
    If borrowing to pay interest and QE3 are about to happen, the USA and the rest of the world will suffer greatly.
    As I think the fools and the greedy are in charge everywhere you can bet on a collapse during which the rich will in vain try to hang onto their wealth.

    • You’re saying that if the US government slashes spending, the aneamic domestic demand they are experiencing on an ongoing basis will suddenly surge back to life, putting them firmly on the road to recovery?

      • Firstly, just increase taxes on corporations to actually make them pay. NewsCorp actually gets paid by the IRS whilst making massive profits. Then reduce the waste by gov’t and there are countless of these and delete all the benefits that special interest groups get via lobbyists bribing Congress would be a start. Stop sending money to banks and primary dealers and spend it on the poor.

  11. “The market continues to slide slowly downwards due to the low rate of new credit being issued by the banking sector”

    Delusional, check.

    • Sorry Juk,

      I can’t tell if that means you agree or disagree with that statement

  12. Reader from India here.
    The “bubble” in AU is but a blip compared to what has happened here in India.
    Home prices have gone up 300-400% over the last 7-8 years in large cities. Land prices 700% and more. Not kidding about the land. First hand experience from selling some ancestral property.
    Inflation has been running at around 7-8% avg during the same period.

    Yet people continue to buy empty land and hold it for capital appreciation. And banks continue to lend large amounts to buy hold non-income producing land.