How the RBA undervalued housing

Remember this chart? It is taken from page 15 of the RBA Research Discussion Paper: Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study, released in September 2010. As you can see, the RBA chart shows a nationwide dwelling price-to-income ratio of around 4.5.

Senior RBA officials have quoted this ratio in a number of fora. For example, in March this year, the RBA Governor, Glenn Stevens, made the following remarks at a question and answer session at the Australian Business in Europe lunch in London:

“There is quite often quoted very high ratios of price to income for Australia, but I think if you get the broadest measures country-wide prices and country-wide measure of income, the ratio is about four and half and it has not moved much either way for ten years…. That is higher than it used to be but it is actually not exceptional by global standards.”

Fellow blogger, Critical Influence, and I have questioned the validity of this measure on several occasions.

In a nutshell, the RBA’s measure of household disposable income is taken from the National Accounts and wrongly includes a number of significant items as income that are not actually ‘disposable’, in that they cannot be used to fund current consumption. Key amongst these inclusions are: (1) compulsory superannuation contributions, which are locked away until retirement; and (2) owner-occupied imputed rents, which are the theoretical rental income that an owner-occupier would receive if they rented their home out.

The dwelling price-to-income ratio of 4.5 calculated by the RBA inferred an average household disposable income figure of around $100,000 in mid-2010. However, as noted previously, such a high level of household income was never believable when considered alongside the following facts:

  1. The 2009 Household, Income and Labour Dynamics (HILDA) Survey estimated that an Australian household only needed to earn over $77,500 after-tax to be classified in the top two income quintiles (i.e. the top 40 per cent of income earners); and
  2. The average pre-tax full-time total earnings in Australia was only around $68,000 as at August 2010.

If those official releases were not enough to convince you that the dwelling price-to-income ratio of 4.5 quoted by the RBA was way too low, or to put it another way, the National Accounts estimate of average household disposable income (circa $100,000) was way too high, then yesterday’s release of the biennial ABS 2009/10 Household Income and Income Distribution Survey (the Survey) should convince you once and for all.

According to this Survey (my emphasis):

Household income consists of all current receipts, whether monetary or in kind, that are received by the household or by individual members of the household, and which are available for, or intended to support, current consumption.

Income includes receipts from:

  1. wages and salaries and other receipts from employment (whether from an employer or own incorporated enterprise), including income provided as part of salary sacrifice and/or salary package arrangements
  2. profit/loss from own unincorporated business (including partnerships)
  3. net investment income (interest, rent, dividends, royalties)
  4. government pensions and allowances
  5. private transfers (e.g. superannuation, workers’ compensation, income from annuities, child support, and financial support received from family members not living in the same household).

For the first time, this survey has also included owner-occupied imputed rents as income, which contributed, on average, an extra $57 to the income of all households.

According to the Survey, the average after-tax household disposable income was only $74,360 (see below extract) – a far cry from the circa $100,000 figure quoted in the National Accounts.

So what can be said about the RBA’s dwelling price-to-income ratio? How much is it understated?

Well, to correctly answer these questions, I require two pieces of information:

  1. RP Data-Rismark national median dwelling price (all regions); and
  2. Median household disposable income.

The first piece of data – the national median dwelling price – is provided in the below RP Data-Rismark home value index release, and was $415,000 as at June 2010.

The second data point – the median household disposable income – can be estimated from the 2009-10 ABS Survey via the following steps:

  1. taking the gross median household income of $1,320 per week;
  2. estimating the median income tax payable by taking the average income tax rate (15%) and scaling this down by the difference between the median and average gross household incomes (i.e. (1,320/1,688) x  15%) and then multiplying this by the median weekly gross household income (i.e. $1,320 x 12% = $158 per week);
  3. subtracting 1. from 2. to obtain the median weekly household disposable income (i.e. $1,320 – $155 = $1,165); and
  4. multiplying $1,165 by 52 to obtain the annual median household disposable income figure of $60,580.

From these two data points, Australia’s Median Multiple (median dwelling price divided by the median household disposable income) as at June 2010 was around 6.8 50% higher than the ratio of 4.5 calculated by the RBA.

An inferior dwelling price-to-income ratio can also be calculated by comparing the average dwelling price – $447,994 as at June 2010 according to Rismark –  against the average household disposable income figure of $74,360 provided in the ABS Survey. This provides a dwelling price-to-income ratio of 6.0, which is still 33% higher than the ratio of 4.5 calculated by the RBA.

Whichever way you cut the data, it is clear that the RBA’s dwelling price-to-income ratio is understated by a significant margin and that Australian housing is, on the whole, unaffordable.

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Unconventional Economist


  1. Shame on RBA. Maybe they simply take their own wages as a data base for the house price to income ratio. Then their calculations can make sense. And why is anyone using average income? It doesn’t say anything and hides very different levels of medium income and income distribution. We have very different Lorenz curves today compare to any of previous decades.

    • It would be a lot higher than $100,000 if they used their wages as the base. Don’t forget that Glenn got a 89% pay rise over five years to get to $1,000,000 a year.

    • Average income is not a bad figure to use (I tend to prefer it to Median), and suffices for the analysis being performed.

      As for the measure used, the RBA use a different measure of diposable income. Hence they are measuring something different. It is not actually that the RBA’s 4.5x figure is under estimating the problem. Rather the 4.5x figure the RBA use is equivalent to the 6x figure used in this analysis. They are the same 🙂

  2. Pity official figures can’t be trusted.

    Nevertheless, the “trend” is at least still clear from the RBA figures, that the relationship has been moving against first home buyers. But the figures still cannot be trusted for international comparisons.

      • Rant on/
        Even when the average data is reliable, it’s not necessarily that useful for trying to determine levels of housing stress, changing living standards, etc.

        The wealthiest 20% will always do well, even in terrible economic conditions. The real measure of whether an economy is delivering for its participants is what’s happening to the remaining 80%……
        /Rant off

  3. Good work, UE. Is not this the classic problem with macroeconomics? Obfuscation reigns. I have never met a representative agent.

    And this is the saddest part: we need to revert to empirical jousting when a state has lost its moral compass and reverts to distortions of the market in the name of the common good (e.g. they think that rising asset values are a “good”). And then they deny the laws of economics by stating — as Plibersek did — that house subsidies do not give rise to house prices! I think that this is called political economy and the shame is that everyone wants to talk about markets, but gone is simple marginal analysis and its capacity to spot distortions.

    So it is easier for the RBA and Battelino & co. to come out with woolly analysis — who hired these dudes? — and state that all is right with the world. They have not seen anything yet.

  4. In a nutshell, Glenn Stevens knows how precarious the whole thing is and he’s keen to keep talking the risks down despite the obvious signs that people are stuggling and our debt-fuelled economy has the wobbles (just like every other Western country). We collectively have one foot in the grave and another on a banana peel but Glenn’s job is to keep talking it up.

    By the way, I really wish one of Gerry Harvey’s underlings would tell him to shut up. I mean, where the hell does he get off telling people they should keep spending money in his (overpriced) shops just so that he can keep moving up the rich list? Did it ever occur to him that we are actually in a recession in this country (despite what we are being told)?

    And there’s the rub. People in high places in this country have NO IDEA how ordinary people live and what a struggle it has become to keep paying accelerating rents or jumbo mortgages. Glenn Stevens, however, appears to know what’s actually going on and he’s doing his best to try and paper over the cracks…

    • Agreed, although looking around should be more than sufficient.

      Just an observation: ordinary people in this country do not do a very good job at being focal and making sure their interests are taken into account (not that the political two-party system helps).

    • I really enjoyed this post. Banana peel, a reference to banana republic?
      But I think you might ascribe too much knowledge to Glenn. He’s a Central Banker (and a *rhymes with*) that thinks like a central banker needs to. He is voted as chairman of the RBA for this reason. It doesn’t matter one bit to him whether houses are 4.5 times or 100 times household wages, it only matters that he looks like he’s keeping inflation ‘within the band’ (2-3%) and supporting our banks reserve functions.
      He will never want to be the sole cause of anything bad in the economy, so don’t expect him to ever say anything is bad. In that respect he’s just a slightly more respectable version of the lying broken record that is Wayne Swan.

    • +1 Mav

      I never thought that the RBA was independent, and this shows how they do see problems yet the government ignores them and we’re then fed spin.

      On the housing story here, it’s been in the RBA/Governments interest to prop up housing so I’m not surprised. Like I said there is no vision to put capital to use in other than housing and mining. No surprises here for any MB reader.

    • Walt Disney's Frozen Head

      Wow! Game, set and match to UE (unless someone wants to raise a trivial objection)

      …and presumably checkmate to Chris Joye.

      A victory for data over assertion.

  5. I agree that RBA figure is too small, but that number almost doesn’t matter because every country has its own measure of income.
    From RBA chart we may see that ratio doubled from mid 1990s, and almost tripled since 1980s. Maybe our house prices are not extreme by international measures but what is important is that house prices in Australia are extreme by our own measures.

    Young Australian families in need for a home are 50% poorer than young Australians in 1980s or 1990s – that’s what matters.

    • “Young Australian families in need for a home are 50% poorer than young Australians in 1980s or 1990s – that’s what matters.”

      Exactly. And that is just looking to rent a similar house to a few decades ago. To BUY the same house makes the young family even poorer and requires a huge gamble on the direction of interest rates.

  6. Awesome work Leith – I really hope the MSM picks this up because it is of huge import to the housing affordability debate. It’d be deserved kudos on your part too. Excellent stuff.

    • +100. Good work indeed. Intuitively one just knows the RBA figures were conjured.
      I work in the PS and I see how all sorts of stats are ‘generated’ to make the situation look better than it really is. It makes me sick.

  7. Great post UE…this is a brilliant and rational way to challenge the RBA and Rismark on their lies.

    I would love to hear Glenn Stevens respond to this post. Or Chris Joye.

    Come on Australian journos…I know you are reading. Ask the questions that need to be answered!?!?!

    • Let me guess the CJ response…….

      “Some back room accountant has challenged my almighty analysis, which is produced with a combination of my now legendary insight, assisted by several PhD’s and various other eggheads. House prices to rise 5% pa for the next decade and affordability to ultimately improve to 2x the average wage…..”

    • I would love to hear Glenn Stevens respond to this post.
      Interested in a DIY exercise? You can try a FOI request
      Or Chris Joye.
      You don’t need a FOI request for that – I think Commentator “Foundation” will come along and respond on behalf of Mr Joye.
      PS: Quelle Surprise! Among the documents released under FOIA, I found an RBA paper that relate to the role of stabilisation funds or sovereign wealth funds to manage windfall tax revenue derived from the mining boom. 🙂

      • Mav, excellent detective work and a really fascinating read. Certainly one I would recommend for any wishing to get their head around the functions, forms, and the +/-‘s of a SWF.

        Also a good insight to RBA thinking on the matter. I felt that if anything, it makes the task potentially more difficult, both in design and subsequent government fiscal policy.

        Something tells me a SWF is not that path the RBA would choose. Mmmmm, does that make it more or less appealing!


        • Walt Disney's Frozen Head

          Something tells me a SWF is not that path the RBA would choose.

          geez when I said that it got deleted!

          …lets see what happens 🙂

  8. Good analysis….confirms what many of us had suspected.
    I’m still not sure about the inclusion of imputed rent as a source of income?
    I assume the superannuation income referred to is actual and current private transfers of super funds made to an individual in the now rather than the amount paid into the fund for future use?

    • The National Accounts treats super as household income at the time it is paid by the employer to the employee’s super account, whereas the ABS Survey treats super as income only when it is drawn from the super account and received as a lump sum or an income stream by the household.

    • ….Which by that stage, you are age 55 or older, and not exactly a first home buyer…..

      Great work Leith…although I think the politico-housing complex will ignore this empirical result as usual.

  9. AnonNL
    August 31, 2011 at 8:09 am
    “Just an observation: ordinary people in this country do not do a very good job at being focal and making sure their interests are taken into account”

    Great stuff UE
    Ordinary working people and small businesses people are too damned busy trying to eke out a living to be actively politically involved.
    As a result the nation is ruled by pressure groups consisting of Govt employees, students, and other unrealistically idealistic groups who have no idea about the real world.

    • The rise of ‘no-real’ world experience advisors and pliticians is extraordinary.

      Not quite that, but yesterday I heard The Greens demanding investigation into the manufacturing sector. Will not doubt retract demand when they come to the realisation this is the sector that they often label ‘high emitting heavy polluters’ advocating imposition of the carbon tax…no clue. Oh – this industry actually employers real living people and makes things, nary a thought to where their car, bike, coffee maker might come from. Land of the fairies.

      • The Greens are not industrial nihilists as you seem to suggest. Last seen, they were pushing for the High-Speed rail between Sydney and Melbourne. As a China/mining fanboy, I am sure you appreciate the importance of High-speed rail infrastructure.

        • They’ll soon realise it will require steel, sourced from iron ore and other minerals, coal fired power station produced, shipped in cargo vessels, again utilising vast amounts of steel and finite fossil fuels to get here blah blah blah.

          I am saying there is a disconnect. And the more extreme fringe would like to see an end to ‘evil mining’ with no real comprehension of what that means.

          Land of the fairies.

          • End of mining? I think Greens said coal mining will come to an inevitable end.. a long long time from now. They didn’t say it has to end yesterday.

          • I am a big fan of the greens, particularly their policy on (not) accepting corporate donations.

            But, 3d1k’s criticism is fair. There is a disconnect in some of their policy positions.

  10. 3d1k I’ve always been interested in a stat that told us how many of the RBA have large mortgages on Sydney houses, investment properties et al.
    It is not necessary to CONSCIOUSLY manipulate data to get the answer you want.

    • Interesting flawse, I offered a brilliant(!) psychological take on the interaction between politicians and CEO’s yesterday, where there is seldom recognition of the unconscious/subconscious motivations at play. It was deleted.

      A very powerful force indeed…

  11. Unaffordable? Not according to the spruikers. According to the property investors on a popular investment forum, nothing can ever be unaffordable because if you make enough sacrifices, scrimp and save, and take on a massive soul destroying mortgage, then anyone can ‘afford’ to buy.

    Everything’s Affordable!

    You just have to trade housing for quality of life. Take no holidays, never treat ourselves to any luxury, delay having children, and put our children in daycare all week, so both parents can work 80 hours.


    • Indebted friends of mine eat various combinations of 2 minute noodles and bread for every meal while they pay back their mega mortgage.

      They are young and although they have a single income because of their child, the earner works like a dog to pay the mortgage and bills. As a result they scrape by ok.

      It is all ok while your’re young, healthy and keen. Unfortunately that stage of life lasts, what, 6 years? 10 years maximum. A mortgage paid at the minimum like many are these days takes upwards of 20 years to repay. That is a long time to be keen and healthy. Attention spans are shorter than ever especially in the FHB crowd.

      Once the indebted start questioning the point of forking over the majority of their income every week for the privilege of saying “this house is ours”, and at the expense of the quality of life that owning a house is meant to bring, then the trouble starts.

      Motivation wanes additionally when problems occur. My indebted friends recently discovered a massive hole in their roof, and rats, and various other problems that require extra money to fix.

      It is 90% psychological. To combat mortgage fatigue, banks should run advertising campaigns around loving your mortgage, err, house.

      “Ignore all the obvious faults with your house, and the fact you have no savings, or capacity to take on the extra debt required to fix them, your house is yours, and a fine house it is! Keep sending us your wages each week.”


      “2 minute noodles and white bread are a staple in many countries. Healthy and chock-full of vitamins. Make sure your children eat all those unidentifiable green and orange flakes that come in the accompanying little plastic packet. Mm, mmmm”

        • The guy who wrote Angela’s Ashes childhood nutrition pretty much consisted of hot tea, bread and lard, watery cabbage soup and if lucky at Christmas a boiled pigs head – made it to a fine old age.

  12. Once again UE makes fools out of the RBA! Stevens might be the worst central banker to have ever gotten off so lightly.

    It amazes me that during times of extraordinary resource wealth the standard of life for the middle and lower classes has eroded. The issue of childcare is the biggest sign that things are not easy for the masses. And that has major repercussions for the future of this country.

  13. Leith, you never answered my question in a previous post – given your view that housing in Australia is unaffordable, what is your forecast for the median house price in Australia? how much lower do values have to fall?

      • We can all have our own assumptions

        But given the the endless posts about overpriced Australian housing, I think he owes it to the likely many thousands of people out there reading this and making life changing choices.

        So let’s hear it…where are median house prices going Leith? $200k? $350k? $50k?

        • The only reason people want ‘concrete’ predictions is so if the market turns around (of which its unlikely to) people can make the same comments they have about how Steve Keen was wrong.

          Looking at all the data presented on this site, its fair to suggest that property would be between 20% – %40 overvalued in real terms. This depends on a number of factors including suburb and the actual dwelling.

          You may find that if interest rates drop, fuel prices may rise (as the AU dollar will drop too). This may result in those properties with good transport links holding their prices a little better then those with only road links.

          • No, that is wrong. I may actually agree with Leith. But the point remains – if you say something is overvalued, then you must have a fair value or rough target for where you would cease to publish articles that say housing is overvalued. I would like further clarification on this. There are people out there scared sh!tless about falling property prices due to continually writing about it on this blog, and in my opinion they deserve to know just how much they stand to lose if Leith is correct.

            Furthermore, you don’t seem overly convinced yourself that house prices will fall further. What happens if the RBA drops the cash rate to 3.5% in 12 months time? What would be your prediction then?

          • My opinion is that lowering interest rates significantly would lower the AU dollar significantly. Whilst this would make it cheaper to borrow money, it would make a lot of the goods we import (especially fuel) more expensive.
            Given a large portion of our GDP is driven on consumables, and our consumables are more imports then locally produced, a lower AUD would potentially push up the prices of these products. This would mean that any ‘benefit’ received by lower interest rates for mortgage holders would be eroded by higher prices for imported consumables.

            Not everyone would agree with me on that one though – as there are some import companies carrying extra margin at the moment due to the high AUD. This could lead to more steady prices, but margin erosion depending on the competitive environment of the industry concerned.

        • You think he owes it?!

          Since when?

          Since when has the MSM “owed it” to anybody for personal decisions made, based on their biased and compromised reporting?

          “Thousands of people out there reading this and making life changing choices”

          Mate…you’ve got the wrong media.

          The people who make life changing decisions based on what they read are targetted by the MSM, and their mates, the property spruikers. You’d probably know a few of them.

          This blog is provided for those who have an open mind and are capable of independent analysis and critique.

          The fact that Joye et al are stupid enough to stick their head in the forecasting oven does not imply the wisdom of mimicry.

          The forecasts of the spruikers are a means to an end..another prop for the house of cards.

          This blog is about pointing out, and discussing, the existence of the house of cards, not forecasting the timing of depth of its demise.

    • Dude, nobody can determine that due to all the unpredictable and unforseeable factors flying around right now. Why don’t you ask Leith what the next winning lotto number will be while you’re at it.

      Your guess is as good as anybody else’s….

      • If nobody can determine that “due to all the unpredicatable and unforeseeable factors flying around right now”, then how can one determine if house prices are overvalued?

        That is ridiculous…if providing a forecast is akin to predicting the next winning lotto numbers then I’m not sure how he can confidently conclude that housing is overvalued either.

        That’s why I’m asking for a forecast…it is fairly easy to give a ballpark figure

        • Populist predictions are so 2007. You would have thought the hoi polloi would have learnt a thing or two about this kind of rubbish. If you want predictions, subscribe to a forecaster or the SMH.

          • At least C.Joye put his money where his mouth is and provided an explicit forecast recently…I happen to completely disagree, but nevertheless he has conviction behind his analysis.

          • Yeah.

            Neville Chamberlain stepped off a plane some time back and forecast “Peace in our time”.

            With conviction too, I believe.

            That worked out well.

        • Pretty much all measures point to housing being overvalued and that we’re heading for a prolonged downturn (as has been pointed out here on MB in previous articles). But any number of unpredictable and unforseeable events may occur that can change the whole scene such as govt intervention, China slowing or re-stimulating, euro breakdown, etc. etc. etc. which makes prediciting how far house prices will move (up or down) and over how long almost impossible which is what you’re asking for. Making predicitons on current trends is one thing, but reality doesn’t work in a linear fashion now does it?

        • BK, let me draw an analogy. UE is a doctor pointing out that smoking and drinking too much will shorten your life span. He has presented all the evidence supporting this claim. He can’t predict exactly when, or even if you will suddenly drop off. Meanwhile the MSM is telling you smoking makes you sexy and drinking makes you rich.

  14. Let’s put the question another way – Leith, at what median house price, given current incomes, right at this moment in time, would you cease to conclude that housing is overvalued?
    This is not even a forecast…I’m simply asking what that price would be today.

    • If the average wage is around $68,000, and the historical price to wage ratio for the median price has been 3.0 to 3.5 – then the point as to which prices become affordable again would be between $210,000 to $240,000.

      This would mean nearly a 50% drop from the current median prices seen.

      • You can also look at it this way:

        Take away the distortion caused by negative gearing and mortgage interest repayments should come down to below current rent levels.

        Translated into property prices would put realistic property prices roughly 40% below what they’re now (very rough 10sec calculation. You can probably do this better and more detailed just to give yourself an idea).

        • “Take away the distortion caused by negative gearing and mortgage interest repayments should come down to below current rent levels.”

          You may be waiting a long time for mortgage interest payments (on most of the price), even if ng goes, to come down below rent. Mortgage interest payments have exceeded rents for at least more than 20 years, probably for 60 years and possibly for ever.

          • Just because it has been so for a long time doesn’t mean it makes sense… Australia is probably the only country in the world where mortgage interest repayments are higher than rent.

            If NG goes mortgage interest repayments will have to come down or rent must go up (which I doubt will happen – people simply can’t afford it) in order for the investment to make sense. Of course I am fully aware that NG will probably only go when hell freezes over…

  15. Jason,

    “My opinion is that lowering interest rates significantly would lower the AU dollar significantly. Whilst this would make it cheaper to borrow money, it would make a lot of the goods we import (especially fuel) more expensive.
    Given a large portion of our GDP is driven on consumables, and our consumables are more imports then locally produced, a lower AUD would potentially push up the prices of these products. This would mean that any ‘benefit’ received by lower interest rates for mortgage holders would be eroded by higher prices for imported consumables.
    Not everyone would agree with me on that one though – as there are some import companies carrying extra margin at the moment due to the high AUD. This could lead to more steady prices, but margin erosion depending on the competitive environment of the industry concerned.”

    Can you please translate what this would mean for house prices? I didn’t ask about what it would do to prices on consumables that we import.

    • If the cost of consumables increases, then disposable income to spend on housing decreases. This will result in some people not being able to afford mortgage payments, and therefore moving into the rental market. It will also result in some people currently renting moving back in with families and shared accommodation to reduce cost. All of this would lead to lower demand for each individual dwelling and result in a lower price.

      There is always an argument that if people cannot afford to purchase, then rental demand will be strong, and therefore investors will be encouraged to enter the market. Unfortunately given current rental yields, the only real incentive for an investor to choose property in the present environment is in the hope of future capital gains. What we are seeing in the current market is first home buyers ‘priced out’, and investors rethinking prospects for future capital gains. Unless one of these markets can be ‘re-ignited’ (see Stimulus) then there will continue to be downward pressure on house prices.

      Previous posts on here have highlighted the property supply risks associated with an aging population, and the negative impact that may have on prices in future years as people in their 70’s and 80’s still living in their own homes die off, and baby boomer investors begin to liquidate their portfolios in order to fund their retirement (due to limited superannuation).

      Increased supply, and the unstimulated demand highlighed above – would ultimately lead to a lower price point (in real terms at least).

      • Interesting that you think falling interest rates would lead to lower house prices as a result of the fall in the AU$ which could be expected.

        The opposite happened last time. Mortgage SVRs were cut form 9.60% to 5.75% between August 2008 and April 2009. The AU$ fell substantially during that period and we now know that real household income didn’t rise. Yet house prices began a boom. Why will it be different this time?

        • Yeah, and we’ll just conveniently ignore the FHOG and offshore govt guarentees. Did lower rates spur on the “boom” of ’09? It’s hard to say, but IMO, judging by overseas examples like the US and Japan, lower rates themselves don’t reignite a slowing market, rather it acts more as a relief to current borrowers. It was the govt stimulus IMO that prices to spike. If rates get lowered, I doubt the market will turn around in a dramatic way like it did in ’09 in the absence of more govt stimulus, rather it would just slow down the pace of decline.

          And anyway, if prices do start to shoot up again, I doubt the RBA will let it happen all over again and will be quick to jack up rates again.

          • “If rates get lowered, I doubt the market will turn around in a dramatic way like it did in ’09 in the absence of more govt stimulus, rather it would just slow down the pace of decline.”

            …slow down the current pace of annual decline of 2.9%?? (today’s data)

            I’m not trying to be a kill joy but all the things you are saying were said last time. Steve Keen in 2008 said that interest rates would go to zero but it would be no good – the crash would still go ahead. Many on the housing blogs/fora agreed.
            Unlike the US, the great majority of Australian borrowers are on variable rates and the RBA has great power to assist those people. Jeremy Grantham has recognised this issue as the dominant reason for Oz and the UK not following the same course as the US.

          • And yet you continue to fail to consider the govt stimulus measures. Keen (whom I’m not the biggest fan of) has admitted that it was the FHOG and other initiatives that the govt took to lift the market that caught him blind-sided. So I’ll argue again, I don’t think lowering rates BY ITSELF will launch the market like it did in ’09. If the govt augments however with another FHOG or some other stimulating measure, then I’d be more inclined to give weight to your “boom boom v2” scenario (with reservations of course).

          • The thing that everyone is missing here is that last time the RBA lowered rates due to the GFC also causing a crash in commodity pricing. So the net effect on fuel,food,etc was hedged somewhat

          •, Steve Keen is being disingenuous when he blames the FHOG boost for his crash prediction fail. That boost was announced before he made his bet with Rory. He knew about the boost and he is on record as expecting a zero cash rate. Yet he still bet on a crash.

            I’m not at all suggesting another boom like 2009/10. I’m just surprised that you think that slashed rates will not stop falls.

          • True Keen made his predictions after govt announced its house targetted stimulus measures, so to re-word if I may, he was caught blind-sided in that he underestimated the impact of the FHOG and the like. Would prices still have gone up if it was just the rate cuts? No one can say, but in my opinion, it would have just slowed the pace of decline (so I agree with you that cutting rates would support the housing market to some degree).

            Also remember, we’re in a different, more precarious position now than we were in ’08 – demand has been pulled forward, we’re more in debt and the govt is not in surplus like it was in ’08 (not to mention it’s determination to get back into the black). There is less wiggle room to dodge an oncoming bullet this time so to speak.

          • Everyone seems to forget that the Oil price also nose dived last time too – buffeting a lot of the impact of the lower AUD.

            What happens next time if the Oil Price does not plummet to $40 USD a barrel (but instead stays $80+) and the AUD drops back down to the 70 cent mark.

            You would find Petrol and Diesel being over well $2 a litre – which would bring a lot of Australian businesses to their knees.