RPData sees the light

RPData has seen the light. For the first that I can recall it has stepped outside of simple supply and demand arguments for house prices and provides a downbeat assessment based upon rates of credit issuance:

The Reserve Bank’s private sector credit numbers for June 2011 showed the lowest level of annual growth in history as the banks tighten their purse strings and consumers focus on saving rather than taking on more debt.

The monthly private sector credit numbers for June 2011 were released by the Reserve Bank (RBA) last week. The data highlights the amount of outstanding credit for the private sector. Of particular interest is the housing credit data.

Housing credit is broken into two parts: owner occupier and investor credit. Total housing credit grew by just 6.0% over the 12 months to June 2011, the slowest annual rate of growth in housing credit over the length of the time series which dates back to January 1991. Owner occupier credit increased by just 6.5% over the year and investor credit grew by 5.8%. Annual owner occupier credit growth was the lowest in history while investor finance growth reached a low of 2.3% in October 2009.

The limited growth in credit is indicative of the response to the Global Financial Crisis (GFC) by financiers, having tightened credit requirements for home loans. It is also representative of the higher interest rate environment resulting in lower home loan demand and consumer caution which is resulting in home loan owners paying down debt.

The annual growth in housing credit across Australia has actually been easing ever since March 2004, which was also the time the housing boom of 2001-04 was starting to run out of puff. As the graph shows, ever since private sector housing credit peaked the rate of capital growth in property values has also been slower.

The most recent RP Data-Rismark Capital City Home Value data is to June 2011, 74 months since housing credit began to fall. Over this time, home values across the combined capital cities have increased by a total of 40%. During the preceding 74 months, capital city home values increased by a total of 97.4%. The evidence certainly suggests that as growth in housing credit slows so too does the rate of property value appreciation.

Although a decline in housing credit is likely to result in lower levels of home value growth, there is no precedent that it will result in substantial falls in home values.

What is a likely result of lower growth in housing credit is a lower number of housing transactions. When the volume of home sales in the three largest cities (Sydney, Melbourne and Brisbane) are plotted against the annual change in housing credit you can see that volumes have been trending lower since growth in housing credit peaked during March 2004.

Obviously this changing market dynamic is going to have an acute impact on home owners and property professionals.

Home values are unlikely to grow at a similar pace to that which they have grown in recent years. It is important to note that this shift has been happening without much notice in recent years. Over the past five years, capital city home values have grown at an average annual rate of 5.5% compared to annual growth of 7.1% on average over the decade. So clearly the last five years have recorded a much slower rate of capital gains than the preceding five years. Lower rates of capital growth mean less equity in homes and as a result less housing market speculation. In-turn, we will likely see fewer investors actively looking to invest in property unless rental returns climb markedly from their current levels, providing opportunities for positive gearing.

For property professionals, fewer transactions coupled with lower equity levels is likely to result in less commission and lower demand.

How long will these conditions last? Who’s to say but affordability is an issue and not one that is likely to be improved upon quickly so these conditions are the new normal with property values likely to grow more in-line with household incomes going forward. The banks have stated that consumers will have to get used to lower levels of credit after the GFC, now obviously that won’t continue forever but a restricted credit supply is likely to remain for a number of years, especially while debt problems persist in many economies.

Well, that’s progress. But if they had only bothered to use the data I had previously mentioned in the ABS’s 5609 and 5671 datasets then it would have been less painful. In overlaying their own Brisbane house price index chart (top) with the owner occupier credit issuance data for Queensland from the ABS (bottom – black line is 12 month trend ) they would have found an image like this.

If they then combine that with their own words…

the banks have stated that consumers will have to get used to lower levels of credit after the GFC, now obviously that won’t continue forever but a restricted credit supply is likely to remain for a number of years

Then they may have thought twice about stating…

… as growth in housing credit slows so too does the rate of property value appreciation. Although a decline in housing credit is likely to result in lower levels of home value growth, there is no precedent that it will result in substantial falls in home values.

Latest posts by __ADAM__ (see all)


    • Wow! What a turn around in views from the mainstream media.

      Its’ been that way for quite a few years. I been hearing mortgage stress stories since 2005.

      Its’ funny (not haha funny) how many poeple will boast over their dunken nights out, vomiting on themselves, drug induced binges of idiocy, being arrested for urinating in public, farting in Church, etc.

      But nobody speaks about debt.

      • Steve Keen speaks about debt. He has been loudly talking about the importance of debt for a long time.

        • And the MSM was happy to wildly misrepresent his “Real estate will fall 40% in real terms over the next 10-15 years” statement. The MSM held him up as the chief prophet of doom during the GFC and then poked a bit of fun at him later on. The average punter only sees Keen through the MSM distorted lens.

        • Steve Keen even has an item on Chancellors’ Property Observer.

          We live in strange times indeed.

    • As much as it saddens me to hear stories about families losing their homes, the couple massively over-borrowed and are now dealing with the consequences of their actions (as any over-leveraged persons must do).

      Essentially they borrowed massively for their “dream home” using their 2 record incomes which also included car, petrol and phones in the package. She lost her job, he lost his, and now he’s on a much smaller salary in a different job and struggling to make ends meet.

      Now they’re trying to sell their “dream home” and move on with their lives. The only problem is that since the market is falling/stale no one is coming to buy it, so now they blame the market for their dilemma!

  1. Combined with Leiths article on the boomer hangover – game over for the housing machine.

    Oh but wait, all that money being taken out of the stock market will go into housing!

    • It is a possible Pez, but my gut feeling is that cash will be king (with gold as queen ) for a bit longer yet. As leith and I have been saying all along demographics is the long term housing market driver and his article is pretty clear about the direction of that trend.

      If we see a QE3 announcement then we will see a run back to equities. Maybe tomorrow ?

      • DE

        I may be naive but putty money into an Australian bank may seem like cash but most of it goes into residential mortgages. So I don’t call that cash

  2. It’s interesting all this waking up from the coma. That 60minutes piece was sensational, literally. Sad depressed home owners and happy jolly renters. Unbelievable shift going on.

  3. There has been no precedent for declines because credit growth has never been this low, it doesn’t take much to see where prices are heading if credit growth slips further.

  4. how exciting when people find out about the negative side of gearing….

    buy home in 2006 (5 yrs ago) for say $400,000. borrowed say $300,000. paid monthly amount of loan say loan is now $280,000 then house price according to agent is to be about the same as purchase (less selling exp) then if mkt drops another 5% … the owners have torn up $20,000 and then the annual P & I of $24,000 as well as a $5,000 loss is looking like fun, hey wife we should have rented for $20,000 pa and partied on the extra $9,000

    the only saviour may be that he RBA will unwind interest rates (markets showing a 1% fall by the Dec meeting) …

  5. Shame Chris Jouye cant bring himself to admit how awfully wrong he has been in his bullishness:

    Hiding in Australia’s property hedgeChristopher Joye

    Published 1:37 PM, 8 Aug 2011 Last update 1:37 PM, 8 Aug 2011

    Property Observer

    You’ve probably woken up this morning a little confused. The US government has been downgraded from a triple-A rating to AA+ over the weekend. Every newspaper or media outlet you read is talking about financial markets mayhem. One minute you are hearing about higher interest rates, the next there is confident talk they will be slashed.


    He states we are a little confused…no, it was you who is clearly confused Mr Joye as you totally missed this coming!

  6. Hi,
    I am no fin guru but have been following this and similar sites for 4 years. Have been happily renting and buying gold. Our landlord has given us notice for November. Wife is sick of renting. We are fin secure and was looking to buy property not more than 3x annual income. How long should one hold off?

    • That’s the trillion dollar question. Is this a slow melt or the beginning of a full on crash? Unlike stock markets real estate is very illiquid and crashes in slow motion. The Wife and I are looking to buy early next year with a 25% deposit (cash in the bank left over as well), and we’re expecting the place to gradually lose value in real terms over the next decade. But if this is a crash I’d like to know, because I’d be mighty pissed if it turns out I could’ve saved $100K by waiting another two years.

      • It depends where you are, and the difference in cost between renting and buying in that location. On the whole. my personal view is that waiting 2 years in Brisbane and Perth would see most of the losses taken, while Sydney and Melbourne will be another year two behind.

        I would personally be very hesitant to buy with a 75% LVR at the moment, even though mortgage rates are likely to fall to 5% over the next year.

          • Because a 20% drop in prices would wipe out ALL of your current savings (the 25% deposit – after you consider buying costs etc).

            If you have $100,000 and buy a $400,000 home, a 20% fall will do it, and this is a fairly likely situation in most capitals. Remember, prices went up 20% in Melbourne in just a year or two, so they can do the same in reverse.

            Leverage works for gains and losses.

            But if you put that 25% cash (say $100,000) into shares (not today of course, but there will be good opportunities soon enough) or cash, you would have a hard time losing 100% of you money.

            Also, in the mean time, renting the same home would be cheaper than buying anyway.

            Why would you blow all your savings now when the bust is happening?

            On the other hand, if you had $400,000 cash with no where to park it, and a stong desire to own your own home, it might be worth doing as the risk is much lower.

          • “On the other hand, if you had $400,000 cash with no where to park it, and a stong desire to own your own home, it might be worth doing as the risk is much lower.”


            There are really two different types of risk here:

            – the risk of buying in to a falling market and losing money (but still having equity and hence being able to sell at any time)
            – the risk of getting in to negative equity and not being able to sell because you won’t be able to pay off the loan.

            Putting down a larger deposit won’t reduce the risk of paying more than you might have in the future but it will reduce the risk of ending up in negative equity.

            Negative equity is a terrible thing – it means that you will probably have to declare bankruptcy if you are forced to sell your house due to job loss or other unforeseen circumstances.

            I expect to see loan arrears rise rapidly as more people fall in to negative equity. In a rising market, it’s easy to sell your house if repayments become too much of a burden. It’s much more difficult in a falling market…

    • We’ve got a similar problem, and I’ve put my foot down 🙂 “Don’t ruin the plan!” We’re pretty much at the top of the hill, just starting to slide down. If you buy now, you’re the ultimate sucker in my book, because you can see what’s happening!

      Seriously though, you’ve just got to find out what the lady hates about renting, and fix it. Can’t paint a wall? Paint it anyway. Not the nicest place? Pay a bit more than you normally would and get a nicer place. It will still be much cheaper than buying.

      • What I personally hate about renting is the small time, mud and dad investors who think simply buying the house is enough to make the money roll in and totally fail to do any maintenance.

        We are in the process of moving, and viewed a house that is more expensive than the current one (which is in need of much more maintenance than the owners wish to pay for) which needed a total overhaul. The only thing that was nicer than the current abode was the garden, and that isn’t exactly a good thing. We were the only ones there, and I am waiting for the phone call to ask where our app is.

        The property investors seem to be of the opinion that it is a set and forget thing. I think the “rental crisis” period when people would take anything, hid some of this, as do the overly complacent property managers. It will become an issue when they try to sell the properties though, as their value will have declined, due to the lack of maintenance will drop the price.

        As a side note on this, an awful lot of places have suddenly had “fresh painting” or new carpets laid, which makes me think that the no maintenance chickens have come home to roost.

    • No one knows exactly when to buy, but certainly many people in the US regret buying when prices had started to fall without realising that they were only part way into the correction.

      In 2006 prices had started to slide in the US, but then they experienced a small bounce in 2007 as many people bought in due to improved affordability. Of the mortgages taken in 2007, 37 per cent were in negative equity by mid-2009.

      If you place a premium on have “your own home” above potential loses, any time is a good time. Otherwise get yourself a good rent buy calculator and look at the difference in your wealth if housing increases 1-2% p.a. and socking the difference away in savings. I want to buy so I can get a puppy and put a nail in the wall, but I don’t want that puppy to cost me $100K.

  7. DE thanks for the article, and RPData were never going to admit they were wrong until they were pushed off the cliff.

    As has been said before I feel sorry for people who just got into a home. The politicians, and MSM have really let the young/not so young people of this country down.

    The Greens and Gliiard what to review press freedoms, and you wonder what the future will be if that goes through.

  8. Hopefully the team at RP Data treat themselves to a Macrobation session today.

    Whilst they’re starting to see the light, the following two sentences show they’re still a long way from enlightenment:

    “Although a decline in housing credit is likely to result in lower levels of home value growth, there is no precedent that it will result in substantial falls in home values.

    What is a likely result of lower growth in housing credit is a lower number of housing transactions.”

    1) As had been demonstrated on this website, transaction volumes drive prices at least as much as prices drive transaction volumes.

    2) Housing Credit Growth = # New Loans * Ave Loan Size… Given that RP Data still can’t bring themselves to contemplate a price fall (and, commensurately, a loan size decline), of course transaction volumes are going to fall if/when credit growth falls!

  9. Well correct me if I’m wrong but isnt RPData a private company with a vested interest? they make their money when and if people are interested in housing. I think they know very well what’s going on, but how can anyone expect them to say “hey I make my money from housing but I gotta tell ya stay away coz it’s pretty shit right now, dont worry about me I’ll get a job selling cars”. Nobody should be in that position because it’s a conflict of interest, or when they are we should have relistic (ie next to no) expectations from them.

    The only worry is that their main customer is RBA, I hope they have a very serious audit function.

    • I agree they do have a vested interest.

      Why you might ask?

      Their main clients will be the average joe real estate agents. They pay something like $500 a month for a subscription to data that should really be accessible to the public. If real estate agents go out of business…. well you can put two and two together to see its bad news for Rp Data.

      Rp Data could open up their client base to the public meaning they could crush Domain or RealEstate.com and compete for market share in advertising properties for sale coupled with the information they provide about the history of the property. They could then generate revune from advertising on the web page and maybe go global starting RPDataEurope or something.

  10. Hmmm, I wouldn’t want to be one of the many developers trying to sell apartments in to the Melbourne market at the moment 🙁