Residex: House prices fell in October

Yesterday Residex released its October median house price indexes and, generally speaking, the downward shift in prices accelerated from September as the Spring selling season got going.

Here is a chart for Sydney:

The housing component fell 1.65% in October. I don’t want to be too alarmist, this is a median index and thus subject to a fair bit of volatility, but that is the largest one month fall since 1979 (and the formation of the index) and follows a 1% fall in September. Even accounting for volatility, it appears Spring has spawned a new vigor to discount among Sydney house vendors.

The story is different in apartments, however, with the index actually rising 0.4%, and clinging to a recent record high in July.

On to Melbourne:

The Melbourne index for houses has trudged lower every month for five months and October continued the trend with a 0.9% fall. Unlike Sydney, however, apartments also fell down for a fifth month in six, some 1.5%.

On to Brisbane:

The Brisbane houses index resumed falling after a big September bounce, reversing all of the 1.5% gains and is now down nine out of ten months. The same transpired in the apartment index, down 0.98%.

Finally, Perth:

The housing index slowed its decline, down 0.36%. Conversely, the apartment index fell more swiftly at 0.76%.

All in all a lousy month. It will be interesting to compare with R.P. Data’s hedonic index.


      • I remember Steve Keen wrote somewhere that it would be “political suicide” to stimulate via the FHBG because most wise to that trick now and there would be a backlash. That being the case it leaves two options: the immigration trick and/or RBA rate cuts. I think there would be a backlash — at least in Melbourne — to any significant increase in population. There is too much congestion as it is. But the vast majority of people, except savers, would embrace a reduction in their interest bill, so any housing stimulus will have to come from the RBA.

          • Thus the attitude of the RBA to household debt is important. If they still buy the idea that lots of debt in the hands of consenting adults is fine especially if secured by houses then they still have plenty of room to move. 160% of GDP ! Whats another 20% between friends.

          • I’m not sure what a another FHOG spree will do. There appear to be other forces at work that are limiting peoples ability to borrow. For example, from Veda Advantage we hear that the average amount owing on gas & electricity defaults has increased 11% in the first 3 months of this year, and was up 30% since 2008. Personal loans up 5% year on year to fund the cost of living… Contraction in retail etc etc. It seems one half of the two speed economy is in trouble.

        • david collyerMEMBER

          Intertest rate cuts? Nope.

          The current level of rates “is about where we want them to be,” RBA Assistant Governor Guy Debelle said yesterday. “If they weren’t, we would do something about it.

          The RBA is letting prices fall.

          Don’t Buy Now!

        • Diogenes the CynicMEMBER

          Vast majority! Au contraire. A minority of households want lower interest rates.

          33% of households have no mortgage. 30% of households rent. Both of these groups get no benefit or negative benefit from low interest rates.

          • Good point Diogenes. Although I am now a bank renter (i.e I have a rental contract with my bank via a mortgage) and I live by margin leverage via trading, I’d rather the higher rates so I get better absolute returns on my superannuation and savings over the long term, than going down the road to ZIRP (e.g going from 5% to 6% over a long period of time is a huge difference and vice versa, IF (big IF) inflation is contained).

  1. I honestly think that the RBA will drop rates 1-2% over the next 12 months.

    They will blame Europe, but in reality will do so to maintain the “Wealth” of Australians..

    I’d almost put money on a bigger drop 2%+, but the banks only passing half of it onto consumers (because due to the Euro Crisis, their cost of borrowing international funds will increase).

    The RBA has a lot of scope with interest rates (compared to the rest of the Western World), and rates dropped a few percent the whole property market would ignite again (for a few years at least).

    • The RBA does not want to see this outcome. The ratings agencies do not want to see this outcome. APRA does not want to see this outcome.

      The government and banks wouldn’t mind at all.

      That’s some pretty serious conflict at the macroeconomic level. No lay down misere.

      • What makes you so confident the RBA have any serious reservations about igniting credit growth by dropping interest rates?

        That platypus speech by Ellis went out of the way to be vague on the RBA attitude towards credit – i.e. forget measures and trust us we can spot platypus.

        I would characterise the RBA as being less bullish on credit than in the past but based on what they have said I doubt they would have any reservation about pumping up credit growth to protect asset values.

        The only thing that seems to limit their downward bias on interest rates is concern about inflation.

        That suggests if Swan keeps to his Surplus Mantra and the RBA believes inflation is OK rates will come down if asset prices keep softening.

        If Swan abandons the Surplus Mantra due to Euro issues / US issues / China Issues and goes all deficit crazy then the RBA may hold the interest rate line for fear of inflation. But if that proves not to be a problem interest rates will be pushed down to support asset values.

        Credit growth via interest rate policy is still the treatment of choice for the RBA – providing inflation behaves.

        • But wouldn’t inflation be the way to eliminate debt?

          If the country ran at a higher inflation rate, then housing costs would in theory become a lower % of income.

          Lower Interest Rates = Lower AUD = Inflation due to global oil price = Scope for higher wages in AU (particular international firms) as AU labor is cheaper on a global scale = Inflation

          You forget that mortgages are effectively a fixed payment (subject to rates). Higher inflation would hurt renters as rents have always climbed in line with the CPI, but it would potentially assist the household debt problem.

          Even if home prices do not increase in “Real” terms, the nominal value would go up 5% per year. If wages follow suit, then would this not assist people in paying down debt in a low interest rate environment?

          Thats my 2c about how the next 5-10 years might play out.

          • You’re assuming high inflation would find its way through to wages. The last time we had a major wage outbreak, the corporate governance landscape was completely different. Cost cutting managers rewarded by large bonuses to essentially reduce labour costs were few and far between.

            It’s the same reason why the rest of the world has gone nowhere with low rates and money printing. The elite won’t part with the cash and the masses can’t get access to it to reinflate asset prices.

          • That’s only if the RBA doesn’t change its mantra.

            I think the RBA might be moving away from a Inflation focus and more towards an Economic Growth focus.

            What is the better outcome?

            Low rates + High Inflation?

            High rates + Low Inflation?

            In an economy already leveraged to the hilt, I think they only have one way to go.

            Why can’t the inflation band be reset to 4-5% ?

          • Lift the target inflation rate to 5%? Perhaps one of our saviours thus far has been the 2-3% target. The 5% targets overseas haven’t been too successful. Sticking our head in the sand on inflation would be suicidal.

          • The BurbWatcherMEMBER

            Inflation is generally good for govt books and those that are in the positions of privilage in the system?

            Why? Because they receive the money before everyone else does, before price inflation actually occurs – it is a incremental advantage based on systemic privilage.

            Inflation is an unjust beast, IMHO.

            My 2c

  2. Sorry to be the bearer of bad news but the only way to stimulate is to increase availability of credit. That means increasing access to offshore funds. Reducing interest rates is not conducive to increasing offshore borrowings. Its a big quandary

    Transferring debt from private to public may help but only in the short term.

    • On the money again as usual Deep T.

      And what about the impact of a liquidity freeze when europe goes down the bond gurgler and China’s miracle bounces like a dead cat? With haircuts happening everywhere, how are the local banks going to maintain funding levels to keep the property wheel spinning? Is anyone willing to take the bet they’d slash their margins to keep lending? I strongly doubt it. They’re already up to their eyeballs in household debt and a global double dip could put them over the edge with unemployment rising and business bankruptcies soaring. Then we may end up with the government having to backstop the big four banks. So try as he might, Swan can cut spending to deliver a surplus but that’s a one trick pony as tax receipts will dry up faster than Tony Abbott can say no and we’re stuck with the impost of bailing out our banks. Toxic debt leveraged to the nth can’t be wished away. We are in a major bind, here and abroad. The wheels are turning, but the hamster is dead…

    • Deep T, also wouldn’t wholesale funding by the banks be viewed by the lender as more risky now looking at?
      (1) the over exposure of the banks to housing, and
      (2) our housing being overvalued.

      I know that NAB and maybe others have sold bonds to the US recently, but anyone looking at our funding requirements, and seeing this $1.4T housing debt would start to ask questions….would they not?

      If we have to borrow from foreign sources won’t the cost be higher? I’m just wondering how much the RBA will be able to drop rates if foreign borrowing costs are likely to increase.

      • > … anyone looking at our funding requirements,
        > and seeing this $1.4T housing debt would start
        > to ask questions….would they not?

        Yes, and the answer that they would receive is that Australia is different 🙂

  3. I think that we will see some more rate reduction, but not a lot unless we see global conditions worsen rapidly. Perhaps another 50 basis points or so, but I can’t see why they would rush those reductions.

    I doubt that the federal government will try to boost the Grant, although maybe increasing it to $10,000 is an option, that won’t do a great deal in real terms, more confidence boosting than material.

    I suspect that the RBA will be delighted with some house price falls, maybe around the 10% level, but won’t want wholesale falls – that would hurt small business, and they need small business to protect employment.

    The economy is still the best drama on TV.

    • I doubt the RBA would be delighted with any house price falls.

      While they may not want assets prices shooting up and encouraging speculation I doubt they would like to see them softening.

      It is very hard to control ‘softening’ prices simply because once the concept takes root it kills the market as people sit and wait.

      From the RBA’s perspective stable assets prices (nominal)is the best outcome and I suspect they will cut rates to achieve this providing inflation permits.

      The challenge though is exactly what Deep T notes. How do we attract investors if our rates are falling? With ZIRP infesting the international scene that may not be a problem for a while at least.

    • Or to frame the issue another way.

      Given the RBA and the governments (State and Federal) will want to protect existing asset values even if they may not want them to grow rapidly, to what extent do they still have tools to achieve that outcome.

      While they have a lot less than they did back in the late 1990’s as they have ‘used’ a lot of them already, they still have a few ones left (interest rates, FHBG’s etc).

      Whether they will be sufficient in the face of an overseas crisis is another story.

      • The state governments will lament the loss of stamp duty revenue, but they are powerless in the short term to stop it. They can only encourage more transactions by reducing stamp duty, so what is the point when revenue is the goal? Long term they could increase the availability of land, but that takes years of planning, and they haven’t done the hard yards yet.

        I suspect that the RBA was very sensitive to outside comments about a property bubble in Australia, so letting some air out of the tyres but not crashing really tells the world that house prices have moderated, but they will stay above trend while we still have a mining boom, just as some countries will be below trend while they have a recession and high unemployment.

        That will reduce investor concerns for the Australian economy, without dulling appetite. Holding higher than normal interest rates, will still attract investment dollars in what is a stable political and economic country.

    • looking at the level of residential housing liabilities/revenue now in the big 4 and the government effectively promising to bail them out, then unlimited FHBG’s may be the cheaper option no matter how expensive it is..

      • Structural planning (to increase availability of land supply or lower of development) and land tax reform is a good bet, doesn’t involve handing out money and actually gives the “housing industry” e.g. construction and real estate a sustainable future. That would give stimulus to the housing industry whilst decreasing volatility of taxes (if we went to land tax and increased our amount of taxable lots whilst prices cooled (though in the future more elastic supply would mean more stable revenues which are better for govn forecasting).

        It is no coincidence that Victoria has the highest margin for infill housing development in Australia and has consequently, after their recent construction boom, a larger supply than demand at the moment. This is only bad for speculators as developers can discount.

        • How about spending cuts on government departments and/or salaries instead?

          Implementing a land tax to keep the government income at present levels is ridiculous and I can’t believe people support this.

          Time to downsize/remove certain government departments and increase accountability.

          • Maybe we should have a tax every-time you move house, so you are discouraged from moving or selling when you move. So that it taxes labour mobility and incourages vendors to bid up prices in order to pay the tax?
            Oh i forgot the government has to think up new taxes during downturns to cover the shortfall. Sounds like a good idea?

    • The BurbWatcherMEMBER

      I honestly think that our economy is structurally predicated upon increasing indebtedness, particularly coming from the property sector.

      We would, therefore, need a viable substitute for the property sector’s uptake of, and injection of, debt…and the only viable alternative in this economy of ours is the govt..but it’s a Ponzi scheme anyway you look at it, when expressed that way.

      IMHO, the structural predication is the reason we are where we are, and the reason that structurally-significant asset-bubble slowdowns turn into bursts, and thus, deep recessions – you simply can’t make up for all that predication in time to save the structure from unwinding significantly….and unwinding begets unwinding, in the same way that winding begets winding during the formation of the structural predication.

      And throw in the slow and stubborn kinetics of job transitions, and we get an idea of why unemployment tends to spike during periods of debt-deflation: dent is being destroyed, capital is finding other homes, and people are in the process of losing and re-gaining jobs (with the loss usually a lot quicker than the gaining!) – and re-arrangement begets re-arrangement, as the non-linear inter-complexities and inter-dependencies expose themselves.

      My 2c, just like a process engineer, eh?



  4. this may be slightly off topic, but regarding overseas ‘asian’ investors, are they cashed up individuals trying to leave China, Japan etc or are they also heavily invested in their local markets?

    So basically if a downturn in China happens, what effect would this have on them still buying up local apartments/properties?

    • If China is rapidly falling, and AU is holding value – it may be the opposite.

      Only a small % of Chinese property investment is international. If ‘local’ investments start to look shaky, then ‘international’ investments start to look better.

      If interest rates are slashed, the AUD will take a hit. This will make AU property instantly more affordable to Chinese investors.

      Just think of the AUD was around the 70 US cent mark, and what that might mean for international investors. The ‘smart’ Chinese investors have already got investments offshore, and I think some of the ‘not-so-smart’ ones will be joining them shortly if conditions suit.

  5. The falls reported are consistent with everything else that has been so widely noted –

    very weak household credit demand
    the sustained rise in household savings
    subdued earnings growth
    sluggish jobs growth
    restrained growth in consumption spending

    Considering the share of household income required to service existing debts is at a 20-year high, it is very unlikely that households can afford to bid housing prices higher.

    In any case, the cycling downwards of prices reflects the way the housing market works from day to day. Most of the trade that occurs is created by families relocating. If you hope to move, usually your ability to buy depends on first selling your existing house. Now, the market is highly stocked and properties are going off at a slow rate at the bottom end of the value spectrum. Knowing this, sellers have to be prepared to list their houses on the basis that they will likely have to settle at the low end of their expected range, and will therefore have a similar constraint on their capacity to buy. In this way, discounting pressure is transferred from one buyer to the next, creating sustained downward action. This is just the reverse of the pressure during a rising market, where the ability to sell high enables movers to also trade up.

    This cycle cannot be easily halted or reversed, especially as it is conditioned by the existing stock of debt that households are servicing. Since this stock cannot be reduced quickly, the market is going to be experiencing “capacity drag” for a very long time.

    I also think that even large changes in interest rates will not change the market dynamics greatly in the short run. Everyone knows that interest rates go up and down, but debt is almost eternal. The only thing that will induce a change in direction in the real estate market is the perception that real prices – not borrowing costs, but actual capital values – have fallen far enough that they have scope to start rising again.

    • The Multiplier Effect also works to the detriment of houses, on the way down. When selling into a rising market, that $50k ‘profit’ can be leveraged up to buy an $500k of extra new home. On the way down, any actual loss ( even if it’s just after costs) reduces the amount able to be applied to the new buy. As the bottom of the market suffers from capacity drag and the upper/top suffers from an ‘upgrade drag’ the whole market curve ( if there is such a thing!) drops.

      • As Deep T pointed out a long time ago, it applies to bank capital requirement as well. Lower the LVR>>lower the risk>>less “liquid” capital needed (relatively) to be set aside.

    • Completely agree with this briefly.

      From what i’ve seen in the Sydney market (at least around St George) in the past couple of months:

      – enough demand for good units up to 500k due to the expiry of stamp duty concessions. However a lot of buyers clearly have limits below the 500k mark; they have been drawn in by the concessions and are really bidding at their upper limits. Poorly maintained/unrenovated units arent selling very easily.

      – housing is a bit segmented; there is a lot of discounting going on in the 600-700k range for houses as buyers arent prepared to overpay (though i have seen one or two exceptions, usually involving a nicely renovated home and a couple of emotional bidders). As with units, unrenovated/poor condition houses arent moving unless they are very cheap relative to other properties, and they see a lot of discounting before selling. I expect housing prices to continue to reduce, especially in the new year.

      – the passed-in properties i have seen have been re-listed at way above the passed-in price. These properties then sit on market for ages without buyers. Sellers still havent got the idea that the market has shifted and buyers are not going to get into bidding wars any longer.

      – agents are doing a lot more legwork than they used to. A lot of follow up, emails, phone calls etc to try and find buyers.

    • One thing that is a wildcard is, majority of investors are negatively geared. Are we likely to see an effect of cooling prices, sometimes in excess of a deposit (in real terms) on their willingness to negatively gear. with rents still at 4-5% gross yield, at least cuts of 2% will be needed to even get them close to positive in capital cities.
      I would say majority of owners have a negative gearing attitude (in that they pay more interest and maintenance than they do for renting)

    • Couldn’t agree more.

      In fact, you have just written everything I was thinking, but didn’t have the energy to type.

      Your last par I think particularly nails it.

      This point is what I am hearing over and over “out there”. Of course, everyone’s opinion on when this point may come is slightly different. But almost all agreee it is definitely not yet!

      Many waiting on the sidelines. And as others have said, the longer the waiters wait – creates its own momentum etc etc

  6. Politically the ‘First Home Buyer Grant’ is pointless. The majority of those who can still afford to buy a home are not Labor voters. Furthermore, with most of the States in the lands of the Coalition, there is no reason for the ALP to make life easier for the States.

    There is only one political certainty : the ALP must return a surplus for 2012/2013, or face total wipeout. The RBA must do all the ‘heavy lifting’ from now on.

  7. rational investor

    I’ve been tracking the same index for Melbourne house prices, and I think it is useful to graph from the beginning of the index which was in the 70’s.
    It clearly show’s when things started getting crazy in the late 90’s.
    Mean reversion can be a cruel teacher.

  8. Based on my observation in Adelaide, the current stats produced by the various agencies are well off the mark ie drops are closer to 10 -20% over the last 12 months. Vacancy rates are up and rents are stalling / decreasing. Discussions with RE agents who were in the game then suggest that it currently is worst than the 1990’s. Unemployment has not yet ratcheted up but it soon will. In the pipeline which both the Govt and RBA will be unable to stop due to external global events is a significant period (5-10years) of deflation and all that it entails. There will be no point buying houses or shares (unless you are trader) under these conditions. Your super if it is (still) in the share market will drop significantly. Cash will be king but expect long periods of unemployment to eat away your reserves.