Can house prices rise when credit falls?

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Leith van Onselen
Latest posts by Leith van Onselen (see all)


  1. So can property prices continue to rise as mortgage credit growth shrinks? The answer is yes, provided that the number of housing transactions also shrinks and/or mortgage holders increase their principal repayments.

    I can’t see that being the case if the marginal rate of supply increases, or the marginal rate of demand decreases (i.e. immigration)

  2. Leith

    I’d also add that the banks would need to have relaxed their servicability ratios or the debt to income ratio they would be willing to lend against for this to occur. Ok if interest rates are going down and staying down.

    Could the same thing happen n Australia? Yes but only temporarily IMHO.

  3. I’d again suggest it’s not about price, but what that price buys. If a buyer has $X to spend on property, it can, and does. What $X buys at any given time may be vary, depending upon what is both available and at what price the holder can or needs to sell it at. Property buyers will generally always buy at the margin of affordability, whether that is from savings (cash or existing property sales, for instance); savings plus debt, or just debt. If a $500k bought a ‘$500k’ house in 2007, but $500k buys a ‘2007, $750k’ house today, the figures still reflect $500k spent today, regardless of the increased quality of the purchase. The amount available to buy may not have changed materially, but what it buys may have done.

    • But isn’t this exactly what the new daily index should overcome?

      ie if “2007, $750k” houses now sell for $500k then the hedonic index should show a 33% decline in the common-characteristic value of housing stock.

  4. Lighter Fluid

    What about growth in income? What about comparing like-for like variables?
    We have the deleveraging data, which is all in the form of stock/flow (ie, debt/income or debt/gdp, bank lending as a %change) – all deflated by some kind of income measure, or as year-on-year change.

    You say that compared with nominal housing data, this seems anomalous because there has been positive (nominal) growth in prices. When compared to real house prices, yes, it is flat – as one would expect when comparing like-for-like variables. I would also expect that in nominal terms, household debt is still increasing, albeit at a lower rate than incomes.

    Also note that annual change in bank credit issuance to households (charts 3 and 8) is not -ve, so this is not downright deleverage – new credit is still being created for new buyers, and only-just faster than the rate that non-sellers are paying down their mortgages. As long as these non-sellers don’t decide to sell, prices can increase.

    So in partial answer, yes – you can have nominal house price increases when credit issuance rates fall, but you need rising incomes (or at least non-zero rates of credit growth) to do so.

    I would say this is more disleverage than outright deleverage…

    • Lighter Fluid

      that should not be a ‘cool smiley’, should read (charts 3 and eight, or the second last one)

      • I prefer “charts 3 and cool smiley”

        It’s like a poker player, that chart 8. Glasses on, holding a hand worth not much, bluffing the table (market) that it has a winner.

    • Great point. Credit has not stopped growing. For the deflation to happen the credit issued this month must be less than that of last month. The blue line in chart 3 has to go below 0.

      This is the danger of measuring credit by looking at its growth (1st derivative). If we saw the graph of total credit outstanding we would see a line that is going up (leveraging) and not down (deleveraging).

      More philosophically, I think this is a sign of these “accelerated” times where we plot rates of growth. Any study of the slope of the graph is a study of acceleration and not speed. Sad…

  5. How many highly-paid mine workers in Australia finish their shift and then fly back home…..across the ditch?

    In a country with such a small population, it might not take all that many $150 000 per year workers buying houses to push prices up if overall transaction volumes are low.

  6. New Zealand is a funny one. Today a story came out about the record number of Kiwi’s leaving NZ for Australia. Apparently April was a record month, and the annualized figure is now over 50,000 Kiwi’s moving to Australia.

    Property prices are right up with Australia, Canada and Hong Kong as far as unaffordability.

    Many areas in NZ are seeing discounting on properties, but Auckland is heading the other way with prices increasing.

    I think the big spanner-in-the-works missing in Leith’s piece is the Christchurch Earthquake. Thousands of houses have disappeared or deemed uninhabitable from Christchurch. Many have moved to Auckland, as Wellingtons earthquake risk would mean they won’t settle there.

    This inflow into Auckland has re-inflated the market, which by the normal laws of gravity should be falling.

    • Don’t forget the thousands of properties taken out of the market ( unsaleable?) due to ‘The Leaky Homes” fiasco. Auckland is awash with houses no one will touch at anything like historical purchase price due to this. Eventually those Leakies will have to make a substantial discount in price ( I’m talking half price, and lower here!) to move the risk in them on to new buyer, and then any buyer will ask” Do I pay 100% for a good-un or 50% for a suspect one and either put up with it, or do it up” That time can’t be far away. (NB: The Government & LocalCouncils are already chipping in 25% each towards restitution on houses built under a recent time frame. So there’s the clue on what the discount will be.)

      • There’s also the migrant factor that Auckland has over the rest of NZ. Even there is currently a net outflow, a good portion of this is attributable to Christchurch etc. There is still a strong inflow into Auckland of cash-rich Asians whom typically choose to settle there rather than elsewhere.

  7. Leith, any chance for a graph showing the real price for Australian commercial property? That’s one interesting aspect of the graphs, how little commercial values rose during the boom.

  8. Can’t remember where I saw an article saying that Greeks (and others) are also looking to buy property in London? Somewhere to park their cash… from one disaster to another disaster in the making.

  9. thomickersMEMBER

    Can house prices rise when credit falls?

    Not for the long term.

    It’s a sign of the last few weeks before the ponzi scheme ends.

  10. Hugh Pavletich

    the sorry state of the New Zealand housing market inflating unnecessarily can be quite easily explained. Some of the posters above have touched on the major drivers.

    It is impossible to get affordable new supply on the dfringes of our major urban markets. Within the affordable US markets it costs ALL UP about $US600 per square metre – New Zealand $NZ2,500 per square metre and north of it. And thats just for starter quality stock.

    There is at least $NZ1,500 plus per square metre of what I term “Government Stuff Up Costs” – being artificial inflated land supply , inappropriate infrastructure financing and severely degraded construction industry performance thanks to the politicization of the industry. It has been pretty much bludgeoned back in to the Stone Age of inefficient cottage building.

    Then the stock of virtually unsaleable leaky homes throughout the country and those vacated by the Christchurch earthquakes.

    Structually, the New Zealand housing market can only be described as a shambles,

    Hugh Pavletich
    Co author – Annual Demographia International Housing Affordability Survey
    New Zealand

    • Alex Heyworth

      “Structually, the New Zealand housing market can only be described as a shambles,”

      Sounds like the same can be said of the housing itself!

  11. Thanks for another very good article, but one peeve (and minor in relation to the topic)…

    Borrowers (aka mortgagors) are not ‘mortgage holders’. Properly, they can be described as ‘mortgage givers’ – they give a mortgage (that is, a legal interest in their property) to a lender as security for a loan. It’s the lenders (aka mortgagees) who properly are mortgage holders.

  12. And that is exactly what is happening in Australia. People are paying off their debt while younger people are taking the slack with a lot of new debt. This is what the average Australian expected of course – housing to remain unaffordable for a very long time. Even this site is enough to turn me bullish on housing. I hate to say this but the government beat the markets on this one.

  13. While I agree that rising GDP can also cause rising house prices, given the level of mortgage debt to GDP is 152% I would have thought the acceleration of debt would still be more important.

    The credit to GDP ratio can fall if GDP increases faster than the rate of credit issuance. This doesn’t necesarily tell us anything about the acceleration of credit, which has a much better correlation to changes in employment and debt based housing prices.

    From your charts there you can see that credit issuance decelerated between 2009-2011 and accelerated (by a very small amount) between 2011 and 2012. Correspondingly house prices should have decreased in 2009-2011 and increased between 2011 and 2012.

    I would suggest you plot the acceleration of credit to house price changes.