Share on Facebook Share on Twitter Share on Reddit + - Weekly RP Data house price analysis By Unconventional Economist in Australian Propertyat 11:44 am on May 23, 2012 | 89 comments Login to access MacroBusiness Members special reports. If you are not a member, sign up here. Please fill in the following form to login Username: Password: or Please fill in the following form to subscribe * Username * Email * Password About Latest Posts Unconventional EconomistLeith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Latest posts by Unconventional Economist (see all) Weekend Reading: 31 October to 1 November - October 31, 2020 PPI inches out of deflation - October 30, 2020 Sydney auction clearances continue to strengthen - October 30, 2020 Share on Facebook Share on Twitter Share on Reddit + - YOU MAY ALSO BE INTERESTED INSydney auction clearances continue to strengthenCoreLogic has released its final auctionAustralian mortgage growth surgesThe RBA has released its private sector creditInvestor mortgages run for the hillsAPRA monthly investor mortgages are out forCoreLogic: Low inflation is bad for housing affordabilityEliza Owen, Head of Research Australia at Comments Rusty Penny May 23, 2012 at 11:57 am Melbourne rushing to become our homestead? bskerr2 May 24, 2012 at 10:55 am I am wondering, why can’t people who struggle to pay a mortgage setup a house bus or something for single or couples who need a cheap place to rent. It may not be perfect but it would help those that struggle with a mortgage, help those who pay excessive rent and most importantly pull renters from investment homes to have speed up the crash. Rusty Penny May 24, 2012 at 11:22 am Have you seen how punitive and bureaucratic zoning and planning guidelines are? My dad in invalided, my mother recently hurt her back to the point she can no longer work F/T. I thought it would be perfect that they move in with my nuclear family. They are empty nesters, I’d put them in a granny flat with 45sqm of floor space. Mom has stuff all cleaning to do and I have a young child with at least one more planned. They will then have an adult presence at all times in the home. Under ‘Auxially dwelling regulations’, I’m confronted with; * No temporary structures * A limit of 50% of my land content allowable for enclosed space. (Pretty hard when I’ve got to dedicate 100 sqm for the front yard that is redundant) * The roof of the granny flat must have a pitch, colour and material consistent with the main dwelling. * Cladding that is architectually and aesthetically consistent with the main dwelling * Architectually design conforming to the appeal of the local area (arbitrary ruling from planners, basically means small, simple windows from a weatehrboard cladding won’t do, things like bay windows and patios comply with this) Basically I’ve been told a bureaucrat with non performance accountability measures knows what I best need for my family than I do. But please examine your premise of ‘why can’t people live in mobile homes in peoples drive ways to help them pay the mortgage?’ Undeerstand how much our quality of life has diminished when we resort to; (a)needing other family units on our strata to contibute to servicing the cost, and (b)a family unit that is not the poorest 1% considering living in a bus. bv2726MEMBER May 24, 2012 at 1:51 pm Do what I did. I built just a square “room” (a rather large one). No toilet. It was called just a storage room. Got approval. Then, once finished, you apply to put in a toilet. Easy. No problem, as its ok to put in a toilet later. Internal walls are easy, and you do not need a permit for that. Rusty Penny May 24, 2012 at 1:57 pm I know there are design loop holes to get around it. I’d just rather be able to come to the conclusion “It’d be good to have my parents live in 45 sqm in the back of my house”, then work on providing that solution. The amount of interference on my decision making by government is oppressive. Bullion Baron May 23, 2012 at 12:02 pm Confirmation that interest rate changes alone are not enough to move the market. MattR May 23, 2012 at 1:51 pm Agreed, what does $50 a month matter when it costs you thousands more to buy than rent? tsport100MEMBER May 23, 2012 at 2:06 pm Forget interest rates, why would ANYONE buy property in a falling market? The slide can only accelerate as ‘interest only’ investors wake up and head for the exists en masse. MattR May 23, 2012 at 2:45 pm Ah interest only loans, apparantly, according to my ex-real estate agent senior colleague, these are the greatest things ever invented and anyone who uses them will be multi-millionairres in just a few years. 😀 energywonk May 23, 2012 at 4:21 pm colleague at work melted down at me the other day as pointed out house prices falls in last 18 months. has an interest only loan, and a megamortgage. earns about 80k/annum and has about a million in debt. i wonder how widespread this is? responsible lending in this country is a myth. Deo May 23, 2012 at 4:38 pm It is common and I have seen similar cases e.g. people with average salaries but ambitious investment portfolio with 3-4 properties and $1 mil mortgage with Big4 bank. That’s why I said that sub-prime mortgage in Australia is much higher than what revealed in the news. csfnMEMBER May 23, 2012 at 5:10 pm “responsible lending in this country is a myth” One thing that certainly has not been satisfactorily explained is how our total mortgage debt reached such astronomical highs with this so-called ‘responsible lending’. Total mortgage debt reached around 90% of GDP, well in excess of the US for example. The usual reason given to support the huge amount of debt is that it is in the hands of the people who can afford it. But they can probably only afford it as long as residential asset prices rise, which isn’t really evidence of responsible lending practice. The BurbWatcherMEMBER May 23, 2012 at 4:28 pm If this mentality sets in, it is known as “Deflationary Mindset” – why buy today when it will be cheaper tomorrow? …turns slow-melts into crashes… AxelF May 23, 2012 at 12:04 pm I donlt know if it’s right to say the recent interest rate cuts haven’t had an impact – just that they haven’t yet caused property prices to rise on this evidence. My guess that effects of the recent rate cut on the property market would be initially to raise vendors sale price expectations greater that those of potential buyers, at leats initially. i.e. sales volumes dip while those vendors willing/forced to meet the market sell. The dominant short term market factor is subdued buyer sentiment (followed by the hangover from the pull forward in FHBs in NSW). While prices are falling there’s just no reason for sentiment to reach the previous “by now!!!” levels, or anything close to it. Janet May 23, 2012 at 12:17 pm Sentiment, and 40 years worth of education may be different things! “Property always goes up” It always has and it always will….That’s what ‘we’ have all been schooled with; even those of us who think( hope?) property prices will ‘normalise’. Lower interest rates may dampen the immediate market, but sure as eggs is eggs……It’s going to take an experience a la USA or Ireland to even dent that belief. Even those who see property falling, are just buyers in waiting, because they see that ( repeat after me” Property….)! dumb_non_economist May 23, 2012 at 12:53 pm Hit the nail on the head! A great deal of pain will be required to change what are generally intrenched ideas about RE. dumb_non_economist May 23, 2012 at 12:56 pm Sorry, entrenched!! Actually just checked the spelling on that, a dated version! The_MainlanderMEMBER May 23, 2012 at 9:37 pm Your all good DnE. Avid Chartist May 23, 2012 at 12:33 pm The RBA interest rate is a symptom of the health of the economy, nothing more, nothing less. The current rate cuts are a symptom of serious economic weakness, people are fearing for their jobs, so why would they borrow bubblicious amounts of money to buy a house? Without new government stimulus, or a sudden pick-up in economic activity, the housing market is a shot duck, I think. Janet May 23, 2012 at 12:41 pm I agree with you wholeheartedly ( hence my comment ‘lower interest rate may dampen demand’ – not stimulate it; ‘it’s the economy, stupid!’). But it’s only a matter of ‘pick your entry point’. Do we really see a Nipponese experience visited upon Australia – 20 years of property price easing? You may; I may, but M&D don’t. And they are the ones that ultimately will fuel the market zentao May 23, 2012 at 1:59 pm But I was just sitting next to 3 20 something girls quoting “rent money is dead money” jojohotty May 23, 2012 at 2:05 pm Why not? they can stay with family and pay nothing! rent money and mortgage repayments are both dead money. rob101MEMBER May 23, 2012 at 2:09 pm But I was just sitting next to 3 20 something retirement funding sources quoting “rent money is dead money” Fixed Tarric May 23, 2012 at 3:41 pm They are probably still living at home like most 20 something people I know. Ben May 23, 2012 at 4:08 pm This gives me the sh!ts. Will someone tell these people that mortgage interest is also dead money, that the overwhelming portion of mortgage payments in the early years is interest, and that at current prices the amount of dead money you’ll spend on rent is much less than the amount of dead money you’ll spend on interest repayments! Oh, and house prices don’t always double every seven years. Jono May 23, 2012 at 2:46 pm Did the Japanese see it coming either ? Nope. In the 1980s, everyone saw Japan becoming the new powerhouse, the #1 economy in the world. rob barrattMEMBER May 23, 2012 at 3:30 pm Sounds suspiciously like the Celtic Tiger tale.. Karan May 23, 2012 at 12:57 pm Aren’t most interest rate cuts not effective until later this month anyway? That’ll make for a minor shift in sentiment when it finally starts flowing through. briefly May 23, 2012 at 12:59 pm Oh! A 0.34% decline in a week……annual compounding rate is about 19%…. The weakness across the country suggests an economy-wide shift is occurring. While 5 or 6 weeks do not make a trend, if this continues we will be able to see that something really did start to go seriously wrong in April. poid May 23, 2012 at 1:23 pm Certainly the initial data we are seeing makes it seem like the economy hit a wall in April. Will be interesting to see if the poor data continues, and if so what the RBA’s reaction is. david collyerMEMBER May 23, 2012 at 1:02 pm My mischievous calculator finger annualized the nation’s -0.34% weekly change. Australian real estate prices are currently falling at 17.68% pa. A year at this rate will knock $100,000 off the price of houses. I see no government interest in arresting this change. Don’t Buy Now! david collyerMEMBER May 23, 2012 at 1:06 pm Oh, @Briefly, I didn’t compound it. I am therefore MISLEADING THE AUSTRALIAN PEOPLE WITH MY NEGATIVE AND INCORRECT COMMENTS. 🙂 boyracerMEMBER May 23, 2012 at 1:37 pm Actually David & Briefly are both incorrect assuming a flat .34% decrease per week although David was closer. The annual compounded drop is 16.2305%. Briefly was compounding a positive number to get to 19.3035% where as the “principal” amount is decreasing each week the rate of decrease from the original amount is getting smaller. Pedantic I know!! Velociraptor May 23, 2012 at 8:58 pm Correct br 100(1-(0.9966^52)))= 16.2305% The_MainlanderMEMBER May 23, 2012 at 9:44 pm Man I love you Finance guys on MB you rock. Thank you. VirusMEMBER May 23, 2012 at 1:07 pm >My mischievous calculator finger Lol,I tried hard to hold back my giggle.. but couldnt! I guess you-and-30-somethings-hanging-out-together is itched permanently in my memory. VirusMEMBER May 23, 2012 at 1:09 pm edit ‘etched’ david collyerMEMBER May 23, 2012 at 1:17 pm Virus, that slip is Freudian and backtracking merely draws attention to your mental state. UE, macro needs to create an off-site forum for desperate economists denied their biological mission. 🙂 VirusMEMBER May 23, 2012 at 1:23 pm 🙂 reusachtigeMEMBER May 23, 2012 at 1:18 pm A Freudian for sure! coolnik May 23, 2012 at 1:25 pm “itched” mwahahaah, LOL! russellsmith55 May 23, 2012 at 2:09 pm As a fun guessing game (and obviously not as financial advice), when do you think we ‘should’ buy now? 🙂 In my mind, >40% down from peak and/or when buying becomes equal to or cheaper than renting could be a good general rule. It may never reach either, but there’s definitely no reason to make a move yet. Jono May 23, 2012 at 2:51 pm Sounds about right, 40-50% from peak in REAL terms. You can’t predict the speed or duration of the bust. But the magnitude is fairly predictable based on our crazy price/income ratios. So a 20% nominal drop over 15 years is pretty much the same as a 45% drop over 3 years. Mind you, another thing that is completely predictable is the recovery phase is very anemic and slow. Property markets don’t hit a bottom and bounce back within months or even 2 years. They go sideways for a decade or two. Fools rush in. Dr Watson May 23, 2012 at 3:05 pm + 1 There will be ample time to let the dust settle and assess the damage. All that stuff about “buy your house now or you’ll miss out” is just utter garbage from realtors playing on emotions and fears. Revert2Mean May 23, 2012 at 4:47 pm What? If I don’t buy now, I’ll miss out on the fabulous “negative equity” bragging rights! ;¬) Blake May 25, 2012 at 10:56 am My thought on that is to work out when the rent is balanced by the interest repayments AND all ancillary costs and gains/loses. So rent per week verses interest per week plus strata/land rates/water rates etc that are incurred when buying rather than renting per week. Plus the amount of savings interest lost per week due to the stamp duty (or to be really nasty assume you borrow it as well, and add that to the effective property cost). Plus the loss (minus the gain) per week due to deflation of the property value. From my calculations for rent of $300 per week, ancillary costs of $3000 per year, you get a max buy price of about $100,000 if you assume property is dropping at 5% a year, or $500,000 if you assume it is going up by 3% a year. Basically picking your gains rate allows any price you want. Incidentally if you pick 7% growth (ie doubles every ten years) then it is irrelevant what the price is, since the growth in value is higher than the interest repayments, and the maths above gives you a broken equation (price goes past infinity at the point where the growth matches the mortgage rate). reusachtigeMEMBER May 23, 2012 at 1:20 pm Why did several comments from people celebrating these falls get deleted? Is this offensive to you? DrBob127MEMBER May 23, 2012 at 1:27 pm When it becomes widely accepted that house prices are falling significantly, people may focus on MB and comments that celebrate house price falls may be cause for scapegoating MB. Only my theory russellsmith55 May 23, 2012 at 1:39 pm I do see the old ‘correlation is causation’ meme coming back and being used to blame sites like this for the new trend. Even if it was responsible (it isn’t) then it would be good thing, as it saved many from my generation and generations to come from pointless debt slavery. Haters gonna hate 🙂 poid May 23, 2012 at 1:55 pm There are an awful lot of people that seem to blame those “talking down’ the economy, rather than reflecting on the actual issues and causation. It wouldnt surprise me if there was a backlash against sites like MB. Rusty Penny May 23, 2012 at 1:58 pm Pfft, any publicity is good publicity. How is the ‘MB caused housing to crash’ going to stick? poid May 23, 2012 at 2:34 pm I dont see it as being “MB caused the crash”, but i expect that MB will be grouped in with the likes of Abbott and Keen as doomers who contributed. Certain trolls are already targeting MB in other ways david collyerMEMBER May 23, 2012 at 1:45 pm @DrBob: too right. The ‘Gearers have self-selected for government assistance in wealth creation and are obvious losers in the deflate. They can be expected to exhibit bizarre behavior when their guaranteed rentier status proves a mirage. Expect messenger shooting, strident pleas for government assistance and hair-pulling. The politico-housing complex will bear no responsibility, of course. Deo May 23, 2012 at 4:26 pm I expect the vested interests to do their best and in doing so make Australian economy messed-up even more. There is no easy solution on our problem, hence the sudden impulse to save more is prudent IMO. VirusMEMBER May 23, 2012 at 1:47 pm Oh, is that why Andrew Wilson, Joye, and MSM do not celebrate falling house prices because they are afraid of becoming ‘scapegoats’? Tarric May 23, 2012 at 3:46 pm That is a good theory Virus, chances are that is why they have been very quiet lately on the property front. Caution the following is saracsm. They dont want to be lumped in with the rest of us who caused this property crash merely through our own ignorance and lack of confidence in our infallible real estate market. tonyddMEMBER May 23, 2012 at 5:12 pm The spruikers should perhaps invest in armoured cars and think about leaving the country for a while. There are going to be some very upset folk looking for somewne to blame. greggsy May 23, 2012 at 2:33 pm MB, the website that took down a country? Tarric May 23, 2012 at 6:06 pm Sounds like a great slogan for a Tshirt :p MattR May 23, 2012 at 2:01 pm It’s interesting, I am so mixed on this. Personally I know that housing prices are way too high. I have explained the issue to so many people and had them turn around and call me a variety of names (boo boo me lol), so seeing prices fall would have quite a lot of satisfaction. On the other hand, I like the economy to at least crawl along. Falling over isn’t good for anyone. Aussieoil May 23, 2012 at 2:37 pm Really good point – I am making an assumption here, but I would guess that a high % of those renting our of the Gen Y/X and are in the flecible/contracted workforce. So while lowing house prices will be good for them, they likely have a higher chance of being under or unemployed. rob101MEMBER May 23, 2012 at 3:45 pm Guaranteed udermench status within the community or a chance at owning a house? Hard choice, at least we have a chance in the event of a crash, i’ll take my chances at unemployment if it means I don’t have to pay (economic) rents to the over 50s and no-longer working full time for the privilege of living in the country I was born into. dumb_non_economist May 23, 2012 at 2:50 pm MattR, I’d call you a number of names, but not for that reason!!! Charles Ponzi May 23, 2012 at 3:38 pm Falling over will at least make Australians more pleasant as neighbours. I’m sick of living among materialistic and smug Australians who don’t give a shit about anyone else. MattR May 23, 2012 at 3:55 pm You need better neighbours me thinks. dam May 23, 2012 at 4:11 pm At least P Cayenne one the road will be driven by deserving ones (me 😉 ) not by BB fleecing the next generations. Rusty Penny May 23, 2012 at 4:14 pm I wouldn’t say that’s a long sighted statement. Sure 2012-14 may be worse, but Australia, say 2016 onwards will be much better placed if we have a boomer destroying crash occur in the next 12 months. ceteris paribus May 23, 2012 at 2:04 pm One positive thing that you can say about the property market is that it gives you plenty of notice, in relation to the comparative stickiness of asset prices. Unlike the sharemarket which is a casino with its extreme volatility. Anyone paying attention has been fully informed (by MB at least) of the distinctive eighteen month trend, in say Melbourne, of price falls equivalent to 0.5% per month. While the tail risk of a tipping point, with accompanying rapid depreciation, still exists, people have had adequate time to consider their options, unlike the situation with equities. I suppose the reasons for the slower and signalled change in RE prices are pretty obvious: prohibitive transaction costs, delayed transaction times, the house serving a real-life function rather than just being another investment chip etc. But the comparative slow-motion of RE price change, despite the huge dollar value involved, is to be welcomed from the point of view of stability for the consumer. Aussieoil May 23, 2012 at 2:34 pm Real interesting – I follow the “Property Observer” on Twitter and they linked to an Article with the Caption that says “Australian Housing Market Crash Unlikely: Credit Suisse”. Phew I thought, homebuyers can breathe a sigh of relief and everyone can get back into the market. However when I read the article it just says the CS doesn’t think it will be a sharp/quick correction but rather a long drawn out one! Either the a) Property Observer did not read the article b) They did not understand the article, or c) they think the common property investor is not smart enough to comprehend the article. Not sure which is worse! N.C. May 23, 2012 at 3:40 pm If we modify c) only slightly, we get “they think the common property investor is resilient enough not to read the article”. Because if you’re only watching the headlines, you’ll be safe as houses! Tarric May 23, 2012 at 3:50 pm Option C is definetly worse, it means that instead of a drawn out deflating market we will likely end up with investors rushing for the door once the media can cook up a reason for our property market falling apart that doesnt blame the politico-housing complex like a Greek exit of the EU for example. If that does happen then we will likely not only see prices crash to the long term mean but likely below it in a sequence of panic selling. dumb_non_economist May 23, 2012 at 5:40 pm Or answer d.) They expect people to only read the headline, not the article. Jack May 23, 2012 at 2:44 pm I seem to remember a chart that illustrated the point that it took about 60 years for melbourne property prices (inflation adjusted) to recover back to the peak price achieved prior to the 1890’s depression. russellsmith55 May 23, 2012 at 3:30 pm Now thats something I’d like to see – do you think you can track down a link? Alex Heyworth May 23, 2012 at 4:15 pm If you go to this discussion http://australianpropertyforum.com/topic/8489576/1/ you will find that in some parts of Melbourne, prices are still nowhere near their 1890s level. Revert2Mean May 23, 2012 at 4:53 pm Oh oh. Links to the trolls’ nest. Alex Heyworth May 23, 2012 at 5:04 pm Yeah, sorry. It seemed relevant on this occasion. Alex Heyworth May 23, 2012 at 4:18 pm BTW, it is no wonder that Melbourne had a property bubble in the 1890s. Population grew from 280,000 in 1880 to 490,000 in 1890. Alex Heyworth May 23, 2012 at 5:14 pm Here’s a chart that says it took 110 years.Scroll to the bottom of the page (comment 18) http://wanderingdanny.com/oxford/2010/09/housing-bubbles/ russellsmith55 May 23, 2012 at 5:27 pm Wow… kinda puts the current price levels in perspective doesn’t it… Rusty Penny May 23, 2012 at 5:49 pm Today’s prices are higher than then on a national level. Melbourne was really an outlier back in the 1890’s. The bust pretty must crippled its economy. It is hard to come across a building built in Melbourne between 1900 and 1915 due to the overhang of supply from the preceding era. The Melbourne economy never really recovered until after WWII. Aristophrenia May 23, 2012 at 6:47 pm Funny that you linked to the chart on some distant blog, when it is linked from right here… http://www.macrobusiness.com.au/wp-content/uploads/2012/04/ScreenHunter_02-Apr.-13-10.41.gif Aristophrenia May 23, 2012 at 6:49 pm Also, if you look at peaks to trough trends over that hundred year period, they almost always trend back to around the $100k mark – me thinks it will return to below that $300k peak. No wonder bulls are so virulent, they have so, so much to lose. thomickersMEMBER May 23, 2012 at 4:17 pm The typical melbourne home has lost $200/day everyday over the last 12months. russellsmith55 May 23, 2012 at 5:08 pm I wonder how many NGs made $200/day of income that is entirely taken as tax to offset this loss… thomickersMEMBER May 23, 2012 at 8:44 pm they will be thinking “long term…long term…” PETER_W May 23, 2012 at 5:56 pm I wonder if 60,000 additional NEW ‘investors’ will create $20 billion of additional NEW credit over the next 12 months now that prices are falling 5 – 10% p.a. The_MainlanderMEMBER May 23, 2012 at 9:59 pm The jig is up. I bet that they rue the day they created this index it is sooo not working!