Macro Investor: Can credit growth fall but house prices rise?

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Leith van Onselen

Comments

  1. … the situation for house prices can best be represented as rate cuts versus a weakening economy

    +1, in a nutshell. There are also wildcard factors from outside Oz. Who wants to take on $500k in mortgage debt when the nightly TV news is full of (take your pick): European chaos, Chinese hard landing, US fiscal mayhem, Arab uprisings, Iran blocking the straits of Hormuz Israel resolving its disagreement with Iran, etc?

    • Those things you mention don’t affect us! It’s like watching a farmer getting caught in a combine harvester on YouTube; it doesn’t hurt a bit, until you’re that farmer….

        • I know what you mean. But debt has lost it’s fear factor. It’s almost a bragging point today ” Look how much mortgage the bank gave me!” Debt repayment; serviceability don’t really come into the thought process beyond “What will I have to pay each week?”. It’s “How much will you lend me” and very little thought given to the implications of the debt. Maybe that will change ? I hope so, in a macabre sort of a way. (NB: Once you’ve seen what a Combine can do to a person, it puts you off getting too close …for life!)

          • True, and I think the biggest reason mentioned is that the government and RBA will do everything in their power to ensure property still go up and not down. The government policies up to now have created moral hazard in the mum & dad property investors’ mind so as you said the big mortgage has lost its deterrence and becomes bragging point.

    • The USA is already at war with Iran. That’s what sanctions are. They are an act of war. I find it laughable that average American’s believe the politicians tripe about these countries being a threat to them. Iran (like Iraq) is a third world, has no missiles that can even make it half way to America, and who aren’t even close to a nuke in the estimation of international inspectors (and so what if they are, it’s not like they are going to use it). If Iran launched a nuke at any sovereign country there would be a giant crater in the place “formerly known as Iran” by the next day.

      The fact that American’s actually buy what politicians tell them, that these people want them dead because they have a McDonalds, green lawns, suburbs and “freedom” (which they have less and less of) is laughable to any reasonable person. These people want them dead because they have military bases in their countries, they prop up evil dictators by funneling them money and weapons, and they launch drone strikes all over the place that kill unintended victims. It’s called BLOWBACK. Their own CIA tells them that’s what’s happening, yet the gullibility of the public and the power of the military industrial complex is just too much. You can’t bomb and prop up dictators which kills hundreds of thousands of children and expect the families of these kids not to want to kill you. If these people were left alone they wouldn’t bother with the USA and it’s allies, they would be having their own tribal warfare, and it would be Sunni vs muslim.

      • Your assumption here is that if the USA (and us) DIDN’T have “….McDonalds, green lawns, suburbs and “freedom”….”, the oil would still be in the ground, no other major economies would have utilised it to become a hegemonic world power, and if they had, they would be a more benign hegemon than the USA.

        Not credible, my friend. But the haters of the USA and global capitalism never have been long on basic common sense and reason.

        • Not a hater of global capitalism, but does the USA actually have capitalsim atm? Also i’m not saying your argument isn’t valid, just saying i can’t fathom how stupid half their populace is that they actually believe they are being bombed because “they hate our freedom”

          Either way, my rant was grossly off topic.

        • Phil,

          “Your assumption here” “they would be a more benign hegemon than the USA.”

          We will never know. As to whether the US would have been more or less benign depends upon the country you live in. For Australia, all good, but for Iraq, Iran, Vietnam, Cambodia, Korea, Nicaragua, Chile, etc… maybe less so.

          Read Peter Dale Scott “Legacy of Ashes”, John Perkins “Confessions of an Economic Hitman” or the many other books on US overt/covert foreign policy. It’s no mystery, just that no one cares unless they live in a country where their affects are not benign.

      • Iran is not a Third world, it is a developing country! And They are not Arabs either, >5K years of History and that should be enough!!!

    • you seriously think your average bogan even reads further than the front page of the SMH, most probably couldn’t even find Israel on a map even if you drew a star of David round it.

      These clowns take their “advice” from the weekly musings of the MSM property “Experts” and nothing more. What happens in the big bad world has little impact on their decision to buy a 800k dog box in Bronte.

  2. Rising average prices on falling sales volumes is classic bubble behaviour as evidenced by Canada and others.

        • Gold isn’t in a bubble. It’s fundamentals are rock solid.

          Agreed, and silver’s fundamentals are even better:

          * numerous industrial uses

          * tiny amount above ground compared to gold

          * vital to solar photovoltaic panels in a warming world that needs to turn to solar panels in a big way (90% of crystalline silicon photovoltaic cells (the most common cell) use silver paste and over 100 million ounces of silver are projected for use by solar energy in 2015.)

          * numerous medical uses (kills bacteria while antibiotics are losing their effectiveness)

          … I could go on.

          Intrigued? What about silver nanowires in the latest solar panels?

          • There is actually very little “paper” “money” in existence anyway.

            The vast majority of the Quadrillions in notional “money” in the world, are nothing more than electronic digits. Bookkeeping entries.

            Ban usury.

        • “Gold isn’t in a bubble. It’s fundamentals are rock solid.”

          When the total valuation of gold is more than all the agricultural land in the USA plus 16 Exxon Mobils?

          That’s a MASSIVE amount of money sitting on the sideline. I doubt gold can hold its value once a small fraction of the reserve starts being utilized to more productive assets.

    • Is there a data point that shows the actual amount of transaction flow in dollar terms? That would be interesting. I often see people pointing to HKG as an example of a more expensive market than Australia and therefore proof that Australia is not in a bubble (never mind the fact that HKG prices only this year passed their previous peak … which was in 1997). What they don’t realise is that much of this is driven by actual cash (hello kleptocracy across the border, for example; but not just that), not credit, so the dynamics are completely different.

      For the true believers this is currently a “great time to buy”. But till we actually see prices hit clear new highs I’ll remain sceptical. I think we’re tapped out and there’s a natural ceiling that will be incredibly hard to bust through because the fuel needed (ie. debt) is (a) harder to come by now (for the lenders) and (b) naturally limited by ability to live on baked beans … suspect dog food would be a bridge too far for most people, though you never know.

  3. Leith or HnH,

    At para 4 you refer to “..availability of credit..”

    1. What do you mean by this term and how do you measure it?

    2. You say it “remains in the doldrums”. On what basis do you say credit is difficult to obtain?

    • I would venture that at some point, prices get higher than even the easiest of credit can enable buyers to handle.

  4. The battle at the moment is for hearts and souls (sentiment) of potential property buyers.

    The positive has been so positive for so long that its been difficult for the ‘crazy doomsters’ to get a word in. The GFC was a game-changer and the door was opened, albeit slightly.

    With economic conditions firmly pointed down again for the US, Europe and now Asia, I can only see the door opening further.

    The message of a bubble gained some traction, it is no longer inconceivable among all that house prices never fall. And as household conditions deteriorate with an economic contraction for Aus (in the coming couple of years) this seed will germinate and overwhelm the ‘normal’ attitude toward property and what its worth.

    It will do a lot of damage.

  5. H&H will boomers that have houses sell? what about just living of the rent as I heard from a few lately. they own them and it’s a steady income.

    I can’t make predictions on Aussie housing as my logic says it should come down which means it’ll go up even if credit shrinks. Lower supply maybe and rates going to zero could be the driver.

      • But point taken if they do indeed own them. Retirees I know have already spent the loot, to some degree! They released equity for the last car; holiday; another renter etc. Those are the ones who have relied upon ‘the system’ that may find it hard to balance the sums. And if they sell it may impact on others.

        • Most are positively geared, they have no need to sell and they want the rental income. A retired couple could easily earn gross $50K pa without paying much tax.
          Why is it assumed that boomers will copy the previous generation and move away from home en masse, they haven’t copied the previous generation before, why will they now?

    • Look for a big increase in boomers renting the house for a couple of years and going caravanning! Or even letting the kids move back in and rent their house while the oldies go caravanning.

      Posted by your now returned correspondent after 5 months around Eyre Peninsula, Nullabor, WA coast, Karajini, Litchfield, Darwin, Kakadu and down the centre.

      • Forrest GumpMEMBER

        True! I have an uncle and his wife whom travel 1-2 years at a time and rent out their home while they are gone. They were informed that at any one point in time, there are over 100,000 Grey Nomads travelling around the country. Assume that this means there are around 50,000 homes vacant, or added to the rental market. In reading a blog here, it appears that many Grey nomads either sell up or rent their home out while on the road.

        Also food for thought. If you dont own your home and you have stashed all your assets into areas that are not deemded accesable income, then when you live in a caravan park (or pay at a caravan park) you may be entitled for rental assitance from Centrelink.

        here is the bloggers link for Grey nomads http://thegreynomads.activeboard.com/t47152671/how-many-travel-full-time/

    • Even some boomers whose properties are fully paid off will sell one, to have liquidity. The problem with property is that all your money is tied up and difficult/costly to access quickly.

      So if boomers have more than one property, some will sell one to have spare cash on hand and will put the balance somewhere more liquid, like shares or term deposits. (or lend it to the kids to join the bubble, unfortunately…)

    • I don’t think renting out is enough cash for the majority of boomers. If you only own one house, you can rent it out, but you pay rent on the house you move into. I have a relo who is selling her dream home for a substantial amount to buy a more modest house. LOL but is also stubborn about the sell price and hasn’t sold yet after almost 2 years on market.

  6. With 30,000 jobs lost in last 3 months in Victoria alone, that means 30,000 selling or not buying. That is the biggest job losses in over 25 years! Credit growth is at 35 year low. Already 45,000 properties on Melbourne market. House prices MUST go down.

    • Long term in Melbourne for sure. But keep an eye out for one or two last up-ticks on increasingly thinner volume until the roller-coaster starts the big dip.

  7. According to Steve Keen’s work, price changes are correlated better with the second derivative of credit (the derivative of credit growth).

    For me I think it really depends on what pressures come on sellers. If employment is high, wages are good etc, then sellers won’t flood the market.

    If not (see Gold Coast) then we will get more price falls.

    I am content for the market to fizzle of a long period, simply to maintain economic stability. In real terms I expect prices to continue falling over the next five years.

    • I am content for the market to fizzle of a long period, simply to maintain economic stability. In real terms I expect prices to continue falling over the next five years.

      Rumples…The housing market ‘fizzling’ along involves us going into more foreign debt and/or more asset sales. I don’t quite get how this is called ‘stability’…not picking a ‘fight’. You know what I mean.

    • +1
      From the data I have seen housing affordability measures show the best correlation with house prices over time vs rental growth, population, single credit stats etc.

      Despite low volume prices have had minimal falls in nominal terms. One could suggest that with near record low interest rates prices should have been better supported, but as pointed out credit demand is at 40 year lows.

      That’s the other side of the coin, despite lower clearance rates and record low credit growth prices have not collapsed yet, so in my view all these factors are just a balancing act. We will need some catalyst to push prices back into strong growth or strong falls, I.e a macro turnaround to push income growth and credit demand up in a low rate environment or a macro downturn which sees continued falls in employment and wages…. Until either of those flows through to the real economy prices won’t move a great deal in aggregate… The market does not value housing stock with the same mentality as it values other assets!

  8. Ask Steve Keen is prices can increase without expanding credit.

    I think you’re last paragraph needs a closer look. The Boomer demographic bubble (Like a rat through a snake) is a significant factor in the property market.

    Those younger than 58 are net buyers while those older are net sellers. The number of buyers will stay constant while the sellers will rise every year for the next decade at least!

  9. lower interest rates.
    savings back up at 10% average
    growing avg income

    i tend to believe the market is greedy / ignores moral hazard. as such trends upwards / is bullish.

    given the above, im seeing house prices increase by 5-10% next year – and the only thing that will stop it is unemployment !

    • In my partner company the redundancy process has already started. They are all professionals. The unemployment is already increasing, but maybe most of those people won’t be caught by the statistics for some months ahead.

  10. I’ve been waiting for the bubble to burst since 2003.

    I’m starting to think it will never happen.

    The bubble should break, logic says it should happen but “the market can stay irrational longer than you can stay solvent.”

    • In my opinion the bubble has burst. The declines will be gradual, and over years, but amount to significant falls in the long run. And should there be more shocks in the global economy (likely in my view) then we may see a steeper decline sooner.

    • Bubbley – I had a friend ask me about buying a property in Canberra at the end of 2003. I said she was crazy as prices had run up so far since 2000 and were due for a correction.

      I’m still waiting…

    • I’ve been waiting for the bubble to burst since 2003

      “Markets can remain irrational a lot longer than you and I can remain solvent.”

      It’s bursting, but in slow motion. Bubbles are supposed to burst quickly, but this burst has almost everyone resisting it: Fed govt, state govt, banks, RBA, co-opted media, agents, Mom-‘n-Pop investors, etc.

      • Yes, that’s the irrational part of it R2M.

        The vested interests in real estate, the rivers of gold mentality in print media and the political elements who are always looking at the next election, all these groups have too much to lose if property prices decline.

        The ironic part is that high property prices are destroying everything Australia once stood for. The long weekend, bbq’s with friends and trips to the beach with the kids. Retail shopping with girls is also a thing of the past.

        And why? Because everyone is having to work weekends and overtime to pay for expensive housing. The collateral damage from this is also killing other industries, like retail and tourism. Nobody has the money or the time to shop or take holidays and as a result we are seeing both these business sectors suffer badly.

        I’ll get off my high horse now (its actually more like a little pony)

  11. Over at Planet Joye house prices are booming…

    What is most remarkable, however, is the stunning improvement in Australian housing conditions since a mini-slump in mid-April, and the even more striking surge over the month of September.

    Investors in Sydney have now realised capital gains of three per cent over the first nine months of 2012 while home values in Melbourne are down a much more modest 1.5 per cent.

    There has been an especially interesting acceleration in housing inflation in September.

    Across the five capital cities, dwelling values have jumped 1.2 per cent in September. This is substantially more than the circa 0.4 per cent ‘seasonal’ rise you would expect to see.

    The boom is back baby, the boom is back!

    • Look into my eyes, look into my eyes, the eyes, the eyes, not around the eyes, don’t look around my eyes, look into my eyes, you’re under. Houses prices are going to the Moon and you are going to buy a few this weekend. Got it?

      Aaaand, we’re back!

  12. Um question…maybe my brain isn’t working.

    So ‘we’ are in favour of dropping interest rates to whatever it takes to get this economy growing?
    So doesn’t that just simply result in increased credit availability at cheaper rates?……provided of course we don’t run into a Forex crisis….

    Surely the only limitation, as it is now perceived, is the external account? So on any sign of weakness it’s up up and away…until it can’t be!

      • A far second serenco…a far second. Don’t you know low and indeed very negative RAT rates give us time!
        Hm I’m starting to rant!

        • I’m still betting (hoping) on overseas funding being closed to us in the near future so we might hopefully avoid negative real rates as the banks compete for limited deposits.

          In that situation having cash in the bank might still be a good investment.

    • It is easier to reward debt fueled spending than to invest in areas that promote innovation and enterprise.

  13. Yes, Leith (and others) – Can credit growth fall and house prices rise?

    Non-Australians (aided by government-meddling laws) are buying our property without creating a mortgage using Australian funds…

  14. Chris Joye says (according to his index, so who knows for sure) that prices are up 3% in the last few months.

    If this continues, prices will be back above their 2010 ‘all-time-high’ early next year.

    While I’d love to believe in the inevitability of a crash, or even in the slow melt theory, this doesn’t feel like one!

    The general public are going to see prices rising, note the low interest rates, and flood back in.

    The RBA dare not cut rates any further in this environment, or they’ll have a repeat of the disastrous 2009-2010 boom on their hands.

    Can anything kill this property bubble?

    • The short-term rise is temporary. There’s been a pull-forward of demand as government grants for homeowners phase down.

      Lets see what happens in October once the grants for existing homes are greatly reduced and only remain for new builds. I expect the downward grind to recommence.

      • Do you think the grants are that big a factor? FHBs only represent about 15% of buyers I think?

        Interest rates are surely the bigger driver of this surge? And if rates go down even further…… it doesn’t bear thinking about!

        Aussies are addicted to debt. It will take a major external shock to shock them out of it, I’m beginning to fear.

        • Fair point yes rates are a big factor but the grants certainly have an influence.

          We’ve seen the effect of a multiple rate cuts…fairly muted.

          Next we’ll see the effect of reducing grants.

        • I agree Gral, I think the changes coming to the FHOG in Sydney and Brisbane will have a negative impact on the market.

          @overflow, sure FHBs only make up 15% of the market, but they are also an enabler for existing property owners to upgrade. So when a FHB buys an existing dwelling it has the potential to ignite a chain reaction.

          • … sure FHBs only make up 15% of the market, but they are also an enabler for existing property owners to upgrade. So when a FHB buys an existing dwelling it has the potential to ignite a chain reaction

            Well put. I was amazed at all the negative reaction from bears to the FHOG situation in NSW and QLD. It’s obviously going to hamstring the market for existing homes.

  15. “House prices surge in September : Home values across Australia’s five largest capital cities are officially up 0.4 per cent for the nine months to September…” I must remember – 0.5% p.a. is a surge

    • I think they’re talking about the surge in September itself, not the nine months to September. Prices are up more than 3% in just the last 3-4 months. It’s kind of disheartening because it took a whole year of declines for prices to fall 3%, and then suddenly that can be reversed in a few months.

      • No doubt. But Australia is now where we (NZ) was 18 months ago. Those who have been watching prices slide are now faced with only one question: Are you a true believer in property price falls, or were you just a ‘hoper’ (a buyer in waiting)? The ‘hopers’ will buy now, the true believers are about to have their faith tested.

        • Personally, I’m a true believer in avoiding crippling amounts of debt. My faith in this is affirmed when I see people my age (28 for those interested) having to turn off the heating in winter / cooling in summer because their budget no longer allows basic human comfort any more.

          So for those getting nervous, take a look at it from my point of view – prices up or down, life is happier without that mortgage. Keep renting and saving. Prices will either come back to sensible and you can buy then, or they won’t, and you’ll eventually have saved enough to get a much smaller mortgage anyway.

          If prices do go up and stay there, it will only get cheaper to rent in comparison anyway (in Melbourne at least, yields are pitiful and there’s little pressure to push them higher).

          • Add 30 years 🙂 and imagine what I see with friends also turning off the heating; only putting $50 in the tank and checking the price of every purchase at Wollies. For what it’s worth, that’s where I see the next push coming from, after this respite; us.

        • There seems to be a flood of disheartened bears on MB over the past few days, wondering loudly and often if this cruel bubble will ever end.

          It’s as though someone out there in property ‘turfer HQ has decided that MB is ground zero for the battle against ‘doomers’ and that with an uptick in sight, now is the time to strike.

  16. Good article, H&H.

    The reality is that nothing goes up in a straight line and nothing goes down in a straight line. Australians are over indebted as long as that remains true house prices will remain under pressure. Anecdotally (yes I know), everyone trying to sell a place is struggling. It’s little wonder that fewer and fewer people are putting much faith in the “steady as she goes” stats that the RE industry seems to push out.

    • +1. As I said before, it’s all downhill from here and we’re seeing statistical noise + the typical wavering line you’ll see in any graph. The discussion here about the moment-to-moment trivia is often just flap & doodle, but the grand sweep of the times, the irresistible forces of history, these are clear (to me anyway, using my helicopter vision special powers!)

      There are so many black swans aloft right now, I almost get a little excited thinking about it.

      • Yeah the fundamentals are all looking very bad. Put it this way, if someone gifted me some money and asked: would you like to invest in the Aus property market? My answer: wouldn’t touch it with a barge pole.

  17. So is it safe to assume that overseas buyers exert insufficient influence on the market to keep prices up? Overseas money wouldn’t get counted in the credit growth figures.

  18. If house prices look to boom again the government should put getting rid of negative gearing back on the cards. If they could tee this up with the rba rate cuts, say 25% reduction in expense claims with each rate cut, there would be less of a chance or taking the wind out the housing market and prepare investors who are using this strategy.

  19. Of course falling credit and rising house price can happen. You get falling credit when you have FALLING liquidity in the housing market. But ‘rising’ house price can happen at the same time when the fallen liquidity pay more for the same house than the previous marginal buyer.

  20. steven_packMEMBER

    Has anyone researched the number\volume of transactions that are actually financed by credit? There is no doubt your ‘average’ Australian buys using a mortgage, but what about:

    1. SMSFs

    Their growth is surging, the holders have been burnt by equities and are likely to be comfortable as cash buyers of property. I see plenty of articles about it in property magazines and in financial planning magazines.

    2. Foreign Buyers

    I’ve seen quotes from Mirvac, Meriton and Crown that some of their developments are bought by majority overseas buyers. None of those will show up in housing finance stats.

    3. Domestic Buyers in Cash

    I live in the Eastern Suburbs of Sydney and there are plenty of purchasers who buy property without finance.

    I have no doubt credit growth is one of the drivers of demand, but it’s impossible to know to what level without knowing the impact of points 1-3.

    Indeed, the fact that credit growth has remained low but prices have stabilised would suggest there other factors at play.

  21. Hold the phone…the esteemed Terry Rider over at the Property Speculator tells us that the 7% YoY increase in finance commitments is a great result.

    Trade up buyers are pushing the market along nicely he says. Get in fast or you’ll miss the next boom, the “upward spiral” as he eloquently describes it.

  22. Question:

    If the bottom of the market stalls and people start leaving those properties on the shelf, what will happen to median prices?

    • If the market stalls, prices generally fall.

      Or are you referring to the possibility that the type of housing stock being sold will affect the median?

      It might create a few bumps and wrinkles, but most index providers account for that by using hedonic or stratified approaches to calculating the median – i.e. they account for the type of housing that is being sold. For example, if only mansions get sold, the median shouldn’t be affected because the prices will only be compared against other mansions.

      • Thanks for the reply. I often wonder what is meant by ‘house prices’ when I read these articles and comments.