One strange Australian property cycle abrewin’


Three new reports this morning on property prices and their effects to examine. First up, Westpac has released its quarterly property expectations index:


The Westpac-Melbourne Institute Consumer House Price Expectations Index rose sharply in Apr, to the highest level since Jul 2010. The Index, which is the net % of those expecting prices to rise and those expecting prices to fall, rose from +26.7 in Jan to +53.9 in Apr. This is a substantial improvement, marking a breakout from the ‘moderately positive’ range the Index had been stuck in since Jan 2012. After an extended period of uncertainty, Australian consumers now look to be much more convinced that house prices are on the way up.

…Looking across the detailed categories, the main swing has been from expectations of ‘no change’ or ‘fall 0-10%’ (down 14pts combined) towards ‘rise 0-10%’ (+13pts). At 7.8%, the proportion of consumers expecting double-digit house price gains is still smaller than at the start of 2012. The last time Australia recorded 10%+ house price growth was in 2009-10. At that time well over 20% of consumers expected double-digit gains. Available price measures show annual price growth is currently in the 2-3% range.

The rises are across all states:


And most age groups, except the one that matters, those on the bottom rung:


Vested interest is a powerful motivator, no? But so long as FHBs sit this cycle out, it will disappoint.

Our next report is from R.P.Data, which has released its new RMI for March:

The RP Data Mortgage Index (RMI) tracks metadata flowing across RP Data’s four main finance industry platforms, which accounts for more than 90% of the residential mortgage sector. The RMI was launched in February 2013 and seeks to provide a lead indicator to the Australian Bureau of Statistics (ABS) statistics which are released on a monthly basis. The seasonally adjusted RMI is 88% correlated to the ABS statistics, but is available to the market approximately six weeks sooner.


The National Index reading of 91.1 remains historically high, with the National Index value 6.8 per cent higher than February in raw terms and 6.2 per cent higher in seasonally adjusted terms. This strong national result may be partly indicative of a seasonal lift in mortgage related activity, but also appears to be driven by increased activity from borrowers looking to take advantage of refinancing opportunities with low interest rates and investors also being increasingly active in the market.

So, a good month for the index, but largely driven by refinancing and investors, it seems. This index is brand new and untested so I would treat any conclusions drawn from it with skepticism until it is proven. But the results are consistent with AFG data  showing that FHBs are still scarce.

And finally, over to our top property cheer leader, the RBA, which has released a new detailed study into the wondrous effects of property price inflation on household spending.  What it finds is fascinating, especially in the context of the present inflation which largely excludes FHBs:

We use a household-level dataset, the HILDA Survey, to explore the relationship between home prices and household spending in Australia. Three main arguments have been put forward in the literature to explain the apparent co-movement between home prices and spending: (1) a ‘traditional wealth effect’, whereby spending rises with home prices due to an increase in households’ lifetime resources; (2) the removal of credit constraints, whereby spending rises with home prices due to households’ ability to borrow more, given more valuable collateral, and the related buffer-stock savings argument, whereby higher home prices act as a form of precautionary savings for low-saving households, allowing them to increase spending; and (3) that spending and home prices move together due to a common third factor, such as changing perceptions of lifetime income.

Our analysis most strongly supports the second explanation – that credit constraints and/or buffer-stock saving are the vehicle through which home prices affect spending. At both the cohort and household level we find that the spending by younger (and so more credit constrained) households is more responsive to changes in home prices than that of older households. This argues against the traditional wealth effect hypothesis; this wealth effect should be stronger for older households who typically own more housing than they will need over their remaining lifetimes. We also find that young and middle-aged homeowners respond more than young renters to rising home prices. This argues against the explanation of a common third factor, since renters and homeowners should both be affected by non-home-price shocks, for example increased income expectations.

So, in conclusion, today’s batch of reports rather suggests that young folks are sitting this property cycle out so far and that that will weigh rather heavily on both price appreciation and the economic benefits flowing from the increased spending that comes with it.

It’s one weird property cycle that’s a brewin’. All reports below.

er20130412BullAusconshsepriceexpApr by Belinda Winkelman

Monthly Update RMI and RPI March2013 (1) by Belinda Winkelman

rdp2013-04 by Belinda Winkelman

Houses and Holes
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  1. Mmmm… a growing denial and delusion will pump the bubble up some more….

    PS – Glad to see you are calling it what is is Leith, inflation!

    • RBA “Three main arguments have been put forward in the literature to explain the apparent co-movement between home prices and spending:”……..

      Surely 1 2 &3 are all in operation one form and another. In the long run there is some common factor and 3) becomes the answer. Bernanke published a high correlation between house prices and countries running a CAD. The genius therefore concluded (lied?) therefore that it wasn’t the Fed that caused the housing bubble it was the CAD (Not quite sure how CAD’s set policy).
      Now i grant all these things are self=reinforcing dynamic loops however what seems patently obvious is that the western world runs Negative RAT interest rates that result in distortions to the economy and too much consumption. Then if you don’t worry about CAD’s and borrowing money you hollow out industry, give yourself too high a living standard, and rely on foreigners to make up your CAD with their saved funds. The problem is that there is nothing productive left to invest in and the liquidity that results all goes into housing which is now our traditional way to automatically get rich.

      Anyway through all that confusion (sorry I find it hard to get into a few sentences) the point is 3 is in operation and the main common factor causing both high house prices and spending is zero to negative RAT rates.
      HnH can add in a few other macro policy problems re house prices!

  2. Since its investors piling back into the market they would be looking for a good area with solid returns. This could be skewing the figures to the upside. I am also sure the banks would be more than happy to have investors diluting their equity with more debt.

  3. FHBs are now a tiny proportion of buyers. Whether the banks refuse to lend or they are cunning little calculators doesn’t matter. They’re out.

    What fascinates me here is the continued investor interest in going long and geared into a toppy market. I am intensely curious about the investment case they are making to themselves that emboldens them to buy when the prospect of returns are so poor. Are they innumerate? Weak judges of risk? So awash with savings that this is the least worst alternative? I shake my head.

    Don’t Buy Now!

    • “I am intensely curious about the investment case they are making to themselves ….”

      Faith and hope.

      • Faith and hope

        Actually you’re probably on the money here. I have met quite a few people who combine the religious fervor of “prosperity gospel” in their church with the property-never-go-down cult dogma.

        Their belief system is much more sophisticated than the regular mum & dad’s property investors, for example they believe that:

        1) Australian residential property will never go down because we’re different (whatever it means)
        2) Even if some of Australian properties go down, my investment properties will never go down because GOD will safeguard them 😉

        Those sophisticated investors also tend not to buy any insurance products because GOD also safeguards their health life, cars and everything else they own 😉

    • ” Are they innumerate? Weak judges of risk?”

      you must be right since you have been so wrong for years now.You should reassess sometime 😉

      • Each to their own.

        For me I can’t see the logic in taking out a 6% p.a. loan to purchase a depreciating structure (+ land that we expect to increase roughly in line with inflation) with sub-4% yield… and 10% or so transaction costs/taxes every time I buy or sell…and tenancy risk, insurances, rates….

        So it’s a personal choice. Some may decide the numbers stack up for them. For others the numbers won’t be good enough to justify the risk.

        Perhaps the improved numeracy of consumers that David refers to has something to do with a better understanding of alternatives. You don’t ‘have’ to own property.

        ….If I thought house prices were going to go to the moon I’d buy the guys lending $$ to the space cowboys pumping up the price of property (with debt). At last check banks were still making a 2% – 2.3% margin on loans. That’s the kind of premia that pumped into an Excel spreadsheet could make your mind explode! Pretty sweet deal with none of the risk (unless of course you think there might be a chance prices won’t make it to the moon?)

    • It will be interesting to see how many are prepared to go “All In”
      If the bounce subsides will they have the Temerity to blame FHB for not being willing to over extend themselves.

    • The worst investments decisions are generally made when dumb money is chasing yield.

    • I was having a conversation this morning with a work colleague.

      He actually thought that house prices had gone up 6% in the last year and that was typical …

      His accountant is trying to get him to setup a SMSF and buy an IP …

      I was speechless so I just sent him the MB link ..

      • These are the very same people who will be screaming for everyone to take a share of the huge shit sandwich coming our way and cry “Why have we been singled out!” as the market corrects ripping the guts out of their savings and any hope for retirement.

        Buy it up girls, go get your loans and NG your life away.

        For myself and others like me….

        Just smile and wave boys! smile and wave lol

    • Savings are being eaten up in tax and inflation. The stock market and currency markets for the moment have had their run.

      Where I live in Sydney there’s a lot of positive geared property out there (if not slightly negatively geared) so I do think rent’s unfortunately back the valuation.

      Australia wants a big population. It’s a bipartisan policy to grow population, house prices. It is the only policy the government has executed well and unofficially is probably their greatest success.

      Inflation is always the easiest answer for governments. It is less painful than all the other alternatives. Interest rates could go to zero, exchange rate could fall and the government would see the inflation as fuelling their most successful policy and excuse the side effects.

      If there was no government I would be the biggest bear. My mistake before was not realising that the government would ruin the country all in the name of the policy above. I agree it’s overpriced, its unaffordable – so what? Just means greater wealth inequality, more suffering and our kids being doomed to rent all their lives.

      • Hasn’t AK has said it how it is? Money is cheap right now, building is down, supply is falling and once people are not afraid there will be a rush to buy. Unless gov policy changes house price rises will return along with inflation in general.

        Inflation = increase in cash value of wages and prices and increase in cash value of real assets and devaluation of cash assets and reduction of cash debt.

        • sorry should have said “reduction of mrtgage debt as a percentage of property cash value”

      • dumb_non_economistMEMBER

        A question for AK or anyone else who can answer it for me.

        If the $ takes a big fall to produce the required level of inflation how the hell do you keep IRs down to a level to allow property prices to keep rising and not go through the floor and UE hits the roof?

        • Easy to answer.

          Interest rates don’t have to rise. Everyone assumes interest rates will rise to accomodate inflation. If the link between the two figures was that strict then inflation would cause IR’s to rise no matter what the RBA does (including fudging the CPI numbers).

          I would rather think in the opposite direction – to me interest rates are the price of money. If I flood the market with money I can reduce interest rates (see every other country on the planet).

          Inflation can be lied about. But we will feel it everyday. Unemployment won’t spike necessarily because of interest rates at least.

  4. “Our analysis strongly supports the second explanation”, ie

    “(2) the removal of credit constraints, whereby spending rises with home prices due to households’ ability to borrow more, given more valuable collateral, and the related buffer-stock savings argument, whereby higher home prices act as a form of precautionary savings for low-saving households, allowing them to increase spending; ”

    Or, to translate: “People are spending more because zero-sum house price inflation allows them to borrow more. Hooray!” Am I the only one who is chilled by this and also by the fact that nobody in a position to stop it seems remotely concerned by it? I mean, the RBA may have well have just said: “We’re f*cked.”

    • Yes. The RBA, like all central banks, just doesn’t include house prices and other speculative assets in their inflation numbers.

      Easy peasy.

      The link i posted earlier in the day is a great one. We now have so much global debt that central banks are doing the modern equivalent of a post-war financial repression. ie they are captured by the government.

      Australia is slightly different because we haven’t yet handed our private debt to our government – but as the ‘comment of the year’ points out this might not be far away.

      • But if the Aussie crashes, then the house prices will do too. At least the Chinese investors will fly back.

    • One reason is that quite a few people expect it to crash. Crashes don’t usually happen if they are expected.

      • It’s been 5 years since the US crashed. And we’ve all been waiting for it to happen here. (I am a renter by choice for that reason).

        But maybe we never crash. When I see what Japan has just done, I start to think that all asset prices everywhere may be supported by the sheer amount of new money being created.

    • DrBob127MEMBER

      slow melt.

      Look to Japan’s property market history for what is more likely to happen in Aus.

      • Mining BoganMEMBER

        I’m with you. I used to think it would be sharp bit I’ve turned. I’m gonna have to listen to my fellow bogans whinge about their negatively geared assets losing value for the next ten years.

        The ones with the sense of entitlement moan longer and louder than anyone…

        • dumb_non_economistMEMBER


          They won’t be moaning as their accountants who told them to NG RE to drop their tax rates won’t be game to tell them of the real impact on their net wealth.

    • Australia has been given a remarkable window from the epic ToT. Our floating currency will do it’s thing when the time comes.

      That 1mil pad will still be worth 1mil AUD, it’s just it will be worth 700USD. Hey presto – the home-owner loses 30% of their value, its just hidden by an fx curtain. Of course, unless savers are clever, they will be no better off either.

      It’s a stacked game … of course inflation is on its way then.

      • I am with you there chief. Having my dough international and living local fairly tight.

        The only thing I would observe is that once a bout of currency depreciation related inflation moves onto the screen the standard RBA response will be to jack up rates, while the standard Government response (particularly a Torynuff government) will be will be to squeeze the budgetary nads that much harder.

        My guess is that the 1/3 mortgages being service interest only will provide a fertile base from which to anticipate properties being coughed into the market in a distressed condition with higher interest rates, and that the prospect of some pro cyclical austerity from the Torynuffs will have some of the more highly leveraged types rough casting the bowl with properties too.

        It sure is the strange property cycle a brewing.

        It is a thalidomide property cycle – the one you have after you have sedated yourself with ‘never been a better time to buy’ for a few years.

          • Every time I attend an open house or talk property with a friend or colleague it gets thrown about. I just shake my head thinking they must know something I don’t.

        • Gunna,
          “Having my dough international and living local fairly tight.”

          You do realize that this is a very risky Aussie Tax strategy because a decreasing AUD generates an Aussie tax liability even though your international capital is receiving almost zero interest.

          It makes much more sense to be a non-resident Aussie while any AUD corrections occur.

          • But to have a tax liability, the strategy must have made a profit? Isn’t that all that matters….

          • Janet, All that the ATO cares about is the change in value as seen in AUD from one tax year to the next.

            So $1M USD held in say Tresuaries todays exchange rate is $952K AUD if in 12 months the AUD is at 85c than your $1MUSD Tresuary bill is worth $1.17M AUD. You will owe taxes on the $218K AUD income (say about $75K taxes for a tax rate of 35%).

          • My point was that in USD Gunna has not made a profit so if he were US resident for the whole period he owes no tax (neither to the IRS nor the ATO) however because he is in Australia with significant International investments he incurs this exchange rate tax. the unfortunate problem with this tax is that it is, from a practical perspective, almost impossible to claim a deduction, for an exchange rate loss (unless you have other income)

            If Gunna remained in Australia for say 3 years and then returned to the US, and the exchange rate fell back to say 60c (during this period). He would return to the US about $250USD poorer
            (per $M net worth) then when he arrived in Australia and that’s just the tax bill!

          • China Bob, I don’t get it. I thought that you pay tax on income which in Gunna’s case is either realised capital gains on Capital “sold” or interest received. Surely you would not pay tax on the capital gain (Foreign Notes vs AUD value) of your cash holdings until you rreconverted it to AUD at a time of your choosing?

          • Guys, if you are married to a foreign national there are other options. Sorry I am not going to go into them here.

          • ASX Foreign currency ETF should avoid this – i would expect they can generally be treated on capital account.

      • aj. sounds like you are providing a counter argument to the property crash theory. no property crash just a currency crash… then we back to the same old cycle. So people may as well buy if they can afford to as a savings protection mechanism I cannot imagine that a signifanct number of people will look to foreign investments as a potential savings hedge like Gunna.

        • That’s right – I’m not really in the price crash camp. Regrettably Australia is too fond of supporting housing speculation.

          A big rollover in commodities and the ToT could see the dollar go a fair bit lower, so property speculators would be losing money on a relative pov. High AUD may be holding back the asx as well, so on a capital allocation pov speculators on property may get hurt.

  5. You know what I’d like to see?

    Some sort of research as to how past expectations of the Westpac-Melbourne Institute Consumer House Price Expectations Index correlate with actual house price changes.

  6. 59 Piccone Drive, Edmonton, Queensland

    Googleearth that bad boy and go to street view, this is the standard you can expect for $700k by the time you pay it off.

    Prices always go up?

    Early days for the data this year but the message is there for all to see.

    • Werribee is an interesting read.

      Av ~50 sales per month for the last 10yrs.

      8 sales total for 2013 so far. Price starting to fall as well.

      • First time I have paid much attention to that site. Just had a look at Geelong West and East Geelong. major drop off in sales numbers too and prices well down.

        Anyone know how accurate that site is?

        • In fact I find it bizarre. That site is saying that there has not been a house sale in Geelong (Postcode 3220) so far this year. When I am fairly confident (despite my gloomy outlook for real estate) that there has been.

    • Wyndham Vale

      ~30 sales per month on av for the last 9yrs.

      6 sales total for 2013 to date.

    • Hoppers Crossing

      ~50 sales per month for the last 9yrs

      10 sales total for 2013 year to date

    • re Piccone Dr

      Might not be $700k for much longer. That Edmonton median sale price is down 42% in 4 months!

  7. Perhaps the FHBs who dont provde the rental demand that balances high income earners demand for negative gearing investments to save tax.

    It could just be an increasing concentration of wealth consistent with increasing Gini coefficient and lower effective tax rates on the wealthy and the preservation of family wealth across generations with smaller families and no death duties.

  8. Interest rates are too low. If interest rates were higher, people could save more for their retirement and have money left to spend on discretionary items. It is very risky for baby boomers to depend on the future sale of their home or investment property to fund their retirement especially when so many baby boomers will be retiring around the same time. Baby boomers had better hope that Australia’s real estate property is not in a bubble. Imagine trying to sell your house in a falling market during a recession when many people will be losing their jobs or only working part-time for low wages.

    Higher term deposit interest rates would help young couples saving for their first house. Compound interest can be a young man’s best friend. Young couples would actually be able to save a large deposit for a new home and the government wouldn’t have to offer first home buyer grants that only raise the price of real estate for everyone. It is amazing how people are thriftier and more careful with money they have actually earned and saved over many years.

    Bankers, however, make more profits and receive bigger bonuses when customer debt levels are high. When debt levels can climb no further, bank profits will crash and the taxpayer will be asked to carry the loss. Private debt will become public debt. Bankers are capitalists during good times but they will have few qualms about socialising bank losses during an economic crisis.
    I wonder what the bankers will be doing with their bonuses this year? My guess is that they won’t be keeping it in the bank or in cash. No doubt, they have all bought a fortified castle with armed guards to protect themselves and their gold from the hoards of disgruntled savers whose money will be trapped in bank accounts or made worthless due to hyperinflation as a result of the American, British and Japanese policy of Quantitative Easing (money printing) as part of a global currency war.

    I would like to personally thank all the Australian politicians for their part in encouraging this real estate Ponzi scheme with negative gearing policies, first home buyer grants and for not regulating our banks more closely or from discouraging our banks from being concentrated into ‘the four pillars’ which are now too big to fail.

    I would also like to thank the media who has shamelessly spruiked the virtues of buying real estate to the masses and helped fuel the desire for sexy property investment portfolios. Without our politicians, bankers and the media’s participation for the past ten years in spruiking real estate our monthly mortgage payments never would have jumped 105%!!!

    It would be tempting to blame real estate agents too, but oddly I feel that they were simply at the right place at the right time. After all, when you go the barber he will never tell you it is the wrong time for a haircut—even if you’re bald.

    The blame for huge monthly mortgage payments will unfortunately fall on the victims who bought houses they could not afford. All fingers will point at the debt slave for believing the fairy tale that house prices double every ten years and that if they didn’t buy now they would be shut out of the market forever. The debt slave will be ridiculed and mocked for listening to their baby boomer parents who told them that rent money was dead money. The children of the debt slaves in future years will not be so gullible as to believe that house prices never go down. A whole new generation will come of age seeing only house prices depreciating year after year. Soon we will all be Japanese.

    A man’s house is his castle—but for a debt slave or a bonus rich banker, a castle can turn into his prison.

  9. Yes – the australian people have been fed a monumental lie by politicians and the financiers.

    There is nothing good about rising house prices, there is nothing good about private debt being used to bid up the price of our own residential housing. In fact it should be a source of national shame that prices are rising. Headlines should read:

    “Tragedy of rising home prices strikes again, speculators and rent-seekers put ahead of young families again”

    The politicians have used the magician’s trick of making people look in one direction when all the action is somewhere else. Look at the public debt, look at the public debt – when all along it is the private debt that will sink us.

    The world has gorged on debt, so much so that the all other major western economies (where the private debt became public debt) are essentially using post-war financial repression (low negative rates) to try and survive. Australia is importing this through our currency and the attempts by the RBA to lower the currency through rates is just going to turn us into one of these basket cases.

    We are walking in a trance to private debt hell and the politicians are out the front carrying the lantern.

    • You reckon? That’s not the pollies out in front carrying the lantern! Whatever that light is, it’s just about to burst out of the debt tunnel at you, at full speed. And the pollies? Well, they’re still back at the station, selling tickets to gullible passengers for the next ride to that suburban destination of Debt Servitude……and they’re called, First Home Buyers…..