A focus on real house prices

ScreenHunter_15 Mar. 05 15.42

By Leith van Onselen

RP Data’s Cameron Kusher has today provided a nice overview of house prices across Australia, breaking down performance in both nominal and real terms. From Property Observer:

…home value growth was significantly lower over the period of March 1996 to March 2013 when inflation is taken into consideration.


…combined capital city home values increased by 241% over the period in nominal terms, but in real terms they have increased by a significantly lower 121%.

Although nominal values have risen over recent years, in real terms, capital city home values are currently at a similar level to what they were in September 2007.

Quarterly capital city house values were -3.3% lower than their September 2010 quarter peak over the first quarter of 2013.

Unit values across the combined capital cities also peaked over the September 2010 quarter and at the end of the first quarter of 2013 they were -0.9% lower.

If the results are adjusted for inflation, each peak was also recorded in September 2010 however, house values are currently -8.9% below their peak and unit values are -6.6% lower.

In nominal terms, all cities and product types have recorded an increase in values since their respective lows, highlighting the pick-up in home value growth since the second quarter of 2012.

When adjusted for inflation the results are quite dramaticallydifferent in some instances.

Sydney, Brisbane, Perth and Hobart had the most notable differences.


When adjusted for inflation, the Sydney market peaked in the first quarter of 2004 and house values remain -8.7% lower than their peak and unit values are -3.4% lower.

In Brisbane, house values peaked in the first quarter of 2008 and are -16.7% below their peak, and unit values peaked in the final quarter of 2009 and are -12.8% lower.

House values in Perth peaked in the third quarter of 2007 and are currently -11.8% lower while unit values peaked in the final quarter of 2009 and are -10.5% lower.

Finally, Hobart house values are currently -17.0% lower than their fourth quarter of the 2007 peak while unit values are -13.8% lower than their second quarter of 2009 peak.

…over recent years, rising costs across the economy have outstripped the increase in home values.

As a result, the relative affordability of home values has shown some subtle improvement over this time…


The fact that ‘real’ home values have remained below their peak for a much longer period of time in Sydney and Perth is a reflection of why these two housing markets have recorded some of the strongest rebounds in home values of all capital cities over recent times.

…we would expect that increases in home values will continue to track fairly closely to inflation, or perhaps slightly higher based on the low mortgage rates, over the coming year.

Another way of measuring housing values is to compare the total value of the housing stock, as measured by the Reserve Bank of Australia, against Australia’s GDP. As shown below, Australian aggregate home values increased from just under 2.0 times GDP in 1996 to a peak of just over 3.3 times GDP in March 2010 – a real increase of around 70%. Since then, values have fallen to around 2.8 times, representing a real fall from peak of nearly -15% (see next chart).

ScreenHunter_27 May. 03 10.41

For what it is worth, my tip is that Australian housing values will ultimately revert to around 2.0 times GDP – the level that existed prior to the huge run-up in housing values from the mid-1990s – as price growth going forward fails to match growth in GDP (i.e. the “slow melt” thesis).

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Unconventional Economist


  1. would you expand a bit on the relationship of gdp to housing stock and why 2 or any other number makes sense?

    • 2.0 times GDP was the stable level pre-1996, prior to when prices surged (although the ratio was significantly lower pre-financial deregulation). I don’t believe current housing values are sustainable in light of the pending unwinding of the mining boom (both commodity prices and mining investment). Moreover, the employment-to-population ratio is set to trend downwards over coming decades as the baby boomers retire and the population ages. Both factors will weigh on asset prices.

      • UE
        I’m looking to buy a house in leafy melbourne tomorrow with a gross yield of around 2.5% (on orders from my wife). Is this a wise decision as I dont think so? ps – i wont sue if you are wrong.

          • Giordano Bruno

            If you want to lose real money, and an awful lot more of potential earnings – then go for it.

            Melbourne prices are falling, and are about to see a cliff.

            Ask yourself would you buy into Spain or Ireland RIGHT BEFORE the crash ?

            If so – go for it.

          • Squirell, I recommend you and your other half also follow Garth Turner’s “Greater Fool” blog for a while….. he does a great “rant”, the MB columnists are too restrained…..

        • thomickersMEMBER

          lol at 2.5% rental yield i’m guessing you are looking for a house over $1,500,000 in areas such as Canterbury, Surrey Hills or Deepdene?

        • Wasted OpportunitiesMEMBER

          I think you already know the answer to that squirell. Pluck up your courage and go tell the boss what’s what. Good luck.

          • Agreed W Opp.

            Grow a pair Squirell eh, you will end up busting your balls locked into a house you can’t sell for what you owe.

            If you “change” as your mind slowly melts trying to feed the materialistic side if your relationship, you can look forward to losing the house and having nothing but a hefty share of debt for your trouble.

            Seen it happen too many times my friend. You know it’s not right, why else would you ask the question.

  2. On Housing stock/GDP basis you’ll probably be right, but not because of the ‘slow melt’ (that’s probably come and gone) but because GDP itself will fall. A slow melt won’t re-emerge if that’s so, but a quick nominal price adjustment, might. Higher interest rates might poke the slow melt back into action; lower ones will just entrap more property cannon fodder….

  3. “Another way of measuring housing values is to compare the total value of the housing stock, as measured by….blah….blah….blah….blah…”

    Well, the best way to measure housing values is to stand outside the bubble, ignore all the spin, the bullshit, the vested interests, the bleaters, the speculators, the apologists, the rent-seekers, the politicians, the bankers….basically all the mainstream wankers and use some simple common sense.

    So what do we have at the end when you strip out all the blather and noise…..one big enormous freaking BUBBLE.

    There you go, wasn’t that hard to use a bit of alternate reasoning was it ! It is very easy to see when you are not with the religion.

    • Aaah – welcome to the “Angry and Frustrated Phase”… You will feel better when you no longer care about this excrement and go on and do things which really need to be done with the money you saved by not ploughing them into a pile of overpriced pile of dirt, bricks, mortar, mould and mildew.

      • So well put! The time for trying to help the doomed is at and end….leave ’em to it, I guess you mean …..

      • I think I’m way past ‘angry and frustrated’. Way past. I’m up to the ‘actively encourage them to their doom’ phase.

        Now’s the time to get in!
        Interest rates are low!
        House prices are low!
        You’ll miss out!

        Warning them didn’t work.

        • +1. It’s all just plain war in my book.

          So house prices are more than 2 times what they were in 1996. Just as I thought, the commonly cited 40% off isn’t enough, 60% off is where the fair price is.

        • It’s like some kind of bizarre blood sport,

          MMA to the death but with cash.

  4. “…combined capital city home values increased by 241% over the period in nominal terms, but in real terms they have increased by a significantly lower 121%…”

    So, even at 121% that’s madness. Did population increase by 121%? Did real wages increase by 121%? Fat chance.

    Price has far outstripped ability to pay. How much longer can we get into more debt and hope to pay it off (providing of course unemployment, middle class welfare and the terms of trade stay rosy)?

    Seems all these “house prices to increase” spruikers have (still) got their heads up their collective ass.

    • “How much longer can we get into more debt and hope to pay it off:”

      The answer is for as long as there is confidence in the market. People are still buying in droves because they see that their parents, friends or whoever bought a few or many years ago and have since doubled or made ten-fold their money or whatever. Before, you really couldn’t lose with property, no matter what or where you bought. It’s going to take a while before buyers come to realise that the big gains are not going to be there much longer. Mind you, with all the government props e.g. negative gearing, massive immigration, relaxed foreign investment and if the banks are willing to lend at low interest rates, people will still take on as much debt as they can to buy a dwelling.

      And yes, the spruikers still have their heads up their arses. They probably believe what they’re saying too. We bears have been proved wrong for far too long, but that doesn’t mean this madness can continue forever.

      • And don’t forget that investors are buying because there is no point not buying. Real yields on currency are being repressed, so savers are being basically herded into assets.

        Speculators are buying because investors are buying.

        FHB are not buying because they are poor – but who really cares about them anymore…

        • “…..FHB are not buying because they are poor…..”

          Not necessarily that they are poor, it is more than house prices are so OTT that like Rolls Royces and Ferraris, you have to be a millionaire to buy one for yourself.

          • The biggest difference in impact on society between undistorted and distorted markets, occurs at the bottom end.

            In a median-multiple-six-plus city, the very cheapest accommodation will be poky, ugly and unsavoury. in a median-multiple-three city, the bottom end of the market will tail out in accommodation that is about half the price of the unsavoury stuff above, and several times as acceptable for human habitation.

            The reason for this is that in the median multiple six-plus cities, the cost of land is exponentially higher. It is not just that ALL the difference in the median multiple (i.e. six minus three = three) is in land cost; it is that this land cost component is for far smaller amounts of land per dwelling as well. Basically, someone living in a lean-to in London on 10 square metres of ground, will be paying just as much for that as someone in Atlanta will be paying for approximately a quarter acre.

            If you are really, really poor in an affordable US city, THIS is MANY TIMES preferable to options costing many times as much in an unaffordable city:


      • Alex Heyworth

        “house prices are so OTT that like Rolls Royces and Ferraris, you have to be a millionaire to buy one for yourself.”

        Most millionaires have enough sense to realize that paying a Ferrari price for a Commodore is not a good deal.

  5. I note this: “capital city home values are currently at a similar level to what they were in September 2007.”

    But the real estate lobby assumes me that property doubles every seven years!

    Which means property will double between now and September 2014!

    Buy buy buy! Surely the real estate lobby would have no reason to mislead us!

  6. In the end, its all government and voters fault. A functional government would have both parties stop their bickering and agree on certain problems that need to be solved regardless of political outcomes. The housing bubble, and denial that it exists is a major one. If not, people would vote for totally different parties.

    But instead we have Dr. No who can only disagree and suggest policies that make things worse. Maybe he isn’t a total idiot though. Maybe he is just acting the way people want and polls would suggest that that is correct. I shouldn’t be angry, I should be celebrating democracy. If people wan’t a shitty bubble-addicted nation, then they should be free to make it so.

  7. UE

    Still cant come to grips with the slow melt thesis.

    To get to 2xGDP that’s a 25% fall if GDP remains constant. Besides the end of mining investment even a slow melt would decrease GDP making the fall larger and self reinforcing accelerating into a crash

    A slow melt assumes a large number of very irrational buyers are out there. On second thoughts maybe you’re right

  8. To be fair to all sides of all arguments, there is no way of proving a price “bubble”. Sure there is a mathematical maximum that can be paid under any condition other than 0% interest-only loans. But the facts remain that current prices (to income, to GDP, etc…) could be here to stay.

    But that doesn’t mean it’s not overpriced. To me, and to many Australians (and the majority of the MB commentators, I’d say).

    For others current prices may present “opportunities”. These are the people who are happy investing in a depreciating structure on a plot of land perhaps with a yield of 4% (+/-1%).

    The issue I have is that MOST of those buying into these “opportunities” are doing so on the assumption (RE lobby rhetoric) that the capital value of the land & structure will increase much faster than inflation. And this is worrying.

    I still hear of people who are convinced that a “investment property” with a 3.5% or 4% yield is worthy enough an investment to mortgage their own home to borrow 90% of the property value (interest rate ~6%, plus transaction costs/SD ~ 10% etc). Evidently the prospect of that 4% yield increasing year-on-year is enough to validate its investment potential.

    Based on a valuation of our current rental, our landlord is raking in a massive 2.9% (pre rates).
    From what I have seen most of the research that new purchasers do is sourced from their real estate agent, the RE lobby groups, “investment clubs” or other muppets like Dr Wilson. And as we know there’s no point looking for independent analysis on any of the news/newspaper sites (as their RE advertising dollars are too valuable). It’s sickening.

    Home buyers need to start taking some responsibility for their own financial decisions. If more of them did their own research then maybe we wouldn’t be in the position we are now.

    At any rate, my point is that value is subjective. But when you can get a better return from AA grade debt then it begs the question of what weird world property investors are living in. Only possible explanation is price speculation (which as previously mentioned has a mathematical/economic maximum…price elasticity etc).

    • And thanks to Macrobusiness.

      If you can save one poor soul from jumping into the debt abyss, then you have succeeded in making the world a better place


    • I agree on the speculation. It always feels to me that no matter how you want to look at the issues, it is very hard to get around the ‘debt for speculation’ element to the pricing in all markets.

      Humans are just eager gamblers and the banking system has now evolved to allow this speculation as a source of fees.

      It amazes me that notwithstanding that we are only 5 or so years on from a massive equity shock that wiped out fortunes in capital, we are now back to pre-GFC margin gearing in equities.

      Housing and stocks have become very subtle forms of high-leverage bets for all but the most disciplined and patient investors and buyers.

    • I think you’re right. There are just too many home buyers that are not well informed about the fundamentals of the market. That’s not to say it’s necessarily a bad thing – it’s just how it is.

      If the various vested interests can convince a majority that real estate is a good buy despite the underlying fundamentals, that’s probably got to be chalked up as a win for the marketers. And that’s before you consider the role of governments at all levels as cheerleaders in chief of high house prices while pretending to care otherwise. As long as the marketers and government intervention can continue to win out over rational analysis, the current inflated market can probably continue on for quite some time yet.

  9. House prices can be simplied even further.
    Interest rates go up, house prices go down.
    Interest rates go down, house prices go up.
    As Australian interest rates are heading towards 0%, house prices will go up, and up, and up.
    To anyone waiting for the bubble to burst, you only have to wait 10 more years.

  10. DinkiDi Dotdoodoodotcom

    That’s what I like about MB; you sure like to reinforce your own prejudices….a majority of contributors have been calling the top of the market for so long / too long now…
    I think the MSM have got it just about right…latest house prices a mere ‘stumble’ to a never ending and beautiful story of enlightenment and enrichment……..

    • Fabian AlderseyMEMBER

      Prejudice is an odd word to use.

      If I saw a $10 banana and thought to myself “that’s expensive”, would I be prejudiced?

      • The Patrician

        Yes Fabian, by applying independent thought and analysis to your purchase, you prejudice the vendors ability to realise the inflated price of his banana.
        If you share your analysis with another purchaser, the prejudice is doubled.

    • Tongue in cheek of course – but still off the mark a bit. Many on this site have been wondering if the bounce is a bull trap, but there are many that have acknowledged that more loose monetary policy is just going to be a boon for housing and stocks.

      Don’t fight the fed (or the RBA).

  11. Producing inflation adjusted house values makes no sence as cash on deposit would loose to inflation similarily. Unless author assumes everyone are smart and should have swapped housing to gold at 2004

    The whole monetarist system is a fraud as u csn see rates in all countries are heading to 0 eventually with asset prices and debt to the moon. AUS housing have some room to go untill we hit zero policy.

    No inflation will materialize as all countries at once either going to zero or even printing money meaning they already below zero

  12. By Rodney Dickens (NZ economist)

    “…..From the peak in the national average real house price in the December quarter of 1974, the national average house price increased less than prices in general for the next five years. House prices didn’t fall over this period, but because prices in general increased significantly more, the real value or purchasing power of the average house fell 40%.

    The fact that inflation in general averaged close to 15% per annum
    over this period meant that the sins of the bubble in house prices between 1970 and 1974 could be washed away over the subsequent five years without requiring actual house prices to fall. This experience will have helped create the myth that house prices never fall much.

    But be in no doubt about the implication of the 40% fall in real house prices over the five years after December 1974. Anyone buying a house at the peak
    of the speculative bubble in 1974 and selling it five years later lost 40% in terms of the purchasing
    power or real value of the money they invested. Again, people consume goods and services not dollar coins, so what really matters is real house prices……”


  13. OK I accept that an RE “return-to-the-mean” is conceptually appealing BUT the times have changed and as a result so too must the RE ratio to GDP.

    As an exercise consider a diverse economy with thousands of stable profitable companies all competing for scarce investor dollars. If investment capital is some portion of GDP than logically the available capital pool would be split across the available portfolio with some short-term and long term bias.

    Now do the same exercise for a hollowed out economy. As the economy looses breadth it MUST reallocate the available capital across the shrunken asset pool. Logically this will inflate the surviving assets and in the process create investor bias towards this asset class.

    For RE return-to-the-mean to occur the economy must do one of the following
    – destroy wealth by devaluing RE assets
    – Create new a class of more desirable assets

    Devaluing RE and thereby destroying this wealth is a VERY worrying concept especially given the exposure our banks have to residential RE, not to mention the high percentages of foreign capital that supports our big 4 banks. Lets face it Politically this cant happen.

    Creating more appealing asset class: (Mining aside) the only new yet valuable asset classes that I see within Australia are created when ex-gov’t monopolies are hived off to banks and pension funds. Good the value of the asset sky-rockets as the monopoly exercises its control but in reality nothing has been created. Some might even suggest that value is being destroyed.

    Nope I cant bring myself to accept a return-to-the-mean hypothesis for RE. This argument even ignores the demographic side of equation associated with boomer wealth accumulation in their peak earnings years.

    The only logical outcome is Japanese “lost generation” style stagnation. Unfortunately I’ve seen friends in Japan whose lives were ruined by this slow grinding depression. It’s a soul destroying journey especially for the optimists (entrepreneurs) who might otherwise have created, well, who knows what!

    • But what if the investment capital…isn’t capital at all, but debt. Then there is only debt to be spread across the asset classes and as that is paid down ( isn’t that what ‘yield compression’ is supposed to do – repay debts?) then asset prices should fall, as the excess debt is reduced. Spreading capital isn’t the problem. Reducing debt, is.

      • In all honesty I dont see any difference between Debt, Equity and Capital Investments especially when the macroeconomy is considered. The choice of funding is largely driven by risk perceptions. The greater the perceived rick the greater the equity portion of total “term-sheet” value, for the extremely risky classes of start-up investment we reserve the term “sweet equity” whereby value is created out of thin air.

        As RE prices inflate yields must logically compress eventually resulting in a liquidity shortage (no one wants to invest any more in this asset). However capital is still being created (boomers are still at their peak earnings years and the economy is still growing) so in the absence of new investments this capital must flow into RE (surviving asset). The ultimate path to this RE asset might be circuitous but make no mistake this is where the money ends up (eg CDO’s supported mortgage securitization through 1% ARMs issued by Mortgage agents signing off on liar-loans)

        • Or to put it the other way around, ( I won’t labour my difference of opinion re capital vs debt!) the lower interest rates go, compress, the higher the one remaining asset classes, property and the stock markets etc, must go. Why? Because risk has been taken to its lower common denominator by those low interest rates. Only when risk is again forced on the economy by HIGHER interest rates will productive allocation of capital/debt recommence; less consumptive behaviour ( less existing dwelling/stock market speculation) and better use of funds. For the life of me, I can’t see how de-risking life is going to give us the impetus we need to get things going again!

          • Janet, Capital will eventually flow into any asset that produces net free cash flow sufficient to cover the risk premium associated with the underlying activity.

            Over time investors will readjust their perceptions of risk and with this readjust their portfolio balance. The smart money will naturally move fist and extract both a free cash flow advantage AND an asset capital appreciation associated with the changes in portfolio allocation.

            The only question on my mind is relates to Australia Inc.s ability to create these future businesses. If Australia fails to create value then eventually the search for yield will drive capital away from Australia and create the liquidity shortage needed for interest rates to rise. When it happens it wont be pretty, an we will all see just how ineffective currency hedging is as a longer term tool.

            As I have said before I dont expect this to happen in the short term because I believe we are entering a transition period away from International trade dominated by the USD and towards an era of SDR (special drawing rights) with these SDR’s underpinned by a basket of “low risk” currencies. So for the next few years I expect the direction of the $AUD to be dominated by this “Global Triffin dilemma”.

            Effectively this means ZIRP forever, so maybe some Aussie bound capital will search for RE alternatives and get the ball rolling again but I wouldn’t count on it!

    • China-Bob, the conclusion of keeping the RE-to-GDP ratio high (and indeed rising) is being played out in the UK right now. I would hate to see the ratio for the UK, I believe it would be higher still than Australia.

      There are no good options once you have the inflated ratio.

      Economic land rent is sucked out of the economy, household discretionary spending is constrained, and productive, self-liquidating investment is constrained. This is not sustainable.

      Ludwig Von Mises famously said of endless monetary-expansion cycles, each one to “stimulate” the economy after the bust that followed the previous one; that this would ultimately result in a catastrophic and final collapse of the entire system.

      I believe a similar theory can be plausibly advanced regarding cancer-style growth of economic land rent.

      • Phil, you wont get an argument from me, because this is clearly not self sustainable.

        For any other class of inflated assets the market has built in mechanisms which automatically act to moderate the asset price. In the first instance you can short-sell most equities so their price can be reduced even in the absence of competition.

        Simultaneously the market will create / fund competition for any inflated equity. Sometimes this new company is created as the counterbalance for the long-term short positions, so the trading position of short selling drives long term capital investment in competing solutions.

        RE however is a special class of investment whereby the creation of new assets (more homes)is intentionally constrained. We invent cute names for the organizations, but only a complete fool would believe their ultimate role is to do anything other than intentionally restrict supply thereby denying the market alternatives. IMHO any political system that supports this RE distortion is morally corrupt and certainly not deserving of office.

  14. Well, just got back from auction. A few Aussie bidders started the bids, but once past reserve Asians took over, 4 sets no less, and they were all either recent immigrants or foreign investors given they were talking foreign languages. The same happened last week.. This is a real tragedy, and I have to say the bubble madness can continue while we maintain ridiculous immigration levels targeted at foreign mainly Chinese.

    … Yes I could continue to wait and point to the Japan Gold Coast bus etc, but I’ve been waiting a while. I could point out that 2 percent yields make owning 3 times as expensive as renting etc etc etc. we all know the theory, but then we all deep down suspect that govt policy will let this madness play out as long as possible. Yes we may be heading for hard times, but then hard times mean lower rates, and that might lead to further inflation as the govt uses property bubbles to maintain illusions of growth a la swan post gfc. Fuck it

    • Do you know who the vendors were? Were they locals or foreigners selling to other foreigners?

    • Sorry mate – its a speculators paradise in Australia now and it might last for a long long time.

      Interest rates are going down and we can expect to see speculators getting easy cash at only 5K per 100K roaming the streets sucking up all in view.

      Game over for young buyers i’m afraid.

  15. And last week in a more subdued auction under reserve, the top bidder was ALSo Asian. So I’m not convinced this market is being driven by low rates, wr are simply bringing in too many immigrants who often have more money than us. Ditto for nz. What a sell out.

  16. Australian house prices will overall head downwards. There will be the occassional short term retrace, as with all trends, but overall prices will head downward.

    Looking globally, both the US and Europe have insurmountable debt. Asia’s growth is slowing. And worst of all, when the SHTF in the middle east, centered upon Syria, and drawing in Iran, Turkey, Israel, US, UK, Europeans, Russia, China etc etc, the globe will enter a significant and protracted depression; house prices in Aus will return to a sensible level in the coming 3 years, and likely sooner.

    Keep an eye on Syria. It seems insignificant to most Australians because they are ill-informed. But the domino effect should things get out of hand there are VERY significant for the global economy.