On 23 April, University of Western Sydney Professor Steve Keen finished his walk to Mt Kosciuszko wearing a t-shirt emblazoned with the slogan "I was hopelessly wrong on house prices."
Keen had lost a bet with Macquarie Bank economist Rory Robertson about the future movement of Australian house prices. Robertson thought they would go up. Keen thought they would go down. This was more than a year ago.
After an initial wobble in the wake of the global financial crisis, particularly at the top end of the market, Australian house prices have resumed their inexorable rise. The luxury sell-off was mainly the result of over-leveraged investors like Eddie Groves and David Coe liquidating their mansions to pay margin loans. But in the middle and lower sectors of the housing market, the past six months have seen double-digit price rises and high auction clearance rates.
Is it a bubble? It’s the $1.2 trillion question: that’s the size of household debt owed to banks in this country, according to the Reserve Bank of Australia.
According to the RBA, Australia doesn’t have to worry about a bubble. This is the take-home message of the latest Financial Stability Review, which drills down into the available data about Australian household debt. On measures like the number of non-performing loans, household balance sheets and the number of households with serious debt problems, Australians are doing okay. The Reserve Bank concludes that "although the Australian household sector as a whole has become more indebted, it remains the case that there is only a small share of very highly geared borrowers. In general, households appear well placed to meet their debt repayments."
Economists and analysts like Christopher Joye, Oliver Hartwich and David Hetherington agree. As Westpac’s Bill Evans argued at the start of April, "Australia is not entering a period of speculative excess in the housing market" — mainly because the RBA seems determined to keep increasing interest rates. The banks themselves have also played a role, significantly tightening their lending standards after the GFC and increasing mortgage rates in excess of the RBA’s levels.
As a result, Australian house prices may well level off in coming months, simply because many prospective buyers — particularly first-home buyers — are unable to find finance and are anyway priced out of the market. Most houses are therefore being bought by investors. As the RBA’s figures demonstrate, around a fifth of Australian houses are bought "without a mortgage" — in other words, by cashed-up investors who simply pay with a cheque.
None of this means a bubble isn’t developing, of course. Regular readers of newmatilda.com will know that we have been consistently bearish about the long-term prospects of the Australian housing market. The RBA’s statistics are by definition lagging indicators: they look backwards at history, not forwards to the future performance of Australian mortgages. And central bankers are not the font of all wisdom. Those who place faith in the RBA’s analysis need only cast their minds back to US Federal Reserve Chairman Ben Bernanke’s comments in May 2007 — on the brink of the sub-prime disaster — that "the troubles in the sub-prime sector on the broader housing market will likely be limited".
Steve Keen begs to differ. Unsurprisingly, the renegade economist has taken issue with the RBA’s analysis, arguing that over the really long term, house prices are way out of whack with historical averages. According to the ABS, for example, capital city house prices have more than tripled since 1986.
Worse, there may not even be a housing shortage. In contrast to property industry bodies like the Real Estate Institute of Australia, the Australian branch of UK property analysis Hometrack thinks there may even be a housing excess in Australia. Hometrack’s Brendan Darcy recently released analysis claiming that the ABS data significantly under-estimated the housing supply in Australia, because it only counts "occupied dwellings". But on census night in 2006, the ABS reported 830,000 unoccupied dwellings. "We estimate there are at least 10 million dwellings in Australia compared with ABS data showing occupied dwellings of 8.3 million. The extra one to two million dwellings consist of a mixture of housing awaiting sale or development, vacant dwellings, second homes, and abandoned homes," Darcy concluded.
Even if there isn’t a housing bubble, the issue of affordability remains a central concern to lower- and middle-income Australians. As we’ve canvassed before, the problem is as much a result of government policy as market exuberance. Australia has one of the most skewed property taxation regimes in the industrialised world, rewarding investors and owner-occupiers at the expense of renters and those looking to buy a house. The Capital Gains Tax exemption for the family home costs taxpayers $30 billion a year, disproportionately advantaging those of us who own multi-million dollar homes.
Meanwhile, negative gearing costs taxpayers in excess of $4 billion. As The Age‘s Tim Colebatch pointed out recently, between 1993 and 2007, the number of landlords reporting profits grew by 36,000, while those reporting losses grew by 594,000. As a group, landlords now report net losses of $6.4 billion. Some of those losses are genuine. But many are clearly paper losses, created to minimise tax.
In any other area of our economy, the phenomenon of constantly rising prices is called "inflation". It’s considered a bad thing. Remember the angst about rising petrol prices in 2008? In housing, constant price inflation is somehow a good thing. But rising house prices can’t make us all rich, because most of us have to buy and sell in the same market. We all need somewhere to live, after all. The more we spend on our homes, the less we can spend in the rest of the economy. And when that spending is financed by mortgage debt, it stores up a time-bomb for the future — as the US has just discovered.
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