Now we’ve established that the spring selling season has not immediately transformed the housing market from its winter of discontent, and the barrage of "spring has sprung" headlines have once again done the rounds and subsequently been exhausted. We can perhaps start looking at the reality that’s facing a rather sick real estate market, which needs a little more than a Paracetamol to recover from recent lows.
It’s easy to come up with excuses to explain the current malaise. Consumer confidence is a favourite – albeit overused – term. However, it tends to suggest the market doldrums are nothing more than a brief bout of post-winter blues that simply require a short-term prescription of Prozac to recover.
I was looking at the red line. It does indeed show that house prices to income ratio went down from 1989 to 1997. And then took off like a rocket.
It would be interesting to see the rate of real growth if this period were 'smoothed out'.
Of course in the real world, investors look for situations like this as opportunities to buy in. It's not that easy to pick them, though (see previous my comment about having a crystal ball!).
Nice graph, confirms the bears belief that houses were affordable in 1997 and 1987. At 3x income. Now they are 8x income. Cant see why it will be 12x income.
I don't know anybody, bull or bear, who doesn't agree that it was pretty damn easy to get into a property at the end of the 1990s, but there is *no way* houses were affordable in 1987. The repayments would kill you unless you could buy with cash, which hardly anyone can.
1997-2000 was probably a once-in-two-generations event, maybe even longer. I wouldn't be betting my life on it happening again.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
I was looking at the red line. It does indeed show that house prices to income ratio went down from 1989 to 1997. And then took off like a rocket.
Yes that is true, but it does not show what you claimed in relation to income / price multiples, which was: "Nice graph, confirms the bears belief that houses were affordable in 1997 and 1987. At 3x income. Now they are 8x income. Cant see why it will be 12x income.". it looked to me like you were reading the interest rate values that pertained to a different line on the chart?
Catweasel laugh. Continuing with the big nutty about price level and a "abstract exponential". It a mean its predictive models should contain a slope coefficient, however the nutty it a seem. Of the course, determine the slope of its exponential will throw it into a unknown.
The prospect of lower interest rates is good news for the property market, though this has led to concerns the Reserve Bank could kick-start a house price bubble.
Responding to questions this past week, RBA deputy governor Philip Lowe conceded the risk of house price pressures picking up and promised “that’s something we’ll need to watch very carefully”.
Indeed, house prices have risen in countries facing similar issues, such as Canada and Switzerland. They also face weak trading-partner growth and uncomfortably high exchange rates – and have responded by cutting interest rates to quite low levels. Official interest rates in Switzerland are almost zero, and in Canada they’re 1 per cent.
At 3.25 per cent, our official cash rate still has some way to go.
More generally, to my mind the preconditions for a serious bubble in house prices – as evident early in the last decade – do not exist. In particular, while home loan affordability has improved relative to the average of recent years – it’s nowhere near as good as it was from the late 1990s and prior to the boom. Households now also carry much higher levels of debt and have become more cautious since the global financial crisis.
It won’t take much of a price gain to push affordability down to levels where prices flatten out again.
Interest rates steadily dropped over much of the 1990s in line with structural declines in inflation. And despite lower rates, house prices eased relative to incomes – such that home loan affordability by the late 1990s was quite high. This underpinned the subsequent house price boom.
Of course, affordability worsened as house prices rose – though so-called “bubble” conditions probably only existed in the one or two years to the end of 2003. In the main, we responded to lower interest rates by bidding up house prices and loading up on debt – so mortgage repayments ate up a similar chunk of disposable income.
Since 2003, house prices have cycled around a broadly flat trend against per-capita household disposable income. Indeed, due to recent sluggish house prices, my estimates suggest the house price-to-income ratio in the June quarter was a modest 6 per cent below its average since late 2003.
Interest rates have also moved in cycles around a broadly flat trend. Allowing for the latest rate cut, the discounted bank variable mortgage rate is likely now about 5.9 per cent, compared with an average of 6.8 per cent since late 2003.
All up, that suggests home loan affordability is about 14 per cent below its average since late 2003 – and at the best level since mid-2009. More rate cuts would improve affordability again, which should be a positive for house prices.
Personally I can't see this happening over the next 12 - 15 months especially if the boom is over, although nothing is impossible. Prices in some cities are quite low, and wages are high by international standards. Our high dollar gives us a lot of buying power.
Spruik spruik spruik
After a bubble has burst, no one denies that it existed. But before it does, the popular refrain is that though bubbles existed elsewhere in the world, “there’s no bubble here”. So housing bubbles are admitted to have existed in Japan, the USA, Spain and Ireland – because they’ve already burst.
Oh well, looks like I won't be buying any time soon. I need to work out why 98% of the population's incomes are climbing faster than mine.
"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works". -- John Stuart Mill
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I was looking at the red line. It does indeed show that house prices to income ratio went down from 1989 to 1997. And then took off like a rocket.
