A Stubborn Mule’s Perspective

Back in April, I announced that the Mule was to be graced with a guest post providing an alternative, more positive picture of Dubai than the one painted by The Independent. Sad to say, although written, the piece is not going to see the light of day. My guest poster’s employer has ruled out any scope for publishing the piece, even if it is done anonymously.This experience suggests to me that on the score of openness at least, Dubai does not do well!

I was excited at the prospect of the occasional different voice here on the Mule, so if anyone has something they are itching to share with the world, let me know. There could be a guest spot for someone here yet!

Property prices have always been a popular topic of conversation in Sydney, but the subject has become more contentious since the onslaught of the Global Financial Crisis. Views on prospects for Australian property prices range from the bleakly pessimistic to the wildly optimistic. Iconoclastic economist Dr Steve Keen is one of the more prominent pessimists and expects a fall in property prices of as much as 40%. At the other extreme, research firm BIS Shrapnel recently released forecasts that prices in capital cities will rise by almost 20% over the next three years. Of course, both sides have their critics. Macquarie Bank economist Rory Robertson is so convinced that Keen is wrong that he has offered a wager in which the loser will have to walk to the top of Mount Kosciusko wearing a t-shirt saying “I was hopelessly wrong on home prices! Ask me how”. Meanwhile, many dismiss the optimists as mere shills intent on talking up the market in the interests of their clients.

Faced with a debate like this, the only recourse for the Stubborn Mule is to look at the data. Fortunately, I have been able to get my hands on a rich set of data (and ideas) from University of New South Wales economist Dr Nigel Stapledon*. Stapledon has painstakingly assembled data on Australian property prices back to the 1880s and rental data back to the 1960s. This data underpins a detailed comparison of the Australian and US property markets in Stapledon’s forthcoming paper  “Housing and the Global Financial Crisis: US versus Australia” in The Economic and Labour Relations Review, Sydney. By comparison, the House Price Indexes published by Australian Bureau of Statistics (ABS) commence in 1989.

A first glance at Stapledon’s index of Sydney property prices does indeed appear to show a meteoric trajectory that would inflame the passions of the pessimists.

Sydney House Price Index

Of course, asset prices tend to exhibit exponential growth, so it is far better to look at historical prices on a logarithmic scale. This reveals a striking trend. The growth of Sydney property prices has been remarkably consistent at around 9% per annum over the last 50 years.

Sydney Property Prices (log scale)

Prices for Australia overall show a similar trend, with average prices over the six major capital cities growing at an average of 8.6% per annum since 1955.

Australian Property Prices

What these charts do not take into account is the effect of inflation. Indeed, inflation varied significantly over the last 50 years, so adjusting for the effect of inflation shows that the trend in Sydney house prices has not been so stable. Booms such as those from 1987-1989 and 1997-2003 are made very clear in the chart below. But it is also evident that  prices have failed to keep up with inflation over the last few years. Nevertheless, over the last 50 years, Sydney house prices have appreciated an average of 3.1% over inflation and that is before taking rental income into account.

Sydney Prices (inflation adjusted)

One difficulty with long-run property price data is that fact that observations are typically based on median house prices, which does not take into account changes in the quality of houses. The median house in 2009 may be “better” than the median house in 1955 and changes in price may reflect this change in quality as well as price appreciation. Stapledon has attempted to take this into account by constructing an index for Australian house prices (six capital cities) that is adjusted for both inflation and standardised to “constant quality”. The trend in real prices, adjusted for quality over the period 1955-2009 has been an increase of 2.1% per annum over inflation. This compares to an increase of 2.7% per annum over inflation without adjusting for quality. So, at a national level, quality changes overstate the trend growth rate by 0.7%. While Stapledon has not constructed a quality-adjusted index for Sydney, assuming that the national trend applied would lead to the conclusion that Sydney house prices have a trend growth rate of 2.4% over inflation.

Australian Prices (quality and inflation adjusted)

Interesting though this historical exploration may be, the question we would like answered is where prices may head in the future.

One approach to the problem is to assume that growth in property values in real terms may change in the short term, but over the long term will revert to a long term trend. Enthusiasts of trend following may see some significance in the fact that Australian prices still appear to be above the longer run trend, while Sydney prices have already fallen below trend. Of course, depending on the time period used to determine the trend, very different conclusions may be reached. If I were to base the trend on the full history from the 1880s, the last 50 years would appear to be well above trend.

Another popular approach is to consider housing affordability. This approach either looks at ratios of house prices to income or ratios of housing servicing costs (whether interest or rent) to income. The assumption is that these ratios should be stable over time and if increases in house prices result in reduced affordability this indicates the prices can be expected to fall in the future. Stapledon is critical of this approach, arguing that:

while income is expected to be a major influence on prices, there is no theoretical reason for any fixed relationship between prices and income or between rents and income

Over time, people may change their priorities and place a greater or lesser importance on housing and, as a result, be prepared to spend a larger or smaller proportion of their income on housing. Stapledon argues that a better approach is to examine rental yield, which is the ratio of rents to prices. Since the property prices can be expected to keep pace with inflation (and, in fact, outpace inflation), rental yields should be comparable to real yields (i.e. yields over and above inflation) on other asset classes. The easiest real yields to observe are those of inflation-linked Government bonds.  The Reserve Bank of Australia publishes historical data for inflation-linked real yields back to the late 1980s. The chart below compares these Government bond real yields to Stapledon’s history of rental yields. While the correlation is not perfect, both rental yields and real yields show a downward trend from the late 1980s/early 1990s which has only recently begun to reverse. Since rents have not fallen over this period, this provides an explanation for the strong growth in property prices over that period.

Australian Rents and Inflation-Linked Bonds

So what could this approach tell us about property prices? Rental yields have already risen further than bond real yields, but certainly could go higher. What this means for prices does also depend on where rents themselves may be headed. The chart below shows the contribution of rents to consumer price inflation as published by the ABS. While the rate of growth in rents has slowed, history would suggest that rents are unlikely to go backwards. A cautious, but not overly pessimistic forecast could see rental increases falling to an annualised rate of 1% while rental yields could climb back to 4%. The combined effect would be a fall of 12%. Since prices have already fallen by 7% over the year to the end of March 2009, this would amount to a fall of almost 20%.

Rent Inflation (Quarterly)

This is certainly a significant drop, but still half the fall that Keen expects to see.  For prices to fall by 40%, even assuming rents remain unchanged rather than growing by 1%, it would be necessary for real yields to rise to 5.8%, which exceeds the record level since 1960 of 5.4%. On this basis, I find it hard to be as pessimistic as Keen. Indeed, the latest data from RP Data-Rismark International suggests that prices are once again on the rise. The next ABS release is a little over a month away, so it will be interesting to see whether they see the same recovery.

The relationship between rental yields and real yields is an interesting one, but ultimately does not provide definitive predictions, but rather an indication of a range of outcomes that would be precedented historically. Of course, as Nassim Taleb has emphasised, unprecedented “black swans” can occur so history does not allow us to rule out more extreme events. Furthermore, nothing here addresses the question why prices in the US have fallen so dramatically and yet Australian prices could suffer far milder falls. That is the primary focus of Stapledon’s paper and is a topic I may return to in a future post, but this one is long enough already!

UPDATE: In this post I noted that the historical data shows a marked shift in behaviour from the mid-1950s without providing any explanation as to the cause of this shift. Needless to say this is a subject Stapledon has given some serious consideration, and I will quote from his doctorate, “Long term housing prices in Australia and some economic perspectives”:

From a longer term view, a key observation is the clear shift in direction in house prices and rents from circa the mid 1950s. House prices, in particular, jumped significantly, best illustrated by the rise in the price to income ratio from about one: one to about 4:1 in the 2000s. Looking at demand and supply variables…indicates that this shift in direction cannot be adequately explained in terms of the demand variables of income and household growth. Supply side factors appear to be more crucial and there is a substantial literature emerging in the US emphasising the importance of supply side variables and specifically the propensity to regulate to constrain supply. The evidence presented in this thesis of the lift in the cost of fringe land in the major urban areas provides prima facie evidence that supply factors have been a significant factor explaining the upward trajectory in house prices in Australia since the mid 1950s.

* I would like to thank Dr Stapledon for generously making his data available to me.

I have now uploaded the swine flu data to a Swivel data set. I will update this data set periodically and so the rankings in the chart below should stay reasonably up to date.

Data sources: Guardian Data Blog, CIA World Fact Book.

UPDATE: A number of people have told me that in a number of places, including Victoria and much of the US, testing for swine flu has ceased. This means that the “lab confirmed” swine flu count will become increasingly meaningless over time, so I have decided to stop updating this data.

The Guardian have been publishing swine flu data on their Data Blog. They are sourcing their data from by the World Health Organisation, the US Centers for Disease Control, country health agencies and press reports, which makes their data the most up to date I have found. One thing missing from their data is a sense of scale for each country. Of course populous countries like the US have had a high number of infections, but this also means that hidden in the smaller numbers are some fairly significant infection rates in countries with smaller national populations. So, in a return to a theme started in my Olympic medal tally posts, here are the top 20 swine-flu afflicted countries ranked by lab-confirmed infections per million population (as at 15 June 2009).

Mexico was the source of the swine flu outbreak, but is now only ranked 5th in infections per capita, while Australia has rocketed to 4th place, largely due to the extensive outbreak in Victoria. As The Guardian continue to update their data, I will monitor the per capita rankings.

UPDATE: The data has been updated and Panama has now fallen to 4th place, which puts Canada in the lead and Australia in 3rd place. I have now uploaded the data to Swivel.

Photo Credit: johnmuk (Creative Commons)

Over the last few years, I have posted a number of times on the subject of music. These posts have ranged from the subject of Krautrock to a critique of the RIAA. From now on, I have decided to post pieces which are directly about music (concert reviews, genres, etc) over on The Music Blogs, where I am now a guest contributor. Anything about the economics of music or music and web 2.0 may continue to appear here on the Mule.

I have begun this shift with a review of the Lee “Scratch” Perry concert at the Sydney Opera House. Perry, one of the pioneers of dub music, is now 73 so it was a historic occasion, not to be missed. It was a great concert and featured the legendary Adrian Sherwood on the mixing desk, but that’s as much as I’ll say here. To find out more, you’ll have to read the review!

Last week the New South Wales Food Authority began publishing details of penalty notices issued to food outlets around the state. Their media release included examples of the sorts of tasteful details included in the reports:

• - KFC in Victoria Street, Taree fined $660 for having an accumulation of dirt and grease in the shop.
• - A noodle takeaway in Teramby Road, Nelson Bay received two fines for $330 each for having a dirty shop.
• - An outlet in Great Western Highway, Marrangaroo (Lithgow) fined $330 for not maintaining a required standard of cleanliness.
• - A noodle shop in Salamander Bay fined $660 for having evidence of cockroach activity in the shop.

The data stretches back to November 2007 and consists to date of 1038 penalty notices. Data sets like these are a delight to data-miners like myself and so I plan to define a data-scraping tool along the lines of the one I developed to capture Grocery Choice data (speaking of which, it is probably time for an update on grocery prices on the Mule). In the meantime, I have my hands on details of 1000 of the 1038 and have conducted some intial exploration of the data.

First there is the suburb hall of shame. The table below shows the 15 worst suburbs ranked by number of penalty notices. The inner West Sydney suburb of Ashfield has the ignominious award of first place, with 33 penalty notices. These include a number of repeat offences, including five notices for the Eaton Chinese Restaurant for offences including storing food in the rear yard and failing to provide hand-washing facilities. See them all here (note that this search includes a few Summer Hill restuarants).

Having recently moved to Petersham, I was gratified to see that neither Petersham nor Leichhardt have yet blotted their copybooks burnt their toast*. The Mayor of Newtown should be pleased to see that Newtown has only one penalty notice for the Tandoori Grill.

It is also interesting to see the outlets that have incurred the most infringements. Domino’s Pizza has been served with 14 notices across Castle Hill, Five Dock, Katoomba, Merrylands, St Mary’s (five notices there!) and Ballina, while the Asian fast food outlet Hokka Hokka has received 11 notices across Brookvale, Castle Hill, Chatswood, North Sydney, Sydney and Warriewood. Other offenders, all with 8 notices, are Zisti & Co in Alexandria, Top Choice BBQ Restaurant in Burwood and Blue Sky Chinese Restaurant in Springwood.

This is a subject that the Mule will certainly have to revisit. In the meantime, I will leave you with the penalty notice for Zhen Zhen Van Loi Hot Bread in Ballina, which is the inspiration for the picture above:

A person must not sell food that is unsuitable – A loaf of bread sold contained a cockroach.

Photo credit: kronicred on flickr (Creative Commons)

* The choice of language is an attempt to appease commenters who hate clichés.

Prompted by an article entitled “Bust and Boom” in the current issue of The Economist, I have decided it is time to dust off a Stubborn Mule staple: the petrol price model. As The Economist notes, following last year’s precipitous fall, oil prices have been climing again over the last few months. The West Texas Intermediate oil price per barrel (bbl) has almost doubled in US dollar terms and, despite a stronger Australian dollar, the price in Austalian dollars is not far behind.

West Texas Intermediate Oil Prices

Rising oil prices may seem odd in a world economy still under the influence of the Global Financial Crisis (aka the GFC), but The Economist points the finger at the collapse in investment in oil exploration and development of new fields. This raises the fear that, while oil inventories are currently in record excess, once these inventories are drained, digging up more oil is getting harder and, consequently more expensive.

So where does this leave Sydney motorists? The simple regression model I have used before is still showing a tight relationship between wholesale oil prices (in this case refined Singapore 97 oil prices) and prices at the bowser. If The Economist’s fears are justified, petrol prices will be reaching $1.30/L very soon and will be headed north from there.

Data source: Bloomberg and the Australian Automobile Association.

Regular readers of the Mule will know that I am a bit of a data-mining junkie. Whenever I come across an interesting chart I start Googling for the underlying data. But, even with well-honed Google skills, it’s not always possible to find the data. Sometimes it is simply not publically available. I ran into just this problem recently. The recent Australian Federal budget triggered countless alarmist opinion pieces despairing that Australia would be “mired in debt” and this prompted me to do some research of my own. In the process, I came across a handy primer on the subject entitled “A history of public debt in Australia”. Written by a number of Australian Treasury employees in the Budget Policy Division, it included the chart below which shows the history of net Government debt (combining Commonwealth and State debt) over almost 40 years. The chart also includes forecasts for the next few years.

Australian Government Net Debt to Gross Domestic Product

While the paper is clearly quite recent (it has no publication date), the forecasts pre-date those included in the May budget, so I was interested in updating the chart with the latest Treasury forecasts. The underlying data does not appear to be published online and, since I do not work with the authors in the Budget Policy Division, I had to resort to special measures. I turned to a handy (and free, open source) little piece of software I have used a number of times to pinch data from charts. The software is called Engauge Digitizer and it allows you to import an image of a chart and extract the underlying data.

Engauge Digitizer Screenshot

For charts with points or curve segments, Engauge generally does a great job of automatically finding the data. For a column chart like the one I had found, the process is a little bit more manual, but with a bit of clicking on the tips of each of the columns in the image, I had my data. The chart below shows the data I obtained. One indication of the accuracy of the results is that the authors of the history paper noted that net debt had averaged 5.7% of gross domestic product (GDP) since 1970. Satisfyingly, the average of my extracted data over this period was also 5.7%.

Australian Government Net Debt to GDP (imported data)

Having obtained the data, I was then able to replace the forecasts with the more recent Treasury figures included in Budget Paper No. 1.

Australian Government Net Debt to GDP (updated forecasts)

For the alarmists who are worried about this growing debt, it is useful to put these forecasts in a global perspective. The chart below puts these Treasury forecasts alongside IMF forecasts for a number of other developed countries.

Global Debt to GDP Forecasts

Compared to the rest of the developed world, the global financial crisis is still not looking quite so scary for Australia. When it comes to the United Kingdom, rating agency Standard and Poor’s is even more pessimistic than the IMF and is concerned that their net debt could reach 100% of GDP and have accordingly changed the credit rating outlook for the UK to negative.

UPDATE: For anyone interested in getting hold of the data without resorting to scraping it from the images, I have uploaded it to Swivel. This dataset includes the most recent Treasury forecasts.

Last year I wrote about the the music/social network combination blip.fm. That post was followed up with one on the demise of muxtape and mixwit in which I said “I hope that blip.fm does not become the next victim of the RIAA”. While blip.fm has survived to date, it may only last by significantly changing its laissez-faire approach to streaming music.

A post on their blog last week opens

In the past few weeks we’ve had to make a few difficult decisions that will change the way some things work on Blip.fm.  For the majority of you the changes will be for the better, for others they might be less than ideal for the time being.

It goes on to note that music will “primarily” be sourced from the music service imeem rather than broad-based searches of the internet. Users will no longer be able to submit urls pointing to mp3s. Instead, a set of “approved” urls will be used.

Blip say they cannot give the reasons for the changes, but it is no surprise that blip.fm is under enormous pressure from the music industry to curtail their service and these steps will certainly help ease that pressure. However, as noted in many of the comments on their blog, the risk is that these changes will undermine the very features of blip.fm that has made it so popular. For example, they are likely to fall foul of the mess that is music “territory” rights. Most “legitimate” music services like imeem restrict music streaming to certain countries, filtering based on IP address (in the case of imeem it only plays 30 second clips, while other services like Pandora are completely blocked). If blip.fm ends up relying exclusively on these services for their content, they will lose much of the international audience that has been a major contributer to their growth in recent months.

So, while blip.fm may survive in a compromised form, it provides yet another example of the extent of mess that is music distribution in the digital age.

UPDATE: In further news, the concert-streaming site fabchannel has been forced to close. Their post explaining the closure makes for very interesting reading.

The phrase de jour (or du mois in fact) in financial markets is “green shoots”. Optimists, world equity markets included, are seeing tentative signs of improvement in the world economy. Google trends saw a blip in searches for the phrase green shoots back in January when UK Government minister Baroness Vadera used the phrase and was lampooned for what was perceived as premature optimism. Moving forward a few months and searches have surged again, but this time consensus seems to be far more supportive of a positive outlook.

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