Australian Property Prices

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

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 House Price Index (log scale)

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.

Six Capital Cities

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 House Price Index (inflation adjusted)

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.

Six Capital Cities (quality adjusted)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.

Rental Yields

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 CPI

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.

UPDATE: finally, I have published the post on why I don’t think Australia’s property market will experience the same fate as the US market.

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53 thoughts on “Australian Property Prices

  1. Danny Yee

    Keen’s argument for a dramatic drop in house prices in Australia is the same as his argument for (and explanation of) the house price drop in the US and UK and Spain and Ireland – excessive debt levels. The availability of credit is absolutely critical to maintaining house prices, as a majority of both owner-occupiers and investors borrow at high LVRs to buy property. So a reduction in the availability of credit could conceivably produce a crash even if affordability (prices or repayments in relation to incomes) wasn’t also at record lows.

    He doesn’t focus narrowly on housing – he sees that as one aspect of the debt bubble – but the most focused comment of his on housing prices is


  2. stubbornmule Post author

    @Danny: you are right that I have not addressed the issue of the credit bubble, which is the thrust of Keen’s argument rather than the affordability angle. Part of an analysis of the similarities or differences between Australia and the US has to address this question. Indeed, I would attribute the decline in real yields and rental yields to the credit bubble, at least in part, so it is not surprising to see them backing up. So, until I tackle that broader topic, what I can say is that if Keen is right, it would almost certainly lead to an unprecedented move in rental yields. Of course, that in itself does not prove anything as one could easily counter that the burst of an unprecedented bubble can have unprecedented results!

    Anyway, now I’ll re-read that piece by Keen (I think I read it when he first posted it, but he’s written a lot on the subject, so I may be thinking of an earlier one). In the meantime, have you seen any LVR data for Australia? I haven’t got any handy at the moment, but my memory from when I last looked (primarily at pools that were securitised) is that average LVRs were in the 65-70% range, which is not particularly high and that the vast bulk of mortgage lending in Australia is capped at 95%. This information could be out of date.

  3. Paul Heath

    Great post Mr Mule.

    Has your data mining on property come across any data relevant to the changes in growth in supply of housing over time. Often I hear references to limited supply of new housing as an explanation of house prices. There seems to be two likely sources of new housing supply. New zonings of land that allows land previously unable to used for housing to be used for housing and changes to rules that allow more dwellings than previously allowed on existing land zoned for housing.

    In theory both sources of new supply should be measurable. Greenfield zonings usually specify restrictions that result in a reasonably certain number of potential dwellings and the same could be said for changes to zonings of existing residential land (for example 3 suburban blocks re-zoned for 2 storey townhouses of minimum size X means 3 could become say 12 townhouses).

    Just curious whether you have seen anything along these lines.

  4. billy

    Im a bit baffled that Sydney prices can rise at 9% pa or 3.1%pa accounting for inflation.
    Has Sydney not come across the Herengracht Index? if he has he certainly has no respect for it!

    Obviously harder to work out but I feel equally enlightning would be the annualised growth rate in Sydney prices between 1880-1960. Do these show a 9% pa ?

    Also when the UK had big property price drops of around 30% (and reposessions) in 1988-1996 did Sydney experience similar falls and “blood on the streets”?

  5. Mike Beggs

    Yeah, great post Mr. Mule. I’m also really interested in the break in the 1950s. Guess I’ll have to read Stapledon’s thesis, but one other demand-side possibility springs to mind – a jump in the availability of credit to households. In my own thesis I look at the great leap in consumer credit around that time but unfortunately I haven’t looked at housing finance. But the 1950s were a time of major financial innovation, both state and private, and it could be a possibility. At the time, savings banks were huge and forced by regulation to hold a large proportion of their assets in housing loans.

  6. stubbornmule Post author

    @billy: The Herrengracht index certainly makes for a striking contrast to the behaviour of Sydney’s prices. Stapledon makes the following observation on that subject:

    The broad picture that his time series paints is one of prices essentially showing no trend for three centuries, with cycles related to the economic events. Against that long term perspective the post 1970 rise in house prices in Holland stands out. But one city is probably not convincing.

    Moreover, there was clearly a structural shift in Australian prices (as indeed elsewhere around the world) sometime in the 1950s. As Mike Beggs observes in his comments, this was a time of significant change in the world of finance. So, Sydney’s prices since then have behaved differently not only to the long run Herrengracht prices but to Sydney’s own prices in earlier times. The key question is whether this is a temporary (albeit 50+ year) phase?

    As for Sydney’s experience in the late 1980s and 1990s, prices did not experience the precipitous collapse seen in the UK. Instead, the rate of change in prices slowed for a number of years. I have zoomed in on this period here:

    @Mike: there were some interesting insights into the major changes to the US mortgage market following the depression on this recent NPR planet money podcast. It’s a good listen (as indeed are all of the episodes). While some of these changes did not take place in Australia (e.g. the creation of Fannie and Freddie and the prevalence of 30yr fixed rate mortgages without break costs), there are some analogies to Australia’s experience.

  7. billy

    Thanks for your reply to the late 1980s early 1990s.Sydney House prices.
    They certainly flatten for around 10 years but nothing like the UK graph for the same time.

    looking at the sydney prices (inflation adjusted) graph:

    Now what is it that causes such a massive spike in house prices in the mid 1950s? that appears to see no end?

    Granted prices spike in approx 1880-1890 but look where they end up in 1900 then there are around 3 spikes in prices from then till the mid 1950s but each boom has a bust or recorrection which gives us a pretty flat line overall for 70 years.

    then post 1955 we have 4 j shaped curves that just keep going skyward.

    However where does the trend line fall if you include the large peak caused by the land boom in the 1890s. If we disregard the “noise” between 1890-1950 due to 2 world wars and many other conflicts that drew on the men of australia etc and a great depression , does that make the trend line fit more appropriately?

    So is the time since 1955 bucking the trend or following the trend?

  8. stubbornmule Post author

    @Calum: The inflation adjustment is done using CPI. I know that there are plenty of challenges in constructing consumer price indices, but is there a specific concern you have with the ABS methodology for CPI? If CPI does indeed understate inflation, then the real growth rate of Australian property prices would be even lower!

  9. Iris

    Hi Mule

    Great post. Actually, the housing price has been rebound from the bottom of last year. It was said the power of enormous government stimulus packages. Does this mean assest fueling rather than real growth? or there will be another bubble (bonds or credit card) crisis next round?

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  11. stubbornmule Post author

    @Iris: I saw the RisMark property data bounce up. It will certainly be interesting to see whether the Australian Bureau of Statistics data follows that pattern. We’ll know soon enough: they’ll be releasing the June figures in less than three weeks.

  12. Kevin

    An interesting set of data.
    I raise the following issues for your consideration.
    In the period 1998 to 2004 when house prices surged in Adelaide, analysts such as BIS Schrapnel consistently released predictions that prices would remain steady. When challenged on their logic, one analyst said it was a simple matter of matching stock to demand and given there were no population pressures in SA, prices would be stable.
    But the factor that they missed was a social one, not an economic one.
    The extra buyers in the market were young single females who, rather than wait for Mr Right, craved their own financial independence.
    There was also the increase in single person households courtesy of relationship breakdowns.
    So the anecdotal data from agents in the market picked up what the economists couldn’t see.
    Therefore, I raise the following factors that have impacted on house prices in the last ten years and I look forward to any comments.
    1. When I bought a house in 1980, it was a house and no more. When I buy in 2009 it has inhouse sound systems, fully-fitted out outdoor entertaining areas including covered areas, built-in barbies etc. Pools, spas etc are now easier to maintain and are an add-on and not an undesirable. The houses also have better and more expensive air-conditioning systems, solar panels on rooves etc. The product we are buying is significantly value-added.
    2. Assuming there is a relationship between disposable income and house prices, the family that buys a house in 2009 is almost twice as likely to be a two income household than it was twenty years ago. Compared to say, 1955, it would almost certainlt be two incomes versus one.
    3. In years gone by, families bought a house and then made additions and alterations as they went. The shed went up, the carport was added than a verandah or extra bedroom. Todays buyer wants it all at once.

    So it would seem that the “product” we are talking about has changed significantly over the decades and the flexibility of the purchaser has also changed.

    Finally, there is the question of finance.
    When I bought my first house in 1983, our loan was capped at seven times the amount of money we had saved the previous three years.
    When buying property in 2004 they asked “how much do you want and can you pay it back”.

    When my parents bought an asbestos house on a main road in 1955, with no furniture, no lawn, paths shed or fence they paid 3000 pounds or $6000 on an annual income of $1500.
    The same house, now fully established, renovated etc sold in 2004 for $194,000 and would now bring in the region of $250-70k.
    With two household incomes and easier credit rules, I make it a cheaper buy in 2009 than 1955.

  13. billy


    On paper it may look like your parents house costing $6000 on an annual income of $1500 seems to be “dearer” to finance than a dual income say $40k + $25k couple buying it today at $270K.

    But today as you have said everybody wants it now.
    So dont forget that todays couple will run 2 cars, go out on the town regularly, buy all the mod cons, no make do and mend here.
    There spending will be more than likely all of their income.
    They probably dont grow their own veggies ( today heard that produce prices have inflated at 4% pa from 1993).

    So take everything into account and I would reckon that the single income earner in the 1950s had the same if not more discretionary spending than today.
    The only difference as you said happened in 2004 is that the banks throw more at you today. They want to hook you in and keep you paying to them forever.

  14. Sean

    To address some points:

    Steve Keen argues that we have seen 40-50 years of continual leveraging which is culminating in a ‘catastrophic event’ rivalling the Great Depression. Hence that explains the rises since the 1950s somewhat — the new use of credit since that time. Others argue that new credit products are simply an economic enabler that have no bearing on inflated property prices or any other form of inflation for that matter, that ‘credit is good’ because it allows people to achieve things that they otherwise couldn’t by borrowing against the future — their earnings future.

    The LVR rate averages to something like 65% only because of more cautious lending by the banks *in the past*, and lower house prices allowing for easier repayments *in the past*. Current crazy rates of lending on high LVRs like 90%, 95% or 105% (or even 125% in the UK) are the dangerous loans. Note that an LVR analysis only relates to the ongoing overall risk level to the bank and therefore bank solvency questions. If Person A bought affordably on 1 wage in 1970 and has paid the place off, or even done a small HELOC loan since then, they can probably pay it off comfortably. Person B who boorrowed $400K on a 95% loan at bubble prices may be in some difficulty if facing unemployment or reduced hours.

    I commend the Australian forum of the Global House Price Crash site to readers also, which involves a lot of prognostication, based on harvesting worldwide press, looking at local economic indicators like unemployment rates, inflation, advertised house prices, vacancy rates, commodity prices and trading volumes, exports, legislation and political maneuvering, and just about any other relevant factor.

  15. Sean

    Note also that new house prices have crept up lately due to cost-shifting by councils and state govts onto developers of new subdivisions, which of course goes onto the asking price of the houses. In the past, new infrastructure like power and sewerage and phone lines and road construction and parks and nature strips and lighting etc used to be borne by the entire community through general tax revenue. Now it has been shifted in recent years to the developer on a ‘user pays’ basis, new houses on the fringe etc have an extra fillip in their prices that wasn’t there in previous years — hence, house prices in relation to infrastructure are not a closed system but an open system — cost-shifting can occur in the land cost base due to adjustments by govt in their contribution. This would then reduce the ‘house price inflation curve’ presented above by another factor of X, not counting increases in resale prices for existing housing. If new dwellings bearing extra infrastructure costs are being sold at a much greater rate than ‘used’ housing (due to established families having no need to move, etc) then you would expect another inflationary skew in the housing figures that should probably be controlled for as well. Then it’s a question of whether the attraction of buying a brand new house, possibly on the remote fringe, outweighs buying a ‘used’ house in buyers’ psychology — where location also becomes a big factor in value. The study of brand new apartments in Rhodes, Sydney, shows that in fact apartments are falling a lot in value on resale after only a few short years. Hence, what does this do to the global figures when 500 new apartments are sold at once for high values, and then 100 are resold within 3 years for a loss? The 500 original high prices will drown out today’s present resale values due to the lower volume of resales, while the other 400 owners bravely ‘hang in there’ without selling. You have to look at annual volume of sales as well as prices — right now, voumes are right down as markets crash and correct with vendors hoping prices will recover in future.

  16. debtland

    With RE prices at say 7 times annual income versus 3.5 times (long term average), property is overpriced in Aus. Executive Summary – The housing affordability problem

    Here are some possible reasons. If the community of Aus decides that having a nation of home owners is preferable to a nation of renters, then these factors will need to be addressed:

    ABS: does not include the land component of housing in its calculation of the CPI. Solution is to include land inflation in CPI calculations.

    RBA: uses the ABS data with diminished inflation due to not including the rapid rise in the cost of land. Result is that its 3-4% inflation range is an illusion. Other effects include the real inflation (about 12% per year if land was included) eats away at real salary and income. Retirement incomes are also diminished by real inflation. Solution is to include land inflation in CPI calculations. Don’t mention the Debt

    Treasury: continues (either deliberately or naively) to play host to elements of the tax system that are basically speculative in nature. Two prime examples are Interest only loans and negative gearing. Solution is for Treasury to take advice (rather than ignore) from bodies such as Productivity Commission and Senate Select Committee on making housing affordable. For example, outlaw Interest only loans and phase out negative gearing:

    Productivity Commission Inquiry Report No. 28, 31 March 2004 FHO:

    2008 Senate report – Housing Affordability:

    Banks: continue to behave in irresponsible manner with home equity loans still available up to 110% last I heard. Solution would be to say mandate 20% deposits. Their equity loans should they pull the plug in a price downturn will see many home owners cum investors lose even their family home.

    Landbanking: vast swathes of land are held in cities doing nothing – land that could be used for building but is currently held in speculation. Solution would be to deem an income from vacant land and tax accordingly.

  17. stubbornmule Post author

    Sean: thanks to the pointer to the discussion forum. I see there is now a thread discussing this blog post. I haven’t got through all of it yet, but it certainly seems to be an animated discussion. I certainly agree with you that LVRs are an important consideration in assessing the potential risk of major price collapse. I don’t suppose you have come across any Australian LVR data on the forum or elsewhere? Also, your point about attempts for people to “hang in there” rather than crystallize losses on an investment is an important one. This is a significant factor in property market dynamics. It is a side effect two apartments in the same block not being quite as equivalent as, say, two BHP shares. You can certainly argue that this means observed property prices are not “real”, and I would agree with this up to a point. Then there are two dynamics to explain: the “real” prices and the transacted prices. Here I am only trying to get to grips with the latter. Also, your comment about fringe regions of Sydney leads naturally onto the differences between capital cities and regional areas. The price data here is only for capital cities and I am quite sure that the drivers in regional areas are likely to differ significantly. Fringe areas of capital cities are probably somewhere between to two in their behaviour.

    Debtland: I am not convinced that including land prices in CPI would achieve very much. It may make the rises in property prices look more modest relative to CPI, but the point of highlighting above CPI growth of property prices is the real effect that property has become more expense relative to various baskets (over time) of other goods. The question is whether this is sustainable. The data shows that it has been sustained over a long period of time. As with global growth, I expect that things will be significantly slower for some time to come, but that does not in itself make a price readjustment back down inevitable.

  18. xoc

    House prices have a few fundamentally important factors. The physical supply, the potential demand, and crucially, the perceived value. Physical supply is ever more limited in a way because they aint making any more land close to the CBDs. Potential demand is a function of population, demographics, economic prosperity, employment and interest rates. Perceived value is a tricky one – housing becomes more and more valued until the bubble bursts, and then its necessary for clear fundamentals to emerge before buyers are prepared to pay ever growing prices again. The clearest fundamental is when rents are more expensive than mortgage payments.

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  20. Rob

    It is simple maths people… You cant defy the laws of gravity forever!!!!

    3% above inflation for 100 years means that in 100 years house prices will be about 19 times higher than they are now in real terms. That is a $500,000 house renting for $500 per week will be 9.5 million and only renting for $500 per week.

    Logic people please!!!!!

    If you stretch your arguments out over a longer time frame, you realise how ridiculous they are!!!!

    Property has gone up at the rate above inflation for 2 main reasons.

    1. Easy credit. There is only so much the average person on $65,000 per year can afford in rent and interest payments. If you think that the average person will be able to afford a $9.5 million dollar mortgage with a $40,000 deposit in 100 years then property prices will continue at 3% above inflation. If you are a rational person, you may consider that a bit of a stretch!!!!

    2. More women working – double income. Until we allow multiple wives / or husbands in Australia, this factor in property price growth has a limit. Maybe people are thinking we might be able to follow India’s model and get the 5 year olds working to help pay of a bigger mortgage. The money has to come from somewhere!!!!

    I hope some day the government wakes up and regulates the property industry spruikers who promote their own industry saying things like it will boom 20% over the next 3 years just to get the old “fear and greed” juices flowing in the mass ignorant.

    No one knows if property will crash or boom. People can only know the facts that property must be linked to inflation and wages over the long term and that most divergences from long term trends cannot continue for ever at an increasing rate!!!!

    These divergences, such as increased borrowing capacity due to lower interest rates, easy credit and extra household income from a working spouse (something we didnt have in the 50’s) have a one off effect of increased borrowing capacity per houshold. This would account for a certain percentage rise over the normal rate of inflation growth or wages growth for a set time frame, but it is one off!!!! You cant then project that one off effect and say the 3% or so extra growth above inflation in house prices will continue!!!!

    I agree with the argument that immigration will sustain house prices in Australia to some extent. But this wont support above inflation growth over the very long term. If you think that people in 100 years are going to keep coming to Australia if our house prices are 19 times higher than they are in real terms today due to that magical 3% above inflation growth, then I am barking on deaf ears….

    Sorry to bring logic back into the housing argument…..

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  22. davinci

    I think that Rob’s comments are far more logical and objective than Stubborn Mule’s. House prices cannotpossibly keep rising at these rates.If they did then most Australians would be living in the streets. I can’t believe the rubbish some people try to concoct using “statistics” to justify their fantasies.

  23. Stubborn Mule Post author

    davinci if you read the post, I do not argue that prices will continue to rise at rate above inflation. In fact, I outline a possible scenario in which rental yields rise, leading to an aggregate fall in prices of around 20%. Since this post was written almost 18 months ago, I now have the added benefit of hindsight. It would seem that prices have not fallen. In fact, over the 12 months to September 2010, Sydney prices rose another 11%!

    While I still fail to see the condition for a price crash (as discussed here), this price rise has resulted in lower rental yields and so to generate returns comparable even to term deposits, investors must be banking on more capital growth (and presumably further falls in rental yields). This still leaves me thinking that property prices should at least flat-line, if not decline over the medium term. The point of this post though, is that timing these predictions can be very hard!

  24. davinci

    My apologies Stubborn Mule for “flying off the handle” at your article. Yes I agree that the market is very unpredictable and almost anything is possible. I suppose, like many people, I am tired of basic commodities such as shelter being turned into speculative entities and driven up in value so that my kids have to pay the price.
    Your article was an attempt to make sense out of the situation and in these circumstances it is wise to step back and try to analyse the situation as objectively as one can.

  25. Stubborn Mule Post author

    davinci there are few things outside religion for stirring the passions like property! I do understand you frustration, and my analysis is as much as anything else an attempt to make sense of it all for myself. Anyway, your comments are appreciated.

  26. Stubborn Mule Post author

    I should add that I agree with much of what Rob said, particularly in relation to easy credit. There’s too much concern about government debt and not enough about private sector debt…some thing I’ve written about a few times.

  27. davinci

    Yes I will read your other comments on private sector debt as it seems to be a growing problem in Australia. I personally have no debt, but then, I myself am a bit of a “stubborn mule” in relation to my old fashion beliefs in only spending what you can afford.

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  29. leo loughnan

    Our prices are related to our export income, the wealthiest country in the world and WA is the wealthiest state in the nation. Our politicians are not the creators of this, it just happened because we have the natural wealth which was developed by certain entreupreners and politicsans risk takers and large companys need i say anymore to the mateship and workers who achieved this in a short time relatively speaking.

  30. Stephen

    Though how long can we sustain our wealth based on our natural exports? The housing prices at the moment all around Australia seem to be rising to impossible high amounts. Something needs to be done about it and soon.

  31. Thomas Kline

    A year ago there was total denial the real estate market was in any bother. Now the recognition is beginning to dawn on the smarter folks that something terribly serious is happening to the property market, but as normal their blind faith is that they will have the oft spoken about ‘soft landing’. Ha! No way hose! The bigger the boom, the bigger the bust. The property boom that began here in the late 90s started slowly and snowballed into the biggest property bubble the planet has ever experienced. This crash that’s now underway will be absolutely the same. My advice to real estate speculators is panic, NOW! As this year pans out you’ll finally recognize property in Australia is dead for generations. This crash is going to be the big one!

    Tom Kline

    Tom’s Blog – Aussie Real Estate Myths – DEBUNKED!

  32. mel

    Keens only mistake was the timing.

    If he had been aware of government medling he would have no doubt factored that into the equation..

    Japan here we come

  33. Stubborn Mule Post author

    It is certainly possible that Australia’s property market could see a 40% decline from 2008 levels, which would vindicate Steve Keen’s prediction all bar the timing. The further the market rises, the more nervous it makes me feel about it (and household debt is still disturbingly high and now interest rates are higher), and I certainly find it very hard stomach the property bulls’ optimism, but I still think that a more modest slowdown is the more likely scenario. The jury is still out.

    It’s also worth noting that most of the “government meddling” in the property market that people point to (including negative gearing, capital gains tax concessions and the initial first time home buyers grant) were in place at the time of Keen’s original prediction, so I think it is a bit too generous to use that as an explanation as to why the prediction did not come to pass.

  34. Magpie

    Hi Stubborn!

    I tend to agree that a housing deflation does not necessarily means a dramatic, sudden fall of prices and that, at this moment, a gradual thing seems more likely (but not sure: it could still go bananas, although considerably less likely, in my estimation).

    Which is a good thing, because if this thing burst, like it did in the US, Ireland, or the UK, then we’d be in deep… trouble.

    What I don’t agree much is in the characterization of Prof. Keen’s position. True, “government meddling” has been pointed by many people (not just Prof. Keen) as a possible cause of the increase in prices and all those things were in place before the original prediction (otherwise, they could hardly be suspected of being causes, methinks).

    But what Prof. Keen has said is that the improved first time home buyers grant, together with a host of other things (including the fall in interest rates!), implemented as part of the stimulus package, stopped AND reversed the fall in prices, which he thought would be catastrophic and unstoppable.

    And that, at least to me, sounds quite consistent.

    Just saying…

  35. Stubborn Mule Post author

    There were certainly additional measures in the stimulus package, but to say that without them Keen would have been right is to say those additional measures propped up the market to the tune of 40%. To me that is not self-evident.

  36. Magpie

    First, I did not say that without them Prof. Keen would have been right. I was merely observing that your previous comment did not distinguish between the before and the after.

    Second, let me ask you something: What is the magnitude of the fall in housing prices (30%, 20%, 10%, 5%, 1%, 0%) that you estimate the stimulus package was able to reverse? And please, let me know how you calculate it.

  37. Stubborn Mule Post author

    Magpie, the initial claim that Keen was only wrong in the timing was Mel’s not yours. In defending Keen, I thought you were agreeing with her…my mistake, apologies for that! I am certainly not going to estimate the extent of support the stimulus provided, which was in fact my point. Mel seemed to imply that it was clear that without the support Keen would have been right, i.e. the market would have fallen by 40%. But, that sort of counterfactual is in fact very hard to quantify, so all I am really saying is that it is not clear that Keen would have been right otherwise. I am likewise, however, not proving that he would not have been right.

  38. Magpie


    I was just clarifying Prof. Keen’s position, according to my understanding of it.

    And although I find his explanation plausible (after all, that was the very purpose of the stimulus), the bottom line is that his predictions did not come to pass. (By the way, I believe the agreed threshold to consider his prediction fulfilled was a fall of 20% in prices, not 40%).

    To make things more uncertain, I doubt there is a way to untangle the effects of the stimulus, either to support or to contradict Prof. Keen’s hypothesis. And in this I believe we are in complete agreement.

    As things stand, I think both anti- and pro-Keen sides should take things with a lot of humility.

    In the pro-Keen side (and I count myself in it, as you know) we need to understand that the models Prof. Keen has developed are not useful for detailed predictions (say, at 14:03:37 of 12/02/2011 the Sydney housing market will crash, properties losing 32.098% in one week, and the blond lady, dressed in red, who lives in this address in Fairfield, will be evicted; she might attempt against her own life).

    What’s more it may take a long while until they are useful for detailed forecasting, if they ever reach that point.

    And, at the risk of being repetitive: his predictions did not materialize. Period.

    And the other side should keep in mind that, even if they were entirely mistaken (and I don’t believe that’s the case), Prof. Keen’s models may still prove useful.

    And what if it turned out that the models can be improved in the short term, to provide deeper insights in the qualitative behaviour of speculative markets (if not accurate forecasts)?

    It would be regrettable if a man that has so much to offer would be discouraged to keep working and contributing.

    Finally, I would like to remind everybody (in favor or against) that Steve Keen is a professor and he has earned the honorific.

  39. Stubborn Mule Post author

    That’s fair enough: we are in agreement that it’s essentially impossible to prove the what-if either way (whether 40%, 20% or whatever–for the record, this was my source for the 40% figure, which was peak-to-trough rather than over any particular timeframe). Like Keen, I have been concerned by the high and growing levels of private sector debt in Australia (and not at all by government debt) and so have a lot of sympathy for his cause in that respect. I was, however, always in two minds about the bet itself: on the plus side it certainly helped publicize his concerns, but on the negative side, as a hard and fast prediction it was always going a bit beyond what the modeling really supported, in my view. Personally, I would probably have shied away from making the bet, but that may reflect my more risk-averse temperament!

  40. Chris S

    I know it’s an old article but everyone seems to miss the REAL reason for property price increases. It’s Women in the workforce. This is not a sexist comment simply a statement that two incomes allow the properties to be more expensive. The reason this has continued is simply because more females went into full time work. It has simply take this long for women in the workforce to be common. As the push for higher wages in sectors women are more likely to be in this will again be pressure on this curve.

    As for your summary of property prices you were pretty much correct. I would be interested to see you ideas on the new review which says the same. From the Data I have seen I would expect on small growth (maybe below inflation) But not negative growth.

  41. davinci7

    Yes you’re partly right Chris and it’s the reason why tax payers now have to foot the bill for women to leave the workforce temporarily when they give birth to children. Who benefits?
    It seems ridiculous that because household income has increased (through dual incomes) that it follows that the cost of living should automatically increase in direct proportion.
    What about women who can’t or don’t want to work a fulltime job AND raise a family? No woman can hold down a professional job (60 hrs) and bring up children at the same time without something important being compromised.
    Society has put itself into a very precarious situation. The long term effects will be interesting.

  42. Chris S


    I think everyone benefits from leave for women have children. It means they don’t have the financial pressure when choosing to have a child but have a pressure to move back into the workforce ASAP. It’s the only way Australia will be able to deal with the workforce shortages we will have going forward.

  43. davinci7

    I agree Chris, but if it wasn’t for the HUGE mortgages women could afford to take time off work while their children are young (as in the past).
    The government forced up the cost of housing so they could rake in more revenue through stamp duty…now they have to subsidize working mums who can’t afford the big mortgages. Wouldn’t we all have been better off if prices hadn’t been forced up in the first place?

  44. Chris S

    Wrong horse. It’s demand not the government that increases the prices. Simply because people had more money there was higher demand which pushed up not only price but the home sizes. Governments have not wanted this squeeze they get most of their money from other taxes. This tax is more away to stop people short selling houses which would have a massively negative effect on property price. You would see people buying and selling houses like commodity stocks.

  45. davinci7

    “It’s demand not the government that increases the prices. Simply because people had more money there was higher demand which pushed up not only price but the home sizes.”
    Not correct: The government openly withheld land supply and increased immigration knowing it would push up the price of land. They stood by and did nothing to lower interest rates when housing and rent (a basic need) went through the roof in pricing. Would they have done this with food prices?
    Stamp duty and taxes on land sales in WA constituted 47% of the WA government;s revenue during this period.

  46. Keen Jnr

    Wow…. it’s now 2011 and I’m still waiting for this property crash.
    Instead of just buying my own home I’m going to sit my money in a low interest account that barely keeps up with the rate of inflation, when there is this 40% crash and only then will I snap up my bargain. And I will live the remaining 1o years of my working life thinking… I’m glad i waited those 10 years for the market to crash.

  47. oneup

    Its May 2011 Keen Jnr, take a look around the real estate market, sit back & wait just a few more months,…prices have dropped & will continue to do so.

    Source: I am a real estate agent

  48. Pingback: Where do you find historical housing data and national median house prices?

  49. RationalThought

    1) It’s extremely disconcerting that inflation has been running at 6% compounded for nearly 60 years. I guess when you expand the money supply faster than GDP growth, you get inflation.

    2) Inflation is irrelevant, as it is the relative value of money, and applies to every asset class, including cash. Moreover, CPI is a useless way to discount for present value, not least of which because it is both subjective and political. If you have the cash curve for the last 50 years you can determine the gain against par.

    3) Single (median) income households can no longer afford to buy ANY property in the Sydney basin. If there is any increase in unemployment in the middle of the curve, the default rate will climb along with the increase in unemployment.

    4) Following on from (3) … In order for this ponzi scheme to continue we must have both (a) dual income households and (b) 100% effective employment among mortgagees. Should we be fortunate enough to achieve this, we still need to wait for inflation (wages) to catch up to house prices before they can rise again. Median house price has outstripped median income by a fair margin and has reached the tipping point where wage pressure will resume.

    5) Aside from somewhere to live, or renting out to someone else, there is no reason to purchase property versus any other asset class. The temporary exception to this are Asian investors with more money than sense. Housing has poor liquidity and a high cost of carry, so investors purchase for capital gains. Once capital gains diminish, only the irrational investor will continue to invest in property, while rational investors will move to either risk assets or fixed income.

    Therefore, the current price levels can only be sustained under the following conditions.
    1) High employment.
    2) Wage rises (inflation)
    3) Irrational investors.

    Once the current commodities boom is over, we will wake up and realize that we invested the windfall into indebting the nation to foreign banks, and have nothing to show for it, save perhaps a renovated kitchen.

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