Steve Keen sees housing gloom


Professor Steve Keen lays down the facts of the current decline in Australia housing… His full analysis can be viewed >here<

Australian house prices have now fallen 6.1 per cent from their peak, and have been falling for 21 months, which is the longest downturn in nominal prices ever recorded by the ABS – the previous longest being the 12 months from the beginning of the GFC (which was terminated by my favourite government policy of all time, the First Home Vendors Boost).

I’m sure the usual spruikers will come out with why this is now the bottom, and it’s a good time to buy, and there wasn’t an Australian house price bubble, and the shortage will drive up prices, and…

So let’s put the current data in the context of the bursting of acknowledged overseas house price bubbles.

Firstly the inflation adjusted data: in real terms, house prices have now fallen 10 per cent from their June 2010 peak, and are back to a level they first reached in late 2007.

Now let’s compare the Australian experience to date with the Japanese and US experiences – where no one, not even Alan Greenspan, denies that there was a housing bubble.

The Japanese bubble peaked in June 1991; the US bubble peaked in May 2006; and Australian house prices peaked in June 2010. Figure 3 shows the three declines from the peak, and while the Australian experience so far is clearly better than the US’s, it’s only a whisker better than the Japanese experience to the same date after the peak.

The motive force behind Australia’s bubble was the same as in the US and Japan: accelerating debt drove rising house prices during the boom. Now in both those countries, decelerating debt is driving house prices down.

And even though the actual level of mortgage debt is still rising, it’s doing so at the slowest rate ever recorded by the RBA.

The odds are that the rate of decline will accelerate in the next year – since as Leith van Onselen pointed out yesterday, many baby boomers are relying on rising house prices to secure their retirements. Now that house prices are falling, and have been doing so for almost two years, many of these boomers – 74 per cent of whom earn less than $80,000 a year, with the average investor losing over $9000 a year on these “investments” – could decide to get out rather than continue to absorb losses. The unwinding of their leveraged positions could push mortgage growth below zero, and of course accelerate the house price fall.

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