Australian economy update (part 2) – Credit & house prices
Posted on 02 November 2010
Trend watching in economics can be about as interesting as watching paint dry, then fade, then peel… It generally takes time for the cycle to unfurl. So no surprises in this month’s data with the broad conclusion being that the high level of household debt (secured against inflated house prices) remains the key issue facing the Australian economy.
The data
The ABS releases (based on August data Housing Finance here and Lending Finance here) suggested that housing related lending continued to ease.
Yet the RBA’s credit aggregates suggested that household debt kicked back up again in September – growing at 8.1% annualised for the month (RBA release here).
While the RBA updated its household leverage data – which confirms that against disposable income measures, leverage is back to historical highs (note this is to end of June).
So where are we in the cycle?
If household debt has been rising at >10% per annum for over a decade, yet retail trade and new car sales have been rising at ~3% per annum (see yesterday’s post here), then where has that extra debt been flowing to? Answer – House prices.
Is this a reflection of a shortage of housing ‘supply’? Perhaps – though ’cause and effect’ is not straightforward in the real world.
I’d argue low interest rates have been a key driver of housing demand over the last decade. As is patently clear to all in a post-credit bubble world, asset prices were inflated in a self reinforcing cycle with expanding and cheap debt. If the population has been growing at between 1% and 2% p.a. across the same period, then the rise in demand beyond this has been due to declining housing density – that’s the number of people sharing a dwelling. At some point higher house prices (relative to disposable income etc) will stop this trend – the evidence suggests we are already past the turn.
The housing sector is the key driver of the Australian economy. The cycle is turning down – slowly but surely.
9 responses to Australian economy update (part 2) – Credit & house prices
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“The housing sector is the key driver of the Australian economy. The cycle is turning down – slowly but surely.”
I agree with you there Rohan. I guess the tougher question is to what extent housing will weaken: stagnation for a while or something more dramatic?
It reminds me of early 2008 – it was clear that we were in for a beating with respect to debt and equity markets, but not too manyy people appeared to figure out early just how bad it was going to be.
I guess your house price index chart gives us an answer of sorts – housing appears what, 40 or 50% overvauled? But then again, how will it close that gap – quickly or slowly?
Think Alex makes a good point – it’s down to the inertial tide of market sentiment. Without an external shock, probably more likely to be a long stagnation. But if unemployment ticks higher, or wages fail to keep up with consumer price inflation (I’m thinking basic commodities), then we could start to see distressed selling tip the market lower. Either way, not a great time to buy that MacMansion in the hinterland.
Nice one Rohan. I agree with your analysis. I wrote a detailed examination of the Australian housing market on my blog and arrived at similar conclusions (see: Australian Housing Bubble.
Cheers Leith
Just had a look at your analysis Leith. Very detailed and balanced – and very different from what the media generally regurgitates. I’ll sign up to your blog.
Yesterday’s ABS data showed prices down in five cities, and up in three, but a slight positive national figure (due mainly to strong Melbourne result). The question is what happens from here. Will Q4 be the first quarter to show a national fall. If so, that just might spook the public and falls could accelerate. But it prices rise in Q4 then the public will think the worst is over and we’re back on an uptrend. Public sentiment is everything. To be honest I don’t think the political will exists for more housing stimulus. Both parties are too weak, they’ve got more important things to think about, and frankly I’d wager they’re happy with this flat result. A ‘soft landing’ is exactly what the RBA and government wanted to achieve, and that’s what they’ve got here.
Alex Barton
Australian Property Forum
http://s4.zetaboards.com/Australian_Property
[...] Higher interest rates are beginning to affect the Australian housing market. (Data Diary) [...]
Rohan
I have been thinking about why the RBA/CBA keep saying on historical metrics we do not have a bubble, but the macro hedge funds (according to press reports) are shorting our banks.
The answer I believe lies in the dramatic income effect we have seen from the terms of trade in Australia since 2003. Costello/Swan handed reasonable part of governments share of the benefits of the terms of trade back to households – households then went out and geared up there increased household income (from lower taxes).
Our productivity performance over the past decade has been poor, so we have not seen a lift in incomes driven by genuine improvements in the way the economy operates.
This suggests that if the terms of trade remains stable at record levels, the RBA and CBA are probably right that houses prices are expensive, but not in a bubble. However, if commodity prices were to decline (not even mean reverting) to long-term trend levels the income shock in Australia could be signficant.
So if you are a global macro fund playing the reflation trade in emerging markets and want to hedge yourself, how would you do it? Short the Australian banks (leveraged to highly indebted households)and short the AUD – both are likely to get whacked if the China story falters.
I have seen a couple of pieces written recently heading in this direction to explain the risk to Australian house prices. Do you have any thoughts?
Seems like sound logic to me Andrew. Apologies for the delay in responding, bandwidth constraints getting on top of me.
Steven Keen would probably argue that even worse, if the terms of trade remain stable from here, causing income and debt levels to stagnate, then this ultimately acts as a drag on economic growth in any event. At the very least, the housing sector needs the leverage heap to keep growing to sustain it – and that isn’t looking too good – with the multiplier effects to follow.
Having said that someone pointed out the other day that the ‘short Australian banks’ trade has been a logical, but wrong trade, consistently over recent years. Still when pressed, the response was ‘not my favourite long in the Australian financials sector”.
In short, I can see shorting the banks could act as a hedge against the reflation trade. Guess it depends on the other side of the trade as to whether it makes money. Think I prefer simply shorting the AUD – deep, liquid and without the risk that the local market will be buying on weakness.
[...] Back at the desk and updating some housing finance data (it’s been a while – last housing commentary here). [...]