House price predictions

Steve Keen is predicting a 40% drop in Australian house prices over the next 5 years. Everyone else disagrees.

Turns out the market is also not responding in the expected way. For the last three months, they have risen overall across Australian capital cities.

14 thoughts on “House price predictions”

  1. RP Data tell me the link that Joshua has provided will not be updated until Monday. So in the meantime, here is the media release…


    Using Australia’s largest property database, the October RP Data-Rismark Hedonic House Price Index results have confirmed the September RP Data-Rismark Index findings that Australian capital city residential property prices have started increasing again during the second half of 2008.

    The RP Data-Rismark Index results are reported by the Reserve Bank of Australia (RBA) in its Statement on Monetary Policy and have recently been selected by the Australian Stock Exchange (ASX) as the basis for the ASX’s new residential property derivatives market. Moody’s and SIRCA have both independently concluded that the RP Data-Rismark Index results are the most accurate measures of house price change in Australia.

    During the 3 months to end October 2008, Australian capital city residential property prices increased slightly by +0.3% according to the latest RP Data-Rismark Hedonic Index estimates.

    Despite some gloomy predictions, Australian dwelling prices have now risen in the months of both September (+0.2%), based on the ‘final’ RP Data-Rismark index numbers for September, and in October (+0.4%) using the latest ‘indicative’ estimates.

    The recent recovery is consistent with the big improvements in affordability brought about by the RBA’s decision to cut rates by 1.25% in September and October combined with the government’s announcement that it would increase the first home owner’s grant as part of its $10.4 billion fiscal stimulus package. The RBA’s 0.75% rate cut in November has lent further support to the market with mortgage rates having fallen from a peak of 9.6% in August to around 7.7% today. Based on current futures market pricing, we should see mortgage rates fall below 6% during 2009.

    The increases in house prices are also in line with housing finance volumes released by Australia’s largest mortgage broker, AFG, which announced that its October 2008 home loan volumes were the strongest since November 2007 rising by 18% in the month. Australia’s biggest property listings website,, has also released data showing record increases for 2008 in home buyer activity during the months of September, October and November.

    In the 10 months to end October 2008 Australian capital city residential property prices have only declined by a small -1.2%. This is an improvement over the final September RP Data-Rismark index year-to-date estimates, which found that Australian residential property prices were off by -1.6%.The worst period for property prices was in the second quarter of 2008 (ie, the three months of April, May, and June), when prices fell by -1.9%. The first quarter of 2008 (ie, the year to March) was much more positive with residential prices increasing by +1.1 %

    On a year-on-year basis, Australian residential property prices has declined by only -0.8%, which compares extremely well with Australian shares (ie, the S&P/ASX 200 Accumulation index), which are down by -38%, and the ASX Listed Property Trust Sector (Accumulation), which has fallen in value by -56% over the same period.

    In the 10 months to October 2008, Adelaide and Darwin have been the best performing capital cities with residential values rising by +3.5% and +6.2%, respectively. Adelaide prices have, however, shown signs of slowing down in the last three months to end October (only +0.5%).

    In the 10 months to October 2008, Melbourne residential prices have been flat (+0.2%) while Brisbane (-1.7%) and Sydney (-1.9%) are off slightly. However, during August, September and October 2008 Melbourne (+1.1%) and Sydney (+0.5%) property prices have increased consistent with the overall market recovery following the Q2 contractions. While Canberra property prices are also off by -2.6% in the year to end October, the three months to end October have seen prices rise by +1.1%.

    The worst performing capital city has been Perth, which has seen residential property values fall by -4.8% over the year to October. Over the 3 months to end October this trend has continued.

    Houses have outperformed units in the three months to end October with national price growth of +0.3% for houses and +0.2% for units.

    The capital with the most expensive houses is Sydney: Sydney’s median house price currently sits at $564,376 as at end October 2008.

    Despite the ongoing slowdown in the Perth market, it still has the most expensive units in Australia with a median value $455,286 as at end October 2008.

    Regardless of its recent robust price growth, houses in Adelaide remain the most affordable of any capital in Australia with a median price of $410,942 as at end October 2008.

    The least expensive units in an Australian capital city are in Darwin with a median price of $312,146 as at end October 2008.

    Rental yields are highest in Darwin: the current annualised yield is 6.55% for houses and 6.94% for units. Yields in Sydney remain above the national average: the current annualised yield for a Sydney house is 4.59% and 5.74% for Sydney units.

    The lowest rental yields in an Australian capital city can be found in Perth where yields sit at 4.14% for houses and 4.64% for units.



  2. Dyork: what you have said is factually wrong.

    The ABS data ends in September and has historically reconciled with the RP Data-Rismark Index results. The RP Data-Rismark results are for OCTOBER. Further, the ABS data was for the QUARTER to September, whereas the RP Data-Rismark Index is MONTHLY and showed Australian house prices rose in SEPTEMBER and OCTOBER.

    Over the QUARTER to September, the ABS Index was broadly in line with the RP Data-Rismark Index. APM, a third index provider, have released their results for October and show stronger price increases than RP Data-Rismark does.

    The ABS and APM Indices uses a much simpler methodology, known as a stratified median approach, which is subject to greater biases (the RBA acknowledges this in research it has published). The RP Data-Rismark Indices are based on a far more advanced HEDONIC regression method. This is why the RP Data-Rismark Indices are normally MORE CONSERVATIVE in their estimates of growth. However, since this is a monthly index you cannot compare it directly to the ABS’s quarterly measure (RP Data-Rismark also produce a quarterly measure for subscribers who want it).

    However, let there be no doubt: based on the biggest property database in Australia, house prices increased (across the country) in the months of September and October.

    Finally, the Australian Stock Exchange (ASX) recently spent over a year doing due diligence on all the indices and selected the RP Data-Rismark Index as their benchmark for the new residential property futures market the ASX is launching in 2009. Moody’s and SIRCA have also done independent reviews of the different indices and found RP Data-Rismark to be the most accurate (see here

    Disclosure: I run Rismark which owns the patents covering the RP Data-Rismark Index.


  3. Chris Joye, credit financing, being a prerequisite for a house purchase is beginning to be restricted.

    This leading indicator suggests that the escapade of speculative house-flipping is over, which infers that house prices will be on their way way way down 🙂

    You might want to skate to where the puck is going, not where it is.

    But I would also be in a state of denial, if I were in debt up to my gills, unfortunately, facts do not cease to exist because they are ignored.


  4. i agree that the single biggest risk to Australia’s housing market is credit rationing, which is what has hurt the US and UK markets. there is a story in the UK of a FTSE 100 CEO only be able to get access to a 40% LVR loan when buying a home. amongst many other major differences between the US/UK and Aussie markets (including our tiny default rates, the absence of a sub-prime market, and no real credit rationing in the home loan market) is the fact that while in the UK/US most home loans are fixed rate, and therefore do not change in the near-term when central banks cut rates, in Australia aronud 85% of loans are variable rate. This means that are mortgagors immediately benefit when the central bank cuts rates. Despite very high interest rates over the last 2 years, 90 day mortgage default rates in Australia as at August 2008 were only 0.4% (according to the RBA using bank balance sheet loans, which represent more than 90% of the market these days). In the US the equivalent figure is over 2.5% for prime loans and 15% for sub-prime, which don’t really have here (less than 1% of all loans according to the RBA).

    a good indication of why there is yet to be any real credit rationing in our home loan market is the fact that you can still get 100% LVR loans from NAB, CBA and Westpac/St. George (so long as you are an excellent credit). ANZ has reduced their max LVR to 90% but otherwise good borrowers can comfortably get 95% LVRs from the other 5 big banks (incl. St. George).

    and the reason that there it is highly unlikely there will be little credit rationing going fwd is because the banks have been the beneficiaries of massive deposit inflows (in part because of the govt guarantees). They ARE rationing credit to the riskier business lending market–whcih is 100% risk weighted–and ploughing it in to the safer, 25% risk weighted (under Basil II), home loan market.

    according to AFG, Australia’s biggest bank broker, home loan volumes in Oct 08 were the highest since Nov 07.

    so broad generalisations about credit rationing seem nice to make, but don’t sit well with the facts.


  5. Chris
    The facts are not in dispute, but your rosy interpretation certainly is.

    The RpData figures show that house prices peaked in Feb 2008 and are still below that peak. Year-on-year growth for September and October were 1.5% and 0.4% respectively, wiping out most of the recent gains.

    What we are seeing is a normal seasonal fluctuation, but even that is weak, less than half what is was a year ago. The figures for the next 3 months will give a better indication of where prices are headed, and I forecast down.

    The facts we don’t have would be even more interesting. Anecdotally, there are fewer listings, poorer clearance rates, more settlement defaults, higher inventory, and price drops in segments like premium and vacation properties. Construction is down too, which points to a drop in demand.

    Personally I welcome a return to the long term ratios of house prices to incomes and rents, but I’m not yet confident the downturn will be that severe.


  6. Chris Joye,
    the arguments that you put forward, are confirmation biased.

    All of this information provides a “rosy” picture for the Australian housing market under circumstances where there is continued and vibrant economic growth. However, under current conditions, this is definitely not the environment we are finding ourselves in.

    Only if one has a superficial understanding of what is taking place in world capital markets, since October 2007, and more specifically the entirely dysfunctional debt market rather than the schizophrenic equity market, can believe that all bodes well for access to credit into the future.

    The commercial paper market are dysfunctional and have completely seized up; central banks around the world are the only lenders that are propping up these zombie markets.

    This implies, access to credit for credit cards, car loans, et cetera, is going to be expensive, and inaccessible to most, save those with outstanding credit. This segment of the Australian population is becoming ever minuscule.

    Australian banks raise about half their cash from local deposits, a quarter from local bonds and the remainder from the global debt market. Banks are no longer able to access the latter two sources of funding, as they once did, neither in quantity nor in cost. One just has to look at all the local mortgage funds that have been forced to freeze their redemptions and close off their funds, whilst the global debt market is severely risk averse to MBS funding. The rebalancing of capital to bank deposits, due to a fleet to saftey, is by no means going to offset this funding gap.

    The 2nd tier banks, BoQ, Bendigo et al., with their current BBB+ ratings, will be priced out of the market reducing further credit availability.

    With the ANZ and NAB recent attempt to recaplitalise, via the allocation of preference shares, sends out a strong signal questioning the quality of their balance sheets and their ability, looking forward, to willingly and confidently lend to an economy that is rapidly weakening.

    The mortgage securitisation market is dysfunctional, and to all intense and purposes, is shutdown; the Government being the buyer of last and only resort of these securities.

    The recent $8 billion announcement to support this market is a drop in the ocean in comparison to the amount of securitisation only one year ago of approx. $200 billion.

    Using “tiny default rates” as a support for your argument, is absurd and just represents confirmation bias on your part. One would naturally expect default rates to be small at the beginning stages of a housing market down turn, what is clear is that the rate of change is now positive.

    Your assertion that sub-prime market does not exist in Australia is, frankly, with out basis.

    No-doc and low-doc loans exist and have been well supported in the Australian non-bank mortgage lending market. The impact will only present itself when unemployment begins to rise, which it is certain to do.

    Your attempt to put forward as evidence that no credit rationing is taking place by the fact that tier 1 banks are continuing to provide 100% LVR loans (so long as you have excellent credit) has buried within it two fallacies.

    Firstly, a 100% LVR loan to those who have excellent credit is *not* a logical conclusion that automatically follows that credit rationing is *not* taking place.

    Rather, your argument can be construed to say nothing other than banks previous imprudent lending standards have now been replaced with far more prudent standards.

    In addition, one can say that 100% LVR loans are still available, but now to a smaller demographic within the community, as opposed to a once broader demographic in the past, when lending standards were far looser than they are today.

    Furthermore, it should be clear that no evidence of credit rationing is not the same as evidence of no credit rationing.

    It also takes two to tango, a willingness of a lender to lend and a borrow to borrow.

    One can only come to the conclusion that your arguments are a consequence of a logical fallacy of missing the point (ignoratio lenchi).

    With your reference to AFG; it is a vested interest group and unless they can publically publish there loan activity, one can only consider this at best anecdotal evidence at worst spruiking.

    Some evidence supporting an alternative view:

    BNP Paribas:
    High household debt (higher than US), low housing affordability (second lowest in world, behind New Zealand), high interest rates, dependence on overseas borrowing make Australian version of Northern Rock likely.

    TED spread: 2.18%

    3mo BBSW-OIS spread: 51 bps has come down from a peak of 150 bps in mid October, but still significantly higher than the long term average of about 10 bps; cost of short term funding remains high.

    Jobs growth slows, particularly in NSW.

    Consumer Sentiment hit by financial crisis.

    Wholesale borrowing costs (about half of bank requirements) are more than 1% higher than before the crisis began. Retail borrowing costs have also tightened significantly as the smaller institutions that are now denied access to funding in global markets pressure domestic funding costs. A test of whether we can expect further bold moves from the banks will be the degree to which they are able to manage down retail deposit rates. Banks are intermediaries. They can hardly be expected to aggressively cut lending rates if deposit rates do not also fall.

    Index of Commodity Prices -2.7% in November.

    RJ/CRBCommodity index down sharply (242.2) from July 2008 peak (473.52). Forward looking, this does not bode well for commodity exporting countries. The commodity boom is over, for now at least.

    Baltic Exchange Dry Index (BDI):
    Sharply down (715) from a high of 11,500 in June 2008.

    Housing finance for owner occupation, dwellings financed – Trend (5609.0)
    % Change Previous Period: -1.9
    % Change Corresponding Period Last Year: -27.1

    Dwelling unit approvals – Trend (8731.0)
    Mthly Sep 2008
    % Change Previous Period: -2.0
    % Change Corresponding Period Last Year: -14.5

    Building approvals -Trend (8731.0)
    Mthly Sep 2008
    % Change Previous Period: -1.4
    % Change Corresponding Period Last Year: -3.1

    Total dwelling units commenced – trend (8750.0)
    Jun Qtr 2008
    % Change Previous Period: -1.2
    % Change Corresponding Period Last Year: 3.0

    Total new motor vehicle sales – Trend (9314.0)
    % Change Previous Period: -1.4
    % Change Corresponding Period Last Year: -10.8

    Yield curve continues to flatten, signaling recessionary environment.

    TD Securities-Melbourne Institute:
    Inflation gauge dropped 0.6 percent in November — the biggest one-month fall in its six-year history. Note, even after a significant AUD devaluation, disinflation is still taking effect.

    As you can see, Chris Joye, I can also provide a narrative that establishes credible evidence as to the beginning of the end in the greatest bubble in history over housing.

    The fallacy in your argument is your attempt to use flawed inductive reasoning, by which you extrapolate historical trend into the future, whilst ignoring other information that suggests the historical trend is no longer relevant. This is at best naïve and at worst delusional.

    Some words of advice: you might want to skate to where the puck is going, *not* to where it is.


    Paul Krugman rightly put it:
    “…to get sucked into the biggest bubble in history over housing, which you know has been around for say 5000 years and some how believe the old rules do not apply over buildings is really really pretty bad…”

    “… Anybody who looks at the numbers, can see that housing prices are way out of line…”

    As is normal human nature, you are attempting to rationalise why previous house prices do not apply, and this time it is somehow different.

    If you look at house prices relative to rents or income they are completely out of line with in historical patterns, but of course you try to ignore this information.


  7. To Iconoclast: brilliant!

    Clearly Chris has a vested interest in churning out good news for customers of his service, but surely Chris (and Joshua) have the skills and training to be able to see and interpret the many economic signs available that point in precisely the opposite direction.

    Even his own figures look gloomy, if viewed without the rose-coloured spectacles.


  8. The history is in Steven Keen’s favour so are the economic statistics. The question is one of weather we can stabilise the method of bubbling the residential housing market price some unprecedented 7-8 times the annual household income ratio. Not easy. But still a way could be found given the ingenuity of human economics to stabilise the housing bubble, rather than the rhetoric of ‘confidence now there there’ lets think about this.

    EG1: The key is permanently nominally low interest rates 2-3% and the loan times adjusted on demand. A process of house swapping value ratio where once you purchase your home in a community or semi/full rural setting and want to move, you swap your residence for another on the basis of differential value in that way you can swap your residence all the way to a nursing home. You may start with 9R:1I ratio and then end up with 0R:9I You can bank or spend but only a regulated portion of any credits, any disputation in divorce would require family law ratio property division.

    Whilst you are living somewhere there is no reason for a house debt/ income ratio to be exponentially higher to a point), because the debt ratio can be passed on in death, in essence does it matter what a house is worth providing we can afford the payments – if interest rates were nominally fixed to say 2-3% then it become about the same as rent. That way you can buy in at any at any ratio providing you can afford it.

    Eliminate all personal inccome taxes and duties and have just GST. Govt needs to stop ripping off residential owners and making residential housing the core business of Govt and the economy – building construction should be export orientated. Govt should however return to the pegging out and allotment allocation to largely eliminate developers and local Govt middleman.

    The economic challenges should allow for larger increases in residential income ratios providing the parameters are set accordingly.


  9. Charles Norville,

    I totally agree with your last comment on “Govt needs to stop ripping off residential owners and making residential housing the core business of Govt and the economy – building construction should be export orientated.”

    I had lived and worked in Germany for quite a number of years.

    The German economy is literally an absolute marvel, you can see prosperity all around you. You stand in awe seeing what this country and its citizens have created. Germany certainly has its share of problems, but in the area of economic stewardship, there is nothing but praise.

    The German leadership were not naïve to believe that wealth and prosperity can be derived through simply having a lax monetary policy and allowing massive house price inflation to be sold as prosperity to their citizens.

    The existing policies of negative-gearing, basically a leveraged buyout model in the property market, does nothing at all but promote a speculative form of arbitrage (I would certainly not use the word investment to categorise this phenomena), which is further promoted by the bean-counters in this country as the way to accumulate wealth.

    Thus, we have the scarce resource of capital being misdirected into, of all markets, the property market to achieve nothing but inflated asset prices, and in most instances in established housing.

    That is, we are in an even worse position than the U.S. coming out of this housing bubble fiasco. They have, at least something to show for it, an over supply of new housing stock, which of course also brings with it problems.

    We, on the other hand, have followed more closely the script that has been followed by the UK, where most of the capital went into house-flipping, with less into new housing stock. Although, this difference has no influence on house price deflation that will happen.

    To go further, this abject failure falls fair and square on the head of the Governor of the Reserve Bank of Australia and his incompetency. One should also not ignore the previous Liberal Government, which took the politically easy way out, through their ideological neo-classical laissez-faire attitudes to the economic mismanagement.

    Misguided Government policies, of the past and present, have not and do not promote innovation and new enterprise.

    Australia has been let down for a very long time by poor stewardship.

    I put this matter to my member of local parliament, regarding adjusting policy to reduce market distortions with regards to the property market.

    His answer to me was: “the average bloke on the street only understands property and nothing else.”

    Talk about not rising above mediocrity!

    Well it looks like hello Germany goodbye Australia.


    I’m am not German.


  10. Yes agreed and to continue on……….my belief is in a natural order of things, which human being need to obey, currently we invent unnatural extravagances (bubbles). When man kind moved out of the great ice thaw some 11k years ago our brains started to challenge further our surrounding and we developed technology at an accelerating rate.

    Where man perceives (thinking) imbalance it is viewed as challenge, we invent to satisfy an action to overcome the perceived imbalance we cannot help our innate genetic behaviour.

    It will always come down to energy-materials per capita ratio. If a society does not have enough of this ratio to that of an adjoining society, then an application of military or/and economic solution occurs, a process that has advanced superior armies (not necessarily societal). War technology is king.

    The rest of the world view Aus with contempt because of our high em-c ratio. The UN is corrupt, a crude extravagance, and it appears the US has regressed into a greedy cult, Aus cannot defend itself because our defence systems are designed to help allies like US, pathetically and inevitably we will be challenged, we are non aligned economically and militarily (ANZUS is a joke).

    Finally I will state that nanotechnology will make the cost of labour irrelevant (technology progression has always been present), with low me-c ratio countries like China and India etc doomed to fail, unless a way is found to justify, geopolitically, the merging of individual sovereignties. European Union is way out in front here, BRIC is new – I think I have come full circle with the irrefutable logic of me-c ratio. Will the rest of the world tolerate the continuance of the Aus sun worshipping cult?

    I have two sons born and breed in Aus, what do I do, allow the Aus Govt to send them off to war, or do we allow the Aus Govt and say the US Govt to broker ie create distractions, change the focus, on a merger of China with Aus?………….


  11. Hi,

    To iconoclast, about negative gearing. Please do not blame accountants for this. We are not allowed to give financial advise on this matter and if yours is then i would reconsider who you are getting to do your taxes.

    The finger needs to be pointed directly at the relationship between financial brokers and real estate agents and the highly poor advise on negative gearing that they are allowed to give. I know that they have to make a profit at the end of the day but their influences on the enconomy can be dangerous, not to mention the low level of skillset that they have for the power that they obtain.

    These industries need to be held accountable for what they are advertising, and if heavy regulation is required then so be it



  12. Interesting about real estate industry who in fact absorb any slack in the economy eg decreasing interest rates increases house price spruking. Really a parasite industry that can’t appreciably develop the product, asset class, they are selling.

    The EG1 that I used, house debt/income ratio, is certainly not a perfect model, but by reducing the cashing up of house sales, instead you either increase or reduce your house debt/income ratio. The aim is to reduce speculation that makes housing the core business of westernised economies. Its obvious the damage it does.

    EG2 For those investors in -ve gearing mortgages or +ve gearing, allow linking to personal superannuation. Changes to tax laws which is definitely required but not simply for housing. There is too much government in the wrong areas.
    a) eliminate all forms of personal income tax, revenue charges and levies, instead a broad based GST on consumption of goods, not services, all in no exceptions;
    b) companies pay 20% company tax and can reduce this to 5% if they invest in: 1. R&D 2. regulated training 3. worker safety & social well being such as child minding. [compulsory super still applies]
    c) nationalise all compulsory superannuation so that all citizens can enjoy the same super entitlements as their political masters – a nation building fund – extra private super is ok.
    d) eliminate all State and Local Govts and establish the Regional Govt proposed in the 50’s.
    e) establish medical practices in public hospitals and build more hospitals Govt then to underwrite all medical negligence insurance.

    I suppose you could add the regulating of exec salaries and better access to training and employment. This isn’t rocket science people.


  13. Matt,

    you are not allowed to give such advice, although many do! Let us not delude ourselves on that. The term bean counter is extended to include the financial planning industry, which I would not recommend to anyone. If you want to seek investment advice, spend time to learn how the world capital markets operate. If your not interested, and put all your trust in someone else, then be prepared to suffer the consequences. Alternatively, stick your money in low risk fixed-income securities.


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