Thursday, May 20, 2010

Housing and population updates

Australian housing finance is falling rapidly with prices likely to follow.

This graph of historical prices and housing finance approvals deserves a look. Also, the graph below was part of the RBA's Luci Ellis' speech on housing last week and was referred to as follows:

Australian housing debt is higher relative to housing assets now than in the past (Graph 4). We should expect this ratio to be higher than in the 1970s and 1980s. The financial regulation of that period artificially restricted household borrowing. For example, unmarried women found it hard get mortgages back then. The question is whether this measure of leverage is higher than can be sustained. After all, it is much lower than in the United States, even before their boom-bust cycle. But we should expect that to be true. Because they can claim home mortgage interest against their tax, American owner-occupiers have less incentive to pay their debt down than their Australian counterparts.
Recent data suggest that we do not have a credit-fuelled speculative boom on our hands.

I wonder what data would be required for Ellis to conclude otherwise? If it was so easy to see a speculative bubble in the data, none would ever form.

Finally, a word of caution about the graph. It is the ratio of debt to value. Therefore a rise can be caused either by an increase in debt or a decrease in home values. Clearly the dramatic lift in the US ratio in 2008-09 was caused by declining asset prices, not increased debt.

Strangely Ellis concludes that a 40% aggregate debt ratio was a massive bubble in the US, but 30% in Australia is not apparently, even though we should expect this relationship due to differential tax treatment of mortgage interest.

The RBA is sounding very confused these days.

On another note, the 'population growth increases house prices therefore the Australian market is safe' point of view is looking very shaky. Latest BIS Shrapnel report forecasts significant declines in population growth in the coming years.

BIS Shrapnel says annual net overseas migration - which includes permanent migration and longer-term but temporary stays - will fall from its pace of 298,900 in the year to June 2009 to 240,000 in the year to June 2010. It will fall more dramatically to 175,000 in 2010-11 and 145,000 in 2011-12.

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