How much downside might there be in real estate?

Steve Keen recently produced an interesting (and sobering) look at the Australian real estate market entitled “Lies, Damned Lies and Housing Statistics“.

In it, he takes issue with a number of fairly widely held perceptions, among them that housing affordability is now back towards the long-term average, that house prices are no longer excessively overvalued, and that Australia continues to suffer from a housing shortage:

The data in support of the belief that Australian house prices will not suffer during the forthcoming recession is therefore nowhere near as conclusive as Richards’ [Anthony Richard of the RBA] speech implies. The price index might well be driven higher in coming months [the piece was published in April] by the artificial stimulus imparted by the doubling of the First Home Buyers Grant (see FHB Boost is Australia’ s ” Sub-prime Lite”); but the downside risks to Australian house prices could be every bit as big as those that apply in other OECD nations.

Not a popular view, certainly. Still, his analysis is intriguing and seems to make a good deal of sense. I’ve long (idly) wondered if we could really sail through this crisis relatively unscathed, given (for example) that residential real estate here had a peak value of over three times GDP, as compared to less than two times GDP in the US before their downturn.

However things turn out, one of the charts (in which long-term real house price indices in Australia and the US are traced back to 1880) provides a truly alarming illustration of just how far real prices diverged from historical norms over the last few decades.

Complacency isn’t quite as easy in its wake.

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vanaalst.robert
vanaalst.robert(@vanaalst-robert)
12 years ago

At least for housing, are charts dating back to 1880 of any great use? I mean, at least in Australia, cities were tiny, people rode around on horses, there wasn’t any social security system, the job market was nothing like today, women didn’t work, etc. . Surely these sorts of factors make comparisons between then and now rather hard.

vanaalst.robert
vanaalst.robert(@vanaalst-robert)
12 years ago

I agree they’re interesting (no matter what — I was just wondering about their predictive power), although I think that even in the last couple of decades there were some major changes, like more women working (even in 1980, it was only slightly above 50%) and two I missed from before, more gay couples (dual incomes) and people having less children (less expenses). Less obviously, I imagine that people’s ability to tolerate large distances from work must be nonlinear, so, if there are big drops, it will be interesting to see whether Melbourne and Sydney experience them as much as everywhere else (although it doesn’t explain why smaller cities also rose).

In any case, I guess we might not have to wait too long to find out whether prices really do drop back to historical averages, so the question should really answer itself!

THR
THR
12 years ago

I think Prof Keen predicts a 40% plunge in real estate over the next few years. I’m not quite sure how he comes to this figure, and it seems a little excessive, but he may be right about the general trend.
The housing shortage is a furphy. The real shortage is in public housing, with its dire waiting lists. However, since most of those on the waiting lists struggle with private rental, they’re aren’t the ones driving up housing prices. Hence why the shortage isn’t pushing up prices, and why you don’t see shanty towns on the outskirts of Australia’s major cities.
There are already plenty of people waiting for the first home owner’s grant to lapse before buying. The RBA can cut interest rates all it likes, the banks aren’t going to pass on any savings. Add 8.5% unemployment, as a relatively optimistic estimate, and the demise of the grants, and it’s hard to see the survival of the housing bubble.

billie
billie
12 years ago

Prof Keen made the point that in a normal year only 9% of the housing stock turns over. Already in the upper echelons house prices have dropped 40%. House proces are very buoyant in the first home buyer end of the market, but as more finance bods lose their jobs and are forced to move back home to mum when the proportion of the housing stock on the market exceeds 9% then the bottom will fall out of the market.

I wryly note that now that the finance sector is facing lay offs they recognise that unemployment exists. On behalf of all the laid off factory workers and former IT workers, welcome to the club. You can’t access Newstart until you are down to your last $500 and the incompetent Centrelink staff will micromanage your affairs with invasive diligence and perhaps a few sour grapes because you were once so RICH. Insultingly you will get $100 a week less than a pensioner, be expected to go to job interviews and your numbers will be systematically UNDERREPORTed